Investing in Risky Jurisdictions? Take Note

By: Larry Cyna | Tue, Jun 26, 2012
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There is enough risk in investing without the added risk of political instability so why does the investment community often use the same metrics to value the shares of exploration and production of resources companies regardless of their location in the world? This is so very wrong, yet it continues. Frankly, when investing in the stock market you should always discount the value of the stock that you are considering buying if the jurisdiction is not historically safe, stable, and economically strong.

I have written extensively on the subject of country risk (both jurisdictional and political) in the past here, here and here but with recent events around the world my cautionary tale bares re-emphasizing.


Why Safety from Political Risk Warrants Little Attention

1. Analysts and investment houses give little emphasis to investing risk in unsafe jurisdictions because they are in the business of selling product. As I have revealed before (see here), investment houses need product to sell. They make their money not from successful investing. No, that would be too logical. They make their money when they sell something to you. It doesn't matter if it is a good investment or a bad investment. When you buy, they earn a commission. It is as simple as that.

2. Countries want investment dollars and downplay the risk of investing in their country. Two countries - Argentina & Colombia - who have had problems in the past, and until recently were considered "safe", have now hit the press.

a) Stephen Ferry of The New York Times wrote recently, regarding Colombia, that "Involvement of armed men has been a part of the history of mining in the country. Guerrillas and their paramilitary adversaries use mining to launder money and to extract extortion payments." As the "War on Drugs" makes drug trafficking more dangerous for the drug cartels, they are turning to other activities including kidnapping for ransom and extortion. More and more miners in the country are paying extortion money in order to stay in business. There are now stories of heavily armed men guarding the areas being mined to ensure that they are paid properly by the companies for any activities.

b) Hernán Scandizzo of Latinamerica Press wrote: "In early May, Argentina's Congress passed the Executive-driven Hydrocarbons Sovereignty law by an overwhelming majority. The entirety of the ruling party and a large part of opposition parties approved the legislation, which expropriated 51 percent of YPF's shares that were held by Spanish oil firm Repsol. It also declared self-sufficiency in hydrocarbons as well as in exploitation, industrialization, transportation and marketing to be "of national public interest and a primary objective of the country," and created the Federal Hydrocarbon Council.


Portfolio Composition

Given the above examples of Jurisdiction Risk and Political Risk it is very important to consider such in the composition of one's portfolio. When one considers creating a portfolio, diversification is very important. This is an accepted Investment Truism. If nothing else, the dramatic swings in stock values over the last 4 years should convince doubters.


Don't Gamble in the Stock Market

It is realistic that a small portion of a portfolio may be used for stock trading, or other forms of gambling but one should never gamble with an entire portfolio by heavily concentrating in a single sector, or in a single geographical location. Getting wiped out economically in not fun.

A corollary of the above Investing Truism is that a certain portion of a portfolio should be in juniors. The question is, "Which Juniors?" There are many companies in the exploration and development of natural resources to consider in many parts of the world and some of their stocks may be prone to getting beaten down because of Political and Jurisdictional Risk.


Investing Alternatives

South American Silver Corporation (TSX:SAC) is a company that is attempting to grow and advance one of the world's larger silver, indium and gallium resources in Bolivia. It is a good company, but it is an example of the above mentioned issues as noted in a recent press release from the company stating that "a small group of people carrying out illegal artisanal mining on exploration concessions owned by South American Silver have been encouraging confrontations between communities and attempting to interfere with work on the project. Groups associated with this illegal artisanal mining activity have joined with activists from outside the local community and have recently held protests in La Paz and are now protesting near the project site."

As a comparison to the issues of South American Silver, one may look at Quebec in Canada, which is one of the friendliest and most proactive mining jurisdictions in the world. Other Canadian provinces may not match the unique advantages than Quebec offers, but everywhere in Canada is safe, secure, and business friendly (with some grimaces when thinking about British Columbia). Below are some Canadian companies that have great value:


Conclusion

To reiterate what I mentioned in the opening paragraph, when investing in the stock market ALWAYS discount the value of the stock that you are considering buying if the jurisdiction where the company's operations are taking place is not historically safe, stable, and economically strong.

 


 

Larry Cyna

Author: Larry Cyna

Lawrence J. Cyna, CA
www.cymorfund.com

Larry Cyna

Larry Cyna, CA, is CEO and Portfolio Advisor to Cymorfund, a boutique hedge fund. He expresses his insights several times a week on his blog www.cymorfund.com and offers a free newsletter which can be subscribed to here.

Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the public markets, has been a founding director of public companies and is a strategic consultant to selected clientele.

He is and has been a director, a senior officer and on the Advisory Board of a number of TSX and TSXV public companies in the mining, resource, technology and telecommunications sectors, and the Founding Director of two CPC's with qualifying transactions in mining and minerals. He was an honorary director of the Rotman School of Management MBA IMC program, has completed the Canadian Securities Institute Canadian Securities Course & Institute Conduct and Practices Handbook Course, was a former Manager under contract to an Investment Manager at BMO Nesbitt Burns, a roster mediator under the Ontario Mandatory Mediation Program, Toronto, a member of the Institute of Corporate Directors of Ontario, a member of the Upper Canada Dispute Resolution Group, and the Ontario Bar Association, Alternate Dispute Resolution section.

He obtained his designation as a Chartered Accountant in Ontario in 1971 and was the recipient of the Founder's Prize for academic achievement together with a cash reward. He became a CPA in the State of Illinois, USA in 1999 under IQEX with a grade of 92%. He is a Member of the Institute of Chartered Accountants of Ontario and the Canadian Institute of Chartered Accountants.

He holds certificates in Advanced ADR & in Civil Justice in Ontario, Faculty of Law, University of Windsor, certificate in Dispute Resolution from the Ontario Institute of Chartered Accountants. Previous accomplishments are Manager of Cymor Risk Consultants LP specializing in Risk Management Assessment; CEO of Cyna & Associates specializing in mediation and ADR; Founder & Senior Partner of Cyna & Co, Chartered Accountants, a fully licensed and accredited public accountancy firm with international affiliations; and was a partner in a large public accountancy firm.

Mr. Cyna is well known in the Canadian Investing community. He attends presentations given by public companies to the industry on a daily basis.. These presentations are intended by the various hosting companies to present their inside story for the purpose of attracting funding, or of making parties more interested in acquiring shares of those companies. Being in constant communication in this manner keeps Mr. Cyna deeply involved in the current market and leads to numerous investment opportunities.

Mr. Cyna is currently a Director of Argentum Silver Corporation and Telehop Communications Inc.

Copyright © 2012-2013 Lawrence J. Cyna

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