Jim Letourneau's Blog

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The Dark Side of Resource Stock Investing - Part 2 Redux

I want to revisit the theme of political risk. I gave an overiew of the issue in a previous post. ResourceInvestor.com discusses pending mining legislation changes in Tanzania and Peru today.

This is a global issue that won't disappear any time soon. If Eritrea can take a 30% cut without losing investment, why shouldn't the Mongolian people benefit from a similar arrangement? Another country might take 35% which might prompt other nations to reevaluate their take.

Royalties, degree of government participation, and taxation can radically alter the economics of investing in a country's mineral resources. It is the marginal resources that are the most sensitive to royalties and taxation. For example most countries have lower royalty rates for heavy oil and oilsands compared to light oil. As heavy oil/oilsands projects start to throw off big profits it is likely that royalties will start to increase on them.