More On Country Risk, Canadian Prime Minister Harper on Canadian Economy, The Eurozone

September 27, 2021

More On Country Risk, Canadian Prime Minister Harper on Canadian Economy, The Eurozone!
Today's Economic & Resource Stocks Commentary
by Ian R. Campbell, FCA, FCBV

Commentary and discussion on the day's filtered news. Subscribers should consider reading our daily commentary in conjunction with the Daily Filtered News posted each day to Stock Research Portal's homepage.

More On Country Risk!

Following our recent commentaries on Peru’s mining tax increases and Argentina’s cancellation of mining permits, now Mongolia wants bigger stake in massive Ivanhoe copper mine – article reading time 1 minute.

The article reports that the Mongolian government wants to renegotiate its share in the Ivanhoe Mines (TSX:IVN) Oyu Tolgoi copper-gold project to 50% from its current 34%. This, according to the article, “amid public pressure as it heads into parliamentary elections next year”.

‘Fact-specific’ situations aside, I suggest you increasingly think about Country Risk broadly, particularly in developing countries. As I see things it is quite possible that we will see much more by way of income tax increases, required ‘good works contributions’, government regulation, government ownership intervention, and so on in developing countries as their mining and oil & gas resources are explored for and produced by foreign resource companies.

I say this because the exploration and development costs to find a resource typically are large. Unlike many non-resource businesses, the resource (i.e. the business) can’t be physically moved. It seems to be that this means once any given developing country government is satisfied that a sufficient number of foreign resource companies have expended sufficient capital, and found sufficient resources to ‘lock them into staying in the country’, that a form of the Golden Rule then will apply.

I am sure you are well aware of the Golden Rule - he who owns the gold makes the rules. In the case of developing countries I suggest three things:

(1) Governments continually change, and the elapsed time from beginning exploration to commercial production typically is between 5 – 7 years for a mining company, less for an oil & gas company.

(2) Governments make the rules in their individual countries, which rules may be subject to International Law – but pursuing an International Law Claim brings with its own set of problems and uncertainties.

(3) Foreign resource companies that expend significant sums of money in developing countries are bearing incremental risk over those same expenditures where made in developed countries – which incremental risk needs to be compensated for by ‘incremental’ return on investment.

Stock Research Portal will be introducing new Country Risk data features going forward, with the first to be introduced on or about October 17. We expect these new Data Features to enable our Subscribers to better and much more efficiently, research Country Risk than they currently are able to do.

Canadian Prime Minister Harper on Canadian Economy!

An article Sunday is titled ‘Canada vulnerable to economic downturn, Harper warns’ – reading time 5 minutes. The article reports on a speech made last week in New York, where Mr. Harper apparently said that the Canadian economy, being export-driven, is “very vulnerable” – which of course it is – and that Canada’s export market is its biggest challenge.

Mr. Harper also is reported as saying (among other things) that:

while Canada currently is running a deficit, it does not have a Sovereign Debt issue, nor is its deficit “structural or protracted”;

Canada is America’s largest and friendliest trading partner, and largest energy supplier; and,

Canadian energy exports offer America its most reliable supply of oil where that oil supply is “based on market principles rather than strategic objectives”.

I premise the following by making it clear I am a Canadian who has lived my entire lifetime in Southern Ontario - Canada’s most central and populated province. That said, and with my most objective hat on, I see Canada as having a number of advantages in the current economic environment that in combination I believe no other country has:

Canadians are comparatively few in number (approximately 33 million) occupying a vast and resource rich geography;

We have a Parliamentary Democratic Political System, which to some degree ensures compromise where Canadians elect a minority Federal Government. Thus, in Ottawa (our Nation’s Capital), we never have the extent of political polarization that we have seen in Washington as long as I remember, and now exacerbated ‘to new levels’ in difficult economic times – and that in my view will cause the U.S. to continue down an increasingly rocky economic road;

Most importantly, in my view, our best friend is the biggest ‘big brother’ in the world’s ‘schoolyard’. This enables Canadians to enjoy social programs and a standard of living that would otherwise be unavailable to us, as a result (for example) of Canada not having to spend on military to the same comparative degree as many other developed countries;

In the current economic environment we have just elected a Majority Federal Government. This means that for the next 4.5 years we are assured as Canadians that important Federal legislation will be passed without stalemate when decisive action may be required in unsettled world and unsettled country-specific economic times; and,

Canada has gun control laws, and while Canada is a proponent of ‘free speech’, we do not take ‘free speech’ to the extreme our American friends do. For example, I absolutely believe a Religious Leader in Canada with a following of 60 people who announced he was going to ‘burn a Koran’ would have been immediately shut down, as would any other similar racial or religious public bigotry.

