Most Popular
1. Dow Max Drawdown Bear Stock Market 2022 - Accumulating Deviations from the Highs - 21st Feb 22
2.Putin Starts WW3 in Ukraine, Will Use Tactical Nuclear Weapons, China Prepares Taiwan Blitzkrieg - 28th Feb 22
3.World War 3 Phase 1 - Putin WINS Ukraine War! - 25th Feb 22
5.Will There Be A 2024 US Presidential Election? - 3rd Mar 22
6.Gold and SIlver, Precious Metals Sector Is at a Terrific Buy Spot - 6th Feb 22
7.Why Putin Wants the WHOLE of Ukraine - World War 3 Untended Consequences - 6th Feb 22
8.Dow Stock Market Expected Max Drawdown 2022 - 19th Feb 22
9.Stock Market Calm In the Eye of the Inflation Storm - 4th Mar 22
10.M = F - Everything is Waving! Stock Market Forward Guidance - 7th Mar 22
Last 7 days
Why Ray Dalio is WRONG About China - Principles for Dealing with the Changing World Order - 24th May 22
Globalists Convene to Plan Central Bank Digital Currencies - 24th May 22
After Recent Highs, What’s Next for the Gold Junior Miners? - 24th May 22
Why APPLE Could CRASH the Stock Market! - 21st May 22
Why Is Crude Oil Ignoring US Inventories? - 21st May 22
Here is Why I’m Still Bullish on Gold Mining Stocks - 21st May 22
US Real Estate Investors – Is There An End In Sight? - 20th May 22
How Technology Affected the Gaming Industry - 20th May 22
How To Set And Achieve Reasonable Goals For Your Company - 20th May 22
How Low Could the Amazon (AMZN) Stock Price Fall? - 19th May 22
Bitten by FANG? Clocked by Cryptos? -- 'Air Pockets' Everywhere - 19th May 22
Northern General Hospital Orthopedics Fractures and and Ankle Clinic Consultations Real Patient Experience - 19th May 22
Cathie Wood Goes All in on Teladoc, ARKK INSANE Noob Investing Strategy! - 17th May 22
This is Anything but Positive for US Housing Market - 17th May 22
What Should We Do If There Is No Fed Monetary Policy Pivot? - 17th May 22
All Possible Ways to Earn Free Litecoin - 17th May 22
How low Could the Amazon Stock Price Fall? - 16th May 22
Cathy Wood ARKK INSANITY There is NO Coming Back! - 16th May 22
NASDAQ 100 Stock Market LOWER LOWS & LOWER HIGH - 16th May 22
Sanctions, trade wars worsen US inflation - 16th May 22
AI Tech Stocks Earnings BloodBath Buying Opportunity - 14th May 22
Futures Contract – Trading Crude Oil With USO - 14th May 22
How to Get Kaspersky Internet Security for 80% Discount! Do not Pay Renewal Price! - 14th May 22
Sagittarius A* Super Massive Black Hole Monster at Centre of Our Galaxy REVEALED! - 14th May 22
UK Public Debt Smoking Inflation Gun - 13th May 22
What Happens When the Stock Market Dip Keeps Dipping? - 13th May 22
Biden Seeks Inflation Scapegoats; Gold Advocate Wins GOP Primary - 13th May 22
Apple and Microsoft Nuts Are About to CRACK and Send Stock Market Sharply Lower - 12th May 22
The War on Gold Ensures the Dollar’s Downfall - 12th May 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Commodity Investing in a Time of Rising Resource Nationalism

Commodities / Resources Investing Sep 07, 2012 - 11:36 AM GMT

By: Roger_Conrad

Commodities Best Financial Markets Analysis Article“Ever-deeper, ever-further” has been the mantra of major natural resource producers over the past decade, as emerging Asia has replaced the US as the world’s single biggest consumer and driven demand to new heights.

This unprecedented expansion hasn’t always driven up costs. In fact, major producers of everything from copper to platinum are uncovering some of the richest reserves yet seen with their massive investment. That’s helped keep a lid on companies’ overall production costs, which in turn has aided further investment. It has, however, elevated resource nationalism risk to heights not seen since the 1970s, when countries such as Chile expropriated assets from investors domestic and foreign.

Among the more alarming recent developments concern South Africa, long one of the world’s biggest producers of scores of key resources. In July, an increasingly violent clash between rival unions hampered production at a mine owned by Lonmin Plc (London: LMI), the world’s third-largest platinum producer.

