|
| Some Thoughts
On Debt Relief And Mining Investment Economics Of Development |
|
| Because
I lived in Africa and now live in Latin America I no longer ought to be
surprised at certain irrational decisions made by movers and shakers in
the less developed world. It’s also beyond my limited ability to comprehend
every now and then what the local hoi polloi in the less developed world
goes on a rampage for. Since getting interested in investing in junior
mining companies I’ve stumbled across two more examples of rather bizarre
actions and attitudes in the less developed world. |
|
| The first
example is currently unfolding in northern Peru. Yanacocha deserves
to be called one of the world’s biggest and most profitable gold mines.
It’s located in northern Peru, about an hour north of Cajamarca. Even though
mining contributes to twenty nine percent of Peru’s tax revenues, opposition
to mining in that region is increasing. To quote The Economist:”...Peru
cannot afford to do without mining”. |
|
| The second
example unfolded in Eritrea last year. Nevsun Resources was exploring
very promising deposits in Eritrea. All of a sudden the Minister for Energy
and Mines gave the order to stop all exploration and mining operations. |
|
|
|
|
|
| Even
though Nevsun Resources could eventually return to work, it illustrates
that doing business in the less developed world entails a little risk. |
|
| At the
same time, loads of countries in the less developed world are heavily indebted.
When switching on your TV–set you can listen to the wisdom of a bunch
of do-gooders like Bono, the lead singer of the Irish rock band U2. They
all blame evil capitalism for poverty and starvation as well as suffering
in the less developed world. As a remedy, these do gooders suggest to write
off or cut these debts. |
|
| By the
way, yours truly doesn’t have a box at home. I’ve more interesting
things to do than wasting time passively in front of the box. But that’s
not the point in this context. The point is rather: Are all these do gooders
right? Is it a bright idea indeed to write off or cut debt of poor countries? |
|
| Debt Relief |
|
| Let’s start
with an ethical argument. Do you reckon that it’s ethical to cancel
the debt of some countries while other countries have made a serious effort
to pay their debt? |
|
|
|
| Moreover,
there are a few countries that are vigorously opposed to the idea of cutting
or writing off their debt. Laos may serve as an illustration. Why are
those countries opposed to the idea? Brian Hammond of the OECD points out
that cutting or writing off debt repayment affects the country’s credit
rating. The country may also have to pay higher interest rates on future
loans. |
|
| Let’s not
forget the issue of governance. Debt relief doesn’t necessarily help a
country develop its economy and infrastructure. Unless the incompetent
or corrupt movers and shakers there are removed from power, debt relief
will only save their butts and keep them in office. |
|
| Michael Edwards,
who was with the Ford Foundation and the World Bank, puts it in a nutshell:”Africa’s
crises is really one of governance”. |
|
| Sometime last
year yours truly made the suggestion to write off all debts of less developed
countries on the condition that they’ll never ever receive any loan or
foreign aid whatsoever. |
|
| That approach
entails the advantage that debt relief doesn’t backfire on these countries
in terms of credit rating and interest rates on future loans. |
|
| However,
since then I’ve come across an idea which I’m even more favourably inclined
to. The idea comes from Robert Wheelen. Robert is with the Institute
for Economic Affairs. Robert’s idea boils down to privatising all heavily
indebted countries in the less developed world. |
|
| He wants
multinational corporations to run them on a twenty-one year lease.
I’m tempted to add one point to round Robert’s idea up. After the expiry
of the lease we’ll arrange a management buyout or spin off. The countries
can then be run entrepreneurially. In case the idea prevails I’ve already
a country/company in mind in which to place some private equity. |
|
|
|
|
|
| Even if
the debt of developing nations were going to be written off or cut,
it remains to be seen how the debt relief may be financed. The British
chancellor of the exchequer, Gordon Brown, recently suggested to use a
revaluation of the International Monetary Fund’s (IMF) gold reserves. |
|
| Some of these
gold reserves may then be sold to finance the debt relief. In case Gordon’s
idea sounds a little abstract, it might work – a little simplified - more
or less like this: |
|
| The IMF
is said to currently own about one hundred million ounces of gold. They’re
valued at about forty US$ an ounce. Assuming that these gold reserves are
going to be revalued at two hundred and forty US$ an ounce that little
revaluation would immediately “generate” twenty billion US$. These
“generated” funds could then be used to finance the debt that countries
in the less developed world owe to the IMF. In a nutshell, all this sounds
to me like an accounting trick, not like a serious discussion of debt relief. |
|
| I’ve arrived
at a few conclusions on debt relief. In my humble opinion, if this
sort of thing is going to be carried out make sure that the debtors will
never ever again receive any loan or foreign aid whatsoever. The alternative
is to privatise all heavily indebted nations in the less developed world
to sort out the underlying problem, which is bad government. Finally, Bono
and U2 may be hopefully inclined to give a concert in Laos. |
|
| Junior
Mining Companies |
|
| Since getting
out of business and law and into college teaching I enjoy having time to
suss out in detail stuff that manages to attract my interest. |
|
| The
stuff ranges from debt relief to investing in junior mining companies as
well as emerging markets. The time appears to be right to consider investing
in carefully selected junior mining companies. |
|
| What are
the reasons that make me come to that conclusion? The global mining industry
has gone through some serious mergers and acquisitions. Mining
companies are more inclined to significant mineral deposits. Significant
mineral deposits generate mineral for loads of years. They demand significant
capital, however, to develop the deposits. The need for this sort of significant
capital has resulted in large mining companies, outfits like Rio Tinto
for example. |
|
| As a result
of this mergers and acquisitions process, the newly created outfits slashed
their exploration expenditure. Geologists left the major sector and
joined the junior mining sector. Moreover, heaps of juniors have managed
to attract high calibre management with geological expertise. |
|
|
|
|
|
| That expertise
together with financing is what leads to promising investment opportunities.
To quote Simon Ridgway, president and director of Radius Gold:”With
exploration plays, it’s usually management. With early stage development
companies, if the management is good it controls the funds’ use, and good
things can happen”. |
|
| A second
reason to be mentioned is that demand for commodities has tremendously
increased all over the world, in particular in Asia. Because commodities
suffered from a bear market for quite a while, there haven’t been a bunch
of new significant mineral discoveries during the past decade. The major
mining sector is making an effort now to get its hands on new resources. |
|
| As Ross Beaty,
Executive Chairman of Pan American Silver puts it:”....we are probably
half way through a bull market, but I believe this particular cycle will
be longer and stronger than at least the last two cycles. That’s because
of the profound economic transformation sweeping through Asia....notably
China and India”. |
|
| In a nutshell,
even though the junior mining sector does involve a great deal of risk,
it does offer opportunities to make a little money. |
|
|
| A Day In
Colima |
|
| You may be
wondering how come I have the time to suss out issues like debt relief
and exotic investments like junior mining stocks. Quite simple. My new
life in college teaching gives me a bunch more freedom and flexibility
than my previous life in business and law. A typical day for me in Colima
looks more or less like this: |
|
| At about 8.00
am I manage to get my butt out of bed. It then takes me about an hour to
have a shave and a shower as well as getting dressed. When I look more
or less presentable it’s time to stagger to one of my favourite restaurants
for brunch. |
|
| Afterwards
I check my Email on campus and scan a few newspapers. During that time
yours truly also prints some material out and prepares his classes. After
all this, it’s time to stagger home to spend a few hours on my roof terrace.
In the afternoon I return to the campus. The purpose of the exercis is
to spread my wisdom in the classroom and create some entertainment there
at the same time. This reflects quite accurately my daily rhythm from Monday
to Thursday. After going through this sort of stressful week, I go into
my well deserved three day weekend. Most of the sussing out is thus done
on my roof terrace. You’ll continue to hear about it. |
|
| The following
is a list of articles written by Jurgen for the magazine: |
|
|
 |
|
|
