Sizing up the threat of nationalization in Bolivia (May 23, 2006)

“This is just the start,” Bolivian president Evo Morales told a crowd regarding the nationalization of the country’s hydrocarbons industry. “Tomorrow, or the day after, it will be mining, then the forestry sector, and eventually all of the natural resources for which our ancestors fought.”

While the words don’t appear to leave much room for ambiguity, companies with assets in the region insist their talks with Bolivian government officials paint a very different picture.

“They’ve talked about some fairly benign policy changes that will not materially affect they way we operate,” says John Carlesso, president and chief executive of Apogee Minerals (APE-T), a company with all of its silver and zinc assets in Bolivia.

In fact all of the seven companies with operations in Bolivia surveyed by The Northern Miner said while higher taxation is anticipated, anything approximating nationalization is not.

Speaking via satellite in Toronto in early February, the minister of mines Walter Villaroel sought to alleviate anxieties over the issue. “I was a miner. I’ve been in the industry for 20 years,” Villaroel said at the time. “I understand that mining needs investment.”

The Ministry of Mines has recently issued statements saying its principle aims are to strengthen the national Bolivian mining company COMIBOL, to increase taxes on mineral sales and to revise the mining code.

Carlesso says officials at the ministry of mines have told him a draft of the new code will be forwarded to Apogee within the coming weeks, and again, anticipated nothing overly burdensome within the draft.

But Ivan Rebolledo, president of the Bolivian-American chamber of commerce, says the threat of nationalization is real.

“It’s not going to happen today or tomorrow,” Rebolledo says, “but there is a call for it and it is evident it will happen down the road.”

Rebolledo notes that after a slight dip, the polls show Morales has been riding another wave of support as nationalization rhetoric and actions have ramped up.

However, Rebolledo does think the Morales government will be kinder in its dealings with the mining industry than it has been with hydrocarbons.

Unlike the hydrocarbons industry — made infamous amongst many Bolivians for running natural gas lines past towns with no heating the mining industry has built some goodwill in the country over the last 15 years, Rebolledo says.

“They’ve been lucky,” Rebolledo says of foreign mining companies operating in the region. “They’ve been sheltered from the issues that hydrocarbons have had to deal with.”

The market has echoed Rebolledo’s concerns. After Morales’ comments in early May, companies with significant assets in the country had their shares prices hacked.

Apex Silver with its massive San Cristobal project, has fallen roughly 43% since May 1. Apogee and Coeur d’Alene — which is developing its San Bartolome project in the country both lost roughly 57% over the same time period.

But John O’Brien, an analyst with Seattle-based Ragen Mackenzie, a division of Wells Fargo, says the market over-reacted to news out of Bolivia.

O’Brien points to similar comments made by Venezuelan president Hugo Chavez in September of 2005. Those remarks, which alluded to Venezuela taking claim over its natural resources, sent shares of companies in the region plummeting — only to regain their former prices months later.

“Based on the Venezuela example, it will correct itself if there are not any additional, major negative developments in the country,” O’Brien says. “We’re looking at, at least, a two month time frame before the stock begins to recover. But it could be longer.”

O’Brien holds shares in Denver-based Apex and Wells Fargo holds a greater than 1% interest in the company.

The Bolivian context

Morales won the December 2005 election on a platform that promised the nationalization of the hydrocarbons industry a promise he is making good on.

Judith Anne Teichman is a professor of political science specializing in Latin America at the University of Toronto. She describes Bolivia as the “poster child” for the failure of economic structural reforms of the last two decades that saw the privatization of public sector industry, and a wave of foreign investment coming into the region.

Persistent poverty, especially among the country’s massive indigenous population, has brought an appetite for nationalizing amongst the electorate.

“Bolivians have had a huge upheaval and there’s a strong demand for nationalization,” Teichman says. “The government will have to make some effort in that direction.”

However, Teichman says, moving “in that direction” doesn’t necessarily mean full-scale nationalization.

“The government doesn’t have the funds or possibly even the expertise to take a 100% controlling interest,” she says.

Instead Teichman speculates that the government could take a 30-40% interest in projects.

“But,” she warns, “if levels of tax and redistribution don’t improve, everyone will be just as mad as they are now, and they’ll want further nationalization.”

Teichman’s analysis touches upon another issue arising amongst investors in Bolivia. Just what counts as nationalization in the eyes of Morales and his supporters?

“The word ‘nationalization’ in Spanish means something slightly different than it does in English,” says General Minerals (GNM-T) chief executive Ralph Fitch. “It’s more like participation than a take-away, which is how we understand it.”

While Fitch anticipates new regulation on the industry; he says from the indicators he is getting, General Minerals will be able to live with it.

“Change is never comfortable but Bolivia is poor and will go through a number of changes,” Fitch says. “Provided you can live with it and ride it out, it’s a very interesting place to be from a mineral point of view.”

But how much of a change can companies shoulder?

By Ragen Mackenzie’s O’Brien’s calculations the market is already factoring an increase in the tax rate to 65% into Apex’s current share price.

O’Brien says an increase to 40% is more likely. That would be a 60% increase on Apex’s current 25% tax rate, and would, O’Brien says, keep San Cristobal as an economical project.

The power for words

As for the nationalizing rhetoric coming out of La Paz, Apogee’s Carlesso says the strong words have more to do with playing politics than setting policy.

“Morales is trying to get the most amount of leverage that he can right now,” Carlesso says of the recent speech. He says Morales’ real aim is to put himself in a better negotiating position with countries that have significant stakes in Bolivian resources.

“We’re being caught in the middle of it,” Carlesso says, “and in the short term, I’m fine with that.”

On May 17 Apogee announced the finalization of the 100% acquisition of the La Solucion silver, zinc and lead mine in Bolivia. Beyond the usual economics behind the acquisition Carlesso’s says the acquisition is symbolic in that it underlines the company’s confidence in the direction of the government.

More Joint-Ventures?

Pan American Silver‘s (PAA-T) chief executive, Geoffrey Burns, envisions more scenario’s like Pan American currently has in the country. The Vancouver-based silver producer is in a joint venture with EMUSA, which gives the Bolivian based company an option to earn a 50% interest in the project by investing US$2.5 million.

Burns says Bolivia’s need for foreign investment it is the poorest country in South America means that, as he puts it, a “draconian” nationalization policy, would only drive foreign investment away.

Many believe the country cannot afford that scenario, as it would leave larger projects such as Apex’s San Cristobal and Coeur d’Alene’s San Bartolome — which still need capital investment to get to production — at a complete standstill.

Coeur d’Alene’s chairman, president and chief executive, Denis Wheeler says Bolivians themselves won’t let that happen.

“There is recognition in most quarters that foreign capital is necessary for them to successfully develop their country,” Wheeler says. “As long as companies behave responsibly, they are welcome.”