Predicting country risk

Quod principi placuit, legis vigorem habet (What pleases the prince has the force of law)

— Roman Law principle justifying the Divine Right of Kings.

Several Canadian junior companies — Nevsun Resources, Sunridge Gold, Sanu Resources — and some Australian ones too, are resuming work in Eritrea after a four-month moratorium on exploration imposed by the government.

What they have returned to is an amended Mining Proclamation that now permits the government to purchase a 30% working interest in a mining project, an increase from 20%. Like many Third World countries, Eritrea reserves a 10% carried interest for the government, and it also gets a cheque for a 5% royalty on precious metals and a 3.5% royalty on other metals and non-metallic minerals.

The government’s behaviour has been erratic, to put it gently. The moratorium was imposed all of a sudden, without a public explanation — and the consequence was unbridled speculation about what the moratorium was for. Worries about security — never far from the surface in the light of recent events — bubbled up.

That was followed by four months of silence, during which the exploration companies affected by the ban could only tell the market that they, too, were waiting for news. (In Eritrea, those four months also deliver some of the most equable weather of the year, adding inconvenience to incomprehensibility.)

In the end, the government told the companies it had been conducting a comprehensive review of the mining law and decided to make only one change.

This was worth a four-month moratorium?

Kicking government interests in mining up a notch is in vogue right now, as metal prices improve and newly funded explorers fan out across the globe. The temptation to see just what kind of cut the market will bear has proved too much for some governments.

The change itself does trench on the rights the companies thought they had, but by some standards, it’s not that significant. The government would be paying its way on the additional 10% interest, at least. Still, the hush-hush four-month review of the Mining Proclamation implies that everything was on the table.

That, in turn, suggests that the Eritrean government may have retreated from the idea of increasing royalties or the carried interest, in favour of a greater working interest.

In practice, where is the investment money going to come from? The government ran a US$140-million deficit in 2004, out of total expenditures of US$375 million. It will be hard enough for the government to find the cash for a 20% working interest.

That may mean that the Eritrean government will exercise its new option not on its own dime, but using foreign aid money.

As far as process is concerned, the government’s conduct was in character for a one-party state — which Eritrea is, after all. Consult the people whose legal rights were affected before acting? No. Pass a law through an elected legislature? Too inconvenient: we’d need a legislature, for one thing, and hey, that’s why we call it a mining “Proclamation” rather than an Act. Conduct the review openly, allowing the companies to continue work if they choose? We’ll see you in four months.

Country risk is sometimes hard to quantify. But it’s not always difficult to predict.