By Joseph Kirschke, News Editor-Mining

Through the legacy of the Soviet Union’s collapse, Chinese capitalist-style reforms, Internet technology and the 2008-2009 worldwide recession, among other factors, BRIC (Brazil, Russia, India and China) nation growth representing 40% of the world’s population has surged—along with the economies of resource-rich countries servicing their markets.

By 2040, the world’s population may top 9 billion—up from some 7 billion today, according to UN statistics; and as China appears likely to supplant the U.S. with the No. 1 economy in the next decade, India is poised to exceed its neighbor’s 1.3 billion people in its relentless population growth—amid dire energy poverty.

Few grasp these demands better than the mining companies charged with satisfying them: Indeed, with global energy requirements forecast to surge 30% by 2030, according to the International Energy Agency (IEA), coal is fast outpacing oil as the world’s biggest fuel, accompanied by increases in steel and baseline copper demands at 90% and 60%, respectively—among many others.

But with heightened awareness of their endeavors comes an emerging threat from foreign governments: resource nationalism—the use of tactics from increasing taxes and royalties to tightening exports to outright expropriation—curtailing access to resources for economic or political gain. Deemed one of the biggest threats to the global mining in the 21st century, “this not only has operational and financial implications for extractive companies operating in these countries, but it could create further instability for global energy markets,” according to Maplecroft, a U.K.-based risk analysis firm.

In its 2012-2013 business risk report for mining and metals, global professional services and accounting firm Ernst & Young similarly placed resource nationalism at the top, so companies “continue to engage with governments to foster a greater understanding of the value a project brings to the host government,” said E&Y Global Mining and Metals Leader Mike Elliott.

With this in mind, in April’s E&MJ we begin our first installment in an ongoing series addressing mining sector resource nationalism. In it, we shall explore the complexities and nuances of each global mining jurisdiction where it either currently prevails—or is emerging—in all its forms.

We begin with Bolivia, a Latin American mining colossus—and one of the most aggressive countries anywhere when it comes to resource nationalism.

Evo Morales, “Mother Earth” and Nationalism
Similar to many developing nations, Bolivia’s mining tradition has never been a terribly forgiving one. Origins of the gold and silver enriching Spain 500 years ago remain hardscrabble enterprises—ones where injuries and fatalities are endemic to a remote Andean landscape where air and prosperity are equally scarce.

In this spirit, Bolivian miners have long paid homage to small “Tio” statues on the way down. At each entrance, the clay “Uncles” enjoy offerings including cigarettes, alcohol and tiny deposits of coca leaves—the same ones keeping miners’ hunger at bay and their senses alert while descending into the silica-heavy depths below.  

Bolivia has vast natural resources. But since the 2005 election of Evo Morales, Latin America’s first indigenous president, executives at foreign companies operating in the world’s No. 4 tin producer have been saying their own silent prayers.

And rightly so. In a country with a $5,000-per capita GDP—and 2014 elections looming—threats of state appropriations to Bolivia’s second-largest industry won’t end anytime soon.

Demands, Extremism and Worries
Bolivian resource nationalism has been catastrophic—even, to a degree, by Morales’ own admission. The June takeover of the Colquiri zinc and tin mine—Bolivia’s second-biggest—from Swiss major Glencore plc’s Sinchi Wayra subsidiary following a labor dispute offers a textbook case.

Since the appropriation, involving the deployment of 1,600 soldiers and police officers, output fell to 337 metric tons (mt) in December—down from 429 mt, a 21% decrease. The number of workers, on the other hand, jumped to 1,249 from 959—a 30% increase. Morales for his part, was “very surprised” at the “worrying” figures, reported El Nacional.

Of equal concern had been a two-week labor dispute between rival unions at the site three months after the takeover, costing the government nearly $4 million—at $250,000 a day—in production losses, according to officials.

Still, La Paz officials remain defiant. “We’re not going to hand our country to foreigners who destroyed Bolivia and left it stagnating for 20 years,” Vice President Alvaro Garcia Linera told state-run Radio Patria Nueva.

In an opinion piece for The Financial Times, Bolivian Finance Minister Luis Alberto Arce was even more confrontational. “We have not nationalized, nor will we nationalize, genuine investments in the private sector—either domestic or foreign,” he wrote.

The Bolivians are resting on their laurels, say observers, thanks to the dividends driving global resource nationalism in the first place: Huge global market demands for an industry that, in 2010, employed nearly 80,000 miners, according to data from Bolivia’s Ministry of Mining Production and Development.

