Each year, each mining company produces an Annual Report. Ignore the color pictures of locals, women geologists, heart-rending schools & hospitals built with mining profits, and go instead to the sections headed RISKS.
Not all Annual Reports have such a section, but those that do tell us a lot. I predict that a section on risks faced by the company will soon enough become a standard section. The logic of full-disclosure and law-suite avoidance makes it inevitable.
Here are some of the common risks listed in the 2011 Annual Reports of a few of the majors, such as BHP, Rio Tinto, Vale, Barrack, Potash Corporation, and Anglo American:
- Market demand fluctuations, including a significant change in the demand for, price of, and profit from mining the commodities they focus on.
- Currency fluctuations between the countries of mining and profit accounting.
- Availability of skilled staff and the ability to bring projects on line, on budget, on schedule, and in compliance with local laws, environmental demands, and social pressures.
- Climate change—not bigger floods, greater drought, more heat, and so on, but the possibility (indeed likelihood) of taxes on carbon generation.
- Opposition by locals. See Conga Mine, Pebble, Pascua Lama, Rosemont Copper. It matters not where or by whom, or of what country, or what religion (although the Catholic countries appear to be the worst.) Also beware of rich, old people who oppose disturbance of their retirement and recreational places (e.g., Rosemont and Pebble.)
In summary, I propose these three risk issues that the prudent investor should think about before selecting a major mining company in which to invest:
- Water Availability: Is there water to make mining possible and profitable? Read the stories of mines in Arizona and Northern Chile.
- Water Contamination: Is there water downstream of the mine at risk of being contaminated? Read the stories of Conga and Pebble. Maybe also most new mines in British Columbia.
- Commodity Demand Fluctuations: Decide if the Chinese Supercycle is over or if the demand for commodities by the billions who do not live like we do is still to be met.
I discount the issue of enough skilled staff. I and those of my age could produce more if pressured. Most young folk in consulting are under-pressured and under-producing. There are many civil engineers in America who are under-employed and could be pulled into higher-paid mining jobs. All that is required is effort and persuasion.
The Annual Reports of most mining companies are available through company websites, stock exchange resources, or from the InfoMine Companies site. Get them, read them, evaluate them, and hence decide where to park your investment money. Or maybe just go buy water-front property, as one person knowledgeable of the mining industry has done.
This blog was originally published on I THINK MINING on August 30th 2012 and is re-published here with permission. Mining IQ thanks Jack Caldwell.