Financing and risk management of investments in mining sector

ABSTRACT: This study aims for investigating the process of mining investments and calculating the level of risk to which mining companies are exposed. As a mining firm gets involved in a project, there are many risks to be assessed including environmental, social and reputational risks. Therefore, the presence of a sustainable development framework in the mining sector helps to consider all dimensions of mining projects in order to mitigate the risk exposure. As undeveloped mineral resources are mostly located in the jurisdictions with high levels of risk, project finance is often the preferred financing strategy in the mining investments. In addition, the host country where all the key players of project financing are involved in the related activities plays an important role in the appraisal and risk assessment of the mining projects. Since it is not possible to investigate the mining sector in a single study, the gold mining firms are chosen as the target of this study. In this respect, top five gold mining companies are identified. Then, in order to address country risks affecting project financing of these firms’ properties in different countries, this study suggests a methodology in which risk scores are calculated. These risk scores evaluate four basic categories of risks: political, commercial, technical and legal. A calculated risk score is comprised of surveys and rankings that are most relevant to the four risk categories. Results show that the production percentage and the risk score of the host country in each category are important factors to the overall risk exposure of these gold mining companies. In addition, higher risk scores are associated with less risky jurisdictions and vice versa. These findings could be as the first step in the appraisal of mining investments by financiers. Keywords: Gold Mining Firms, Project Finance, Political Risk, Legal Risk, Technical Risk, Commercial Risk, Risk Scores. …………………………………………………………………………………………………………………………………………………………………………………………………………