What next for South American Silver

The release yesterday of South American Silver’s (SAC-T, SOHAF-O) remaining employees and a police officer taken hostage earlier this month by opponents to its Malku Khota project in Bolivia marks a new phase in the Vancouver-based company’s problems in the South American country.

Bolivia’s labour minister Daniel Santalla signed an agreement on Sunday to secure the release of the final three detained individuals. As part of the agreement opponents to the project were seeking cancellation of the mining concession, South American Silver stated in a press release. But the government minister “acknowledged that this could be difficult due to the original decree giving South American Silver the rights to the project.”

The company also noted that President Evo Morales and Minister Carlos Romera agreed that a “prior consultation” among all indigenous communities in the project area would be required to proceed to determine the direction of the project based on the consensus view of all communities.

Bolivia’s mines minister has also said that there will be a period of constitutionally mandated consultation with the local indigenous communities in the project area before the extraction phase of the project begins, likely in 2014 or 2015, South American Silver told shareholders in a press release on July 4.

The faction that is opposed to South American Silver’s development of the silver-indium-gallium project represent just three of the 46 indigenous communities in the area, the company says. The company has already signed comprehensive impact and benefit agreements supporting the project with five of the six land-owning indigenous local Ayllus, which represent 43 of the 46 indigenous communities.

The question on everyone’s mind of course is whether Bolivia will eventually nationalize the project.

Jon Hykawy of Bryon Capital Markets in Toronto doesn’t think so. In a research note today he reasons that “the balance of probability is that South American Silver will ultimately be allowed to develop Malku Khota” despite opposition demands in Bolivian press releases that the Morales government “return Malku Khota to the people.” Indeed Hykawy is so confident of this that he is maintaining his speculative buy rating on the stock with a target price of $2.75 per share. (The company closed today at a new 52-week low of 49¢ a share.)

“Bolivia has plans to do a large bond issue, in order to improve available infrastructure for resource exploitation in, among other regions, [the] Potosi department,” he argues. “Were it to succumb to terrorism, the Morales government must recognize the potentially significant negative implications for this bond issue and for any future foreign resource investment in Bolivia. Both of these results run counter to a large part of recent initiatives by the Bolivian national government.”

“Similarly, neglecting the illegal detention of, and injury to, a police officer, as reported in the press, must have serious negative consequences with respect to Bolivian national security and its internal rule of law.”

Hykawy concludes that while “there may be a period of extended dialogue, the rule of law is likely to prevail and SAC will likely have the opportunity to develop at least the main ore body at Malku Khota.”

In the worst case scenario and the company is stripped of the project, he continues, “there is remaining value in cash as well as in the Escalones copper project in Chile. We would estimate that this value is no less than $1.85 per share, continuing to support our speculative buy rating.”