Political Risk

It's a helluvan ending to nine years' work on developing a mine. Crystallex has had its flagship project in Venezuela yanked from it by the Venezuean government.

Corporacion Venezolana de Guayana has “unilaterally terminated” the mine operating contract it had with Toronto-based Crystallex, according to a letter from the state-owned firm that Crystallex disclosed on Sunday.

The letter included a resolution passed by CVG on Feb. 3. According to Crystallex, the resolution cited the company’s “lack of activity to progress the Las Cristinas project for more than one year” and “for reasons of opportunity and convenience.”

Venezuelan President Hugo Chavez has steadily moved to bring resources under state control and in the past year has turned his attention to gold miners. The Caracas office of Reuters cited an unnamed mining ministry official who confirmed the contract was cancelled and that CVG has nationalized the project.

The expropriation was good enough to knock about 40% off Crystallex's share price. Given that this project was its flagship, there's no reason to not expect Crystallex to go down further unless they can get it back. They could rely on the new majority stakeholder in Las Christinas: the China Railway Resources Group. The PRC government may successfully intervene on CRRG's and Crystallex's behalf. Needless to say, a lawsuit isn't likely to get past the sovereign-immunity barrier and Chavez's stubbornness.


No wonder political risk is often discussed. The trouble with a mine, unlike (say) software, is it can't be whisked off like software can. For a related reason, mining is more politically risky than real estate. A real estate developer can always get back at an expropriator, in extremis, through arson or demolition. A mining company can too, if the project's underground, but a lot more dynamite is needed; also, the new "owners" need only dig out the rubble to get at the pay rock. A strip mine is even more vulnerable.

Given this admittedly Hobbesesque perspective, it's encouraging to see how few mining projects are expropriated. Respect for property rights is often taken for granted.