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Emerging Market Risk — Perceptions and Reality

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Author N Brown, N Robson and E Stephens

Description

Australian mining companies are actively exploring for and developing mineral deposits throughout the world with interests in emerging markets such as Africa, Asia and South America.

It is important to understand emerging market risk as this will affect the willingness of mining companies and financial institutions to invest in a country, especially with reference to their key asset, the mining licence or operating/concession agreement.

Mining companies looking to develop new projects in emerging markets have different risk profiles than projects in countries such as Australia and Canada. Examples of key risks faced in emerging markets include:

  1. political – expropriation, nationalisation, contract
    frustration, currency inconvertibility, war, terrorism, strikes, riots and
    civil commotion; and

  2. legal – mining legislation, arbitration and dispute
    resolution, trade agreements.

There is a problem in the difference in risk perceptions between mining companies, financial institutions and insurers. This can cause different stakeholders to carry out different evaluations of the risks faced by a project, resulting in confusion about the risk margin attached to any project.

In a time where resource nationalisation and energy security are prompting governments to become more involved in the mining sector we run through some recent examples of mining companies that have had problems due to the key risks highlighted earlier.

Importance of carrying out the right due diligence to replace perceptions with reality:

  • early identification of risks – detailed due
    diligence on emerging market risks that may arise will help with their
    identification and mitigation,

  • make use of companies that can help identify risks
    and suggest solutions,

  • control the cost of financing – risk margin applied
    to a project finance loan will be influenced by the risks faced, and

  • risk management and using political risk
    insurance.

There are plenty of opportunities in emerging markets but it is important to recognise the associated risks. Detailed due diligence at an early stage will provide long-term benefits.

FORMAL
CITATION:
Brown, N, Robson, N and Stephens, E, 2007.
Emerging
market risk – perceptions and reality, in Proceedings
Project
Evaluation 2007
, pp
211-218
(The
Australasian Institute of Mining and Metallurgy:
Melbourne).