The Bolivian government plans to expropriate South American Silver’s (SAC-T, SOHAF-O) wholly owned Malku Khota silver-indium-gallium project, the Vancouver-based company announced after markets closed on July 10.
South American Silver says it has not received formal notice from the Bolivian government about its cancelled concession and is seeking clarification about its intentions, but confirms that the government intends to nationalize the project.
The news comes in the wake of Bolivia’s nationalization of Glencore International’s (GLEN-L) Colquiri lead-tin mine earlier this month, and its expropriation of Spanish energy firm Red Electrica’s local grid in May.
“Bolivia stated publically after the Glencore nationalization and that of Red Electrica that these were ‘renationalizations’ of previously state-owned assets, and that private investment would be respected under the constitution,” Greg Johnson, South American Silver’s president and CEO, tells The Northern Miner.
“For us it was particularly surprising in that only a little more than a month ago an accord was signed with the government supporting the [Malku Khota] project and supporting the community, and expressing the desire of the local community to have this work,” he adds. “We’ve been here since 2007, and have been particularly focused on working with the indigenous community. Areas of social responsibility and community relations have been a real focus for the company. We take this whole area as an important part of our business approach to mining.”
South American Silver has invested more than $16 million in the development-stage project over the last seven years, and says it receives support from 43 of the 46 indigenous communities in the project area.
Johnson adds that while it is a setback for the company, it continues development work at its Escalones copper-gold project in Chile, and has had over $38 million in cash since March.
“While there is still a small chance that there could be some consideration received for the asset expropriation, we have taken a draconian view at this time,” Paolo Lostritto, a mining analyst at National Bank Financial, wrote in a research note on July 10. “We value SAC based on the remaining cash-on-hand [about 27¢ per share], and the in-situ value for the preliminary resource at Escalones [about 46¢ per share] in Chile.”
Calling Bolivia’s planned nationalization of Malku Khota “a perverse move,” Lostritto said the decision “is likely to cause the country to suffer from a decrease in foreign direct investment, and have a negative impact on the nation’s ability to attract investors to its recently announced bond auction.”
Tom Hayes, a mining analyst at Edison Investment Research in London, told The Northern Miner that if the statements made by the Bolivian government are true, it would mean that the country is going against its own policy of only “recovering” previously state-owned assets, and “sets an unwanted precedent for further potential appropriations of private foreign investments in the country — something that Finance Minister Luis Alberto Arce once said his country had never, and would never do.”
“Previously, projects in the oil and gas industry that have been nationalized, in certain cases, were once state-controlled anyhow, and the government just took back what they considered was once theirs,” he continued. “Malku Khota is a little different in this respect as it is a new project being developed, and the recent comments of nationalization by Evo Morales seem to have been made to try to quell a minority group, that seems to have little support from the wider community, rather than take the project for any strategic means. The reasons for nationalization of the oil and gas industry at least can be viewed from a strategic resource standpoint.”
Bolivia’s nationalization comments come after a violent minority opposition to the project detained members of South American Silver’s Bolivian subsidiary and a local policeman. The final three captives were released on July 9 after the national government stepped in to help negotiate their release. Local opponents to the project wanted the government to cancel the mining concession.
Mike Niehuser, the founder of Beacon Rock Research in Oregon, describes South American Silver’s management as being “in the top 1% of mining companies today in working with governments at all levels, not just to develop projects, but also leave a positive legacy on the communities they operate,” and says that until it receives a formal notice of nationalization from the government, the statements “could be miscommunication, or could be positioning to reposition the government relative to the company.” He also notes that something could have gotten lost in translation. “Not only do you have issues with word choice and translation from Spanish into English, but you have words spoken to one audience in Bolivia, namely voters, and another audience footing the bill elsewhere, namely investors, listening intently.”
But he says that if Bolivia does take the course of expropriation, not only will it put investors in the company at risk, but also “the citizens of Bolivia who will continue to live without foreign investment.”
“Bolivia is a wonderful country,” he continues, “and the project is world-class, and management could not be better suited to the challenge — but integrity and trustworthiness is a universal trait, and we will see whether the Bolivian government fits in the world or not.”
In the meantime Lostritto of National Bank Financial has slashed his target price on South American Silver’s stock price to 60¢ from $2.85, and changed his rating from “sector outperform” to “sector perform.”
The analyst says he arrived at his new target price by applying a 0.75-time multiple to his in-situ valuation of the company’s early stage copper-gold porphyry target in Chile.
“We believe that Escalones has excellent exploration potential, but the market is likely to require some time to digest the negative events that transpired in Bolivia,” he said.
Lostritto noted that South American Silver completed an initial resource estimate for Escalones in December 2011, and upcoming catalysts include drill results over the coming months, additional drilling from October to April and an updated resource estimate and preliminary economic assessment released in the next 12 months.
Escalones has an inferred resource of 420 million tonnes containing 3.8 billion lb. copper, 56.9 million lb. molybdenum, 610,000 oz. gold and 16.8 million oz. silver using a 0.2% copper-equivalent cut-off grade, representing a copper price of about US$2.50 per lb. On a copper-equivalent basis Escalones contains 4.5 billion lb. copper grading 0.49%, based on three-year average metal prices in late 2011 of US$3 per lb. copper, US$1,200 per oz.gold, US$22 per oz. silver and US$16 per lb. molybdenum.
Jon Hykawy of Byron Capital Markets has cut his price target from $2.75 per share to $1.40, and reasoned in a research note that the next steps for the company would be to “somehow negotiate an involvement for SAC in Malku Khota on some reduced set of terms. By involving the Bolivian state in the form, perhaps, of Comibol [Bolivia’s national mining entity], it may be possible for SAC to regain some value from the project.”
“We should perhaps be grateful that the move to nationalize the project occurred at a time when minimal investment had been made by SAC,” he continued. “We ha
ve previously noted that our valuation of Malku Khota — based on a historical level of silver, indium and gallium pricing, and using a 17% discount rate and 10-time terminal multiple — was $196 million. To date, nothing like this value has been spent on the project. If Comibol was to take a stake in Malku Khota, and ‘control’ the social aspects of the project, even with SAC carrying the full weight of development and capital expenditures, there is good value in pursuing Malku Khota.”
If that isn’t possible, Hykawy added, the wisest course is just to “abandon the claims and the country.”
“It is very likely that it would not be alone in doing so,” he said. “Litigation is likely to prove fruitless, and would likely be a case of throwing good money after bad.”
I see no mention of the man shot dead by police — and others injured in the police assault — that fuelled the escalation of protest and led to the “kidnapping” (company employees were actually held and tried by a traditional community tribunal; reports vary as to how well they were treated). The Morales administration tried hard to defend the company and its investment until it became untenable to do so without resorting to even harsher repressive measures. If this is not of concern on human rights grounds or simple human decency, perhaps it should be considered relevant in explaining how this situation came about, that others might learn from it.