A Look At Geopolitical Risk In The Metals And Mining Sector

Investing in a world fraught by geopolitical uncertainty can be tricky. In the mining and metals industry, there are a number of geopolitical and security drivers shaping today’s business environment for investors to weigh.

Acacia's Costly Tanzanian Problem

One high-profile case involves Acacia Mining Plc ABGLF and its ongoing dispute with the government of Tanzania, which will no longer allow Acacia Mining to manage its mines in the country and will only work with the company's parent Barrick Gold Corp GOLD, which is the largest gold mining company in the world.

The long-running disagreement cost Acacia $700 million in 2017.

Acacia continues to favor a negotiated resolution to the company's dispute with Tanzania.

In July, Barrick Gold announced it would acquire Acacia Mining for $428 million.

Since March 2017, Acacia's business and operations have been materially affected by the ongoing dispute.

'A Counter-Trend Move' In Gold

Despite the risk, some see opportunity in gold, which is considered a safe haven investment.

While a "big pop" is occurring in gold miners, the question is whether it will continue after a Fed rate cut, said David Russell, vice president of content strategy at Tradestation Securities.

Gold was boosted by the Fed going dovish, but the idea that gold is going to continue to go higher is a tough call, he said: gold is still in a bear market, and investors have been buying on rumors.

"Generally, gold and the U.S. equity market move the opposite of each other. Gold is still in a bear market in a longer-term sense, so right now, this is more of a counter-trend move."

Ryan Giannotto, director of research at GraniteShares, said gold offers a “potential safe haven in times of geopolitical stress."

This has been a key factor underpinning gold's recent breakout given the tensions emanating from the Strait of Hormuz, he said.

Factoring In US-China Tensions

China and the U.S. have been embroiled in a trade dispute that escalated this year, with a number of semiconductor businesses being impacted.

In retaliation, China signaled that it may restrict the export of rare earth minerals to the U.S. in yet another example of geopolitical tensions impacting supply chains.

While market attention often focuses on semiconductor and smartphone subcomponent supply chains, the underlying reality is both more nuanced and comprehensive, said Giannotto.

“Even in the case of broad commodities, global supply chains are very much akin to Swiss watches and subject to geopolitical tensions."

The increasing strategic competition between the U.S. and China could have a critical impact on mineral supply chains at any time, he said.

Countries such as Brazil, Australia and Indonesia feature more prominently in China’s mineral supply chain, Giannotto said.

"U.S.-Chinese trade tends to be split between high-value products and agricultural goods, with input minerals being a relatively small component of the relationship."

Related Links:

Barrick Gold Will Acquire Tanzania-Based Acacia Mining For $428M

Vale Analyst Upgrades Mining Operator, Says Worst Is Behind It

The Buzwagi Goldmine in Tanzania. Photo by Hansueli Krapf via Wikimedia.