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Grajem12

1,227 Posts.

161

01/05/20

10:21

Post #: 44374360
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Originally posted by BMWMPower: ↑

We are not lending to the Ecuadorian government, we are a junior lender into a mining asset in Ecuador.

The Country Risk posed by the sovereign government is a MATERIAL risk factor that needs to be accounted for in return economics or mitigated through PRI (Political Risk Insurance) or other forms of Credit Enhancement. It is a very rare occurrence for the credit quality of an entity in a country to be above that of the sovereign. See here for further details -> https://www.standardandpoors.com/ja_JP/delegate/getPDF;jsessionid=F64653FB819B98411DB2FEFF6F7D92A2?articleId=1493557&type=COMMENTS&subType=CRITERIA

Let me pose the question to you this way. What do you think the risk of any of the following occurring:
- Ecuador Nationalising a portion of the gold mines in the country?
- Ecuador Imposing new or increased tax on the production or export of gold from the country?
- Ecuador mandating gold produced in the country must be sold at a Government determined price?

None of these are zero probability events and there is a risk associated with them and projects in these jurisdictions where the sovereign is experiencing a level of distress. I personally view the second as a material risk that I would demand to be remunerated for, which is why I am absolutely livid at management and the boards decision on the purchase. Blackstone have done beautifully out of this and played them for absolute suckers IMHO.

My RoE expectation is 15%. If we're talking about a de-risked (developed and producing) asset in a Tier 1 Jurisdiction (i.e. AU, CA, US), I'll accept 12%. If it's an explorer or in development the risk premium (RoE expectation) goes up, materially.

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You make some very good points, and market agrees with you. SP down to offer price.

ROE is poor considering sovereign risk and why not bloody well invest in AUS mines, and shareholders benefit from franking credits, with low risk relatively.

NCM Price at posting: $25.94 Sentiment: Hold Disclosure: Held
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