The battle between the Association of Mineworkers and Construction Union (AMCU)—a nascent organization centered on less skilled workers—and the incumbent National Union of Mineworkers (NUM) concerned a demand for higher wages for rock drillers. NUM refused to strike in support and the result has been chaos at the mine. In August, riot police killed 30 striking workers at the mine, escalating tensions between workers and management.

Unfortunately, the battle is just the latest in a series of developments that has undermined investor confidence in South Africa. Mining companies today face periodic shortages of electricity, and wage costs have risen far faster than inflation. Most worrisome, politicians are now debating outright nationalization of much of the mining industry, as the ruling African National Congress struggles to maintain its monopoly of political power.

Given the country’s vast mineral wealth, investors are unlikely to abandon it entirely, unless forced out. But the Lonmin incident is a sober reminder of the political risks facing mining companies as they look for new sources of supply to meet rising demand.

South Africa is hardly the only country facing these risks. Violence among workers in New Guinea, for example, has interrupted production at major mines there. Other countries in Asia and Africa are also studying ways to get more from foreign mining firms. And while Australia has turned back a more draconian version of its proposed mining tax, even this investor-friendly country has been debating raising levies.

However, there are positives to resource nationalism. Most important, the growing risk it poses to supply helps build an effective floor under prices of many key minerals, just as Middle East turmoil has for global oil prices for decades.

With Chinese industrial production noticeably slowed from last year, this trend is likely to prove very important for global prices and producer profits over the next six to 12 months, or at least until the Chinese economy accelerates again. However, companies will only really benefit if their reserves and output can be maintained from outside troubled countries. Otherwise, output will drop and they’ll be victimized by lower prices and falling volumes.

One way investors can protect themselves is to stick to large, geographically diversified resource producers—or failing that, to focus on companies that get the majority of output from more politically stable countries where the odds of radical resource nationalism taking hold are lower.

North America is obviously the top choice, particularly Canada where the government has even been willing to allow foreign takeovers of resource producers. The Australian economy also has a long history of stability, the recent proposed mining tax notwithstanding. And despite the rise of bellicose left-wing governments in Argentina, Bolivia, Ecuador and Venezuela, Latin America remains largely open for mining companies’ business, particularly Chile and Brazil.

Accordingly, I like to hold a mix of mining companies. In general, companies diversified over several countries are safer, because they’re less exposed to negative shifts in regulation and/or flare-ups of resource nationalism. More focused companies are often smaller and therefore more leveraged to upside in the market for what they produce.

Resource nationalism is also a powerful driver for mining industry mergers, because larger companies are financially better equipped to weather interruptions in output caused by political strife and sudden regulatory shifts.

The biggest merger deal currently in progress involves Glencore International (London: GLEN, OTC: GLNCY), which has an outstanding bid for major metals producer Xstrata Plc (London: XTA, OTC: XSRAY), of which it already owns a sizeable chunk.

Given the expense and risk of going “ever-deeper, ever-further,” the odds of more big deals being announced in coming months continues to rise, as borrowing costs remain historically low and falling resource prices pressure earnings.

If you own a mining company that is affected by resource nationalism, your first course of action is to determine what’s actually at risk. In most cases, the market is likely to overreact to the danger and successful mining companies are skilled at finding compromise.

Freeport-McMoran Copper & Gold (NYSE: FCX), for example, is considering offering a portion of its PT Freeport Indonesia unit to the Papua administration of between 5 percent and 9.4 percent. The company’s Grasberg copper mine is among the most prolific and lowest-cost in the world; these operations have been closely scrutinized by government and at times interrupted by labor strife. Having local government as a de facto partner could go a long way toward settling that strife.

Other companies have been able to overcome the ill effects of resource nationalism by virtue of diversified operations. Canada’s First Quantum (TSX: FM, OTC: FQVLF), for example, saw its assets in the Democratic Republic of the Congo essentially expropriated but was eventually compensated and has since moved its investment to more hospitable terrain.

It’s a sure bet that governments in the future will continue to use their power to change the terms of contracts for some companies. When the investment in that country represents most or all of their operations, affected companies will be at risk of folding. However, if you stick to diversified miners, any emotional market reaction to a flare-up of resource nationalism will likely represent a buying opportunity. I uncover 5 solid commodity stocks in my free report, Top Rare Metal Stocks, which you can access here.

Mr. Conrad has a Bachelor of Arts degree from Emory University, a Master's of International Management degree from the American Graduate School of International Management (Thunderbird), and is the author of numerous books on the subject of investing in essential services, including Power Hungry: Strategic Investing in Telecommunications, Utilities and Other Essential Services

© 2012 Copyright Roger Conrad - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in