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It has been a
while since we had this nagging feeling that we’re witnessing something
profound taking place before our eyes and the market doesn’t seem to
grasp it yet. We are not talking about
the smorgasbord of events effecting markets all over the globe that is
receiving ample coverage elsewhere in the media. As readers might know, our particular
interest is in the silver space, and that is where we see an elephant in the
room that hasn’t made headlines yet.
No doubt most
readers are aware of the recent developments in countries like Argentina,
Bolivia, Peru and others, with respect to what can be broadly classified as
“resource nationalism”. Our general views on the subject were detailed a
few years ago, here. As
discussed by this writer and others, such developments are not new and
certainly not limited to silver or even the mining sector. However, in our opinion, it is in the
silver space that these events should have the most profound effect.
Why? Because
the silver sector is so small and the above mentioned countries collectively
make up a big of chunk of it. According to CPM Group’s 2012 Silver
Yearbook, the aforementioned countries are projected to produce some 170 Moz
silver this year versus the anticipated total global silver production of 788
Moz. While at first glance that only makes up 21.6% of total annual mine
supply, which in itself is significant, we submit that it represents an even
greater percentage of “investible”
silver production.
Let’s
take a closer look…
Of the total
788 Moz of annual (projected 2012) world silver production, the part that is
accessible without much hassle to you and I, the unsophisticated investor
through public markets is largely limited to Mexico, USA, Canada, Australia
and Europe. For the purposes of this missive, the rest of world offers
few-to-no easy ways to invest in silver. Why not much to look at here? The
larger contributors to silver production in the rest of the world are China,
Russia, Kazakhstan, Chile, Turkey, Morocco, Indonesia and India.
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The
bulk of Chinese production is dominated by large base metal producers and/or
smelters/refiners. Silvercorp is an exception and is a Canadian company, so
we bundle it into North America;
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Russia
has several companies listed in New York and London as well as RTS –
most of them primarily gold and/or base metal miners;
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Kazakhstan
has few larger publicly traded companies (Kazakhmys in London) – none
of which make primary silver plays;
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Same
for India, Indonesia and Turkey. Morocco may produce a silver play in the
near future if efforts of May Gold and Silver (TSX-V: MYA) are successful;
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Chile
has no primary silver mines with the exception of Kinross’ La Coipa,
which once again, makes a poor silver play – the remainder of silver
comes from primary copper and gold mines buried in large companies such as
Codelco.
The only
destination of significance in Europe in terms of contribution to silver
production accessible via public markets, is Poland (KGHM is a large silver producer but primarily a copper
mine). The rest of European
production is scarcely accessible as a bet on silver because the mines that
produce silver are either not primary silver mines, or are private, or
otherwise not easily investable. The other European silver play that we know
of, is Global Minerals (TSX-V: CTG) – a Canadian junior advancing a
past-producing silver project in Slovakia – not yet in production,
though moving in that direction.
There are a few other juniors scattered around Europe with some silver
exposure that are not primary silver plays. That about sums it up, given that the
whole of Europe is projected to kick-in 56.5 Moz in 2012 – of which,
Poland stands for 40.4 Moz followed by Sweden
at 9.1 Moz (Boliden, a conglomerate, not a silver company).
Australia has a handful of smaller silver mines
(under 3 Moz annual production) to choose from, since the biggies do not make
good silver plays (BHP and Xstrata).
Sounds
ominous, doesn’t it? You know, there is a reason silver is a
p-r-e-c-i-o-u-s metal. That is
why Silver Wheaton has a business – it provides a way to unlock the
value of silver buried within larger polymetallic mines, which by itself is
insignificant to the actual miner, but can be substantial when separated.
Silver Wheaton’s $12B market cap is proof of that.
So what is
wrong with Argentina, Peru and Bolivia, and why is
it a big deal? Here we would
like to refer the reader once more to the article we
penned on the subject in 2009 where we defined nationalization as “not only outright expropriation of private
property but all other forms of "creeping" or indirect
nationalization which ultimately leads
to increased control of natural
resources by governments at the expense of current stakeholders in a non-free
market way. These may include any flavor or combination of
increased taxation, excessive/retroactive taxation, breach of contracts,
delay or revocation of permits and licenses required to exercise legal
owner's rights, support or tolerance of other groups/interests' illegal
activities to the detriment of property owners, and so on”. It looks as if Argentina, Bolivia and
to a lesser extent, Peru, are trying to hit it on all points, based on the
actions of central and (in the case of Argentina, some) provincial
governments.
Bolivia, of course, was the latest in the news
with nationalization of the flagship Malku Khota silver-indium project of
South American Silver (TSX: SAC). So much so, that it led to the ultimate
resignation of Greg Johnson as its President & CEO – who was
largely responsible for putting that company on the map in the first
place. The stock is back where it
was when Johnson took over as President, back in March, 2010.
