I spotted a great comment on Twitter the other day which perfectly illustrated the brutal force of resource nationalism. It showed the share price performance of the larger UK mining stocks so far this year with the words ‘spot the companies with operations in Tanzania’.

While nearly all of the stocks were in positive territory, two stocks stood out because they had declined by a significant amount due to interference by the Tanzanian government.

They were Petra Diamonds (PDL) and Acacia Mining (ACA), both down by about 50% year to date. In contrast, the best performing miner, copper producer KAZ Minerals (KAZ), is up by more than 110%.

Why are those shares down so much?

Acacia has suffered considerable losses after being forced to close one of its gold mines after the Tanzanian government blocked the export of unprocessed ore and accused the company of tax evasion.

Petra had one of its diamond parcels seized by the government and its Williamson diamond mine in Tanzania was temporarily closed while certain personnel engaged in talks with the authorities. The company has now warned it might breach agreements with its lenders over the ratio of debt to earnings if it cannot resume sales from Williamson by the end of the calendar year.

Chief financial officer Jacques Breytenbach says it has been one of the most difficult years for Petra in a long time.

It has also been a very testing time for shareholders, particularly as Petra was meant to have been at a major tipping point in its career where the benefits of a long period of development work would soon translate into significant cash generation.

Underappreciated risk

Resource nationalism is one of the underappreciated risks associated with investing in mining stocks, so too oil and gas companies. It can be very difficult to predict precisely when it will happen – and in which countries – but historically it tends to happen at a point when commodity prices are rising.

The term resource nationalism covers many things. Ultimately it means a country increasing its percentage stake, income stream or control of natural resource projects through higher taxes or directly appropriating assets.

You also need to factor in competing global concerns over resource security, climate change, sustainable development and poverty reduction as drivers of resource nationalism.

The Tanzanian government appears to making changes to mining rules in order to benefit local people. However, its aggressive manner could ultimately backfire and stop foreign investment in the future. It has been a similar situation with many other countries over the years.

Most miners and oil firms go out of their way to give back to the local communities such as through job creation, setting up schools and infrastructure improvement. Yet many governments clearly don’t think that is enough, hence why they can go through spells of being heavy handed.

What governments really need to do is create a system that supports a sustainable environment for foreign companies. Sadly that is unlikely to happen everywhere in the world as the leaders of many countries are not rational thinkers.

Next time you think about investing in a resources company, make sure you look at its country of operation rather than just its balance sheet and asset quality.

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