You say:
No lender will finance mine development without political risk insurance...
How do know this? Seems logical but is it 100% true?
Also, exploration and mine development still seems to be going ahead in some pretty risky places such as Zambia, Dem Rep. of Congo, Russia, Peru etc. So how does Ecuador compare to other risky places? Had a difficult time finding up to date publically available data on the web. One source I found is from Coface, a quasi-governmental French company that underwrites export credit. Useful site:
trading-safely.com
It gives Ecuador a C rating saying of political risk:
"With the presidential election scheduled for October 2006, the political situation has been shaky since President Gutierrez's removal from office in April 2005, as demonstrated by the August 2005 and February 2006 violent protests and strikes. That climate has affected household and investor confidence, although economic activity should be driven by private consumption, supported notably by migrant workers' remittances, and public spending, boosted by increased oil revenue.
In the run up to presidential and congressional elections, and in response to popular protest, interim president Alfredo Palacio has been determined to increase social spending, at the expense of debt repayment. He has also renegotiated, in March 2006, the sharing of oil resources with international companies, whereas the confiscation, in May 2006, of the assets of the US company Occidental, the biggest producer of oil in the country, has been the result of a long standing dispute. As a result, negotiations between Ecuador and the USA about a trade agreement, suspended at the end of March 2006, are not likely to resume.
In that context, the improvement in public sector finances and debt ratios achieved in recent years could come to a halt. That possibility has exacerbated financial markets wariness, with Ecuador continuing to face high liquidity crisis risk, notably due to the inadequacy of its foreign exchange reserves.
Moreover, the country's political instability and weak institutional and legal environment has tended to deter local and foreign investors, which has hardly been conducive to diversifying the economy."
Comparing Ecuador to Dem. Rep. of Congo:
Congo Country risk = D
"The political transition engaged after installation of a national unity government in June 2003 has continued but at a slower pace than expected. Although the constitutional referendum was held in December 2005, the legislative and presidential elections planned for June 2005 had to be postponed to spring 2006. The political and social situation has remained tense in that context with the government encountering difficulties in extending its authority throughout the country. Despite the efforts of United Nations forces, many eastern and southern regions still constitute areas of instability controlled by diverse militias.
Although the economic recovery has continued, the government is still facing enormous challenges with limited room for manoeuvre. A very narrow tax base attributable, among other factors, to a very large informal economy and extensive corruption, has been undermining public sector finances. Moreover, the slow pace of structural reform implementation, a difficult business environment, and deficient infrastructure have not facilitated exploitation of the country's vast natural resources, with large external account imbalances persisting in consequence.
The country has thus remained dependent on international aid that has taken the form of a three-year IMF programme concluded in 2002 and extended until June 2006, which has allowed it to obtain substantial foreign debt reduction in the framework of the HIPC programme for highly indebted poor countries and the Paris Club."
In spite of the high risk apparent in Dem. Rep. of Congo, political risk insurance is available, or at least was until fairly recently,
"May 4, 2005 Common shares outstanding: 29 million Anvil Mining Limited Secures Political Risk Insurance from World Bank Agency for Mine in the DRC TORONTO – Anvil Mining Limited (TSX, ASX: AVM) is pleased to announce that the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group has approved political risk insurance cover for Anvil’s Dikulushi Mine in the Democratic Republic of Congo (DRC). Dikulushi represents the first guarantee to be put in place by MIGA for a mining project in the DRC, which became a member of the agency in 2003. MIGA’s announcement of yesterday’s date is reproduced in full on the next three pages of this News Release......"
or how about Zambia:
country risk: D
So why are companies forging ahead in Zambia, at very advanced stages?
equinoxminerals.com
"
Lumwana Copper Project
Situated in North Western Zambia, Lumwana is one of the world's largest undeveloped copper deposits.
Measured and Indicated Resources presently total 269 million tonnes averaging 0.8% copper (4.9 billion pounds of contained copper) with additional Inferred Resources totalling 632 million tonnes averaging 0.6% copper (over 8.9 billion pounds of contained copper).
Equinox ’s plan for developing Lumwana envisages that the Malundwe and Chimiwungo deposits, which are 7km apart, will be mined sequentially by open-pit mining methods. The ore bodies are 95% sulphide (with only 5% oxide) and very consistent, so large-scale bulk-mining methods will be employed utilising equipment that includes 240 tonne capacity diesel-AC drive haulage trucks and 26m 3 capacity electric face shovels. The mine design forecasts the extraction of 348 million tonnes of ore at an average 3.6:1 strip ratio over a mine life of 17 years.
Sulphide ore will be processed on-site by conventional flotation to produce copper concentrates for shipment to off-site smelters. Metallurgical test work indicates recoveries of greater than 95% copper, producing concentrate grades of 43.3% Cu for Malundwe and 29.5% Cu for Chimiwungo. The flotation plant has a design capacity to treat 20 million tonnes per year of ore and will, in the initial first 5 year period, produce copper, in concentrate, equivalent to 188,000 tonnes of copper metal per year (415 million lbs per year). Life of mine copper metal production will average 150,000 tonnes per year (330 million lbs year).
The Definitive Feasibility Study ('DFS') indicates that the Lumwana life of mine total operating cash costs will be just under US$0.70 per pound of copper produced. During the initial 5 year period, when higher grade material is being mined, total operating cash costs are likely to be just over US$0.63 per pound......"
Migas also insured Bema Gold's Kupol project in Russia in 2006, another pretty risky place.
I am concerned about the political risk in Ecuador. I have thought of it, by far, as the primary risk since beginning to invest in ARU. But I invest in other hi risk places such as Peru, and California, in order to spread and mitigate risk. Your post presents a very unbalanced view in my opinion.
Here is the Belgium site for risk assesment, very nice graphics:
ondd.be |
