2023-04-04 21:47:45 ET
Summary
- The use of gold bullion to pay for imports in a country hosting two of Newmont's flagship mines is a worrying signal.
- Mexican President introduces new laws that are unfavourable for miners, including Newmont.
- Many countries are in the process of de-dollarization.
Preamble
When investors consider purchasing Newmont ( NEM ) stock, I’m sure a variety of numbers are analysed; P/E, reserves, cost of production and so on. I suspect precious few research the geo-political risks connected with the jurisdictions of their operations. In this article, I review some of the many emerging hazards that Newmont will likely face moving forward. Indeed, I would argue that the level of uncertainty has accelerated to alarm bell territory.
Africa
Newmont investors need no reminding that the company has two flagship mines in Ghana. And this African nation is suffering from severe economic difficulties, exacerbated by the weakness of the cedi , the local currency.
One of the main problems the country is struggling with is an inflation rate of over 50% , in part caused by having to purchase oil in USD. In an effort to reduce inflation and the pressure on the cedi, in November last year, the country announced that it would begin paying for oil in gold bullion. To this end, Ghana announced plans to compel miners to sell 20% of their refined gold to the Ghanaian central bank. As you may note from the graphic above, this announcement led to an immediate strengthening of the cedi. Hardly surprising since it was also stated that purchases of gold would be at spot price with no discounts in local currency.
Whilst it is true that Newmont only has mines in Ghana, the overall supportive environment that has been given by African leaders to date has been of paramount importance. Unfortunately, there is some evidence that this backing is sinking beneath the waves, so to speak.
I previously highlighted the chilly reception that various European leaders have received on the continent over the last few months. More recently, the US sent the big kahuna, Kamala Harris , on a charm offensive to bolster support, as the United States looks to ease the developing grip Russia and China have on African nations. She follows in the footsteps of 18 other officials from the US government to take a trip to Africa this year alone. And one hopes that Kamala is successful in her efforts to bewitch Africa. However, the endeavours of the collective West to curry favour pale into insignificance when compared to those of Russia.
The Russia-Africa Summit is an important event for promoting Russia’s interests on the continent and it has proved popular amongst the leaders of African nations. It would appear that 48 of Africa’s 54 countries attended the first summit held in the Russian resort city of Sochi in October 2019 (Nana Akufo-Addo of Ghana attended). The next meeting is to be held in St Petersburg in July and there is no reason to believe that attendance will be less than the first. In fact, reports claim that Moscow expects that most of Africa’s 54 countries will attend the second Russia-Africa summit.
Can there be any doubt that this gathering will ponder the notion of a “fair world order?”, which is synonymous with getting a bigger slice of the pie for African nations. Furthermore, if you read the declaration from the first summit , you may view the following statement; “30. Work together to counter political dictatorship and financial blackmail in international trade and economic cooperation, prevent individual countries from obtaining the exclusive right to determine the appropriateness and permissible parameters of legal collaboration between other countries.” In other words, a good deal of time at the next summit will be spent undermining any leverage the collective West has in Africa.
Chad
This small landlocked African country made the news last month when it voted to nationalise assets Exxon Mobil (XOM) sold to Savannah Energy (SVNNF). Just let that sink in for a moment. Can anyone remember the last time the assets of an American behemoth such as Exxon had their assets nationalised?
Whilst it is true that Exxon has been selling off African operations with declining crude oil production in recent years so that the company can focus on its massive liquefied natural gas project in Mozambique and on more profitable operations in the Americas. Still, this does not detract from the significance of this nationalisation.
The vote taken to nationalise was not even close and was carried by a massive majority. According to Reuters; “Out of 175 lawmakers present, 172 backed the law to nationalise the assets” (of Exxon). These assets include the permits for exploration and production that belonged to Exxon. Now you might be thinking that nationalising assets in Chad is no big deal, however, the country has the 10th largest reserves in Africa. Also, if these actions are successful, then the precedent is set.
