NEW YORK (ResourceInvestor.com) -- Protests led by socialist activists have paralyzed the economies of Ecuador and Bolivia in recent weeks and months - amidst growing calls by opposition movements to nationalize mineral and resources interests in the two Latin American nations.
For the handful of precious and base metal miners who have staked their fortunes on major developments in these two countries, growing nationalization movements could spell a devaluation rout.
While a handful of juniors exploring in Ecuador have seen their share prices suffer outsized declines, the bulk of the companies involved in the two countries have weathered the recent metals downturn fairly well.
It's also notable that almost no company has issued press releases, statements or even attempted damage control regarding the situation - perhaps pointing to the fact that many are simply hoping for any troubles to blow over before any long-term damage is done to their operational viability.
Bolivia Begins to Unravel...
The political situation in Bolivia appears to be most dire of the two nations. Former President Carlos Mesa resigned just days ago following weeks of large-scale street protests led by congressman Evo Morales, an indigenous Aymara Indian who has called for the nationalization of the country's substantial energy and mining interests. Reuters recently reported that U.S.-educated Supreme Court President Eduardo Rodriguez will take the helm as interim president, with new elections to be held within five months.
While demonstrations and civil violence have ebbed along with the promise of new elections, given the current level of popular support for Morales and Bolivia's 65% indigenous population, it's quite likely that Bolivia could make a decisive move away from a free-market economy within a matter of months.
...While Shares of Bolivian Miners Retain Curious Strength
Denver-based Apex Silver Mines [AMEX:SIL], one of the larger silver plays in North America, has the bulk of its valuation wrapped up in its wholly owned San Crist'obal property, a company-making site containing some 450 million ounces of silver, 8 billion pounds of zinc and 3 billion pounds of lead at dirt-cheap cash operating costs (considering lead production as a by-product credit) of $1.31/oz silver and $0.39/lb zinc. Just six months ago, the company's board green-lighted the project's development at a total cost of $620 million.
Truth be told, Apex's stock has been hit harder than other silver producers amidst the market downturn - slumping from a recent peak of $19.47 in early March to a low of $11.51 in mid-May. Still, it has rebounded quite strongly in the face of improving silver prices - and perhaps along with investor optimism of easing Bolivian tensions - to a recent price of nearly $14. This recent movement is fairly in-line with that of silver majors without the same degree of political risk - such as Silver Standard - which is especially curious, given the latter company's highly-leveraged exposure to silver.
Silver giant Coeur D'Alene Mines [AMEX: CDE] could also see major Bolivian fallout, having just last year approved $135 million in expenditures on the development of its 123 million ounce San Bartolom'e project. While the project is expected to expand Couer's production by some 40% in 2006, the company is at least fortunate enough to have several other large producing mines located in more politically stable regions - unlike Apex.
Other signs that the market is not taking the nationalization risk too seriously can be found among the stock price of polymetallic Canadian explorer Apogee Minerals ]TSX:APE], whose sole exploration projects are located within Bolivia. Shares of Apogee were recently trading at C$0.34, down 30% from December 2004 highs - not out of line with the suffering seen by other exploration units during that time. The shares also remain well above their 52-week low of C$0.19, as well as their recent mid-May low of C$0.23. Likewise, Orvana Minerals [TSX:ORV], whose major asset is a small producing from a gold mine in Bolivia, has seen its shares trade largely sideways all spring in the range of C$1. Anther exploration company that could be affected to a lesser extent is General Minerals [TSXv:GNM], which is working on two sites in the country.
Finally, it's worth noting that Anglo-Australian giant Rio Tinto [NYSE:RTP] maintains a one-third interest in state-owned lead/zinc producer Minera San Jos'e S.A. - which in turn wholly owns Comsur, Bolivia's largest private mining company. However, given the extent of Rio's non-Bolivian operations, any damage to the company shouldn't be too extensive.
Ecuador's Presidential Shell Games and Pending Mining Reform
Trouble has also been brewing in Ecuador, where former President Lucio Gutierrez was deposed in April by that nation's Congress after weeks of popular protests. The civil movement against Gutierrez, who escaped arrest by fleeing to Brazil, began after he dismissed the country's Supreme Court in December and then later apparently influenced the newly instated Supreme Court to drop corruption charges against another ex-president, Abdala Bucaram. Gutierrez was also popularly vilified for his decision to implement IMF-approved economic restructuring policies.
While Gutierrez's regime was unquestionably marred by corruption, his ousting raises serious doubts about the future of capitalism in Ecuador.
Today, a delicate balance is being maintained in the nation by newly instated President Alfredo Palacio. However, both the U.S. and Organization of American States have claimed that Guitierrez's ousting was illegal and most South American nations have yet to recognize the new regime.
The country has also begun efforts to reform its mining code according to specifications laid out by the Gutierrez regime. The new code was intended to reign in mining speculation, avoid monopolization of various sites, and possibly increase taxes to locally operating companies. With the recent resignation of the energy and mining minister, however, it's uncertain whether this code will be implemented - and if a new code with stricter anti-mining provisions could be adopted.
IAMGold Sees Little Negative Ecuadorian Fallout; Juniors Take Major Hits
While Ecuador remains in a tenuous state, the popular call for nationalization has not been voiced to the extent seen in Bolivia. Still, for a small nation, Ecuador contains a fair number of companies with major plans that could find themselves in jeopardy.
Foremost among these is Canada's IAMGold [TSX:IMG|AMEX:IAG], which has uncovered major potential in its 100%-owned Quimsacocha property. Recent results from the project, whose main zone is believed by some to contain as much as 1.1 million ounces of gold and 12 million ounces of silver, have helped drive the company's stock higher. It traded most recently above $6.50, up more than 20% from its recent lows.
Given that production at IAMGold's West African deposits is expected to drop off significantly from 2007, it's no doubt that company is putting major stock in the developments of Quimsacocha.
While the project's major potential cannot be ignored, it's notable that management places little stock in Ecuador's political risks.
Just days before Gutierrez's ouster, IAMGold Chief Executive Joe Conway told an audience at the Zurich Gold Conference that Quimsacocha was especially valuable become of the low social and political risks when compared with similar projects in the region.
Juniors exploring in Ecuador have actually seen significant damage done to their share prices - in marked contrast to their Bolivian counterparts. International Minerals [TSXv:IMZ], Dynasty Metals & Mining [TSXv:DMM], Corriente Resources [TSXv:CTQ] and Aurelian Resources [TSXv:ARU] have all suffered extensively in recent months. Shares of Dynasty, Corriente and Aurelian are all down on the order of 50% or more from their 52- week highs. Shares of International Minerals, which has a lesser degree of Ecuadorian exposure, are only down some 20%, but are trading near a 52-week low.
Still, when compared with Bolivia the political situation in Ecuador seems more stable - at least on its face - with many political analysts not predicting difficulty with the transition government. This makes the price movement in the shares of companies operating in the two nations somewhat difficult to explain - is it possible that the marketplace has mispriced Ecuador vs. Bolivia?
Conclusion
Nationalization and mineral confiscation, of course, are nothing new to Latin America. In fact, it's largely due to their long history of resource nationalization and lack of property rights that most foreign companies with operations in Bolivia and Ecuador are still only in the exploration stage -most simply haven't had the time in-nation to develop producing mines.
While the potential rewards - especially in the case of projects like San Crist'obal, Quimsacocha, and San Bartolom'e may be great - they are not without substantial pitfalls. As always, investors enter developing, left-leaning emerging markets at their own risk.
