Wednesday, December 6th 2023

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why it is essential to keep on top of local risks when investing in resource stocks

Recent weeks have once again demonstrated the spreading influence of violent groups in major West African mining jurisdictions Burkina Faso and Mali. The developments highlight the additional risk resource investors take on when they put money into firms with operations in geopolitically unstable countries that are not well covered by UK news channels. Here, we highlight the importance of keeping on top of local macro issues when investing.

Spreading violence

Burkina Faso was thrust into the limelight earlier this month following the news that Canadian geologist Kirk Woodman had been found dead in the country. Woodman, who worked for Vancouver-based Progress Minerals, was abducted by a dozen gunmen at a mine exploration camp in the north of the country. His body was found nearby with many gunshot wounds two days later. What’s more, Woodman’s death came several weeks after two aid workers from Canada and Italy also went missing in the country. They have not yet been found.

Burkina Faso Soldier

Two days after Woodman’s body was found, Burkina Faso’s prime minister, Paul Kaba Thieba, and his entire cabinet resigned from office. No reason was given for the decision, but Thieba’s government had faced growing pressure over a rise in the number of kidnappings and jihadist attacks in the country. These hostilities have been concentrated primarily in Burkina Faso’s northern provinces, many of which border Mali.

Mali has suffered great violence and political instability over recent years at the hands of Islamist groups. These groups are now said to be extending their influence into bordering areas of the poorly-policed Sahel region. These efforts have focused predominantly on Burkina Faso.

Many of Burkina Faso’s attacks have been attributed to the jihadist group Ansarul Islam, who emerged near the Mali border in December 2016. Other incidents have been carried out by a second group called JNIM, which has allegiances to Al-Qaeda. Together, the organisations are believed to be responsible for more than 255 deaths since 2015.

FCO 275 - Burkina Faso Travel Advice Ed4 [WEB]

The situation has now become so severe that Burkina Faso was forced to declare a state of emergency last month in many of its northern provinces. This gives security forces in the once-peaceful country additional powers to carry out searches of homes and restrict freedom of movement. This heavy use of martial law was extended by six months earlier in January following an attack near the Malian border that left 12 people dead.

Meanwhile, violence in Mali itself has shown no signs of slowing down. Ten United Nations peacekeepers were killed in an attack on a UN camp last week. The violence, which left another 25 injured, came just days after two additional UN peacekeepers were killed in the country when their vehicle hit a mine.

International issues

As many UK investors will know, both Burkina Faso and Mali are hotbeds of mining activity in spite of their problems.

Indeed, despite more than 40pc of its population living below the poverty line, Burkina Faso is now the fourth largest gold exporter in Africa, according to The Conversation. The gold price boom in the 2000s led to the creation of eight industrial mines between 2007 and 2014. Meanwhile, the number of artisanal mines increased from 200 in 2003 to more than 700 in 2014.

Likewise, despite its ongoing geopolitical issues, Mali has also turned into a gold mining heavyweight in recent times. The country’s output of the precious metal soared by 23pc last year alone to 60.8ts. Meanwhile, the United States Geological Survey estimates that the country hosts 200,000ts of lithium resources.

Unsurprisingly, some of the most lucrative mining players in these booming industries are not local firms but Western companies operating out of countries like Canada, Australia, and the UK. Indeed, London-listed mining stocks of all sizes operate out of both countries.

To name but a few examples, Avesoro Resources, Acacia Mining, Panthera Resources, Goldplat, and Oriole Resources all have an element of exposure to Burkina Faso across their portfolios. Meanwhile, firms like Hummingbird Resources, Altus Strategies, Kodal Minerals, Capital Drilling, Cora Gold, Two Shields Investments, and, once again, Panthera Resources and Acacia Mining hold interests in Mali.

As a general rule, the threat of violence and geopolitical instability makes it much more difficult to operate from an impacted country. Indeed, fewer mining professionals are going to be willing to spend time on the ground, and the likelihood of developing a project without disruption and establishing strong local relationships will decline. These are all pivotal to running a successful mining operation.

With that in mind, it seems likely that all of the businesses mentioned will be impacted in some way if the geopolitical situation in Mali and Burkina Faso continues to deteriorate.

Do your research

We have highlighted just one situation here, but violence and geopolitical issues are prevalent in jurisdictions all around the world.  Many of these areas also happen also host enormous, largely untapped resources that Western miners are likely keen to exploit.

It is also worth noting that the degree to which each named firm could be impacted in Burkina Faso and Mali will also be influenced heavily by the size of their exposure and the contingencies they have in place. Both of these issues are very much worth looking into.

Regardless, the dynamic provides a vital reminder of how important it is for retail investors to be well informed of the domestic issues impacting their investee company’s assets. Large institutional investors are likely to have the financial resources and technical expertise to ensure they can thoroughly research and visit a business’s projects in person, helping to paint a full picture of jurisdictional health. This gives them a chance to head for the door as soon as possible when it looks like they are beginning to become too risky.

Retail investors, however, are unlikely to be afforded this privilege. What’s more, at the risk of sounding overly cynical, it is improbable that a business is going to be the first party to throw their hands up and inform investors when local matters look like they are starting to get messy.

Remember, one can invest in the most fantastic project in the world, but this means very little if it cannot be developed. Geopolitical factors are as much of a risk here as operational and geological issues.  

In an era where Brexit rules the UK news agenda, many Brits are likely finding that it has become easier-than-ever to limit their global news focus. However, there is definitely an argument to be made that keeping up to date with the local issues affecting your investment’s assets is just as important as keeping your eye on financial results and newsflow.

We note a number of companies that could be affected by the recent instability:

Avesoro Resources, Acacia Mining, Panthera Resources, GoldPlat, Oriole Resources, Hummingbird Resources, Atlus Strategies, KodalMinerals, Capital Drilling, Cora Gold, Two Shields Investments.

The author does not hold shares but was remunerated for the article