Some time ago we presented two articles expressing our concerns with regards to increasing sovereign risk for precious metal mining companies in Argentina (see here and here). The response to these articles included some criticism that we have since taken as a starting point for further research.
The intention of the present article is firstly, to provide references for fellow investors looking to evaluate country risk; and secondly, utilising these references in order to evaluate the country risk for jurisdictions that are frequented by U.S.-listed precious metal miners.
We compiled a list of countries that U.S.-listed precious metal miners report activities in. For this list we considered Barrick Gold (ABX), GoldCorp (GG), Newmont Mining (NEM), Yamana Gold (AUY), Agnico Eagles (AEM), Kinross Gold (KGC), IAMGOLD (IAG), Panamerican Silver (PAAS), and Coeur D'Alene Silver (CDE). Collectively, these companies have operations, reserves or resources in 24 different countries.
Various political risk analysis providers and credit rating agencies generate assessments and ratings for risk exposure in countries around the world. These ratings serve a variety of purposes and are compiled using a host of different methods. We searched for country risk ratings that are freely available on the internet and have compiled the following list for future reference:
- The Fraser Institute conducts an annual survey among mining company executives on various topics related to different mining jurisdictions resulting in a risk index with 100% as the best rating. Some countries even have ratings for selected states or territories.
- The OECD country risk index is often quoted and has been prepared as input for the execution of transactions under the OECD's Arrangement on Officially Supported Export Credits. Ratings range from 1 to 7, with seven representing the highest risk class. High income OECD countries are not rated.
- The PRS Group is a private consulting firm compiling political risk rankings. Their best rating is 100 and decreases for higher risk countries.
- Coface is a leading credit insurance organisation. It publishes a country risk map assigning 7-tiered risk ratings ranging from A1 to D to every country.
- The Economist Intelligence Unit is a business consulting firm who publish regular rankings on sovereign risk. Its scale has 10 tiers ranging from AAA to D.
- Euromoney is a magazine specialising in reporting on investment matters. Among other services it provides a country risk map with ratings ranging from 0 to 100 with 100 being the least risk.
- Professor Damodaran of New York University publishes a list of country risk premiums for individual countries. To estimate the long term country risk premium, he starts with Moody's country rating and estimates the default spread for that rating over the Treasury bond rate. This becomes a measure of the added country risk premium for that country.
- The Basel Institute of Governance provides intelligence for financial institutions and also allows public access to its country risk ranking with scores between 0 and 10, with ten being the highest risk.
Not all of these organisations provided ratings for all of the 24 countries we wanted to evaluate, but every country was rated in at least four of the listed sources. In order to arrive at a compounded score we normalised each rating to values between 0 and 100, with 100 being the best score. We then averaged all available normalised ratings for a given country to arrive at our compounded score.
The table below shows the countries and ratings from the listed sources, along with our compounded score in the right-most column.
In this table a group of six countries (Finland, Canada, Chile, Australia, New Zealand and the USA) is noticeably ahead of the rest. (The inclusion of New Zealand may come as a surprise, but is owed to Newmont's Waihi mine.)
Peru, Mexico and Brazil form another group of countries that could be considered a second tier in this list.
With country risk increasing considerably the next tier of countries is formed by Russia, Indonesia and Suriname. Suriname is a wild card in this group since it is only included in four of our sources, and has an outlier in one of them.
Moving further down the list the next group of countries is made up by Papua New Guinea, Ghana and Guatemala.
The bottom of the list consists of countries scoring less than 40 in our compounded rating and representing maximum country risk. This bottom group includes among others the Dominican Republic, Argentina, Bolivia and Ecuador; all of them mining destinations frequently found in reports of large US-based mining houses.
We believe that country risk is on the rise. The sources referenced in this article will hopefully assist fellow investors in evaluating country risks objectively.
Disclosure: I am long AEM.