Global Mining Faces Government and Currency Risks

By: Julian D. W. Phillips | Thu, Aug 10, 2006
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From - Gold Forecaster - Global Watch August 2006

As hopes for future gold supplies turn more and more to politically risky nations with a growing propensity to tax and control such resources, so the risks facing the well-known producers in the industry are growing.

It is incumbent on all investors to be aware of the nature and extent of these risks to assess their own risks. Investing in sound producers with perspicacity is not a safe course as their priorities are not necessarily the same as the Investor. After all a producer is there to produce gold on an on-going basis. To do so he has to attract money for development of the resources and getting those to the market.

As an example of the risks, this week saw Newmont face a battle in Uzbekistan where government officials seized some mining assets and prevented gold shipments out of their country in the wake of a $48 million tax dispute. A bank has frozen an account owned by the Zarafshan-Newmont Joint Venture and that it cannot say how the situation will be resolved. Now we are hearing that Newmont could be looking at shutting down their mine there. The mine, which employs about 900, is operating at less than full capacity. It produced 123,000 ounces of gold in 2005 and 29,000 ounces for each of the two quarters this year. Newmont said it would consider a sale of its 50% interest in the venture, worth about $94 million.

The partnership has been fighting an order from an Uzbekistan economic court to pay about $48 million in taxes and penalties to resolve two claims dating to 2002. One claim, for the period between 2002 and 2004, is for $37 million. The other, for 2005, is for $11 million. Representatives of the joint venture contend it was protected from changes in tax laws by a decree; Uzbekistan tax authorities have rejected that argument. Uzbekistan officials, in the meantime, have blocked the joint venture's gold shipments out of the country, and some of its assets have been seized. In addition, the European Bank for Reconstruction and Development told the joint venture last week that funds in its account were no longer available. The partnership has an outstanding debt obligation of about $20 million with the bank, and the account has about $14 million, Newmont said.

Newmont has operations in Nevada, Australia, Bolivia, Canada, Indonesia, Mexico, New Zealand, Peru and Uzbekistan and you can be sure that they are carefully weighing their risks in these countries and in all other countries they intend going into.

We have seen several governments begin to treat the international miners in their country far more harshly, on both the taxation front and the ownership front, believing they could override previous agreements with the mining and oil companies. What precautions should an investor take then?

If we look to the Congo, we see a nation in the midst of elections with one of the candidates a warlord. The nation has a past and present record of very poor control over their own land. This is a strange concept in the developed world, but the risks can be highlighted by a look at Angola, where in the war just ended, the two sides realized the importance of mining to their ability to continue to war against each other. One of the tactics used was to go to a mine under the opposition’s control and to kill the mine staff, particularly the management, so the mine could not continue. The place became far more dangerous than the wild-west ever was.

Will the Congo go the same way? Superficially it seems not, but with such poor infrastructure, with the continuing inability of the government to protect mining interests effectively, this risk is higher than would ever be the case in the U.S. or even in South Africa.

Anglo-Ashanti C.E.O. believes: "In all countries, especially young democracies, the right to mine what most consider a national patrimony will continue to be contested. In the end, only one response will prevail. Mining companies will need to show that communities are genuinely better off for their presence.

Consequently, analyst should place a great weight on the Political risks in their own assessment of the situation.

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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.

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