That is not to say the Canada does not have potential economic problems on our horizon, including:

its share of debt problems at our Federal, Provincial and Municipal levels;

particularly in our Provinces of Ontario and Quebec, an ‘integration dependence’ with U.S. manufacturing operations that could be seriously impacted (or so I think) by U.S. return to technical recession and increased trade protectionism;

particularly in our Province of British Columbia a ‘lumber industry’ that is dependent to some degree on U.S. construction activity and tariff rates;

what I think could prove to be a ‘housing price bubble’, particularly in our larger population centers, which has not really abated after 2007; and,

what I see as ‘still there’ but quite diminished French/English issues;

That said, while I do believe that Canada absolutely will face serious economic issues going forward, our size, political structure, and culture will enable us to – properly governed – be more resilient to world economic problems than any other developed country, with I think Australia and New Zealand being #2 and #3 respectively as things move forward.

I will be very interested in your views on this commentary. As usual, disagreements are more to my liking than agreements, and I promise I will publish any disagreements that are balanced in these e-mails. Please write to me at icampbell@srddi.com.

The Eurozone!

On Monday the Wall Street Journal published a summary of selected comments made by 15 delegates to the International Monetary Fund, World Bank, and Group of 20 Finance Ministers and Central Bankers this past weekend. Titled ‘Europe on Their Minds’ – reading time 4 minutes – I suggest you take the time to read the 15 comments carefully.

From my point of view, they collectively spell out an obvious and rather bleak prospect for near-term world economic stability. Of particular note, as I see things, are the following – with my comments added:

Timothy Geithner, U.S. Treasury secretary: “The threat of cascading default, bank runs, and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally.”
My comment: For Mr. Geithner to speak of ‘cascading default, bank runs, and catastrophic risk’ all in one sentence has to be hugely worrisome. I have to believe that Mr. Geithner would not have used the words he did if he did not see those things as possible. That is ‘Four Horsemen of the Apocalypse talk’. America continues to be the world’s largest and most important economy. Without American influence and financial contribution I do not see how, if Mr. Geithner sees such things on the horizon, they can be forestalled forever – and as I see things America is ‘out of spending gas’;

Gao Xiqing, president, China Investment Corp.: “We can’t just go save someone. We’re not saviors. We have to save ourselves.”

My comment: This comment does not surprise on one level – being that I have said a number of times in these e-mails that China will first and foremost act in China’s best interest, and that is nothing more or less than human nature. However, it does surprise me that Mr. Xiqing said this, as it implies for me that there may be more to the concerns that have recently been expressed by many commentators with respect to Chinese inflation, over-building of housing units, recently manufacturing slowdowns, excessive internal debt issues, and so on. Perhaps once again ‘where there is smoke there is fire’. If true, that would be a huge negative to world economic resiliency as I see things;

Christine Lagarde, IMF managing director: “The bad news is that there are downside risks on the horizon, and they are piling up.”

My comment: I find Ms. Lagarde, who only recently became Managing Director of the International Monetary Fund, to be particularly balanced and forthright in her commentaries – which are frequent and consistent. I think she is someone worth ‘paying heed to’, and suggest readers focus on what she says going forward;

Tharman Shanmugaratnam, Singapore deputy prime minister: “We face a confluence of sovereign debt and banking risk with the epicenter of that being in the euro area, but it is underpinned and complicated by the fact that we also face a weakening global economy.”

My comment: Nothing really new here – but interesting that it is being said by someone in the epicenter of the geography furthest away from and arguably among the best positioned from the point of view of labor markets – hence worrisome; and,

Juergen Stark, European Central Bank executive board member: “It is a fallacy to think that loose monetary policy can solve the large structural problems we are facing. Central banks must not become the victims of their own success and should not become overburdened.”

My comment: I agree with this completely. As I see things this is just a more sophisticated way of saying that ‘if you kick the can long enough it eventually will bounce over the cliff no matter what one’s good intentions’.

Again, I suggest you take the time to read and think about all 15 comments set out in the referenced article. Frankly, what I am hearing and reading is sounding more and more to me like an exaggerated ‘Summer of 2008’. I find that to be a very scary thought.

Ian R. Campbell

About Ian R. Campbell
Ian R. Campbell, FCA, FCBV, is a recognized Canadian business valuation authority who shares his perspective about the economy, mining and the oil & gas industry on each trading day. Ian is also the founder of Stock Research Portal, which provides stock market data, analysis and research on over 1,600 Mining, Oil and Gas Companies listed on the Toronto and Venture Exchanges. Ian can be contacted at icampbell@srddi.com