News that First Quantum’s mineral rights in Congo have been overturned is hardly surprising. Personally, in my investments I try to steer clear of highly volatile regions where war, bribery and theft are more common than sound business practices. The other day I sold my shares of Centerra Gold because the coup in the Krygyz Republic, where CG has a huge percentage of its NAV, created too much volatility for my liking. Nor would I ever invest in Venezuela with its kleptocratic dictator, Chavez.
First Quantum’s mistake was taking on too big a risk–as long as the governments in Africa remain corrupt and violent, investors need to be wary and not stick their necks out no matter how lucrative the deal may seem to be. Africa’s riches, gold, uranium, diamonds, and oil, are indeed tempting and lucrative. Indeed, the more lucrative, the more you have to be worried that the corrupt government will want to rescind their contract, so that they can get a bigger piece of the action–or in the case of Chavez, all of the action! This is what happened to Kosmos Energy in Ghana. If it happens in “safe” places to invest like Australia and Alberta, how much more is it going to happen in volatile regions like Congo. Australia recently announced a 40 per cent “profit” tax on mining companies (the latest is that the government may relent on that plan). Alberta has repented of its increased royalty structure on oil and gas in order to try to get things back the way they were before when oil companies found the province attractive for new investment.
When in Chad, I stayed in an “air conditioned” house of a Exxon employee. The air conditioning worked about 2/3s of my stay. The rest of the time you bake because Ndjamena is in the desert. My friend said that he was in charge of a 24 hour plan, planned to the minute, to evacuate all Exxon employees in case of an outbreak of violence in the country. A few short months after my visit, rebels stormed the city of Ndjamena and thousands of refugees fled across the river into Cameroon. The rebels later fled, even though they were on the brink of successful coup, and the refugees returned a few days later to pick up the pieces of their lives. Why, for heaven’s sake, would you want to send your employees to a country like that? The Chinese and Koreans are finding that there are still plenty of places to invest their billions of dollar right here in “safe” Canada. I say “safe” because no place is immune to kleptocracy and war. It is just that some regions present far less risk than others.