The Key to Leveraging Mining for Economic Development

Adrian Day: Investors Crave Regime Certainty

The investor's perspective is found in Investing in Resources (2010) by Adrian Day. (Sebastián Díaz)

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Many Third-World nations have valuable natural resources within their borders. Converting them into lasting economic development, rather than a one-off shot in the arm, is easier said than done.

The first step to achieving the former is to consider the perspectives of investors. The host nation wants employment, tax revenue, human-capital formation, and tangential economic sectors, while cost-effectively minimizing harm. The benefits will only arise if the know-how and financial backing see favorable returns and come to the party.

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A legislative and cultural environment welcoming to resource extraction is pivotal, in contrast to political stonewalling and corruption. Investors are not the enemy, and they seek low geopolitical risk and reliable infrastructure. With the right ingredients, the host nation can go beyond the commodities themselves and leverage mining to offer a mosaic of value-adding financial instruments.

Canada did this in the 19th and 20th centuries and is now a role model for the broader mining infrastructure. She overshadows the United States for mining stock listings and headquarters, especially among exploration companies. There have been hiccups, such as Bre-X in the 1990s, but Canada has become a de facto regulator for mining worldwide.

From the Horse’s Mouth

The investor’s perspective is found in Investing in Resources (341 pages, 2010) by Adrian Day. The Briton living in Puerto Rico is a mining-oriented portfolio manager and financial newsletter writer with Global Analyst. His book has aged well and, inadvertently, it offers gems for open-minded policymakers.

The book’s spice comes from its promotion of lucrative potential earnings in mining. The subtitle, How to Profit from the Outsized Potential and Avoid the Risks, leaves little doubt that he foresees a long-term bull-market supercycle, albeit amid extreme short-term volatility: “Expect a mania in commodities, perhaps even greater than the manias in US housing or internet stocks before that. Astute investors will have made fortunes.” The mania remains in the cards as of 2024.

In particular, Day notes rising industrial demand from China, which has continued since 2010. As exploration costs rise and production delays grow longer, we can see the resource battle playing out as the dictatorial regime seeks to lock down access and increase its influence the world over, notably with its Belt and Road Initiative.

In addition, Day notes waning fiat currencies, especially the US dollar. Rising budget deficits and aging demographics all but assure heightened inflation for decades to come. The implication is that savvy investors will pursue real assets rather than dollar-denominated ones. The dollar’s loss is commodities’ gain, especially in the case of precious metals, the ultimate safe haven from currency devaluation.

The mining opportunity, though, tends to be stuck behind layers of impediments. Investors politely compile their concerns into one data point: the risk premium. Often associated with sovereign bonds, that is the additional return above the benchmark or risk-free alternative to justify proceeding with an investment. A lower risk premium is a path to and symbol of economic development, and it should be a high priority when setting policies.

Climb the Perceptions Ladder

What not to do would be easier to write. It includes letting ruffians with blockades determine mining policy. The recent Cobre mine debacle in Panama is exhibit A. Perhaps even worse was the nationalization of the Las Cristinas mine in Venezuela in 2008, leaving Crystallex still trying after a decade to collect compensation. Pan American Silver’s challenges in Guatemala with the Escobal silver mine are another case of arbitrary violence and lost value.

Unfortunately, perceptions of amenability to mining improve slowly and worsen quickly. That is why a new constitution for Chile would be problematic, since her reputation has been relatively favorable in the region.

The dividends from regime certainty will accrue in the long run, and this necessitates self-control and accountability in a nation’s ruling class. One tactic to facilitate this would be a sovereign wealth fund, akin to Norway’s, to divert royalties away from incumbent politicians. Such a fund brings its own challenges, but the returns benefit future generations and facilitate revenue stabilization.

In terms of policies, the Fraser Institute in Vancouver points in the right direction with its Annual Survey of Mining Companies. It includes a policy perception index “that measures the effects of government policy on attitudes toward exploration investment.” The Fraser Institute literally surveys mining and exploration companies regarding their views of various jurisdictions. Pardon the pun, but this is a gold mine for policymakers wanting to improve their standing. The authors note the importance of low taxation and predictable regulatory processes. Utah, Nevada, Saskatchewan, and Western Australia—where mining is an integral and appreciated part of the economy—top the list. Aspirants can emulate them or offer even better governance environments.

A Nexus beyond Resources

Adrian Day’s Investing in Resources identifies compelling opportunities and problems for mining-oriented investors, and he details the nuts and bolts of how to place one’s own or institutional money into the sector. Further, he addresses the outlooks of individual precious metals (gold, platinum, and silver) and base metals (lead, copper, nickel, aluminum, and zinc). 

This is not easy reading and will be less relevant to policymakers, but a compelling theme arises from the portfolio-construction portion. Day reveals tremendous value added by intermediaries, custodians, and secondary markets, over and above the resources in the ground. That can be from closed-end or exchange-traded funds, storage providers, streaming companies, and private placements.

This reminds me of cacao production in the likes of Honduras. Unfortunately for the growers, they tend to sell the cheap commodity to US or European manufacturers. The buyers add processing and branding and enjoy a high proportion of the price paid by consumers.

Canada has become a home for the mining nexus, adding broad value and remaining resolute during the COVID-19 spread. With patience and the right convictions, other nations can achieve that in their corners of the world, placing the development opportunity into hyperdrive.

Fergus Hodgson

Publisher: Fergus Hodgson, CAIA, is the director of Econ Americas, a financial and economic consultancy. He holds an MBA in finance from Rice University and bachelor’s degrees in economics and political science from Boston University and the University of Waikato. He was the founding editor in chief of the PanAm Post. Follow him on Twitter and LinkedIn.

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