Mining in Bolivia

by John Lee

05/15/2006

It’s time for me to respond to the political situation in Bolivia. As I have mentioned before, the only way to judge a man is by his actions, not his words.

http://news.ft.com/cms/s/feff7e00-ded6-11da-acee-0000779e2340.html

In the Financial Times on May 8th, Mr. Morales was quoted as saying

“Our mineral resources, our forests and our water resources should be returned to the hands of Bolivians”

This is all while Bolivia is preparing to auction El Mutún, an iron ore deposit in the southeast of Bolivia with an estimated 40 billion tonnes of ore. Ten international companies had originally expressed an interest in the deposit, including CVRD of Brazil, Rio Tinto, the Anglo-Australian miner, and Teck Cominco of Canada. Three companies are still likely to put in offers for El Mutún, including Mittal Steel and Jindal Steel of India.

Granted there are different classifications to calculating tonnage, nonetheless 40 billion tonnes of ore will make El Mutún indisputably the largest mineral deposit in South America, bigger than The Carajas Iron Province in Brazil that contains almost 18 billion tons of high-grade iron ore, bigger than Yanacocha of Newmont with not even 1 billion tonnes of ore reserve. It’s also bigger than Ivenhoe’s Oyu Tolgoi with 3 billion tonnes, and larger than the Grasburg complex of FCX with 5 billion tonnes. In fact I couldn’t find a mineral deposit greater than El Mutún in tonnage in the world.

So, is it Mr. Morales’ true intention to nationalize the mining industry? Or is he merely feeding candy speeches of mine nationalization to his constituents. If Morales is actively involved in auctioning Bolivia’s national treasure of El Mutún, should investors be worrying about the nationalization of San Bartolome of Coeur with 50 million tonnes, or San Cristobal of Apex with 230 million tonnes?

If one wants to get technical with Mr. Morales’ speech what does “nationalization” really mean in our context? Yes, Morales re-proportioned the government’s take on natural gas revenue via a higher tax rate. Is that nationalization? Meddling with the tax rate is nothing new among nations throughout the world, eastern or western, capitalistic or socialistic. You don’t hear US nationalizing her mines when monetary inflation acted as a tax hike in a marginal tax-rate structure.

I see what Morales is doing to the natural gas industry as opportunistic. On the one hand he is under pressure to show Bolivia nationalism, on the other he is in dire need of capital and higher taxes are a quick solution. As a Bolivian leader given the same circumstances, I would have probably done the same. But what’s the purpose of stationing troops at the plant; what could Petro Bras do that required 60 guarded troops? Steal the gas away? The troops were nothing but a TV and photo stunt to please the locals. However I see the event as being the peak of the drama. Petro Bras accounts for some 70%+ of Bolivia’s Natural gas exports and Morales has already performed his main act. If he keeps his troops marching, he would cause an irreversible concerted pullout by multinationals and he knows it. Without Petro Bras and Repsol, there will be no gas flowing in Bolivia, period.

Let’s come back to mining. The mining industry dominated the Bolivian economy from 1557 to 1985, but since 1990, mining has accounted for less than 5% of Bolivia’s GDP and government budget.

So what does Morales gain by nationalizing the mining industry? Before answering that, let’s review what he stands to lose by kicking multinational mining firms out.

1. Hundreds of millions of dollars (if not over one $billion) from the sale of El Mutún.
2. 1,000 jobs paid for by Apex Silver.
3. A complete stoppage of foreign investment in mining
4. Stagnant growth, which leads to the boot from the presidential office.

In short, Morales sees things in the same way as you and I - there are not many mines to nationalize but there many opportunities to invite foreign capital into mining to create jobs. I therefore view those who advise against investing in heavily-discounted mining companies operating in Bolivia as missing the big picture. Time will tell, in my opinion, very quickly on who is right.