EDITORIAL — Uncertainty a quagmire for investors — Reality cheque

The North American mining industry has a longstanding tradition of doing deals on a handshake. This, no doubt, was born of necessity, as lawyers were few and far between in the days of the early gold rushes and the subsequent rushes into various mining camps across this continent. But word soon got around as to who could, or could not, be trusted. Those who broke their word were often reviled as untrustworthy louts. The rough justice of those times still lives on in the poems of Robert Service, written a century ago during the Klondike gold rush. “A promise made is a debt unpaid and the trail has its own stern code,” epitomizes the sentiment.

The world is a more civilized place now, but even civilization has its price. These days, few mining companies are prepared to execute even a simple mining deal without putting the paperwork through a battery of lawyers. Most view legal due diligence as a necessary defensive strategy meant to thwart vendors with seller’s remorse and the like. Even more lawyers are required when the transaction involves a project in a foreign land where the judicial system is less than ideal and where political risk is high.

More often than not, it is the shareholders who bear the brunt of the uncertainty generated by legal and political problems related to mining deals. They take revenge by a phenomenon called “negative investor sentiment,” which means taking their business elsewhere. Countries seeking foreign investment would do well to be mindful of this phenomenon, as capital now travels around the globe almost as fast as the speed of light.

And competition for that capital is tougher than ever.

Kazakstan and the Democratic Republic of Congo (formerly Zaire) appear to be paying little attention to the erosion of investor confidence in their business sectors. Lawsuits related to some failed mining deals are beginning to surface, particularly in the Congo, where Laurent Kabila and some of his ministers are reviewing or renegotiating previous deals so they “meet the needs of the state.” In some recent press reports, the government has blamed “multinationalist capitalists” for having caused the production of Gecamines, the state-owned mining company, to decline to near bankruptcy.

Such an allegation is bizarre (at the very least), as it was a handful of Zairian politicians led by former dictator Mobutu Sese Seko who heartlessly plundered the company’s coffers for decades while the vast majority of citizens lived in poverty. The onus is on Kabila to prove that he and his ministers are cut from different cloth.

Investment in Kazakstan also is off to a rocky start. China, too, is becoming known as a extremely difficult place to do business. A number of North American mining companies have run into problems in these countries, and the list continues to grow. A deal today can be gone tomorrow, or changed into something unrecognizable by arbitrary conditions imposed after the fact. Small wonder why some are questioning whether a deal signed in these countries is even worth its weight in paper.

Investors are growing weary of mining ventures that are derailed by unrealistic policies, or delayed as a result of transitions in government. A deal is supposed to be a deal. Granted, many countries are still struggling to understand Western business practices, and their bureaucrats often view foreigners with suspicion. But investors will not be patient forever. They have their own stern code, too. Countries which ignore the rules run the risk of finding themselves out of the game.