Jurisdictional Risk Part 1 -A Framework for Evaluation

Our success in life is largely due to the quality of the decisions we make.

The more consistently we make good decisions, the better chance we have of achieving our personal goals.

So why do some people tend to make good decisions consistently?

This is a great question.

I think the answer is that some people have better frameworks for making decisions than others.

For some, these frameworks come naturally, it’s just the way that they think.

For others, it often requires a conscious decision to follow a framework for their decision making, which, of course, is influenced by what they want to achieve.

The more scattered or unfocused your goals, the weaker your framework is for decision making and the more susceptible you will be to emotional states of mind.

Be very specific with what you want in your life and, more pertinent to this article, what you want out of your investments.

This will dictate the ideal framework for your investment decisions.

It’s clear to me that the core reason I have lost money in the market, in the past, is directly related to the poor decisions that I’ve made.

Unfortunately, mistakes will happen, no one is perfect.

With this said, my personal goal is to both reduce the number and severity of the losses in the future.

Thus, as I’ve stated, I created and use a set of rules to anchor my thoughts and decisions regarding my investments.

My framework and adherence to that framework for decision making in the junior resource sector is better than the average investor.

I’m, therefore, able to minimize my mistakes and, consequently, am able to profit consistently no matter what market we’re in.

Today, I would like to discuss a particularly important subject when it comes to junior resource sector investment – jurisdictional risk.

Unlike many other types of businesses, mineral deposits or mines can’t be moved if a country suddenly becomes a place where it’s hard or impossible to do business.

The assessment of risk within a jurisdiction, therefore, is an integral part of a junior resource sector investor’s decision framework.

While it’s integral, in my view, it isn’t where you should start.

Personally, I think you begin your investigation with answering the following question; what is the delta between price and value?

Buying a company which is trading for less than its value is the overriding principle that must be followed continually to ensure success in the junior resource sector.

Once you have determined that a company is selling for less than it’s worth, you proceed to contrast that value proposition against the risk to investment.

Putting it together, if you personally think that the value proposition contrasted against the downside risk is acceptable, you should be a buyer.

It’s easier said than done.

Identifying and understanding the risks are a big part of being successful.

As I said, employing a system or framework for analysis can drastically improve your rate of success and, ultimately, minimize your biggest risk to your investment – YOURSELF!

Let’s take a closer look at some of the points to consider when constructing your framework for analyzing jurisdictional risk.

A Framework for Analyzing Jurisdictional Risk

Jurisdictional risk is a complex topic.

With that said, I think breaking it up into individual components is a great way to simplify the analysis.

For me, I think there are 3 main components:

• Mineral Potential
• Geography and infrastructure
• Political Risk
  • Law
  • Culture
    • Influences – dominant religion(s), genesis of the country, demographics, etc.
  • Geography
• Timing
  • Flow of Cash – Smart money is typically paying close attention to the timing aspect.

Mineral Potential

Why do junior resource companies explore for mineral deposits in some of the world’s riskiest jurisdictions?

The answer is straightforward; for the most part, all of the large, outcropping, easy-to-find deposits in tier #1 jurisdictions have already been found.

It’s, therefore, the probability of making a big discovery which drives exploration teams to take their drills to these far flung locales.

Further, mineral potential can be gauged by looking at historical discoveries in the region or by simply looking at a map and looking for areas with high geological activity, such as mountain chains.

The potential or the actual size and quality of the deposit should be at the forefront of every resource sector investor’s mind.

Taking it a little further, while the mineral potential is first and foremost, infrastructure can be a major hurdle to overcome, even for the best deposits.

Road access, power, water, and deep sea ports are all major factors contributing to not only the discovery of new deposits, but also the conversion of those deposits into mines.

Both the mineral potential and infrastructure quality are inputs for computing a project’s underlying value, which can then be contrasted against the company’s market price.

The delta between these values will allow you to understand the value proposition.

Political Risk

There aren’t many topics that get more complex or emotional than those focused on political risk.

Political risk breaks down further into a number of sub-topics:

• Law – The rule of law within a jurisdiction is very important as it should clearly outline the criteria for ownership, taxation and liability.  It’s important to research a jurisdiction’s past and current reputation for upholding the laws that it’s supposed to be governed by.
• Culture – This is where things get complex, as a country’s culture is formed over hundreds of years by numerous inputs. Inputs such as the dominant religions, demographics, how and when the country was formed, and much more. What you see is what you get. Don’t expect a cultural shift in your lifetime. Things may appear to be changing or shifting in a direction, but much like markets, there’s always a reversion to the mean.
• Geography – The location and terrain of a nation play a big role in its risk profile. For instance, if a country is land locked, this could be an issue for travel, the importing of exploration equipment, or future export of mineral concentrates. Further, if the country is located next to a high risk country which is dominated by a terrorist organization, civil war or a virus outbreak – these issues can plague neighbouring nations.

Timing

Much like markets, in my view, jurisdictional risk moves in a cyclical motion.

The risk is always there, but it can change briefly after extremes in risk are realized.

Such as after a civil war, the fall of a dictator or on the less extreme end of things, the mass exodus of mining companies due to a new and damaging tax regime.

As I have said many times, it’s impossible to time markets with any consistency.

Sticking with the comparison of markets to the cyclicality of jurisdictional risk, I think that it’s very hard to try and pick a bottom.

What I suggest is that investors don’t try and pick the bottom, let someone else do that.

Look for smart or big money entering a risky jurisdiction after one of those climax-like events happen.

Smart or big money can be named investors putting a large chunk of cash into a junior, or maybe it’s a senior mining company which is buying a project they’re looking to develop on the cheap.

It’s a really good sign for investors in junior companies when a senior mining company sinks big dollars into a project to turn it into a mine.

Fraser Institute

While certainly not being perfect or the definitive source, the Fraser Institute does a great job at quantifying jurisdictional risk in their annual rankings of Mining Investment Attractiveness.

I continually reference the rankings as part of my research into a jurisdiction.

They are free to access and review; I highly suggest adding this to your investor tool kit.

Concluding Remarks

Jurisdictional risk is a huge topic, one that actually requires much more depth than I covered in this article.

Further, I think to really understand the topic, you need to do more than just a desktop review, you really need to visit the country in question.

It isn’t until you visit a country that you can begin to understand the culture and the nuances that come with it.

Further, while much of the jurisdictional risk discussion revolves around countries, you must really drill down to the local level of the project.

Start at the country level and move down to state or province, then move down to county or region, and finally, move down to the immediate locale – town or city.

It’s here where you can find a whole other sub-culture, one which most likely has its own nuances.

With the knowledge gained from this article, you can begin to form your own framework for analyzing jurisdictional risk.

Creating the framework and doing the research puts you miles ahead of the average investor in the junior resource sector.

It’s that advantage which will give you a leg up when it comes to becoming consistently successful with your investment choices.

In Part 2 of the series, I will use the framework laid out in this article to analyze a specific country.

Stay tuned.

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Until next time,

Brian Leni P.Eng

Founder – Junior Stock Review Premium

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria