Conditions Worsening for Bolivian Natural Resource Operations
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As La Razon reported Tuesday morning, Jindal Steel announced that it is leaving Bolivia, a historic $2.1 billion contract, and the world's largest iron ore deposits. Why? Because the Bolivian government and parastatals have not followed through on deals, have started legal proceedings against executives, and placed new, startling conditions on Jindal. Jindal is the second mining company this month to leave Bolivia with multi-million dollar losses due to political maneuvering, and the company's experience is a stark warning for the few foreign-owned extractive companies still in Bolivia, such as POSCO (NYSE: PKX), Petrobras (NYSE: PBR) and Repsol (NASDAQOTH: REPYY.PK).
In 2007, Jindal Steel signed a contract with the Bolivian parastatal Comibol to develop the El Mutún deposits, the world's largest iron ore deposits. At the time, the contract was quite a coup for Jindal Steel. Vale (NYSE: VALE), a parastatal in neighboring Brazil and the world's top iron ore producer, had been vying for the rights to develop El Mutún, along with a number of other large multinationals. The contract, like every mining contract with a foreign company in Bolivia, gave Comibol 51% of the project and Jindal Steel 49%, but with the latter expected to pony up most of the money.
Fast forward several years and the project was far behind schedule because the parastatal oil and natural gas company would not deliver the necessary amount of gas to the project site. Additionally, the Bolivian government initiated legal investigations and then brought charges against Jindal Steel executives, and rejected Jindal's guarantee note. The project ground to a halt as Jindal Steel and the government entered new talks. Jindal stated that it would resume work if four conditions were met: the charges against its executives dropped, the guarantee note issue resolved, the gas delivered, and the Bolivian government must guarantee that Jindal's investments would not be nationalized. This week, the Bolivian government responded with four of its own conditions: charges would go forward, Jindal must resolve the gas situation on its own, Jindal's guarantee note would be rejected and the company must deposit the full $2.1 billion that it planned to invest over eight years into a bank account in Bolivia. Jindal Steel decided to cut its losses and leave.
Bad News for Other Foreign-Owned Projects
Korean steelmaker POSCO recently signed a deal with Comibol that is very similar to Jindal's 2007 contract. Per the deal, POSCO and the Korean Resources Corporation will develop Bolivia's lithium reserves, which are a full 50% of the world's known reserves. Similar to Jindal's ill-fated venture, POSCO and the Korean Resources Corporation must sink millions into the project, while Comibol, with a 51% stake, must deliver key resources and all the necessary permits and licenses. The project's success depends on Comibol's ability to hold up its end of the deal and the national government's continued goodwill. Unfortunately, Jindal Steel's experience -- and last week's nationalization of South American Silver -- illustrates how that cooperation can fail quickly, obviating years of investment and due diligence.
Petrobras and Repsol have a larger and much more developed stake in the country; together, they administer about 70% of Bolivia's natural gas fields. Repsol ran into problems in neighboring Argentina, where President Cristina Kirchner nationalized its Argentinian operations in May. While President Morales stated that actions in Argentina would in no way change the Bolivian government's relationship with Repsol, President Kirchner arrived in Bolivia Tuesday to discuss collaboration on developing Argentina's new holdings. Petrobras's long relationship with the Bolivian government, its stature as a regional parastatal, and its weight in Bolivia's public finances give it a strategic advantage over more recent ventures by more removed foreign companies. However, Bolivia drastically renegotiated Petrobras's and Repsol's contracts in 2006 under threat of full nationalization; a move against Petrobras's and Repsol's multibillion dollar investments in the country is entirely possible and would hit the already battered stocks hard.
CallaMarie owns shares of Companhia Vale Ads and 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). 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.