Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
The impact of COVID-19 is being felt across all sectors: in
obvious ways for sectors like tourism and retail, and less direct
but no less material ways for sectors like mining. When we ran an
interim update factoring in the effects of COVID-19 through our
Country Risk Investment Model, which looks at the impact of country
risk on energy and commodity sectors in financial terms, a few
interesting trends came to light.
The impact of COVID-19
It is no surprise that almost all sectors saw greater projected
losses due to country risk. This is particularly true due to the
expectation of recessions globally, and the rise in risk of strikes
and protests. However, the sectors seeing the largest increase in
average Country Risk Premiums (CRP) globally were the Hydro Power,
Automotive, and Gas Onshore sectors - 0.24%, 0.19% and 0.10%
average rise in the CRP, as compared to an overall average of 0.08%
across the ten sectors in our model. These sectors also saw the
largest average increase in NPV loss as compared to the base case
excluding country risk - 1.58%, 1.84%, and 1.42% as compared to a
1.05% average. This means that these sectors are the most likely to
see an increase in costs due the country risk ripples of
COVID-19.
The mining sector still at highest risk
Despite larger rises in other sectors, the sector that continues
to have the overall highest average CRP and NPV loss figures is the
mining sector. Mining has an average CRP of 4.76% globally,
compared to an average of 3.06% across all sectors, and a 72.76%
average NPV loss, compared to an overall average of 49.60%. This
suggests that mining is the most heavily impacted across all
sectors in our Country Risk Investment Model by losses associated
with country risk.
With the country risks driving losses in mining - contract
risks, strikes and protests, and expropriation - all rising due to
COVID-19, we're likely to see these losses play out globally -
perhaps nowhere as clearly as in Latin America.
In Latin America, the risks to mining are
clear
Disruption to operations in Brazil likely, with delays
to administrative procedures. The government declared
mining an "essential" activity, prohibiting local authority
restrictions to business operations and transport affecting mining.
However, administrative procedures will be delayed as the National
Mining Agency has suspended the assessment of concession requests
and applications for environmental licences. Even without mandatory
measures being imposed, thousands of mining-sector workers have
been sent home as a precautionary health measure. Several companies
have suspended activities, while mining company Vale has admitted
to having difficulty reactivating projects scheduled to begin
production in 2020 as COVID-19-virus-related restrictions are
slowing down safety and valuation inspections. The mining sector
also faces the risk of local authorities asking firms for increased
financial contributions to help fund efforts to control the
pandemic.
Union stoppages and legal challenges are likely in
Chile's mining sector if stricter sanitary measures are not
implemented. Most mining sites in Chile have continued to
operate, albeit at a slower pace and with reduced workforce,
because of isolation measures. State-owned Codelco, Anglo American,
Antofagasta Minerals and Teck Resources have reduced operations or
suspended expansion or construction projects, leading to
suspensions of contracts with third-party vendors. Unions are
demanding increased protection for workers' health through measures
such as limiting travel, avoiding crowded spaces, and even halting
operations, and threatening with stoppages otherwise. The
government is unlikely to order the total suspension of operations
because of the importance of the mining sector for Chile's economy,
but strike risks are likely to be mitigated by enhanced sanitary
measures.
Mexican government suspended mining operations, and
firms are unlikely to receive significant tax relief. The
government has declared mining "non-essential", prohibiting miners
to operate. Companies such as Grupo México and Newmont are scaling
back most operations while others are suspending them completely.
Those who do not comply with the suspension face fines or
prosecution, but the government is likely to consider some
exemptions on a case-by-case basis involving projects that do not
have confirmed COVID-19 cases. The government has refused to grant
fiscal relief to businesses in Mexico and any change of policy
direction in this regard is unlikely to include mining. The Mexican
Mining Chamber is requesting the government to allow them to
operate.
Peru's mining law review will be delayed as the
government is likely to focus on reactivating the sector after the
virus outbreak. Mining companies are allowed to only
maintain essential operations during the state of emergency.
Projects that have been suspended or slowed down include Anglo
American's Quellaveco, Freeport-McMoRan's Cerro Verde, Newmont's
Yanacocha, and MMG's Las Bambas. Because of the economic importance
of Peru's mining sector, once the pandemic is under control and
confinement measures are lifted, the government is likely to
implement stimulus measures to reactivate mining activity. This is
likely to delay discussions about a new mining law proposed by
regional governors, but opposed by the government, that would
impose a 10% tax on mining profits, reduce the term of mining
concessions from 30 to 12 years, and increase the mining 'canon'
(regional tax).
Learn more about our
Country Risk Investment Model and how our sector-specific model
can improve your investment choices.
Posted 08 May 2020 by Alexia Ash, Associate Director, Country Risk Consulting, IHS Markit