Why I'm Investing In Foreign Miners

Published in Investing on 25 July 2011

Although the LSE has a large mining sector, sometimes it pays to look abroad.

Many investors like to invest a proportion of their portfolio in speculative companies; the sort of business whose share price could jump by several hundred percent thanks to a fortuitous event or if its new product turns out to be a surprise hit.

If you're looking for this sort of company you'll eventually come across the mining sector, in particular the many small mining companies with operations in countries such as Australia, Canada and South Africa. If you're a shareholder in one of these companies when it makes a major discovery then, to paraphrase Dirty Harry, it can really make your day.

Whilst a veritable host of these companies are listed on the London Stock Exchange (LSE: LSE), there are plenty more on the foreign stock exchanges. I think that investors are missing out on some great opportunities if they just stick to the LSE.

Why Britain is important

Thanks to our history, London has an excellent support network for the mining sector, our financial institutions are very experienced in valuing mining companies and as a result many miners, even those with no connection to the UK such as Mexico's Fresnillo (LSE: FRES), choose to have their main listings on the LSE.

But it's not just the majors like Glencore International (LSE: GLEN) which select London. Many small miners also come here, sometimes instead of their home market, because of the local expertise and eager investor base.

So why not somewhere else?

There are many reasons why some investors will only buy shares that are listed on the LSE. For UK-based investors it's the easiest market in which to deal, there doesn't appear to be the same degree of foreign exchange risk and it assuages concerns about different accounting and legal issues as well as political risk.

Now I grant that there are extremely good reasons for investing in UK-listed companies which operate in countries with a distinctly lax attitude to the rule of law and property rights. Investors in the Russian miner Petropavlosk (LSE: POG) are happy to own shares in a company which is listed in London, but I suspect that many wouldn't go anywhere near it if it was only listed on the Moscow Stock Exchange.

I wouldn't touch a Chinese or Russian listed company with somebody else's bargepole, let alone my own, but I might consider a UK-listed company with Russian interests. But when it comes to mining companies that operate in democratic countries which respect property rights and the rule of law, I'm very comfortable to venture abroad.

Easy to buy

Most stockbrokers make it easy to buy shares in a foreign company and you don't even need to convert into another currency before buying. If you're using one of the major online brokers about the only difference between placing the deal on the LSE and in a foreign market is the need to specify the country. Otherwise you might buy something that you didn't expect!

The broker will do the currency conversion and your contract note will be produced in sterling.

Of course, if you're placing a deal for an Australian share it probably won't be executed immediately because of the time difference, unless you're online in the middle of the night (possibly watching the cricket).

Many investors used to be deterred from investing in foreign companies because of the difficulty in finding information, but this problem has long since been eliminated by the Internet. If you want to invest in a company the chances are that its reports, accounts and other important information are on its official website. If they aren't, then you probably shouldn't be considering its shares in the first place.

No change to the currency risk

Contrary to popular opinion, if you buy shares in a UK-listed company this doesn't eliminate the foreign currency risk. If some or all of the company's operations are in another country then you're exposed to currency fluctuations whenever these profits are converted to sterling. For example, Diageo (LSE: DGE) gets about 90% of its sales from outside the UK, so it is heavily exposed to changes in the value of the pound against the US dollar, Euro, Yen and many other currencies.

Consider the London-listed Australian gold miner Norseman Gold (LSE: NGL). Gold is sold on world markets in US dollars whilst most of Norseman's expenses are in Aussie dollars. Changes in the value of these currencies aren't going to be eliminated for UK investors simply because the shares are priced in sterling. The currency risk comes with the shares.

Never forget that the currency risk goes two ways. Those of us with shares in the big miners such as BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO) are used to this, because our dividends are declared in US dollars, but since they are paid in sterling they tend to fluctuate.

The good news is that if the pound depreciates the value of your overseas investments increases. If you're pessimistic about the long-term value of sterling, as I am, then you're going to want to have a fairly large proportion of your portfolio in companies that operate overseas.

Oh Canada

I'm a big fan of investing in Canada and this isn't just because one of my favourite TV shows is Corner Gas. Canada is one of the few developed countries whose banks didn't implode in the credit crunch and its economy has an unusually strong primary sector with massive interests in agriculture, fishing, mining, oil, gas and timber. Many Canadian companies simply don't have an equivalent on the LSE, so if you want this type of business you have to look there.

One of my Canadian miners is Aberdeen International; an investment company and merchant bank, with a market capitalisation of about £50 million, which specialises in small mining companies. It's not a share for the proverbial widows and orphans since it invests in an interesting basket of tiny mining companies, whilst it also gets a nice income from two royalties.

Aberdeen's current share price is around C$0.90, a discount of some 40% to its most recent net asset value of C$1.51 (which doesn't include the royalties). It's my smallest holding, at just over 0.4% of my portfolio, but it's something that I plan to add to over the years.

More from Tony Luckett:

> Tony owns shares in Aberdeen International, Diageo, BHP Billiton and Rio Tinto.

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Comments

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ieallison 27 Jul 2011 , 10:26am

Thanks for the article, Tony.

In my case, sorting out any UK tax on foreign dividends is what puts me off. I for one, would welcome a comprehensive article from a reliable source, based on experience rather than theory.

pharmaspecialist 29 Jul 2011 , 2:00pm

Yes I would certainly agree that an article on how to account for foreign dividends on the UK self assessment form would be very useful as the guidance from HMRC is poor and I have got it wrong in the past. However, this problem is not so great that it puts me off investing in overseas companies. Aberdeen International looks interesting and is certainly low profile as I have been looking at vehicles investing in Canadian microcaps (without much success) and did not come across this company, which I have now invested in -so thanks for the info. One point I would make is that I believe the n.a.v. of Aberdeen includes Can$10M of disputed funds which I think would reduce the n.a.v. by about 10% if the legal action to recover them is unsuccessful, but it's still an attractive dicount to n.a.v. bearing in mind the record of Mr. Bharti.

johnnnytemplar 01 Aug 2011 , 10:22am

Good link on this company

http://www.barelkarsan.com/2011/07/aberdeen-international.html

It notes that payments to insiders are very high and also re-iterates the $10mil disputed payment.

TonyTwoTimes 11 Oct 2011 , 10:24pm

A bit late, but the disputed $10 million has been resolved today in Aberdeen's favour. $9 million and payment of the royalty continues. Shares up 14% on the day (11 Oct 2011)

http://tmx.quotemedia.com/article.php?newsid=45134820&qm_symbol=AAB

Aberdeen is very speculative holding, though I still class it as second to Westport Innovations as my most speculative holding.

Time for a Canadian Club methinks :-)

Tony L (the author)

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