Hostages, Nationalizations, and Other Gigantic Red Flags
Calla is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On June 28, three communities around South American Silver’s Bolivian mining operations took two of the company's employees and a policeman hostage. On July 4, three of the company’s engineers were kidnapped by the same communities. South American Silver ceased operations and provided daily updates as the story unfolded, as three of the hostages escaped, one was tortured, and the rest freed by Bolivian commandos as the federal government negotiated a deal with the communities. As I noted in “Bolivian Political Risk Rising Fast,” the deal revoked South American Silver’s mining concessions and made front page news across Bolivia on Sunday, with further developments moving toward nationalization reported Monday and Tuesday. However, South American Silver’s management omitted any discussion about losing the concessions in their daily updates to shareholders and the investment community until Wednesday morning, when the Bolivian government announced that it would nationalize the entire operation.
Traded over the counter in the United States, South American Silver is a publicly traded Canadian company listed on the Toronto Stock Exchange. With only two mining operations, the company is a microcap and the debacle at the Bolivian mine has wiped out 75% of the stock’s value. The company still operates a copper mine in very stable Chile, and as long as copper prices continue to soar, South American Silver has a decent chance of turning a profit and clawing back out of penny stock territory. However, before investing in the company, you have to decide if you're comfortable with a management team that tries to hide publicly available information from shareholders -- a pretty big red flag in my book.
The Bigger Picture
South American Silver’s drama has worrisome and wider implications for the foreign-owned extractive operations still in Bolivia. South American Silver held the concession for five years, had sunk millions of dollars into exploration and development in a joint venture with the state mining company, and had signed multiple agreements, documents of mutual understanding, contracts, public works and jobs promises, etc. with 45 of the surrounding 48 communities. But following the agreement that put a definitive end to the hostage situation, President Evo Morales’s administration has made sweeping resource nationalization statements – such as, “We are prepared to take back our natural resources from foreign companies,” according to the newspaper La Razon – and supported the kidnappers. On Tuesday, the Labor Minister declared that the kidnappers had committed no crime. Even if hostage-taking for political purposes is up for debate as a crime, the story ran next to another reporting that one hostage had been tortured and his skull fractured.
The whole debacle bodes very badly for all foreign companies currently engaged in extractive industries in Bolivia. The administration signaled that it is prepared to stop or nationalize projects in order to put a quick end to conflicts, regardless of the company’s history and due diligence. In the case of South American Silver, the project was stopped and then nationalized even as the vast majority of locals asked the government to let it continue.
Of the companies currently working on extraction in Bolivia, POSCO (NYSE: PKX) and its privately owned partner, Korean Resources Corp., run the biggest risk. POSCO recently signed an agreement to develop Bolivia’s lithium reserves, which account for half the world’s known reserves. However, while South American Silver’s mine is in a remote, little-known part of the country, POSCO will be mining beneath the famous Salar de Uyuni and near several communities that have already expressed their ambivalence.
Oil and natural gas producers should also be on their toes. Petrobras (NYSE: PBR) and Repsol (NASDAQOTH: REPYY.PK) administer most of Bolivia’s oil and natural gas reserves, but Total (NYSE: TOT) and BG Group (LSE: BG) have bought into several blocks in the country’s south. While the south rarely sees the contentious protests that are common in the western altiplano, a recent expose on contract workers' poverty wages at fields run by Petrobras and Repsol has stirred up controversy that could become contentious, particularly if the companies involved do not quickly take the logical step of increasing salaries. It’s relatively unlikely that the Morales administration will repeat its 2006 move and nationalize the entire industry. Yet given recent statements and three nationalizations in as many months, I would not be surprised if the administration revokes or nationalizes several fields.
CallaMarie owns shares of Petroleo Brasileiro S.A. (ADR). The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Petroleo Brasileiro S.A. (ADR) and Total SA. (ADR). 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.