Country Risk - Perception meets Reality

Press/Media: Press / Media


An article on country risk in the minerals sector.

Period14 Sep 2015

Media contributions


Media contributions

  • TitleCountry Risk - Perception meets Reality
    Degree of recognitionNational
    Media name/outletResourceStocks Magazine September/October Issue
    Media typePrint
    DescriptionRESOURCESTOCKS annual World Risk Survey and other risk-focused studies including the acclaimed Fraser Institute survey are important tools for the mineral resources sector. The annual survey data give insight to those companies seeking to allocate scarce exploration capital to far-flung new projects for example. For those jurisdictions that perform well, meaning those countries voted by industry participants as having lower risk than others, the subsequent benefit from a strong set of rankings can translate directly into increased minerals investment. Clearly such industry risk surveys offer valuable insight to governments and policy decision-makers too. Many a politician has stood on the podium at an international exploration or mining conference and highlighted the effectiveness of being “open for business” in delivering a strong ranking year-on-year in terms of risk rating as voted by the industry. As users of survey outcomes as a key information source, we should always ask ourselves about whether the new data represent a true indication of the actual level of country risk changes year-on-year however. That is, without exception, the industry risk surveys are perception-based: the realities in terms of doing business in a specific country of course may be different to perception. A recent study at the Centre for Exploration Targeting (CET) at the University of Western Australia offers some insight here in gauging whether survey perceptions have a close fit with other metrics relevant to country attractiveness. The study compared the mineral policy impact on predicted project investment returns for 10 different mining jurisdictions across Africa and South America. Of course mineral policy is only a small sub-set of overall country risk measured by perception-based industry surveys – but nevertheless an insightful one. After all, the mineral policy is a key factor in determining the bottom line when it comes to mining investment. Specifically, the study was entitled “Evaluating the Attractiveness of Fiscal Regimes for New Gold Developments: African & South American Peer Country Comparisons”. To the detail then: The latest available mineral royalty data and fiscal taxation information was first compiled across the following ten countries. In Africa the principal gold-mining countries of Burkina Faso, Ghana, Mali, South Africa and Tanzania were all assessed. In South America, the mineral policy legislation as it impacts gold mining in Brazil, Chile, Colombia, Guyana and Peru was collated. The aim was to compare the government share of the gold mining revenues in these regions for a ‘standardised’ gold mine, identical in its mineable reserve, capital and operating costs, and production profile but artificially ‘moved’ from one country to the next to evaluate the impact upon investment return. The ranked list of countries by government share is as follows, ordered from high to low: Ghana (66.5%), Guyana (63.9%), Mali (60.4%), Tanzania (58.8%), Peru (58.5%), Colombia (55.0%), Burkina Faso (52.2%), Brazil (44.8%), Chile (44.3%) and South Africa (36.3%). In the quantitative analysis, the total government share over life-of-mine varies from 36.3% in South Africa to 66.5% in Ghana, using the royalty and taxation rates applied to the “standardised” mine parameters, gold price and mining cost assumptions. These percentage figures can be considered the Average Effective Tax Rate (AETR) over the life of mine for a typical gold mine in these countries. The private sector share of the total return is of course in the reverse order to the above list. So a company developing a gold mine under the assumptions of the study would receive a highest return in South Africa and a lesser return in other countries – with Ghana providing the lowest share to the company. So, does industry perception of the attractiveness of the mineral policy in each of these countries match with “reality” as measured by inputting the actual royalty and taxation levels into the gold mine standardised financial model? That is, does the country with the lowest average effective tax rate rank well in terms of industry perception of that country’s mineral policy settings versus a country with a higher effective tax rate? For the majority of the countries perception does seem to match reality at least in relative terms. Critically however there are exceptions, with South Africa and Brazil both looking somewhat ‘hard done by’ in terms of perception versus the actual government take from the mining project. Just as mining companies need to build a positive image with their shareholders – countries need to build a positive reputation with the mining industry. Perception certainly matters – but then so does reality too of course. Good hunting.
    Producer/AuthorAspermont Publishing
    PersonsAllan Trench


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