South American’s Greg Johnson on the Malku Khota Expropriation Threat

By Kevin Michael Grace

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The mining industry is preoccupied by three letters: CSR. They stand for corporate social responsibility, the idea that miners must care as much about local people as they do about their quarterly reports and share price. Greg Johnson, President/CEO of South American Silver Corp TSX:SAC, believes he has committed his company to CSR in Bolivia and that his commitment was recognized and appreciated by its indigenous people. To no avail, it would seem. After anti-mining protests escalated to near-terrorism, President Evo Morales announced July 10 he would revoke SAC‘s massive Malku Khota silver-indium-gallium project.

Malku Khota, located in Potosí Department, is quite a prize, even for Bolivia, a world leader in mineral production since the 16th century. According to a May 2011 NI 43-101 estimate, it contains indicated resources of 230.3 million ounces silver, 1,481 tonnes indium and 1,082 tonnes gallium. Inferred resources are 140 million ounces silver, 95 tonnes indium and 1,001 tonnes gallium.

Indium and gallium are crucial to the production of liquid-crystal displays (LCDs), touchscreens, light-emitting diodes (LEDs), microwaves and lasers. Recently, Asian investors with a strong interest in these metals bought 9.9% of SAC. Total Chinese investment in the company is about 20%.

Malku Khota: "We are a socially inclusive and socially responsible company."

A 2011 preliminary economic assessment estimated a 15-year Malku Khota mine life, with annual production of 13.2 million ounces silver (at US $2.94 per ounce) for the first five years, 80 tonnes indium and 15 tonnes gallium. Based on $25 per ounce silver, the PEA showed a net present value (NPV) of US$1.54 billion (at a 5% discount rate), a 64.3% internal rate of return (IRR) and annual cashflow of US$287 million.

Geologist Johnson, a cofounder of NovaGold, became an investor in SAC in 2007, the year it was listed on the TSX. He joined the board in 2009 and assumed his present role in 2010. SAC‘s team was no stranger to Bolivia; many of them had worked there for nearly 20 years. Johnson says of the Andrean nation, “It is the poorest country in South America. In 2006, Evo Morales became the first indigenous President. The mining industry was their second-largest industrial sector, and expansion was considered pretty critical for them to develop their economy.

“The government indicated that they were open to foreign mining investment. The trend we’ve seen in that part of the Andes over the last 10 years has been greater and greater local say, particularly for the indigenous people. Our working premise has always been if you can work well with the local communities, that takes care of the biggest element of political risk.”

To that end, SAC worked to formalize relations with the indigenous people. Johnson reports, “Over the last year, as we were moving from exploration stage to a more advanced development stage, we were focused on working with the local communities to sign support agreements on the project. We spent much of last year negotiating these agreements, learning to understand what it was they were looking for and seeking to put this in place. This encompasses things like direct job opportunities, job training, educational scholarships, committees and study groups looking at water, agricultural enhancement, etc.

“There are five indigenous districts, called ayllus, in this area. Many of these communities have been there for hundreds and hundreds of years. It is a very traditional place. We signed exploration-support agreements with the five land-owning ayllus covering 46 indigenous communities.”

All but three of the 46 communities supported SAC. The three were engaged in an activity that the Bolivian government had blamed for environmental degradation: artisanal mining. (The anti-SAC forces blame the company.) Johnson says that this mining, “though not economically significant,” set the three against the 43, and the former “started to limit the ability for free access through their communities for ourselves and the other communities.”

At this point, the Bolivian government became involved. Johnson says, “The Mines Ministry and the Governor of Potosí stepped in and acted as mediators. That’s when we really began to understand that the three [holdout] communities wanted to continue the artisanal mining, while the other [43] made it very clear that they wanted our large-scale project to go forward. After the first of those meetings, the Mines Ministry inspected the area. There were concerns about water contamination, and the Ministry determined that the artisanal mining was illegal, was causing environmental damage, and it should stop.”

The anti-SAC agitation then grew in scale and determination, Johnson says. “They had a march in La Paz and when that didn’t get them what they wanted, a number of people from outside the communities joined with the [three holdouts] and started protesting at the project site. Ultimately, we saw them take hostages, first two of our employees, then three of our drill contractors. At one point, they held 10 local indigenous people as well.”

According to Johnson, the number of indigenous people in the Malku Khota project area numbers about 2,500, about 50 to 60 per village. It seems unlikely that fewer than 200 people could be responsible for agitation that would bring a federal government to its knees. This suggests that Malku Khota has become hostage to a larger political struggle.

Johnson says, “What was clear was [the three holdouts] really didn’t want to engage in dialogue. They either would fail to show up for meetings, or when they did, they would show up with violence.”

On July 6, a protestor was killed during a clash with police. Minister Carlos Romero claimed he was a suicide, an accusation strenuously denied by the anti-SAC forces. In any event, Johnson is bewildered the speed with which SAC‘s position in Bolivia was upended.

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