Bolivia Seizes South American Silver’s Malku Khota Project
By Kevin Michael Grace
Since Evo Morales became President of Bolivia in 2006 there has been a struggle between his two halves. There was the soulful and iconic Indian with his love of Pachamama (Mother Earth) and the desire to forge a Third Way between Left and Right. And then there was the admirer of Che Guevara who waged war against big business, Yanquis and the Catholic Church. With the August 2 confirmation of his government’s expropriation of South American Silver’s TSX:SAC Malku Khota project, the struggle is over, and Morales has joined Juan Perón and Hugo Chavez in the ranks of Latin American strongmen.
National Bank Financial analyst Paolo Lostritto (an early supporter of and investor in SAC) is unequivocal about the consequences of the nationalization for Bolivia. “There isn’t certainty of title,” he declares, “and it doesn’t matter how you risk-adjust it, the equation is worth zero. No matter how big the size of the prize, it doesn’t matter. When you multiply anything by zero, you get zero. Therefore, you get a lack of willingness of people to invest capital in that country. Bolivia has shown it’s not open for business.”
Malku Khota, located in southwest Bolivia in Potosí Department, is owned by Compañía Minera Malku Khota SA, a wholly-owned subsidiary of SAC, which is headquartered in Vancouver. It contains 370.3 million ounces silver, 1,576 tonnes indium and 2,083 tonnes gallium. A 2011 PEA forecast 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, Malku Khota has a US$1.54 billion NPV (at a 5% discount rate), a 64.3% IRR, annual cashflow of US$287 million and a 15-year mine life.
According to Agence France-Presse, the Bolivian government claims there has been no nationalization, as it had never had an agreement with SAC but only with Compañía Minera Malku Khota. AFP quoted Mines Minister Mario Virreira as saying that what the world is calling expropriation is merely “control from now on activities related to exploration and planning” at Malku Khota. The story reported, “The government has contracted an independent company to evaluate the investments made in the mine over the next 120 days. Results of that study will be used to determine the amount of compensation paid to South American Silver.”
Miners spend years throwing money into the ground before they start taking money from the ground. Even if a country has a good mining policy in any given year, mining companies are more interested in what the mining policy will be five to 20 years down the road. If they can’t trust domestic stability, that’s a reason to veto an investment, even if the current policy is good —Fred McMahon
SAC President/CEO Greg Johnson was unavailable for comment Thursday, but he told Resource Clips July 29, “I’m not exactly sure what to think. As recently as May 28, the Mines Ministry acknowledged that our concessions were valid and that the people that lived in the community wanted the project to move forward.”
The expropriation is the terminus of a rapid and suspicious chain of events. According to Johnson, SAC had the strong support of 43 of 46 ayllus, local villages in the project area. Three holdout villages, fewer than 200 people overall, opposed SAC; they were engaged in illegal artisanal mining alleged to be the cause of local water pollution. (The three ayllus and their supporters blame SAC.)
The campaign against SAC went national with large protests in La Paz. The project site was inundated with protestors armed with explosives. The protestors then took hostages, and one was killed after a battle with police. Johnson told Resource Clips, “A little more than a month [after May 28], you had another arm of government, the Labour Ministry, signing an agreement to release the hostages and asking for our concessions to be cancelled.”