The Regulatory Risk Ratings and the accompanying Corruption Risk Index and Corruption Potential Index support due diligence and effective risk management and mitigation strategies for exploration and mineral projects. MineHutte applies the same objective criteria of analysis to all jurisdictions. Our analysis does not consider aspects outside of the legal framework e.g. political or economic risk.

Regulatory Risk Ratings Explained

The Regulatory Risk Rating focuses solely on the mining laws and regulations, measuring the level of risk they pose to investment. The ratings – ranging from 0 to 100 – reflect the risk that an investor will retain (or lose) the economic benefits anticipated from a mineral discovery based on the jurisdictions’ regulatory framework, including applicable legislation and regulations.

We caution investors on holding an investment in a jurisdiction with a rating score of less than 50. Such a score suggests that measures, other than those available in the mining code, need to be employed to safeguard investments.

There are six risk categories within the Regulatory Risk Ratings.

≥ 75 Minimal Risk
65-74 Low Risk
55-64 Moderate Risk
45-54 Substantial Risk
31-44 Severe Risk
≤ 30 Critical Risk

 

Minimal Risk jurisdictions offer clear and objective laws, which provide for and protect key rights and principles such as open and equal access, security of tenure and fiscal certainty. The legal frameworks in these jurisdictions are often modern, clearly drafted, well-structured, rules-based systems which effectively create a secure and stable environment for investment.

A jurisdiction in the Low Risk category will share many features with a Minimal Risk jurisdiction, though it is likely to have one or two embedded errors that would require amendment or clarification to elevate the laws and regulations into the Minimal Risk band. Common features in this category include: limited instances of subjectivity; minor shortfalls in respect of basic principles; slightly higher levels of governmental discretion / control. That said, many of the laws in this category still stand out as model codes in their geographic regions.

The mining codes and regulations in Moderate Risk jurisdictions are where we begin to witness the dilution of the protection of certain rights and principles and an increase, both in number and severity of those ‘red flag’ features which may give investors pause for thought. Increasing levels of discretion and / or requirements for negotiation in relation to state participation / fiscal terms are common, as are issues in relation to land access and environmental permitting. Whilst these jurisdictions still offer workable legal frameworks under which many investments have proved successful, care should be taken in navigating their terms.

Depending on where it sits within the bracket, a Substantial Risk jurisdiction is likely to contain some or all of the following characteristics: high levels of government discretion; subjective language and criteria; overly burdensome provisions for operators; excessive government control; and requirements to negotiate key rights with the State. Laws can also be poorly drafted, ill-thought out or overly complex. Even in the case of OECD countries, weak legislation can result in legal disputes and delays to projects. Investors targeting jurisdictions in this category are advised to consider, alongside their regulatory risk, political and governance evaluations, as well as general attitudes towards the mining industry, so as to determine the level of mitigation measures required.

Legal frameworks that are seen to pose a Severe Risk to investment contain very high levels of government discretion and subjectivity. The principle of guaranteeing basic rights is abandoned in favour of a system that requires extensive negotiations with the State on almost every term applicable to a project or investment. Underlying many of the codes is either a distrust of the mining industry, a desire to limit and disproportionately control foreign investment, an effort to exert sovereignty over resources, or some combination of the three. It is imperative that mining conventions and agreements be put in place to ensure protection of investment in these jurisdictions.

Critical Risk jurisdictions are those which offer no security of investment, with the laws and regulations creating a hostile environment which is destined to deter all but the bravest of investors. In most cases the laws and regulations in these jurisdictions preserve upon the State such high levels of discretion that essentially all aspects of a project’s success (or failure) will be determined by the government unless extensive mitigation measures are taken. It is absolutely essential that those who wish to do business in these jurisdictions alleviate their risk by ensuring that they have in place the strongest of mining conventions.

A Severe or Critical Risk jurisdiction does not mean an “un-investible” one, as some of the jurisdictions which fall into these bands demonstrate. Though the legal frameworks in these jurisdictions certainly create an “un-investible” environment, investments can still prove successful providing caution is exercised and mitigation measures (e.g. negotiated agreements / mining conventions) are taken as mandatory.

 

Corruption Potential & Corruption Risk Indices

In addition to our Regulatory Risk Ratings, MineHutte also provides two corruption indices, ranging from 0 – 100, which aim to complement the Regulatory Risk Ratings by providing mining-specific corruption intelligence.

≥ 81 Very Low Risk
61-80 Low Risk
41-60 Moderate Risk
21-40 Very High Risk
≤ 20 Extremely High Risk

 

The Corruption Potential Index (CPI) measures a jurisdiction’s corruption potential, providing a mining specific rating based on:

(1) The importance of various government decisions in the administration of mineral projects;

(2) The degree of discretion associated with those decisions;

(3) The number of state actors involved in decision making.

