Justin's note: Earlier this month, I told you about Casey Research founder Doug Casey's proprietary system for finding small resource stocks with huge upside. He calls this method the “Nine Ps of Resource Stock Evaluation.”

In that issue, our gold stock guru Louis James talked about why “People” matter in resource stock evaluation. I recently caught up with Louis again to discuss another essential component to this method: “Politics.” If you're wondering what politics has to do with mining, read our conversation below…

Justin Spittler: Louis, why do politics matter in resource investing?

Louis James: After bad People, nothing can destroy value faster than bad Politics. This can take many forms, from the straightforward robbery called “nationalization” to the destruction of value before it can be created in the pious name of protecting endangered species.

Some countries, states, or provinces are places where most of the inhabitants—and therefore the politicians who pander to them—either fear or hate mining. Sometimes this is a genuine expression of the local culture and values. Sometimes it's a creation of special interests who lobby and even pay opinion leaders to spread anti-mining sentiment.

I have been places where radical environmentalists have lied to local villagers, telling them that simple exploration drilling would poison their water and kill their animals. I have heard of big landowners supporting such groups, because mining will bring training and higher-paying jobs, pushing up the cost of manual labor. And of course, in first world countries, almost all politicians pay lip service and homage to the Earth Goddess, regardless of economic cost.

Whatever the source, anti-mining politics can prevent exploration and stop mines from getting permitted or built. Or worse, the government might let naive foreigners spend huge amounts of money exploring, discovering, studying, and building, only to steal the mine when cash starts flowing. Such greed wrapped in lofty words is no less devastating for shareholders.

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Justin: You obviously travel a lot, Louis. How does your “boots on the ground” research help you understand a country’s political situation?

Louis: Anyone who bothered to go and look, as I do, could tell a lot. I once went to a mine site where management was saying that they had excellent relations with the locals—but I had to take a longer route to get to the plant because villagers had set up a roadblock on the main road. Anyone could see that was a problem.

However, I do speak several languages and can speak with the locals directly in many parts of the world. I often do “man on the street” interviews, without the potentially biasing presence of the management of the companies I’m researching. This helps me get a sense for the true sentiment and hence political risk in a play. I remember, for example, talking to many people in the Democratic Republic of the Congo about their upcoming election in 2005. That helped me predict correctly that the incumbent Kabila would win, which would be good for mining stocks. We made a lot of money on Tenke Mining (now taken over by Lundin Mining) as a result.

Justin: What are some countries with more favorable political climates right now?

Louis: Well, even in the best countries, you still have to watch out for state or provincial politics. The U.S. is one of the best mining jurisdictions in the world, but it’s much easier to permit a mine in Nevada than in New York. Canada is even better, but there are conflicting aboriginal land claims in British Columbia, for instance, that can make things difficult. Mexico has become a much more stable and pro-mining country than most people realize, but there’s a drug war making some areas dangerous, and local anti-mining sentiments taking other regions off the table.

Scandinavia can be great, with very stable rule of law, but it also tends to have very slow-moving bureaucracy. Peru has been a bright spot on the map for many years, but indigenous opposition to many large open-pit projects has made some areas riskier for miners. Another bright spot is Turkey, which has been very pro-mining for years and is a far more developed country than most people realize. But there, too, the coup attempt last year and Kurdish insurgency raise security concerns.

The bottom line is that no place is perfect. Mining is an “extractive” industry which many people dislike, or outright hate, without really knowing much about it. As Doug Casey says, “You can run, but you can’t hide.” Political risk cannot be avoided in such an unpopular business as mining, it can only be managed. Keeping our ears to the ground in the places where we have investments is one way we do this. Taking profits at first opportunity is another.

Justin: How much of a premium do you normally pay to invest in these safe jurisdictions?

Louis: None. Even in the best jurisdictions, I want to buy at a discount. The formula is “buy low, sell high,” not “buy high and hope to sell higher.” Turning it around the other way, a deep enough discount can attract me to a place with a higher political risk than I’d normally like. Great assets on sale for pennies on the dollar can deliver quick gains before politics has a chance to ruin the play.

Justin: What are some countries speculators should avoid for political reasons?

Louis: Venezuela is a clear no-go zone, with Bolivia not far behind. Anywhere like this with a history of nationalization is not worth the risk, no matter the discount. Places with high levels of corruption or impenetrable bureaucracy, like Russia or much of Africa, are rarely worth bothering with… It takes a huge discount to get me to consider them.

Justin: Great stuff as always, Louis. Thank you for your time.

Louis: You're welcome.

Editor's note: Politics is just one thing to pay attention to for any speculation. But there are eight other Ps that you should evaluate before putting any money into a resource stock. They're all critical to Doug's proven “Casey Method.”

Doug has been perfecting this investing strategy over the last 40 years. He’s used it make gains of 487%, 711%, and even 4,329% in gold stocks.

To see how this method can help you make huge gains in the resource market, watch this new presentation. This video also reveals how to access the nine best resource stocks you can buy right now. Click here to learn more.