Mining companies have little choice but to invest in increasingly remote and politically risky regions to reap the rewards from ever scarcer reserves.

For the last few years, the metals and mining industry has witnessed a flurry of mergers and acquisitions, totalling $210.8 billion last year, as companies found it easier to buy a running operation rather than start from scratch.

Sky-high metals prices have served as a great incentive for M&A activity as key raw materials such as copper, aluminium and nickel have rallied to record highs.

Experts believe the M&A trend is likely to continue, although at a slower pace, but scarce metal reserves in the earth's crust will force companies to go where the assets are.

Increasingly we are going to more remote areas, first to explore and then develop projects, said a spokesman for the world's second biggest miner Rio Tinto.

The reality is you have to go a bit further afield these days to find new, good quality mineralisation. The traditional areas have been very well explored, he said.

That's exactly what Rio did, when it teamed up with Canadian exploration firm Ivanhoe to develop the colossal gold-copper Oyu Tolgoi deposit in Mongolia.

There have been repeated delays in Mongolian legislation to approve the $13 billion project, which has pushed up costs, causing Ivanhoe to lose money in the third quarter of 2007.

But companies have not been discouraged by increased political risks as they have become much more adept at handling them, a senior industry expert told Reuters.

Companies are finding political risk easier to deal with, said Michael Lynch-Bell, global mining and metals transactions leader at Ernst & Young said.

Once you've covered your exploration risk and you know that resources are there, the political risk has become something they can handle, Lynch-Bell said.


Almost half of the participants in a survey by Ernst & Young, conducted in late 2007, said there were no regions in the world that they would avoid.

They have to take the risk, said Simon Gardner-Bond, mining analyst at broker firm Ocean Equities. Because there are no deposits elsewhere for them. It is the lack of supply that's driving people to go to the higher sovereign risk areas.

Countries like the Democratic Republic of Congo, Mozambique, Kirgizistan and Tajikistan have recently entered the spotlight thanks to their mineral-rich deposits.

In the case of larger mining companies, setting up a joint venture or buying a minority stake in the project looks more convenient than owning the whole deposit.

Due to political and safety issues there are certain places you would avoid but you also have to monitor these areas, said Illtud Harri, spokesman for the world's largest miner BHP Billiton.

Harri said bringing in partners was a good way of getting involved. BHP Billiton did exactly that in war-torn Mozambique in setting up an aluminium smelter.

In some cases, majors prefer to act together in risky areas. BHP Billiton, Anglo American and Xstrata operate a big coal mine in Colombia, which faces security risks.

On Tuesday, a coal train from Cerrejon coal mine, owned by the three majors was derailed by a guerilla bomb attack.

David Rovig, president of Greystar Resources, a Canadian mining firm with a big gold/silver project in Colombia said security risks are still an issue, but the situation has improved significantly compared to five years ago.

A lot of the easy stuff is gone. You're forced to look where the minerals are, he said.

In an environment of rising inflation and transportation costs, small mining companies bold enough to take on the initial risks, may hope to be taken over by a major.

They don't have enough resources to develop the mine and related infrastructure and their access to debt and equity funding is harder, said Paul Knight, UBS's Joint Global Head of Metals and Mining.

This scenario could open the door to more merger activity.

In M&A, you do a transaction now, and a year later you've got an operating mine -- the reward is much bigger, UBS's Knight said.

(Reporting by Humeyra Pamuk; editing by Peter Blackburn)

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