The Dark Side of Resource Stock Investing - Part 1

In spite of the potential for outsized gains in resource stocks it is important to be aware of the risks. One of the biggies is political risk. The threat of government confiscation of a mine can wreak havoc on resource stock portfolios. Although outright confiscation is rare, it is very common for governments to award themselves a bigger piece of the pie, after the mining company does all the hard work.

The most recent dark wave of uncertainty is occurring in Mongolia where amendments to their mining regulations are being considered. Although nothing is finalized, draft legislation would have given the government the right to own as much as 30% of a "strategic" deposit.

Ivanhoe mines is developing a large copper deposit in Mongolia and its share price took a hit due to uncertainty about what the final legislation will be. Numerous smaller Canadian explorers were also affected.

In spite of assurances from the companies operating in Mongolia, nobody really knows what the outcome will be. Even if there is no provision for government back-in on strategic deposits this time around, governments can change and so can the rules. They rarely take less.

If you own companies operating in Eritrea, Venezuala or Mongolia you already know about the effect of politcal risk on your portfolio.