Cameco Corporation (USA) (CCJ), Denison Mines Corp (USA) (DNN): What Is “Resource Nationalism” and Why Should You Care?

According to Wikipedia, Resource Nationalism (RN) is “the tendency of people and governments to assert control over natural resources located on their territory.” This definition fails to convey the breadth of the threat the world faces. Most readers recognize overt acts of RN.

At its worst, an act of RN comes without warning, and without compensation for the seized assets. More commonly, a government fails to honor a contract, demands a larger percentage of ownership, changes partnership or JV terms or cancels an agreement entirely.

Resource Nationalism, More Than Meets the Eye

However, RN manifests itself in less explicit ways. For example, via a sudden increase in corporate taxes or royalties. Or, special treatment for domestic companies. Forcing foreign companies to use favored entities for transporting or processing commodities is another example. State-controlled agencies can delay, cancel or fail to grant key permits and fine or suspend mining licenses.

In recent years, non-government actors are playing a disturbing role. Terrorism, for example, is increasingly targeting “soft” industrial assets. Environmental groups are stepping up their game with legal challenges and interruptions of mining activities. Probably the biggest increase in RN is from labor unions and local community opposition groups. In these later instances, clashes sometimes become violent.

Resource Nationalism, in all forms, is a global scourge, and it’s getting worse. There is no cure, and the problem is spreading to countries traditionally deemed to be safe–countries like South Africa, Peru and Chile. Even Australia dropped a bombshell a few years back with a large increase in mining taxes.

Why You Should Care

In the past two years, most commodity prices have fallen significantly. However, demand for key commodities is certain to grow. Global population growth and urbanization leave little doubt. When demand picks up, challenges from RN, will inhibit supply from keeping pace. Foolish investors who pick the right natural resource stocks stand to benefit from rising commodity prices.

Which Commodities Are Most at Risk to Supply Shortfalls?

Two things need to be analyzed in trying to pick the best commodities: supply/demand dynamics and geographic diversity/security of supply. The first can be measured by the spot price and current pricing trends. Iron ore prices are down about 30% from February. Supply is known to be going up as Rio Tinto plc (ADR) (NYSE:RIO), BHP Billiton Limited (ADR) (NYSE:BHP) and Vale SA (ADR) (NYSE:VALE) have ample new production planned for 2014-15.

Iron ore is the poster boy of a commodity that investors should stay away from. Rio Tinto plc (ADR) (NYSE:RIO), BHP Billiton Limited (ADR) (NYSE:BHP) and Vale SA (ADR) (NYSE:VALE) have a stranglehold. Even with iron ore prices down 30%, at a spot price of about $112 per metric tonne, the Big-3 producers still enjoy 50%+ gross margins while companies like Cliffs Natural Resources flounder with much higher costs.