These 3 Companies BENEFIT From Resource Nationalism
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Foolish investors no doubt are aware of "Resource Nationalism," moves by governments to expropriate foreign-owned assets. But there's much more then expropriation at stake. Resource nationalism, "RN," also takes the form of governmental intimidation, aboriginal claims & protests, sudden increases in taxes and royalties, corruption, increased regulations/permitting and environmental scrutiny, export levies, capital controls, and blocking foreign M&A. Each one of these issues is playing out around the globe. Consider the following headlines:
"Bolivia may be nationalizing South American Silver’s deposit. The company describes it as “one of the world’s largest undeveloped silver deposits. Tahoe Resources' large silver deposit in Guatemala is being threatened by nationalism."
"Newmont Mining has had to deal with sometimes violent protests in Peru..."
"Pan American Silver is suspending investment in its flagship Navidad Project due to the rising resource nationalism in Argentina."
"On Wednesday, September 13th, the world's top platinum producer, Anglo American, suspended all of its operations in Rustenburg, South Africa due to, "intimidation" of its workers. Lonmin, which saw a week of strike-related violence at its Marikana mine end in 44 deaths in August, reports a meager 1.8% attendance rate at all of its platinum mines Wednesday. Meanwhile thousands of striking workers are halting operations at select gold mines as well. Currently there is no end or resolution in sight."
"Security guards on Wednesday fired tear gas at workers engaged in a wildcat strike at a gold mine 50 miles southwest of Johannesburg, South Africa. On Sunday, about 15,000 workers walked off the job at the mine, which is operated by Gold Fields."
"The Indonesian government has adopted various protectionist measures including a law that effectively strips foreigners of their control over mining assets by requiring them to divest at least 51 percent of their shares to Indonesian buyers after 10-years of operation."
"Talks of benefit-sharing intensified last year in parliament during a three-month strike at a giant gold and copper mine owned by US company Freeport-McMoRan, which ended with a 37 percent pay hike for workers."
"London-listed company Churchill Mining had its exploration permits revoked. In partnership with a local company, Churchill had obtained permits on 35,000 hectares of land on Indonesian Borneo, expecting to find 100 million tonnes of coking coal. Instead, it found a staggering 2.8 billion tonnes, one of the world's largest reserves. After Churchill publicized the finding, its permits were revoked and were returned to the former concession holder, one of Indonesia's wealthiest men and a presidential aspirant."
Accounting firm Ernst & Young: "...resource nationalism was cited the #1 global risk in mining and metals. The risks facing the sector have become more extreme and more complex over the past 12 months due to the fast changing investment and operational environment. Resource nationalism was listed #8 in the report just 5 years ago. This risk continues to grow."
A key takeaway is that as soon as next year, but certainly within 3-4 years, many commodities will be in short supply. RN will be an increasingly potent deterrent to the growth in supply of almost every commodity. Supply constraints paired with demand growth lead to an inescapable conclusion. Commodities are going higher, the question is when. And, all of this without even considering inflation, which is currently being suppressed in developed countries around the world. Foolish investors should look for low-cost producers in safer corners of the world.
Mining companies with operations in countries offering relatively safe havens to do business in include Walter Energy (NYSE: WLT), Teck Resources (NYSE: TCK) and Cliffs National Resources (NYSE: CLF). I've written plenty about Walter Energy, but let's look at how it benefits from RN. Walter is growing from 12 million tons of coking coal this year to 20 million in 2020. With operations in the U.S. and Canada, RN will not be the cause of potential production shortfalls. Of course, Walter is not immune from difficult geological conditions and market forces. Due to Walter's growth, per ton costs are expected to remain roughly flat as production increases.
Teck is looking better and better. While it shares the pain of low coking coal prices, Teck has huge coal reserves and is the 2nd largest producer on the planet. Teck's high quality copper assets in North and South America are exposed to some, but not a lot, of RN. Copper prices have held up incredibly well this year compared to iron ore and coking coal. 90% of TCK's earnings come from coking coal and copper.
Cliffs is almost entirely an iron ore producer, although it does own some coal assets in the U.S. In 2010 Cliffs acquired the largest known chromite deposits in North America. However, large funding requirements are likely to put the company's ferro-alloy aspirations on hold for the time being. Cliff's U.S. iron ore assets are valuable cash cows, even at currently depressed iron ore prices. With iron ore in both the U.S. and eastern Canada and another profitable iron ore business in Asia, Cliffs stands to benefit from RN in places like Africa.
Coal equities have rallied hard since September 4th, yet coal fundamentals remain very weak. I am not a buyer into this sharp rally. I think volatility will return to the sector as soon as next week.
I am long TCK, CLF and WLT. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.