The CPI is a numeric formulation of the corruption potential associated with the legislative sub-categories which are of critical importance to a project. The regulatory risk score for the 17 sub-categories under MineHutte’s analysis are filtered to those applicable to critical junctures within a project’s life cycle that are deemed to present the highest risk for corrupt practices to manifest. The chosen MineHutte sub-categories within the CPI are weighted by their potential impact on the project’s progress using a unique algorithm.

Rules based legislation will dampen the potential for corrupt practices within these sub-categories. Where the legislation allows for greater levels of discretionary or arbitrary decision making, requires superfluous documentation for approvals and the need for multiple & redundant permissions/approvals is evident, the corruption potential is considered higher.

The CPI formulation is not a summation of sub-category regulatory risk scores, it is cognisant of the exponential nature of regulatory risk, where the combination of different sub-categories can produce a larger risk profile than the individual components.

The Corruption Risk Index (CRI) is the result of a second numeric formula which takes a jurisdiction’s corruption potential and filters this through a governance metric, specifically the Economists’ Democracy Index. This mathematical screening combines the governance measure with the corruption potential to provide guidance as to the actual likelihood of government actors using discretionary powers for improper (corrupt) purposes. 

 

How to Use this Analysis

The Regulatory Risk Rating scores should be used as an indication of overall risk associated with a jurisdiction’s mining code and regulations. The 17 sub-category scores provided can be used to drill down to specific strengths and weaknesses of the legislation applicable to various stages of the mining cycle. For example, exploration companies would benefit from examining the Application Criteria and Competing Licences category scores, while mining companies would benefit from Right to Mine and Transfer Rights scores.

To complement the Regulatory Risk Ratings, the Corruption Potential Index should be used to determine the extent of discretion and subjectivity within government decisions and the impact of such decisions on a mineral investment. A Low Risk score would indicate the potential for corruption is limited, as the mining code creates few opportunities for discretion and subjectivity to play a role in relation to important decisions. 

The CPI only refers to the potential of corruption, while the Corruption Risk Index will indicate the likelihood of such potential materialising. The CRI, which incorporates a governance measure, is indicative of the likelihood of facing corruption in a jurisdiction. Two mining codes may have similar levels of CPI, but democratically advanced jurisdictions are less likely to use such authority in a non-transparent, corrupt manner.

Category Glossary Examples of Excellence Examples of Flaws Maximum Score
Open Access Measures the ease of acquiring exploration rights and the ‘openness’ of the system to foreign, junior and other participants. Freely open to first applicant. Applicant will be considered as to its appropriateness to undertake work. 10
Exploration Exclusivity Measures the extent to which the exploration rights are exclusive to the holder, including undiscovered minerals. Exclusive rights giving holder right to all minerals. Same land may be subject to multiple exploration licences for different minerals. 10
Exploration Duration Measures the ability of a holder to retain exploration rights through a minimum exploration period. Absolute right to keep exploration rights by performing work. Short duration licence (e.g., 2 years) with discretionary renewal. 10
Right to Mine Measures the ability of the explorationist to acquire mining rights (as well as environmental permits). Explorationist awarded mining rights when discovery of resources; EIA process subject to clear timelines, objective tests and court appeals. Applicant will be considered as to its appropriateness to undertake mining; EIA process lacking timelines, standards and right of appeal. 15
Tenure Certainty Measures the ability to fully extract resources from a mine and the right of access. All surface rights included in 25 year mining lease that is renewable on application. Surface rights not included on mining lease of 10 years with discretionary renewal and ability to unilaterally revoke. 15
Economic Certainty Measures the discretion of government to interfere with economics operationally and on an exit strategy. Fixed royalty rates; general corporations tax; no consent on sale; stabilization guarantees. Government interest to be negotiated on grant of mining rights; consent needed for sale. 15
Regulatory Certainty Measures the stability of the regulatory framework. Regular changes to the mining legislation to constantly modernise its administration. No changes for decades to archaic legislation. 10
Other Factors Measures all other aspects of the regulatory framework both positive and negative. No obligation to operate any differently than a general corporate participant within the country; well-drafted legislation and regulations. Obligations to list on local stock exchange, provide preferential rights for offtake, build local processing facilities, etc.; poor legal drafting. 15
Regulatory Risk Rating Measures the risk that an investor or operator will lose the economic benefits of a mineral discovery, based purely on the mining regulation, with 100 being zero risk.  100