Naturally, Savannah will no doubt pursue all legal avenues to reverse Chad’s decision to nationalise. Whilst I’m no lawyer, I imagine that the actions of the Chad government are in breach of agreed contracts, so the case would seem to be open and shut. However, one has to believe that the Chad government are aware of this, so one wonders whether the country will accept the ruling of a tribunal. In this regard, note the previously quoted declaration from the Russia Africa summit; “prevent individual countries from obtaining the exclusive right to determine the appropriateness and permissible parameters of legal collaboration between other countries.”
To sum up, recent changes in Ghana are indeed worrisome, also, the trend, in terms of safety of investments, appears to be towards the downside for Newmont.
Mexico
Newmont's South America region has operations in Suriname, Peru, Argentina, Dominican Republic and Mexico. Perhaps the most concerning changes that may jeopardise future earnings are being experienced in Mexico.
Since his election in December 2018, the Mexican president, Andrés Manuel López Obrador, has rarely been out of the news. In June 2022, The president raised a few eye brows by declining to attend the Ninth Americas Summit in Los Angeles because of friction over the guest list. This action clearly demonstrated that Mexico is treading an increasingly independent foreign policy path from Washington.
Last month, the news from Mexico was a little gloomier for the mining sector in particular. The Mexican government proposed a reassessment of mining laws , including shorter concessions and stricter rules for permits. Specifically, according to reports, a reduced duration of concessions from 50 to 15 years, followed by a negotiation to extend for an equal period. In addition, a concession will start from the date of registration. Further proposals include the elimination of the rights of concession holders to land expropriation and a requirement by miners to hand over a minimum of 10% of their profits to the locals. It is true that these initiatives have yet to be ratified, and could yet be blocked. However, if they pass, it will be a serious blow for the mining sector.
Let us not forget that Mexico officially voted to nationalise lithium mining in April last year. This amendment gives the state exclusive rights over this battery metal. Reading the bill, one can learn that lithium is elevated to the status of “strategic mineral.” So what?, you may say. Well, this means that other minerals may be declared “strategic”; gold for example.
Gold
The price of gold is subject to a whole host of factors, including; economic and geopolitical developments, investor sentiment, central bank policy, global economic conditions, supply and demand dynamics and fear in the market.
Another potential boost for the price of gold is when countries start selling US treasuries since it could lead to downward pressure on the value of the US dollar. A weaker US dollar generally makes gold more attractive to investors and institutions as an alternative store of value. And there have been reports that countries are selling treasuries, the reasons for these sales would be an interesting debate. At time of writing, the USD does appear to be getting weaker and gold touched the $2,000 level once again around 17 th March.
The trend of de-dollarisation was observed by the IMF back in May 2021 , and this trend has accelerated. According to the latest IMF data , USD now only accounts for 58.36% of currency reserves. These days bilateral currency deals between nations has become commonplace and so one can readily believe that the impetus to sell US treasuries by countries is likely to continue.
A further explanation for the declining attractiveness of US treasuries is the fact that 25% of the global population are affected by US-led economic sanctions, which means that they are limited in their ability to carry out financial activities in USD. To circumvent these sanctions, the IMF opines that countries are diversifying into alternative currencies.
Given the marked rise in the amount of gold held by central banks, as reported in the latest report by the World Gold Council , it is entirely possible that some central banks are also diversifying into gold.
It could easily be argued that financial instruments that make up a country’s reserves are of “strategic” importance, especially if the USD becomes seen as an unattractive store of value.
Summary
Not too long ago, it was unthinkable that international miners could have their assets nationalised, but now a precedent has been set. We have now seen that new laws can be enacted that make "safe" mining jurisdictions less so. This together with multiple news stories of de-dollarisation and rising gold purchases by central banks around the world ought to make Newmont investors pause for thought.
As always, this does not constitute advice and investors ought to carry out their own due diligence.
For further details see:
Newmont: Troubling Signs