A Tantalizing, Risky Natural Resource Play
Calla is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last week, South Korean steelmaker POSCO (NYSE: PKX) signed a new agreement with Bolivia’s state-run mining company Comibol and the Korea Resources Corporation to develop Bolivia’s massive lithium deposits. If the agreement stays on track, POSCO and the Korea Resources Corporation will have privileged access to half the world’s known lithium deposits. This is a prize that Mitsubishi, Sumitomo, Bolloré, and others have played for and lost.
Bolivia has over five million tons of lithium sitting under the Salar de Uyuni, the world’s largest salt flat, but the deposits have yet to be commercially mined. Several mining and manufacturing companies sent bids and representatives to Bolivia in 2009 with plans to mine the reserves, but President Evo Morales’s administration rejected all of them, on the basis that the plans outlined only extraction and little downstream development. POSCO and Korean Resources Corporation have used a different tactic, entering into a 50-50 agreement to build a pilot factory in Bolivia that will produce both lithium and lithium products starting in 2013.
The steelmaker has plunged with the industry this year on fears about a slowing China. However, Trefis recently touted the stock as severely undervalued: while international prices have hurt the company’s profits, it dominates the South Korean market, has a growing share of the Japanese market, and can keep its costs low thanks to a low South Korean won. By standard metrics, the stock is cheap, with a P/E of 7.2 and a yield of 2.72%.
Bolivia has an infamous history of nationalizations, particularly with foreign companies engaged in natural resource extraction. Yet its parastatals lack the capacity to efficiently and profitably take over nationalized projects and exploit new opportunities. Thus, POSCO faces two very serious risks: that Comibol won’t be able to hold up its half of the deal and the project will flounder in building, equipment and permit delays and failures. Last month, Jindal Steel all but abandoned a multibillion dollar project with the Bolivian government due to series of infrastructure and legal problems. Secondly, POSCO faces the risk that the Bolivian government will nationalize its share of the venture if nationalization becomes politically expedient, a risk that recently materialized at the Glencore-administrated tin mine.
POSCO is trading at a low valuation due to global uncertainty but its Bolivian lithium deal may give it privileged – and lucrative -- access to half the world’s lithium deposits. In the medium term, this company has huge upside potential. However, POSCO will have to avoid the all too common risks of logistical failures and nationalization that come with Bolivian resource extraction projects.
CallaMarie has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.