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Tuesday, July 21, 2009

Buy mining companies that operate where political risk is low

“Around the world, miners are finding out that a mine is only worth something if you can keep it,” warns Chris Mayer. “And mining companies are finding it tougher to keep them as governments seize them or rewrite deals.

“Rio Tinto, for example, was knee-deep in a $6 billion iron ore project in Guinea. The government just stripped it of 50% of the mine. Guinea said Rio Tinto was moving too slowly.

“The problem is that as commodity prices have crashed, companies have cut back and slowed down new projects. But governments in these developing countries, which granted the rights to mine in their countries, were banking on getting all kinds of royalties and taxes. Plus, governments don’t want to see job losses, which in a lot of these countries could be seeds for unrest.

“China, for instance, is threatening to revoke a coal license from ArcelorMittal after the company warned it would cut jobs. In South Africa, the largest trade union wants the government to nationalize all the mines. In Zimbabwe, in Zambia and other countries, miners face all kinds of political threats.

“In short, political risks are on the rise. It’s fallout from the economic bust. Times are tight everywhere, but only governments don’t cut back. They just figure out new ways to grab money. So for now, focus on valuable resource companies in safer jurisdictions.”
-- from "Banks on the Mend? Biotech Safe Haven, CA’s Budget Crisis, DIY Funerals and More!" by Addison Wiggin and Ian Mathias

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