Investors have been reminded this week that political risk is a harsh and ever-present reality in the resource development business, one that is unlikely to go away.
On Thursday, shares of Tahoe Resources Inc. (TSX: T.THO, Stock Forum) (NYSE: TAHO, Stock Forum) lost almost 23% of their value amid fears that government-proposed mining law reforms might impact the Vancouver’s Escobal gold project in Guatemala, even though Tahoe issued a statement saying it didn’t believe the rule changes will have any effect on its operation.
Shares of Centerra Gold Inc. (TSX: T.CG, Stock Forum) also cratered after Kyrgyzstan’s parliament backed a motion Wednesday to review the operating license held by Toronto-based Centerra for the Kumtor gold mine. The decree calls for an increase in the government’s existing 33% stake in Centerra, which saw its stock price fall 32% Thursday to $6.72.
These developments, which follow reports last week about the nationalization of Glencore International Plc’s Colquiri mine in Bolivia, raise concern about the potential impact on other companies with operations in Bolivia, including the likes of Pan American Silver Corp. (TSX: T.PAA, Stock Forum) (NASDAQ: PAAS, Stock Forum) and Orvana Minerals Corp. (TSX: T.ORV, Stock Forum).
Still a senior Canadian mining official said he doesn’t see this as part of a trend.
“The threat of nationalization can be a risk just about anywhere,’’ said Ross Gallinger, executive director with the Prospectors and Developers Association of Canada.
Gallinger said he can easily recall the days when Australia was eyeing more revenue by threatening to impose a super tax on its resource industries.
Earlier this month in Argentina, Pan American Silver said it was invited to a government briefing were it was advised about pending legislation that would directly impact the regulatory regime for mining in the province of Chubut, site of Pan America’s Navidad silver project.
However, the company said it can offer no assurances as to whether the proposals discussed at the briefing on June 19 will be presented to the Chubut legislature, or enacted as law in the province.
Reports of possible mining law reforms prompted one Stockhouse blogger to post an “avoid Guatemala’’ warning on his page. “Who needs reality, when you have perception,’’ he said.
Still, Gallinger said that when it comes to country risk, things don’t always turn out to be as bad as people fear. For example, when Ollanta Humala was campaigning for the Peruvian presidency last year he called for a dramatic transformation in the style of Venezuelan President Hugo Chavez.
And since being elected, Humala has softened his radical image and distanced himself from Chavez’s “socialist revolution.’’
In the case of Centerra, analysts point out that it isn’t the first time that the company has been faced with the threat of having to restructure its stake in Kumtor, an open pit gold mine that accounts for 45% of Kyrgyz exports and 12% of the nation’s GDP.
The ownership of Kumtor was restructured for the first time in 2004 when Centerra went public and again in 2009 when Kyrgyzstan was granted a higher equity position in Centerra. Since the IPO, CG has agreed to higher social fund contributions and other voluntary social payments to the country.
Parliamentary deputies in Kyrgyzstan have called for a review of Centerra’s operating license as a result of environmental damage, according to published reports. The mine has been the source of toxic spills in recent years, including a cyanide leak.
Still, one senior mining official doubts that Kumtor will be nationalized. “The Kyrgyzstan government will end up with a slightly bigger interest,’’ said Gerald Harper, President of Minfocus International Inc. (TSX: V.MFX, Stock Forum), a Toronto-based platinum group metals explorer. In an interview with Stockhouse, Harper said Centerra’s stock has fallen sharply because investors are focusing on negative news.