Bolivia’s door creaks open to foreign mining investment

SANTIAGO, CHILE — A first-of-its kind deal between Bolivia’s state mining company Comibol and Vancouver-based explorer New Pacific Metals (TSXV: NUAG; US-OTC: NUPMF) promises to usher in a new period of foreign investment into Bolivia’s mining industry.

Under the deal signed in January, New Pacific Metals will have a 45-year contract at its Silver Sand silver project to explore and produce minerals over a 57 sq. km area in Bolivia’s mineral-rich Potosi department. In exchange, the company has committed to spend at least US$6 million on exploration during the first five years and pay a 4% royalty on all minerals produced in the area.

The deal is the first to be signed between Comibol and a private company under Bolivia’s new mining legislation.

“It is a benchmark achievement that shows Bolivia is open to foreign investment,” said New Pacific’s president Gordon Neal, when the deal was announced.

The first signs from Silver Sand are promising, with 94 out of 98 holes in a recent drilling campaign intercepting near-surface silver mineralization, including 77 metres grading 383 grams silver per tonne.

Cerro Rico rises above the city of Potosi in Bolivia. Credit: Istock/dani3315.

The hope now is that similar deals will follow, says Pablo Ordoñez, of law firm Ferrere, who helped New Pacific in its negotiations with Comibol. Since the deal was announced, interest among international mining companies in Bolivia has picked up, he said.

The deal is evidence of a policy shift in the Bolivian government, which until recently was better known for nationalizing natural resources than courting foreign investors.

Bolivian President Evo Morales in 2012.

First elected in 2005, Bolivian President Evo Morales is often lumped together with other 21st century leftist leaders in the region, such as Argentina’s Cristina Fernandez, Brazil’s Lula da Silva and Venezuela’s Hugo Chavez.

But while those regimes ended in huge corruption cases, financial chaos and economic disaster, Morales has presided over a decade of unprecedented political stability and growth, thanks to canny management of the economy and booming gas exports to neighbouring Argentina and Brazil.

After nationalizing the oil and gas industry in 2006, Morales’ left-wing administration funneled the foreign revenues to infrastructure projects and welfare spending, which has driven growth ever since. This year the economy could grow 4.5%,  making it one of the strongest in the region.

However, Morales’ sweet patch may be running out. The decline in oil prices since 2011 and the rise in domestic gas production in Argentina and Brazil threaten to choke off his key source of funding. The value of Bolivia’s gas exports fell from US$5.5 billion in 2014 to US$2.6 billion in 2017, hammering government finances.

Faced with that economic reality, the government is keen to find alternative sources of funding, with mining seen as the best bet.

The country’s geological potential is huge, with deposits of gold, silver, iron ore, zinc, tin, lead and lithium. It was silver from the mines of Potosi, still a by-word in Spanish for incalculable wealth, which supercharged Europe’s economy in the early modern era. Cerro Rico, which towers over the city, is still being mined today using almost medieval techniques.

“The potential is amongst the best in the region. Everything you could imagine, and more,” says Andres Moreno, a mining lawyer in La Paz. Even the tailings left by centuries of mining are richer than most deposits in neighbouring Chile, Peru and Argentina.

But decades of political instability mean that little of the country has been subject to modern mineral exploration. The country’s only large-scale mine is the San Cristobal mine, the world’s fourth-largest producer of zinc, operated by Japan’s Sumitomo.

Leading the search for foreign investors is Mines and Metallurgy Minister Cesar Navarro, in the post since 2014, during which time he has attended the last three annual conventions of the Prospectors & Developers Association of Canada in Toronto.

However, convincing mining companies to return to Bolivia will be difficult, given the administration’s past record. Soon after taking office, Morales sent troops to seize the Vinto tin smelter, then owned by Glencore (LON: GLEN), and in 2012, nationalized the Colquiri tin mine.

From 2012: A protester opposed to South American Silver’s Malku Khota silver project stands in front of a barrier blocking access to the Bolivian presidential palace in the capital La Paz. Photo by Alexis Aubin. al.aphoto@hotmail.com. alexisaubin.blog.com

He has also rebuffed offers from multinationals to develop the Salar de Uyuni´s huge lithium potential, instead developing a state company YLB to head the task.

The new mining law, approved in 2014, replaced existing mineral claims with production contracts, reducing legal certainty.

In addition, the sector has a history of violent protests and strikes, often led by the powerful mining cooperatives, key allies of the Morales regime. In 2016, cooperative miners, protesting over legal changes, kidnapped, tortured and murdered the country’s Deputy Interior Minister Rodolfo Illanes.

Little wonder that in the Fraser Institute’s latest survey of mining executives, Bolivia was ranked 102nd out of 112 jurisdictions, just behind Venezuela.

“The problem is that the mining industry is taking time getting over the stories of the past and the president’s rhetoric,” says Juan Gavidia, CEO of Toronto-based Orvana Minerals (TSX: ORV; US-OTC: ORVMF), which operates the small Don Mario gold mine in eastern Bolivia.

Ordonez agrees, noting that Morales has only nationalized assets that were previously state-owned ones. But the image persists.

Adding to the uncertainty is next October’s general elections, in which the president is expected to seek a fourth term — despite a 2016 referendum in favour of presidential term limits.

The country’s financial difficulties and the general public’s weariness with his regime mean that this could be the hardest electoral challenge yet faced by the former coca farmer. Some recent polls give former president Carlos Meza a clear lead over the incumbent.

Miners at work in 2017 on Cerro Rico mountain in Potosi, Bolivia. Credit: istock/rchphoto.

So far none of the candidates have clearly set out their policy for the mining sector, but given the country’s economic challenges, the trend towards greater foreign investment will likely continue, Moreno says.

But uncertainty surrounding the result could mean that most investors will hold back from signing new deals this year.

A likely beneficiary of this delay could be China. The Chinese government has become a key supporter of the Morales government, becoming a major lender and investor in the country’s infrastructure push.

In the last five years, Chinese companies have picked up road-building contracts worth US$2.7 billion.

This alliance is now expanding into the natural resources sector.

While China National Petroleum and Sinopec are among the companies exploring for natural gas in Bolivia’s lowlands, Sinosteel last year began work on a steel mill that will process iron ore from the 40-billion-tonne El Mutun deposit, near the border with Brazil.

In January state lithium company YLB signed a preliminary agreement with a Chinese consortium to form a joint venture that will invest US$2.3 billion to extract and process lithium and other minerals from the Coipasa and Pastos Grandes salares.

China also has an indirect connection to the new Silver Sand deal: Vancouver-based Silvercorp Metals (TSX: SVM; NYSE-AM: SVM) — the largest primary silver producer in China — is the largest shareholder in New Pacific Metals, with 28% of the stock, compared to 16.4% held by Ross Beaty’s Pan American Silver (TSX: PAAS; NASDAQ: PAAS). Silvercorp chairman and CEO Rui Feng is also CEO and a director of New Pacific Metals.

— Based in Santiago, Chile, Tom Azzopardi is a freelance journalist specializing in the resource industries.