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Mining's risky business

Christine St Anne  |  01 Feb 2013Text size  Decrease  Increase  |  

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Christine St Anne is Morningstar's online editor.

 

When oil and gas giant Woodside Petroleum (WPL) announced in December last year that it would expand its operations in Israel, Morningstar associate head of basic materials Mark Taylor was less than enthusiastic.

Under the agreement, Woodside will buy a 30 per cent interest in the Leviathan gas joint venture. When announcing the deal, the company's chief executive Peter Coleman said the move was a significant step towards realising Woodside's ambition of securing world-class growth opportunities.

For Taylor, the deal was simply "a great way to take the shine off a good story". In his report titled "What are they thinking?" Taylor said it was "di-worsification" at its best and said he hoped Woodside will hopefully "come to its senses before too much is outlaid".

UBS was a little more restrained in its assessment of the deal. The investment firm said that while more work and de-risking is needed, it adds another "growth option" to the Woodside business.

Woodside's foray into Israel highlights the issue of sovereign risk. It was only a month ago when Rio Tinto (RIO) chief executive Tom Albanese stood down after the mining giant announced a US$14-billion write-down - including a US$3-billion write-down of its Mozambique coal assets.

According to Taylor, the miner increased its level of sovereign risk under the watch of Albanese. "Rio's write-down of the Mozambique coal assets gives an indication of where that path can unfortunately lead," Taylor said.

In comparison, Taylor said BHP Billiton's (BHP) entry into US shale gas "kept its sovereign risk in check". But in a world of finite resources, the mantra for many mining and energy companies is to go where the resources are, despite concerns about fraud and corruption.

In fact, fraud and corruption is one of the top 10 risks facing miners, according a recent report from Ernst and Young. Global consulting firm Behre Dolbear found the greatest level of corruption exists in countries such as Russia, Kazakhstan, Mongolia, China, Indonesia, South Africa, Papua New Guinea (PNG) and the Democratic Republic of Congo (DRC).

Rio already has operations in Mongolia, Indonesia and South Africa. Tiger Resources (TGS) is currently operating in the DRC region, while Santos (STO) has mines in PNG.

UBS head of resources research Glyn Lawcock said emerging opportunities will spur resource companies to move further into non-OECD (Organisation for Economic Co-operation and Development) countries.