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Norman MacDonald | April 11, 2012

On the road – Africa: Assessing political risk

There is political risk that comes into play when making investing decisions in Africa. If I’m looking a company with assets in, let’s say, Mozambique or Ghana, compared to a mining company doing business in Ontario or British Columbia, the political considerations are very different.

A lot of my focus is on understanding what are the political risks of these various countries and how the management teams are working to minimize them (in whatever jurisdiction they’re involved in).

This is a big part of why it’s important to be on the ground, meeting with management, meeting with government officials and getting a good sense of that relationship. In February, I was in Cape Town, South Africa for the Investing in African Mining Indaba Conference, and a few months before that I spent some time in Mauritania, in northwest Africa.

It’s very evident that when you have a democratic society, the abuses tend to be minimized. I don’t want to say eliminated, but minimized. I do think more countries are taking an active role in seeing how they can transform the mineral wealth into wealth for the general population. For example, Ghana is one of the best models I’ve seen here in terms of getting the money into the hands of local people.

I felt the political tension at last year’s Indaba conference. But this year, the dialogue between government officials and some of the bigger mining companies seemed more open. It was much more of an open, flowing debate between the Ministry of Mineral Resources and, let’s say, a company like Anglo American PLC.

Anglo American, which makes up 3.49% of net assets in Trimark Resources Fund (as at Feb. 29, 2012) is allocating a lot of capital outside of South Africa. That, on its own, is a message to the government: If you don’t change the way that you’re doing business and treating mining companies, there are other options. They can invest in South America. They can invest in other parts of the globe, such as Australia. They’re not as, I would say, politically tied to South Africa as they were in the past. South Africa’s still very important, but it’s not the be-all and end-all for the company.

At this year’s conference, the Minister of Mineral Resources spoke, and was immediately followed by the CEO of Anglo American. So, I definitely got the sense that the nationalization issue evident at last year’s conference had toned down in 2012.

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4 responses to “On the road – Africa: Assessing political risk

  1. Calvin, a lot of the companies we own are not domiciled in the United States, so the costs they incur are in currencies other than U.S. dollars. Most of the companies we own have their own internal hedging policies, with respect to both risk mitigation on the costs side and trying to be opportunistic on the revenue side. I use my own hedging policy as well, based on purchasing power parity, to hedge a certain portion of the U.S. names within the portfolio since the CAD/USD relationship is correlated with the movement in commodities. There is no one answer but we manage the currency risk at the company level and at the portfolio level as well. Hope that helps. Thanks for your question.

  2. When resources are denominated in US$ and the potential of devaluation of the USD (fiscal cliff and all) will this not bring a negative head wind to the profit of the producer? Yes they get paid x $ for product, but that dollar buys less and less. How do you position the portfolio from this downward pressure?

  3. The Fund’s weighting in the sector comprises a mix of oil and gas that we deem prudent given the current opportunity in the marketplace. Oil transportation out of western Canada is not solely predicated on bitumen to China. The price of oil fluctuates on a daily basis, however when valuing oil and gas companies we use long term prices that accurately reflect the cost of new supply. Thanks.

  4. I see that your resource fund has the largest weighting in the oil and gas sector, predominantly in Canada. If the proposed pipeline shipping bitumen to China fails, will this be a negative factor for those oil stocks situated in the oilsands production area of Canada?
    Also, do you see the world demand for oil increasing significantly in the future with the emergence of a middle class in China, or has that kind of cooled off in recent months. The price of a barrel of oil seems rather stagnant of late.

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