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Geopolitics and geology: Enhancing mining companies’ resilience amid political risk uncertainty

The mining sector is no stranger to political risk, with mining companies being challenged by geopolitical trends and government policy in resource nationalism, export restrictions, regulation, trade disputes, and supply chain disruption.

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The strategically important mining sector is no stranger to political risk. Over the last few years, mining companies have been challenged by geopolitical trends and government policy in resource nationalism, export restrictions, regulation, trade disputes, and supply chain disruption.

Driving much of this volatility is the rising demand for critical minerals needed for the energy transition and other modern technologies. Over the next 50 years, delivering decarbonization will likely rely on critical minerals, meaning governments and businesses place increasingly high importance on them.

To secure critical value chains — including the required infrastructure, transmission, and storage of critical minerals — companies should reconsider their political risk exposure, not just of their production assets but the whole supply chain to assess these complex and converging risks and the impact they could have on their operations. Understanding the strategies to mitigate such risks through the use of political risk and non-payment solutions could be a key strategy during times of economic and political uncertainty.

Understand your supply chain exposures

While supply chain disruptions are often localized, their causes may be due to broader geopolitical tensions, trade disputes, and regulatory changes. Mining companies’ supply chains are complicated, stretching over thousands of miles, so any disruption increases risk and potentially jeopardizes the project’s prospects for delivering expected returns to investors.

Over the last 12 months, companies have been beset by supply chain challenges, including lengthy delays in shipping and receiving goods, disruptions to major transportation routes, and increasing prices. For example, Houthi attacks in the Red Sea, one of the world’s most important shipping routes, have meant longer transit times, increased costs, and sustainability concerns for mining companies. Increased freight rates and logistical costs due to more expensive and less efficient routes will likely raise their operating costs.

Often, when a single country holds a significant position in a key supply chain, such as China’s in global mineral processing, the risks and potential magnitude of economic disruption increases. For instance, in 2023, China’s ban on rare earth extraction and separation technologies disrupted global markets, causing concern around the world. Countries and companies alike were led to reconsider their reliance on China and to strengthen domestic supply chains.

By reviewing products, components, materials, and key shipment hubs, companies can better understand how a geopolitical event might impact revenues.

Make informed decisions about locations

Many governments are pursuing national supply chain resilience through increased regionalization, export controls, and barriers to trade and finance. For example, the EU Critical Minerals Act makes explicit the goal to “reduce dependence on third-party countries to access critical raw minerals.”

Many mining companies are benefiting from various subsidy programs, tax credits, and preferential trade policies in advanced economies, including Australia, Canada, and the US. The flip side is that the global macroeconomic transition may discourage businesses from investing elsewhere. For instance, in emerging markets, operating costs can vary widely depending on inflation rate pressures. At the same time, subsidies and incentives can distort prices, and creditors may be wary of countries with high debt/GDP ratios.

However, while policy changes might support extraction in advanced markets, deposits of critical transition minerals remain in emerging markets. Mining companies that can identify and manage elevated geopolitical risk are more likely to enjoy the elevated returns offered by such markets, despite higher financing costs.

Investments in sustainability

In the coming years, government policies aimed at gaining additional revenue from valuable natural resources will likely intensify. Protectionist policies, or resource nationalism, include such measures as government refusal to grant authorizations to foreign mining companies or imposition of additional royalties or taxes. Such risks, where identified, can be managed and mitigated with a well-structured political risk insurance policy (often for a period of years) providing critical protection for long-term mining operators.

Furthermore, governments may show preferential trade access to certain countries and blocs, such as certain pro visions in the US Inflation Reduction Act (IRA) that benefit the EU and UK. As domestic politics compete with international priorities, contract stability and project investment returns may be disrupted.

While some companies see investment in sustainability and environmental, social, and governance (ESG) measures to gain a competitive advantage, others may prioritize growth and investment. However, both factors are aligned. Strict adherence to ESG and sustainability requirements and guidelines may help to foster good relationships with national and local governments and ease policy interventions that may have derailed a project, such as unforeseen changes in ESG and regulatory standards. Research shows that businesses with strong environmental performance can obtain financing on generally more favorable terms.

Proceed with foresight and responsibility

In 2024’s busy election year, the risks facing mining companies may be further complicated by electoral uncertainty and potentially new policy directions following elections in advanced and emerging markets, including mineral-rich South Africa. The potential implications of changing governments, new mining regulations, or shifting green policies could disrupt markets and potentially deter investment.

Electoral uncertainty, supply chain disruption, and regulatory scrutiny show the extent to which mining companies are affected by political events, with potential ramifications in terms of costs, reputation, and environmental impact. As demand pushes exploration into potentially new and more complex geographies, many mining companies will need to develop more sophisticated risk management strategies, to understand, quantify, and mitigate the political, payment, and performance risks their projects face.

Mining companies that can manage and mitigate these risks will be better placed to recognize opportunity where others may not and be better positioned to drive greater shareholder value.

For more information and insight please reach out to our dedicated global Mining and Credit Specialties teams that deliver robust, cost-effective risk management and risk transfer programs to enhance resilience and manage complex political, payment, and performance risk exposures.

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