Finding an economic mineral deposit and bringing it into production is a tougher business than you might imagine. The odds of success have been estimated at 1 in 10,000. That's about the same likelihood as a new chemical compound reaching commercial launch as a drug.
Even if gold is headed to $2,000 an ounce, as my colleague Chris Barker foresees, the deck is seriously stacked against you if you're investing in a mining "junior" that doesn't do any mining. Probably the last thing you want to do is unnecessarily layer on additional nongeologic risks such as regulatory uncertainty, government instability, and physical security.
Survey says ...
These latter factors are the focus of the Fraser Institute's annual survey of mining companies. This is an invaluable (and free) resource for investors thinking about ponying up for shares of exploration-stage companies like Ghana-focused Keegan Resources (AMEX: KGN ) or Nevada/Mexico-oriented U.S. Gold (AMEX: UXG ) .
The Fraser Institute's Policy Potential Index "serves as a report card to governments on how attractive their policies are from the point of view of an exploration manager." While the industry tends to have a rather strong libertarian streak, this question of policy potential is more nuanced than a simple excess or lack of regulation.
Of the top five jurisdictions, three are Canadian provinces, and one is a U.S. state (Nevada). The fifth is Finland. These are highly developed economies with clear, reliable, and supportive policies in place. Rounding out the bottom are capricious or outright hostile jurisdictions like the Philippines, Venezuela, and California.
A model mining destination
For three years running, Quebec ranks as the top jurisdiction in the world. Agnico-Eagle Mines (NYSE: AEM ) may be headquartered in Toronto, but three of its four Canadian mines are located in Quebec. IAMGOLD (NYSE: IAG ) has a pair of operational mines in the province, and Goldcorp (NYSE: GG ) expects to put its Eleonore mine into production in 2015. Quebec is a great place to explore, and companies like Virginia Mines and Eastmain Resources focus on exactly that.
A false dichotomy
The fact that there are numerous producing mines in Quebec brings up an important point. Exploration-friendliness doesn't count for much if the ore isn't there. That's why investors might prefer to key in on the survey's Current Mineral Potential Index, which integrates prospectivity into the attractiveness of a jurisdiction. This bumps up locales like Burkina Faso, Mexico, and Alaska, which join policy standard-bearers Nevada, Quebec, and Chile atop the rankings.
I think this reveals the argument often put forth by those exploring in the hairy/scary parts of the world -- that there's a necessary tradeoff between mineral potential and jurisdictional risks -- to be something of a fallacy. Sure, it might help to explore in virgin territory, but there's plenty more metal to be found in world-class districts like Nevada. If you're looking to strike the right balance between exploratory upside and regulatory downside, you really don't need to compromise much -- if at all.
So who's active in these high-potential, lower-risk jurisdictions? Kinross Gold (NYSE: KGC ) is already operating one large Alaskan mine, and has exploration work under way through at least three different joint venture partnerships. Anglo American and Northern Dynasty Minerals (AMEX: NAK ) are trying to advance their Pebble project, though local community opposition in Bristol Bay may keep that massive deposit from ever seeing the light of day. Avocet Mining is building a presence in Burkina Faso around its new Inata mine. Countless companies, including the aforementioned Goldcorp, are actively exploring in Mexico.
The Foolish bottom line
My point today is that you don't need to go running off to Mongolia or the Democratic Republic of Congo to increase your odds in this game. In most cases, I would argue that you're actually hurting your odds by doing so. Exploration is risky enough, so think about sticking with jurisdictions that actually welcome your investment, and are unlikely to expropriate whatever your company might be lucky enough to find. Sounds simple enough, but this is something that resource investors overlook routinely.
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