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That’s not sovereign risk… this is sovereign risk!

Zimplats Holdings Limited (ASX: ZIM) has today announced that the Zimbabwean government has agreed to its proposal – in principle – as to how it would hand 51% of its operating subsidiary back to Zimbabweans under that country’s ‘indigenisation’ policy.

And you thought Australia’s mining tax stoush was bad?

In 2008, Zimbabwe’s government passed a law requiring mining companies to effectively cede just over half of their operations in Zimbabwe to ‘government approved entities’. The agreement which has been announced today sees 31% of the operating subsidiary pass to the National Indigenisation and Economic Empowerment Fund, 10% to the community and 10% to employees, while Zimplats retains the other 49%. This was after Zimplats had ceded land to the government in 2006.

This move wasn’t unexpected, with the Zimbabwean government previously rejecting an initial Zimplats proposal.

Regardless, it’s a reminder of the risks involved with investing in companies which have operations in foreign countries, with governments able to call the tune. Specific attention should be paid to mining companies with operations in parts of Africa and Asia, where governments have taken similar actions.

I’ll leave the politics to someone else, but it makes claims of ‘sovereign risk’ in Australia pale into insignificance.

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Scott Phillips is a Motley Fool investment analyst. You can follow him on Twitter @TMFGilla. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).

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