There are substantial risks involved with investments in mining operations in countries that are politically unstable. In politically uncertain situations, any number of eventualities may arise that seriously threaten the profitability of such investments. Some of the factors that can complicate mining operations in foreign countries include infrastructure access problems; problems with national and local officials or government organizations; conflicting national and regional laws; and environmental or cultural organizations that oppose mining interests over issues such as water, land or other natural resources.

A company engaged in mining in a foreign country, particularly one extracting very valuable precious metals such as gold or silver, operates only at the grace of the host country's government. Therefore, if the government that granted permission for the mining operation is unstable, the business situation for the mining company is inherently fraught with risk. The most severe threat posed by political instability is that of a political faction rising to power in the country and nationalizing the mining industry. Such an action in effect completely negates any and all previous rights granted to a foreign mining company. The company may receive some compensation or be granted very limited rights to continue operations, but it may also receive nothing at all in the form of compensation and lose mining rights, equipment and other assets. Anyone directly invested in a mining operation that is nationalized is most likely to see the entirety of his or her investment evaporate. At the very least, shareholders in the mining company may suffer significant losses, depending on how large a portion of the company's overall mining interests is affected.

Nationalization is an extreme situation, though nonetheless a real possibility, but any of a number of other politically related problems may arise that threaten to shut down a mining operation or seriously detract from its profitability. A change in government, either locally or nationally, can lead to new tax policies that may have a substantial negative effect on the mining company's profitability. Problems can arise from changes in export laws, tariffs, shipping costs or fees for use of infrastructure. A new government might put into effect a required minimum wage for mine workers that effectively renders the mining operation incapable of operating on a profitable basis.

Corruption is nearly always problematic and costly for any type of business operating in a politically unstable country. Corruption most often presents itself in the form of requirements for facilitation payments, essentially bribes, to be paid to government or other officials for a company to receive necessary operating permits, materials or operational support services. Such costs can be relatively insignificant or financially crippling for a mining operation.

Another threat to profitability for mining operations comes from environmental or indigenous cultural groups that may oppose mining operations for a number of reasons, usually related to land or water usage or overall environmental impact.

Mining operations in politically unstable environments always carry additional risk. The risk factors are lowered somewhat if the country has a long, established history of mining laws friendly to foreign investment, but in uncertain political circumstances, all potential threats to its operations must be carefully monitored by a mining company.

  1. What main factors affect share prices in the metals and mining sector?

    Discover the primary factors that influence share prices of companies in the metals and mining sector and how companies can ... Read Answer >>
  2. Why should a growth investor consider the metals and mining sector?

    Examine facts and trends about the metals and mining sector and the world economy that make metals and mining stocks attractive ... Read Answer >>
  3. What are examples of popular companies in the metals and mining sector?

    Discover what some of the most popular companies are with investors in the metals and mining sector, specifically gold and ... Read Answer >>
  4. What value metrics are best for analyzing companies in the metals and mining sector?

    Learn what some of the best valuation measures are that analysts commonly use to evaluate companies in the metals and mining ... Read Answer >>
  5. How does government regulation impact the metals and mining sector?

    Learn how permit processes and regulations impact new mining projects. Discover how government bureaucracy and litigation ... Read Answer >>
  6. What is the long-term outlook of the metals and mining sector?

    Take a look at the long-term outlook for the metals and mining sector as reported by the industry agency council of the World ... Read Answer >>
Related Articles
  1. Investing

    The Biggest Risks Mining Stocks Face

    In this article, we will look at risks shared by major and junior mining stocks and what they mean to investors.
  2. Investing

    A Beginner's Guide To Mining Stocks

    Here's a look at mining stocks and what they can bring to your portfolio.
  3. Tech

    What is Bitcoin Mining?

    Bitcoin mining is how Bitcoin gets released into circulation.
  4. Investing

    Mining Stocks: Understanding Feasibility

    In this article, we'll look at the feasibility study as it relates to mining stocks and what it is actually telling investors.
  5. Tech

    Ethereum Fans Build Their Own Rigs to Mine Cryptocurrency

    Cryptocurrency enthusiasts are building their own hardware setups to mine for currencies on the Ethereum network.
  6. Investing

    Choosing Between Major and Junior Mining Stocks

    In this article, we'll compare the juniors and the majors and look at what each can add to your portfolio.
  7. Tech

    How Do You Get Rich Off of a New Cryptocurrency?

    How does one make money off of the hottest new financial trend?
  8. Investing

    (GDX) Market Vectors Gold Miners ETF: Top 5 Holdings

    Take a look at an overview of the Market Vectors Gold Miners ETF and the top five holdings that make up the fund's investment portfolio.
  9. Tech

    Chinese Investment in Bitcoin Mining is Enormous

    China is a major player in Bitcoin and Bitcoin mining, but with the Chinese government changing its rules, what will happen?
  10. Tech

    Bitmain & John McAfee to Open Bitcoin Mining Pool

    Cybersecurity guru John McAfee is way into Bitcoin.
  1. Bitcoin Mining

    Bitcoin mining is the process by which transactions are verified ...
  2. Mine And Yours

    Terms used by floor traders to signify buying and selling. If ...
  3. Political Risk

    The risk that an investment's returns could suffer as a result ...
  4. Micro Risk

    A type of political risk that refers to political actions in ...
  5. Macro Risk

    A type of political risk in which political actions in a host ...
  6. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
Hot Definitions
  1. Asset Allocation

    An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's ...
  2. IRR Rule

    A measure for evaluating whether to proceed with a project or investment. The IRR rule states that if the internal rate of ...
  3. Short Covering

    Short covering is buying back borrowed securities in order to close an open short position.
  4. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  5. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  6. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
Trading Center