Falling numbers of discoveries and depletion of known deposits have prompted precious metal mining companies to look for opportunities in places away from traditional and apparently safe gold producing countries. Some spectacular opportunities have been found in far-away legislations, and with exploitation of these prospects also came the risk associated with alien cultures and jurisdictions, summarized under the term "country risk." Depending on which definition is followed, country risk includes political risk, exchange rate risk, economic risk, sovereign risk, transfer risk, socio-economic risk and others.
In a recent article, an attempt at determining the overall country risk exposure of precious metal mining companies was made. In our opinion this attempt provided much-needed food for thought, but it fell short on two scores: firstly, it only rated each company on its operating mines, disregarding the productivity of each mine, mine life or presence of development projects in a given country; and secondly, it relied solely on the risk rating of one single company with only a 4-tiered risk scale.
In the present article, we would like to expand on the intention of this article and analyze the exposure to country risk for seven major U.S.-listed gold mining companies, including Barrick Gold (ABX), Goldcorp (GG), Newmont Mining (NEM), Yamana Gold (AUY), Agnico-Eagle (AEM), Kinross Gold (KGC) and IAMGOLD (IAG).
These companies are among the largest gold miners in the world with yearly production in excess or close to 1M ounces of gold. Market capitalization for each of these companies is in excess of $2B and $30.3B for the largest company, Barrick Gold. It has operations and projects of variable characteristics and size in multiple countries on all continents. Barrick Gold and Newmont both have operating mines in seven different countries showing the greatest geographical diversification. Other companies from this list have maintained a geographical focus like Yamana Gold, concentrating on developing their business in selected Latin-American jurisdictions.
We decided to study production, reserve and resource statements of each company and sum up the respective numbers for each country these companies are active in. We used 2011 data for this study since more recent data was not available for all considered companies. The table below shows the results of this study. Values are listed in percentages of total production, reserve and resource for each company.
In a very general interpretation of this data, one could presume that production numbers allow for a current snapshot of the exposure to a given country. Reserves represent ore that has been shown to be economically mineable and can be viewed as a mid-term measure of commitment to a specific location. Resources are mineralized materials that have been located in the ground but still need work to be incorporated into mineable reserves and therefore represent a longer-term measure of exposure.
Earlier this week, we published an article with references to various sources of country risk ratings. In this article, we also compiled a table of countries with activities of U.S.-listed precious metal miners and listed the risk ratings given for these countries by these sources. We also averaged all available risk ratings into one compounded risk rating for each country.
For our present evaluation, we proceeded to multiply each entry in the table above with the corresponding compounded country risk rating, interpreting the compounded risk rating as a percentage that reduced each entry for production, reserve or resource depending on the respective country risk. By adding all country-specific reductions, we were able to compute an overall risk score for production, reserves and resources for each company.
Using this methodology, the derived risk score takes into consideration the country risk of each asset, but also provides a weighting of the risk depending on the size of each asset relative to the company size.
The diagram below illustrates our results. A lower score indicates lower risk, and a higher score indicates higher risk. Following our general interpretation above, rising bars from left to right for each company represents increasing country risk going into the future and vice versa.
The ranking tables for the considered companies in the three categories - production, reserves and resource are shown below.
Agnico-Eagle consistently takes first place for lowest risk by a sizeable margin in all three categories indicating a long-term low country risk investment proposition. This finding confirms their advertised strategy of mining in low-risk jurisdictions only.
Newmont Mining, Barrick Gold and Goldcorp consistently follow in the next three positions in these rankings. The increase in country risk for Barrick Gold and Goldcorp going into the future is mainly driven by the joint Pueblo Viejo Mine in the Dominican Republic which has in fact come online recently.
When looking at production numbers, Yamana Gold scored a risk rating comparable to the group of three discussed in the previous paragraph. However, when considering reserves and resources, Yamana Gold scored considerably higher indicating elevated risk levels comparable to Kinross Gold going into the future. Kinross Gold's risk rating is driven by operations in Ecuador and their Tasiast Mine in Mauritania, whereas Yamana Gold's risk rating is largely dependent on their Argentinean projects.
The highest country risk was consistently computed for IAMGOLD in this group of seven owing to their activities in Western Africa and Ecuador.
As mentioned above, we used last year's production, reserve and resource statements for this study since updated statements are still pending for some of the considered companies. Some risk indicated in the presented work has actually already played out with Barrick Gold at danger of losing their Reko Diq project in Pakistan where they have already invested $220M in exploration and development.
Disclosure: I am long AEM.