Precious Metals

Initially South American Silver was surprised that the government intended to retract their project rights in Bolivia. CEO Greg Johnson says it now appears likely to happen but there is some encouraging news.

South American Silver (TSX:SAC) believed that with local community support it would develop its Malku Khota project in Bolivia into a major silver mine. Instead, minority dissent appears to be pushing the government to nationalize its asset. Though the company has yet to be formally notified of the government’s decision, President and CEO Greg Johnson believes it is moving  in that direction. And although the company may lose one of its two projects, Johnson does not believe that recent adverse stock activity is warranted.

Opposition to South American’s operations recently escalated into a hostage situation. Mine employees, contractors and Bolivian public servants were captured and detained by protestors. One opponent died during the conflict. The cause of death is unknown. Bolivian authorities played an active role in diffusing the situation and all of the hostages have been released and are doing well.

But, it appears the government may have negotiated more than the release of detainees.

South American learned of the government’s plans to nationalize their project by way of media reports. The company said the news was surprising and they are continuing their efforts to get clarification of the government’s intentions.

South American knew that to secure the release of the final three detainees, the Labor Minister signed an agreement in which the opponents were pushing for cancellation of the mining concession. However, a company press statement says the minister acknowledged that this could be difficult because of the company’s rights to the project.

Furthermore, South American insists it has support from most of the indigenous people in the area. Of 46 communities, 43 have signed support agreements, which outline benefits that the company will provide. Johnson describes it as “a very inclusive program” and says a lot of communities outlined the programs of interest to them.

But, there are three communities that are opposed to the project and they refuse to sign agreements.

According to Johnson, it was the government that angered these individuals, prompting the escalation of aggression.

“These three communities were undertaking small-scale artisanal mining on our concessions,” Johnson explained. “This was beginning to cause a conflict in the area. When the Mines Minister stepped in, they acknowledged the company’s rights to the property, that this mining was illegal and it was causing environmental damage and basically issued an order that it stop. That acted as a catalyst that would send this small group of individuals into a greater level of conflict,” he said.

The artisanal mining was occurring within one of the dissenting communities, which is centered in the company’s northern ore body. Johnson says this area would have been mined by the company once they developed a mine. But, he emphasizes that the  government wanted the illegal mining to stop.

In a press release the company said that this artisanal mining would provide little economic benefit to the 43 other indigenous communities.

By contrast, Johnson said South American’s support agreements provided benefits to them all.

He says the company has been providing job training and opportunities for exploration stage activities such as drilling services and road building. They have also been providing benefits such as working on agricultural advancement, water studies and education programs.

The company’s contributions are “particularly relevant to the overall conditions that these people live under,” Johnson said, pointing out that this is a remote area with few economic opportunities.

South American has reportedly spent $16 million on this project since 2007. That figure, according to Johnson, is the accumulated exploration expenditures that the company carries on its financial statements.

“There are a number of additional indirect costs and there was work that was carried out on the project before that time, so the total number invested on the project is likely higher,” he said.

“This would have eventually become a several hundred-million-dollar capital investment to get the project up in running.”

With regard to the government take, he explained that in Bolivia, there is contract-based mining law, where tax agreements are negotiated case by case. He noted that Coeur d’ Alene (NYSE:CDE) pays about 52 ½ percent in taxes.

Johnson describes the situation as evolving, but says it appears that the government has made a political decision. South American is, however, pleased to hear comments from Bolivia’s ambassador to the UN which state there would need to be compensation that reflects the value of the asset if the government continues down this path.

Johnson says if so, it would be taken to international arbitration.

Following the media reports, South American’s share price took a blow, falling about 25 percent last Wednesday. Reuters reported that National Bank analyst Paolo Lostritto cut the company’s price target and downgraded the stock.

When asked whether he thought these actions were justified, Johnson referred to two analyst estimates that he says provide valuation for the company, including the silver asset and without the silver asset.

“I believe both of those valuations were well above the current stock price. The current stock price largely reflects our cash holdings.”

He went on to say, “I think this is one of those short-term events where you see the intensity of selling really does not reflect the underlying value of the company. When you consider that we have almost as much cash per share as our current stock price and we’ve got a comparable project that looks to be world-class potential, I do not think it reflects the current value of the company.”

The company’s other project, Escalones, is a coppergold-silver project in Chile.

While Johnson seems to suggest that his company will fare well no matter the outcome, he is not quite as confident about Bolivia. He stresses the importance of security of title in the mining industry.

A company statement warns that this potential action sends a strong negative message to international investors and developers.

If the Bolivian government takes Malku Khota, it will be building upon a history of nationalization which includes natural gas, telecommunications and electricity assets. It will also be establishing a record where violent dissent turns the tide against investors. Following clashes at Glencore’s (LSE:GLEN) Colquiri project, last month the government seized it.

Bolivia, one of the poorest countries in Latin America, is led by leftist president Evo Morales, who passed a law in 2009 promising to consult with indigenous peoples before any foreign companies are allowed access to Bolivian mineral prospects. A new regulation would require a foreign mining company to form a joint venture with state mining company Comibol.

An annual report produced by Ernst and Young has listed resource nationalism among the top 10 risks for miners for the past five years. What has changed during that time is the risk has gone from #8 to #1.

In the 2012 Countries for Mining Investment:Where Not To Investreport, Behre Dolbear assesses the political risks in 25 countries. Bolivia is one step above the lowest ranking, which is held by Russia.

 

 

Editorial Disclosure: South American Silver is a client of The Investing News Network; this is not a paid for commentary.

Securities Disclosure: I, Michelle Smith, do not hold equity interests in any of the companies mentioned in this article.

 

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