Peru has had its share of “misfortunes” in this
regard with Bear Creek (TSX-V: BCM) still trying to recover from its fall
from grace in public markets – through no fault of its own that we can
find. All the rhetoric to the
contrary notwithstanding, things seem to be far from “business as
usual”. The good news is
that Peru (and Chile) has a rather elaborate domestic mining industry with
sizeable publicly trading companies contributing a great deal to its economy,
which is not the case in Argentina or Bolivia. The assumption here is that the
government will be hard-pressed to make a move on foreign investors without
at the same time squeezing influential domestic companies.
Argentina has been making waves for some time,
which seems to have culminated with its government taking control of 51% of
Spanish oil major Repsol’s oil interests in the country. Here’s a
direct quote from a news
release dated July 2, 2012 by Geoff Burns, President & CEO of Pan
American Silver commenting on the legislation proposed by the government
of Chubut province of Argentina:
"This is an incredibly unfortunate
development for the mining industry in the province of Chubut and in
Argentina. Having made significant investments over the last two and a
half years in work to prepare the world-class Navidad silver project for
development, it is extremely disappointing that the government of Chubut
would introduce this legislation without meaningful consultation with the
mining industry. Since acquiring Navidad, we established a policy of
open and honest communication with all levels of government as to our
progress and plans and were surprised that we were not consulted on the
economic effects that the proposed legislation would have on Navidad's
development. I am convinced that it was the provincial government's
intent with the new draft legislation, to define a path for the development
of Navidad, not to render the project uneconomic. However, if the draft
law is passed as submitted there can be no other choice currently than to
stop investing further in the project".
We encourage
you to read that entire news release to learn what else they propose to do.
Mind you, Navidad was supposed to be this blockbuster mine that would take
Pan American to a whole new level (more on that in part II). If memory
serves, they paid some $660 MM to buy it. Despite the recent acquisition of
Extorre by Yamana Gold, which incidentally went for a much lower price than
one figures it would in a more mining friendly jurisdiction, Argentina
appears to be determined to exhaust all other options before doing the right
thing. After all, it’s
barely been 20 years since they opened up the resource sector to foreign
investment.
We would be
remiss not to mention Guatemala,
as it is home to the other blockbuster silver project being advanced by Tahoe
Resources (TSX: THO). If you
examine its stock chart and check the news from the company, Tahoe appears to
have lost about $1 Billion in market capitalization on the account of talk
related to nationalization of Guatemalan resources by that government. They
back-tracked on that, saying they want a bigger stake “only in new projects” – but
the market was spooked and seems to be slow to warm up.
Where to look going forward
Why not look
where the “pros” are going?
While we were mulling these matters over in the last few months, the
event that “drove it home” for us was the unsuccessful bid by
Hecla for US Silver.
Incidentally, Hecla is our “favorite co to criticize” in
the sector. Why? Because coming into this cycle (say 10 years ago), Hecla was
the ‘IT’ company in the silver space. They had it all – the 100 year
history, the NYSE listing, the name recognition, the size relative to peers,
the following (by resource investors and funds), the technical expertise and reputation
of a top underground mine operator.
And they have successfully squandered that early leader
advantage. We are aware of
several “due diligence” undertakings by Hecla that ultimately
resulted in them shying away from pulling the trigger on an acquisition. The best thing they did in the last 10
years was to acquire the balance of Greens Creek that they didn’t
already own. It is about the only
thing of note they did in that period.
That, and the settlement with the EPA – which didn’t come
cheap. That same Hecla,
who’s execs all but swore on a stack of bibles to never “cross
onto the wrong side of the highway” (referring to highway I-90 which
cuts through the Silver Valley separating operations of Hecla from the other
big three mines – The Sunshine, Bunker Hill and Galena/Coeur) made a
bid for US Silver – which now owns the assets previously owned by Coeur
D’Alene Mines in the Silver Valley.
Question
becomes, where else they had to go?
There aren’t many more places they can go! That brings us full circle to where we
started from. As we write this,
the news came out on August
21, 2012 that Hecla made a “strategic investment” in Dolly Varden
Silver Corp. And it only
re-affirms the point we are trying to make: if you want to be a player in the
silver space, right now you’re virtually limited to Mexico, USA and Canada. Hecla’s actions suggest that
they “get it”. In
part II of this piece we will examine who else gets it.
In summary, we
don’t suggest that countries presently stepping up resource nationalism
are a complete write-off, or the situation could not change in the future.
Companies neck-deep with operations in such places will try to make the best
of it and rightfully so – they owe it to their shareholders. Even when projects are nationalized,
they usually continue to operate – though history suggests that
government-run industries eventually work themselves into the ground (no pun
intended). At that point, they
start to look to private business to right the ship and the cycle starts
over. In the meantime, as Jim
Dines puts it, the overall trend is “southward” – towards
more government control – and capital will flow wherever it is treated
best. Jindal
Steel exit from a $2.1 Billion iron or project in Bolivia is a
manifestation of that.
Sean Rakhimov
© Copyright 2012 by Sean Rakhimov.
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