What do Peru, Serbia and France have in common...?
THIBAUT LEPOUTTRE is editor of the Caesars Report, a newsletter and mining portal based in Belgium that covers several junior mining companies with a special focus on precious metals and base metals.
Holding a Bachelor of Law degree and two economics masters degrees, Thibaut Lepouttre is considered an analytical number cruncher, focused on mining company valuations, and consistently on the lookout for the next undervalued mining company.
Here, speaking to The Gold Report, Lepouttre notes that jurisdiction risk continues to grow as a result of countries attempting to capitalize on higher commodity prices.
The Gold Report: Thibaut, at your presentation at the Prospectors and Developers Association of Canada in March, you said that country risk was the second most important factor investors should look at when analyzing mining companies. Obviously, management is the most important factor, but how has country risk changed over the previous five years or so?
Thibaut Lepouttre: I think you will agree that there is a direct correlation between the rise in commodity prices and how greedy a country gets. Country risks have increased dramatically over the past five years with the global financial crisis as commodities are a way a government can make money. This trend will definitely continue.
TGR: Will resource nationalism be the single greatest threat to the mining industry over the next decade or so?
Thibaut Lepouttre: Several countries actually have written into their laws language that gives them the authority to nationalize or partially nationalize mining projects. For example, Russia's mining code states it can nationalize every mine of strategic importance. However, it did not really define what strategic importance was.
TGR: What are some countries where investment risk is actually lower than it was and why?
Thibaut Lepouttre: In Europe, I would say Serbia and Bulgaria. The war ended in Serbia about 15 years ago and since then the country has dramatically changed. It is completely open for foreign investment now, has a favorable tax rate and has great potential for new discoveries. As a country that is a candidate to join the European Union, the political risk has decreased tremendously. There have been several finds there recently.
TGR: What are some other European countries that are worthy of a look?
Thibaut Lepouttre: The most surprising country is France. It has an overseas department, French Guiana, which borders Brazil and Suriname. Because it is part of France, the political risk is almost zero. A company there recently outlined a resource estimate of 5.4 million ounces gold. It is open pittable and the average grade is 1.4 grams per tonne. The gold mining company plans to drill more holes this year. I am certain it will come up with a resource that contains in excess of 7 million ounces.
TGR: What are some examples of countries where the risk is perceived to be much higher than it actually is?
Thibaut Lepouttre: Argentina because President Cristina Kirchner actually nationalized an oil company. A lot of people got scared and thought that the mining business might be next. That was 15 months ago and nothing has happened. The risk of nationalization or government involvement in mining projects is limited, especially because mining licenses are distributed by the state. The federal government is not making the decision on the mining project.
TGR: What are some other countries where risk is perceived to be higher than it is?
Thibaut Lepouttre: Peru. After Ollanta Humala won the elections approximately two years ago, people were worried because he represents a left-wing party – and we all know how left-wing presidents treated the mining industry in Ecuador and Bolivia. But he has proven to be very moderate when it comes to his involvement in the mining sector.
TGR: Can a mining or exploration project with high grades and an experienced management team trump significant jurisdiction risk?
Thibaut Lepouttre: Yes and no. There are countries where you can pull it off, and there are countries where you definitely cannot. An example of where you can is in Eritrea. There the government gets a 10% statutory ownership in a mining project and can acquire 30% more based on the net present value (NPV). Compare that to Mongolia home to the Oyu Tolgoi deposit, one of the richest copper-gold deposits in the world. A few larger companies still have severe difficulties with the Mongolian government.
TGR: Would you invest in Eritrea before Mongolia?
Thibaut Lepouttre: I have been a shareholder of a company in Eritrea for three years and have never encountered any problems. The government of Eritrea is holding up its part of the deal.
TGR: Do you attribute that almost entirely to the big stake that the government has in the project there?
Thibaut Lepouttre: I would attribute it more to the intelligence of the government. In the Democratic Republic of the Congo, the government takes a 40% ownership, but it does not realize that if you nationalize part of it, you actually diminish and reduce your image in the world in the longer term. A lot of people have started to trust Eritrea because it thinks longer term.
TGR: What other countries would you add to the list where investment risk has dramatically increased since 2008?
Thibaut Lepouttre: I would say South Africa. We have seen many strikes and wage hikes. On top of that, a regulation stipulates that 24% of every project should be given to the Black Economic Empowerment (BEE) movement. My main fear is that it is not just 24%, but that the percentage will actually increase over time and reach 49% or even 51%, just as in Zimbabwe.
TGR: But that black empowerment ownership structure started long before 2008.
Thibaut Lepouttre: Yes, but it goes back to your first question that the higher the commodity prices, the greedier the government and these movements are. I think we will see some changes soon, whereby the BEE group will take a larger chunk of projects.
TGR: You talked a little about Argentina and Peru. What is the risk profile of Colombia?
Thibaut Lepouttre: When we are talking about nature preservation and mining companies, Colombia is not alone. I do not think Peru or most other countries are different. Colombia is tremendously underexplored and if you look at the maps in the gold museum in Bogota, there is much more to be found there. Mining companies have to make sure they are in compliance with the environmental laws.
TGR: Any parting thoughts on commodity price risk or the market in general?
Thibaut Lepouttre: I have always been quite conservative when I do my calculations, so I always use a lower gold price. I think from this year on, the financing capability of the management team is the most important thing to look at when a company is running low on cash.
TGR: How so?
Thibaut Lepouttre: Some management teams can raise money easier than others. A new company with an unproven management team will have a difficult time raising a quarter of a million Dollars in this market.
TGR: On the gold price, do you see gold leveling off and remaining within $100 of its current range throughout the rest of the year?
Thibaut Lepouttre: Gold will trade between $1250 per ounce and $1500 per ounce I believe. The Cyprus case has proven that even a big catalyst like confiscation of savings money did not help the gold price. The question in the market right now is whether confiscation and nationalization of savings accounts is a good thing for gold, and what will the catalyst be for gold to move up. I think gold will continue to move sideways.
TGR: Thank you for your insights.