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.
Understand Which Countries Dominate Supply
The second part of the analysis, geographic diversity and security of supply, can be measured by monitoring acts of RN and by understanding which countries supply is coming from. For uranium, 65% of production in 2012 came from Kazakhstan, Namibia, Niger, Malawi, Uzbekistan, Russia and Ukraine. What does that say about security of supply? Nothing good.
Therefore, uranium companies like Cameco Corporation (USA) (NYSE:CCJ), Denison Mines Corp (USA) (NYSEMKT:DNN) and Energy Fuels could be especially strong performers in the next 1-2 years.
Cameco Corporation (USA) (NYSE:CCJ) is a world leader in low-cost uranium production. Its operations provide about 14% of world production. Cameco Corporation (USA) (NYSE:CCJ) is the largest U.S. producer with in-situ recovery operations in Wyoming and Nebraska. The company also has significant operations In Kazakhstan.
Denison Mines Corp (USA) (NYSEMKT:DNN) is an emerging Canadian star. Having sold its U.S. assets to Energy Fuels, Denison Mines Corp (USA) (NYSEMKT:DNN) is the top exploration play in the Athabasca region. The company is frequently mentioned as a takeout target by Rio Tinto plc (ADR) (NYSE:RIO) and Cameco Corporation (USA) (NYSE:CCJ). Denison Mines Corp (USA) (NYSEMKT:DNN) has a range of early and later-stage exploration and development projects.
Energy Fuels is acquiring Strathmore Minerals, making it the single largest U.S.-focused uranium company with 127 million pounds of uranium resources and 3-4 world class development projects. Energy Fuels is already operating, producing a quarter of the roughly 4 million pounds produced in the U.S. The company is 100% owner of the White Mesa Mill, the only conventional operating mill in the country.
Conclusion
Resource Nationalism will never go away, in fact it’s only getting worse. Some natural resource sectors can withstand the detrimental impact of RN. Iron ore is a prime example. However in sectors like uranium, where 65% of global supply is coming from countries most people would never want to visit, keeping up with demand will be difficult. Uranium companies like Cameco Corporation (USA) (NYSE:CCJ), Denison Mines Corp (USA) (NYSEMKT:DNN) and Energy Fuels could be good ways to benefit from rising commodity prices.
The article What Is “Resource Nationalism” and Why Should You Care? originally appeared on Fool.com and is written by Peter Epstein.
Peter Epstein is long Energy Fuels, PPI.TO and PPRTF.PK. The Motley Fool owns shares of Companhia Vale Ads. Peter is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
