Mining Sectors Two Biggest Risks

By: Richard Mills | Fri, Aug 26, 2011
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As a general rule, the most successful man in life is the man who has the best information.

Country Risk - Where the political and economic stability of the host country is questionable, and abrupt changes in the business environment could adversely affect profits or the value of the company's assets.

Resource Nationalism - The tendency of people and governments to assert control, for strategic and economic reasons, over natural resources located on their territory.

The major benefit for developing countries from natural resource development comes in the form of:

There can also be indirect benefits such as knowledge and technology transfers. Foreign investments can also involve infrastructure investments, sometimes on a massive scale, like electricity, water supplies, roads, railways, bridges and ports.

Today many governments are looking at ways to get more money from miners as companies report record profits - the higher the returns and the higher the profits, the greedier governments become. As commodity prices rise governments try to boost their share of the proceeds from their countries energy and mining sectors.

The PricewaterhouseCoopers Mine 2011 survey highlights what governments across the globe are looking at in regards to the world's top 40 miners:

In 2011, Resource nationalism became the number one risk for mining companies.

Miners are an easy target as mining is a long term investment and one that is especially capital intensive - mines are also immobile, so miners are at the mercy of the countries in which they operate. Outright seizure of assets happens using the twin excuses of historical injustice and environmental/contractual misdeeds. There is no compensation offered and no recourse.

"Resource nationalism is taking other forms as well, including greater controls on foreign participation, mandated beneficiation, use it or lose it demands and mandated government participation." Ernst & Young Global Mining & Metals Leader Mike Elliott

The result is a spate of recent news regarding resource nationalism:

"We know it's tempting, at a time when government debt is mounting and metal prices are rising, for some governments to try to grab an even higher proportion of the revenue from mining. But we urge governments to remember that the cumulative effect of these unreasonable tax hikes will be to push up world prices and slow global growth." The Prospectors and Developers Association of Canada (PDAC) President Scott Jobin-Bevans


Skills Shortage

A combination of mass retirements and increasing natural resource demand from emerging economies has created a crisis in the resource extraction sector - one which is definitely not on investor's radar screens.

Increased resource demand is driving demand for skilled workers. A shortage of skilled workers remains the second biggest business risk for mining in 2011 (as it was in 2010) and is forecast to be the number two risk for miners again in 2012.

Skills shortages are global, shortages are happening in South Africa, Australia, Canada and South America. A skills shortage slows growth and increases costs, projects are being deferred or even cancelled outright due to the inability to staff operations - tighter labor markets also provide unions with greater bargaining powers when dealing with companies over wage settlements and other disputes.

The Mining Industry Human Resources Council (MIHRC) estimates that over 60,000 people employed in the mining sector are expected to retire by 2020 but that the industry will need an additional 100,000 people just to maintain current levels of production.

The Petroleum Human Resources Council of Canada warned a severe oil patch labor shortage is looming and that the "patch" will need to hire 24,000 new employees by 2014.

Weak metal prices during the 1980s and 1990s killed the resource sector's intake of talent - there's not many people between 30 and 50 in mining anymore.

The existing shortage of skilled personnel, the imminent retirement of so many baby boomers (many are mid level managers), the skills supply gap in the 1980's and 1990's combined with the mining sector being in direct competition with the energy sector for people to train means prospects are bleak for either industry to obtain the necessary bodies and minds.

Analysts say attracting and retaining increasingly scarce skills will:

The pool of available skill sets, the mine executives/managers, the miners, the engineers, drillers, geologists, mechanics, and other trades needed isn't very deep. This labor shortage is going to increasingly hurt the industry in the coming years.


Conclusion

Many governments are reviewing old agreements and renegotiating contracts. There are now many places, and the number is seemingly growing every day, where shareholders could, without warning, receive news that their operations have been taken over by the government and/or its friends, or that permits are suddenly suffering delays or have been cancelled outright.

We've seen far too many instances of companies and their shareholders losing assets that were lawfully theirs. If the management side of the companies we invest in is so important then maybe we should start regarding the management of the country they operate in as at least as important?

Mining sector employment trends are closely connected to:

Currently many mining companies are having trouble finding skilled workers - there is a "massive talent gap." And it's going to get worse - the oldest baby boomers are turning 65 years old in 2011 - and the global mining industry is experiencing the biggest wave of workforce retirements in 70 years.

In the next five years one-third of the mining workforce will be eligible for retirement. According to the Mining Industry Human Resources (MiHR) Council's latest labor market information report, "Canadian Mining Industry Employment and Hiring Forecasts 2010" the mining industry will need approximately 100,000 new workers by 2020.

As if the mining sector didn't already have enough to worry about.

Mine production of many metals is showing a number of similarities:

Increasingly we will see falling average grades being mined, mines becoming deeper, more remote and come with increased political and nationalization risk. Extraction of metals from the mined ore will become increasingly more complex and expensive, even more so when one considers the effects of Peak Oil - the cost of technology innovation to power mining will be very high.

Broad spectrum peak commodities is a cause for concern over the longer term.

In the shorter to medium term there are several serious concerns in regards to global resource extraction that we need to consider:

Junior resource companies with fully staffed, secure projects in safe, stable countries should be on every investors radar screen. Are they on yours?

If not, maybe they should be.

 


If you're interested in learning more about the junior resource sector, bio-tech and technology sectors please come and visit us at www.aheadoftheherd.com Site membership and our AOTH newsletter are free. No credit card or personal information is asked for.

 


 

Richard Mills

Author: Richard Mills

Richard (Rick) Mills
www.aheadoftheherd.com

Richard Mills

Richard lives with his family on a 160 acre ranch in northern British Columbia. He invests in the resource and biotechnology/pharmaceutical sectors and is the owner of Aheadoftheherd.com. His articles have been published on over 400 websites, including: SafeHaven.com, WallStreetJournal, USAToday, NationalPost, Lewrockwell, MontrealGazette, VancouverSun, CBSnews, HuffingtonPost, Beforeitsnews, Londonthenews, Wealthwire, CalgaryHerald, Forbes, Dallasnews, SGTreport, Vantagewire, Indiatimes, Ninemsn, Ibtimes, Businessweek, HongKongHerald, Moneytalks, SeekingAlpha, BusinessInsider, Investing.com and the Association of Mining Analysts.

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