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Mitigation strategies for mining companies navigating economic and political risk uncertainty

Demand for minerals and metals is soaring due to the pressures of industrial development in emerging markets, as well as progressing electrification and decarbonization.

Demand for minerals and metals is soaring due to the pressures of industrial development in emerging markets, as well as progressing electrification and decarbonization. While this brings potential opportunities, it may also impact the levels of political risk that businesses and investors in the mining sector will need to consider.

Political risk is the risk that a business’s operations, assets, contracts, or investments are disrupted by political events occurring in a country or by changes in the international environment. In today’s world, conflict, trade disputes, climate change, and economic factors have brought unexpected risks to supply chains, creating uncertainty for investors. Marsh’s Political Risk Report 2023 highlights four trends driving political and economic risk: persistent political instability, economic retrenchment, competition for strategic resources, and supply chain diversification.

For mining companies, these four trends have introduced an unprecedented degree of political volatility to commodities markets, affecting companies’ operations, profitability, and investment objectives. Mining companies and investors must be prepared for political risk to protect existing investments and enter new projects.

Mining’s role in the energy transition

The transition to low-carbon energy sources depends on critical minerals that are economically essential, particularly for green technologies. As such, global demand for such minerals is rapidly increasing ­– by as much as 500% for certain minerals.

One significant driver is the increased uptake of electric vehicles, the batteries of which contain lithium, alongside nickel and cobalt. By 2040, demand for lithium is expected to surge by 40 times, according to the IEA – the same year that 30 governments have said they would stop sales of new petrol and diesel vehicle models. The expansion of electricity networks means that copper demand for grid lines is also expected to more than double in the next 20 years.

Producing the supply needed to meet demand is not easy. Geopolitical events, market shocks, logistical disruptions, and long lead times (the average lithium mine takes 16.5 years to develop) are just some factors stretching supply.

Higher demand for critical minerals increases the potential for resource nationalism

The production and processing of critical minerals tends to be concentrated in a few countries, further exacerbating supply constraints. Over half of the world’s lithium, two-fifths of its copper, and a quarter of its nickel, is in Latin America, a region with high political volatility.

Partly in response to increased demand, higher commodity prices, geopolitical competition, and rising costs of US dollar-denominated borrowing, many governments in the region have taken to resource nationalism. This can manifest in different ways. For instance, raising mining sector taxes, introducing export restrictions and local beneficiation requirements, forcing contract renegotiations, imposing regulations and fines, and expropriating foreign-owned assets and investments.

In February, 2023, Mexico signed a decree to expedite the nationalization of its lithium reserves, and Chile has proposed public-private partnerships for mining projects, while the government of Panama and First Quantum Minerals recently resolved a contract dispute regarding disagreements over tax rates and royalties at the Cobre Panama copper-gold mine. Elsewhere, Indonesia, which holds the world’s largest nickel reserves, has banned the export of nickel ore, with the country expected to stop the export of raw copper by 2024. Countries in sub-Saharan Africa, including the Democratic Republic of Congo (DRC), Ghana, Mali, Namibia, and Zimbabwe, have also seen increased government intervention in the mining sector.

The trend of resource nationalism is not confined to emerging markets. The US Inflation Reduction Act (IRA) prescribes that at least 40% of critical minerals in US-made EV batteries must come from US mines or recycling plants or mines in countries with free trade deals with the US.

The revival of protectionism and restrictive trade and regulatory policies can create uncertainty around investment decisions and current operational practices. While a popular move for governments keen on increasing state revenues, creating employment and business opportunities, and securing a sense of social justice, the trend could impede the capital investments needed to scale up production and spur innovation.

One way to mitigate against the increase in these types of disruptions is with political risk insurance (PRI). The tool helps companies and investors manage certain perils associated with investing in emerging market projects, for example, acts of expropriation, regulatory interference, political violence, or breach of contract. This mitigation can protect a firm’s balance sheet against losses, provide management with peace of mind to deal with business priorities, and increase investor confidence. PRI can also facilitate securing capital for project development. It does so by reducing the country risk premium and in turn, an investor’s cost of capital, thereby improving a project’s internal rate of return.

Against the current backdrop of challenging economic and credit conditions, the ability of PRI to enhance project valuation metrics will be crucial to attracting the capital required to fund future mining developments, which are expected to increase as a result of the heightened demand and competition for strategic minerals.

Political risk poses a threat to meeting supply

Global supply chains have come under increased pressure in recent years, given the vulnerabilities exposed by geoeconomic and geopolitical tensions and a reliance on critical metals and minerals. For mining companies, the impacts include lengthy delays in receiving and shipping goods and shortages of materials.

In response to strains on supply chains, countries and companies have shifted away from focusing on efficiency in favor of supply chain resiliency. This has taken the form not only of resource nationalism but also of reshoring production, diversifying supply chains, regionalization, and increasing stockpiles. Governments are also seeking to secure supply chains by collaborating with others; examples include the US and EU critical minerals deal and the Australia and India trade pact. However, these procurement strategies have the potential to further exacerbate geopolitical turbulence and competition.

In some cases, mining companies are attempting to secure and better manage their supply chains by pursuing vertical integration between the upstream and downstream mining and metals sectors and end-users, shortening supply chains, leveraging technology, and investing in exploration and new mining projects. While these strategies can help improve supply chain resiliency, political instability in several emerging market mining jurisdictions continues to cause uncertainty for miners and their financiers.

Risk mitigation

Credit and political risk solutions can offer companies ways to mitigate potential operational disruption, protect asset and investment values, and enhance the mobilization of development capital. A comprehensive political risk mitigation strategy for a mining company or investment considers the following aspects:

  • What is the country’s political risk exposure? A range of tools and processes are available to identify political risk exposures and where gaps exist. For example, rigorous scenario planning can inform a company’s mitigation strategies.
  • What are the contractual and legal protections? New regulations may come into effect (for instance, on environmental, ownership, or labor standards) and deprive an investor’s ownership rights or its ability to operate and control operations. Investors need to thoroughly understand their legal and contractual rights and recourses in the event of such state intervention.
  • Does the project have a strong social license to operate? Community opposition to projects can create delays and add cost and complexity to projects. As such, continuous engagement with local stakeholders is critical.
  • What is the appropriate risk transfer strategy? In addition to the above components, companies may transfer their political risk exposure to the insurance market by taking out a PRI policy. This will effectively protect their balance sheet and future cashflows from catastrophic loss.

Finding opportunity

Political risk may be one of the most important constraints on investment. Many mining investments are in emerging markets where political and economic risks can be unpredictable and challenging to manage through traditional risk management methods.

Yet, companies stand to reap significant financial rewards by pursuing business opportunities in emerging markets. Therefore, appropriate strategies must be developed by companies to identify and respond to political crises early. These proactive steps will translate into rigorous management of political risk, and mitigation of associated losses.

The mitigation of political risk is possible. With a comprehensive risk management strategy, mining companies and their investors can build resilience, enhance profitable growth, and help the world to meet ambitious climate goals.

The complexities of mining require an understanding that goes beyond traditional ways of managing risk. Our 300 dedicated global mining risk specialists deliver robust, cost-effective risk management and risk transfer programs that enhance resilience.

Our people

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Raul Munoz

Senior Vice President Mining Practice Leader

  • Canada

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Chantal Brazeau

Managing Director

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Megan Marshall

Global Sales Leader for the Credit Specialties Practice, Marsh Specialty