investment Analysis 79

1.3 500
US $/A$
1.2
CRB Index 450
1.1
400

CRB Index (1967 = 100)

1.0
350
0.9
US$/A$

0.8 300

0.7
250
0.6
200
0.5
150
0.4

0.3 100
Jan-80

Jul-81

Jan-83

Jul-84

Jan-86

Jul-87

Jan-89

Jul-90

Jan-92

Jul-93

Jan-95

Jul-96

Jan-98

Jul-99

Jan-01

Jul-02

Jan-04

Jul-05

Jan-07

Jul-08
figure 2.4-9 Relative performance of Australian dollar versus CRB index

handle political risk; listen to minority shareholders’ views;

and take social, environmental, and safety risks seriously. In 150%
short, investors are prepared to pay a premium for a com- Net Debt/Market
pany whose management they can trust. In the 2008 market Capitalization as of
meltdown, stretched balance sheets or M&A deals that have Dec. 31, 2008
100% 2008 Share Price
gone bad have led to a reassessment of the perceived quality
Performance
of management teams. In bull markets, most get the benefit
of the doubt, but in bear markets, few are trusted fully.
50%

external environment: geopolitical, Tax,

financing, legal
When evaluating a company, the location of its exploration 0%
BHP Billiton Anglo American Rio Tinto Xstrata
assets or mines is integral in determining its risk profile.
Riskier companies often require a higher rate of return from
investors and debt holders because of greater uncertainty –50%
about the future cash flows of its operations. This is especially
true for mining companies, which can be higher-risk compa-
nies because of the assets’ location. –100%
Generally, companies with operations in countries with
established mining industries and laws, such as Australia and
Canada, are deemed to be lower risk, owing to low sovereign figure 2.4-10 net debt/market cap for the “Big 4” mining
risk, strong legal systems, stable tax laws and royalty arrange- companies versus 2008 share price performance
ments, and lower probabilities of government intervention.
In high-risk countries, including many parts of Africa and with the majority of its exports and therefore foreign cur-
other developing nations, a number of uncertainties may arise, rency. For example, in Zambia, mining accounts for 90% of
the first of these being sovereign risk. Higher sovereign risk the country’s exports. Therefore, governments have a vested
causes debt providers to require a higher rate of return to com- interest in keeping mining projects in operation, which may
pensate for the greater uncertainty of developing a project. limit the scale of any downsizing or cuts in production that
This may lead to financing becoming unobtainable for some may be needed in a downturn.
exploration projects, no matter what the grade or resource. Spotting step changes in the external environment can be
Additionally, the legal system in these countries may be weak a key to anticipating large changes in the value of listed mining
or ad hoc, providing no protection from government interven- companies. How will a global credit crunch differentially affect
tion or challenges to mineral and property rights. There is also various listed mining companies? How will a banking crisis in
greater risk that mining laws or royalties may change, result- Kazakhstan affect a mining company with assets there? (Clue:
ing in uncertainty of future cash flows or contributions from What will happen to exchange rates and exchange controls?)
operations. This has been evident in Zambia, where new wind- How does equity issuance across all sectors affect the returns
fall taxes were proposed for copper producers. for liquid and nonliquid mining companies?
In developing nations, it is often the case that mines pro-
vide a large source of employment and income to the gov- ConCluSionS
ernment through royalties and corporate tax. In the absence This chapter conveys two points. First, the usefulness of
of other major industries, mining may also provide a country the analytical community goes beyond making money for a