Since 2008, moreover, statistics from the Bolivian National Statistics Institute (INE) reveal mining production has soared 60%. And, despite the Eurozone crisis and the U.S. government’s own austerity challenge, 2011 exports alone increased 50% to $3.7 billion over the previous year, according to Moody’s analyst Gabriel Torres.

But for a sector constituting one-third of foreign currency earnings, Bolivians are “limiting their potential upside going forward,” Torres told Bloomberg News.

Overall tin concentrate export declines cited by Bolivia’s mining ministry in the first three quarters of 2012 echo this assertion: State-owned mines generated 6,487 mt, down 7.3% in the same 2011 period. Far more troublesome was Q4 output at medium-sized mines following the Colquiri disruption—collapsing to 52 mt from 758 mt.

A Long History and the Adoption of “Mother Earth”
Huge complications emerged in October with passage of “Pachamama” legislation limiting access to Bolivia’s natural resources by equating them with human rights. Named for the “Mother Earth” goddess in Andean folklore, the law invokes “a living dynamic system made up of the undivided community of all living beings.”

The law has left investors and miners puzzled in prohibitions against “mega-infrastructure and development projects that affect the balance of ecosystems and the local inhabitant communities.” In all, the amendment to 2009 constitutional reforms empowers 11 resources, including water and air.

In a country with a 62% indigenous population, state takeovers of mines—with accompanying popularity among local populations—has deep-seated roots. Until the 1950s, many foreign-owned assets turned a profit on Bolivian miners toiling under poor conditions for meager pay. Convulsive violence between 1918 and 1947 fed into a 1952 Revolutionary Nationalist Movement that established Bolivia’s National Mining Corporation (Corporacion Minera de Bolivia), or COMIBOL.

Early on, though, COMIBOL proved a wholesale disaster. Union-driven rules trumped most sound management decisions, as COMIBOL’s workforce swelled to 36,000 by 1955 from 24,000 four years earlier while productivity fell 20%; absenteeism—and theft of ore—flourished.   

Latin America’s 1980s debt crisis, however, opened a window of privatization under President Gonzalo Sanchez de Lozada. But demonstrations preceded a referendum wherein 80% of Bolivians supported appropriation of national resources which was, in turn, ignored outright by La Paz. Morales’ election followed turmoil in which foreign direct investment (FDI) plummeted more than 60% to $200 million from $567 million two years earlier.  

Moreales is reviewing the national mining code to increase revenues, while defining the roles of government and private sector businesses in profits, taxes and royalties. Present royalties by foreign miners range between 5% and 7%, up to 37% of profits. Under the new code, companies should partner with COMIBOL, which would take majority ownership and 55% of profits.

But quixotic “Mother Earth” sows serious confusion: “She is in permanent balance, harmony and communication with the cosmos,” the law reads, “and is comprised of all ecosystems and living beings, and their self-organization.”

Before the most recent high-profile takeover, though, commodities giant Glencore had announced plans to invest $56 million in Colquiri despite having lost two smelters since 2007. Since 2005, Glencore invested $22 million into the operation and $250 million into Bolivia’s mining sector while paying $70 million in taxes, royalties and fees. COMIBOL officials also cited feuding between workers as a rationale for expropriating the project.  

There’s no denying Morales’ agenda as a champion of Bolivia’s native population. Nonetheless, the 52-year-old retains less control over Bolivia’s mining sector than he would like, say experts like James Lockhart-Smith, a senior analyst at Maplecroft.

“Nationalizations in Bolivia are typically a bottom-up process,” he said. “This responds to the longstanding challenges that have faced Morales in managing and retaining his support base.”

Morales’ recent eroding popularity only furthers his need to accommodate such support, noted Simon Whistler, a Washington-based senior manager for Global Risk Analysis at Control Risks Group. “He has tried to be pragmatic, but it’s politically impossible for him to do so,” he said. “It can lead to extremely difficult situations.”

Aggression with a Silver Tongue
A prime example was the contentious takeover of the undeveloped Malku Khota mine—with one of the world’s largest silver deposits—from Canada’s South American Silver. Violent clashes and a hostage standoff preceded the August appropriation of the Potosi mine—home to 230 million oz of silver and 1,481 million mt of indium.

According to the Vancouver-based company, the project run by subsidiary Minera Malku Khota S.A. had support from 43 indigenous communities—while three were opposed. After a series of protests, a large-scale police raid on a local community escalated after two officers were taken captive. One peasant was initially reported murdered, though subsequent news reports concluded he mishandled a stick of dynamite while intoxicated.   

South American’s then-President and CEO Greg Johnson noted that the company cultivated strong community ties since rights were granted in 2006, adding that activists and others “associated with artisanal mining are acting against the stated wishes and best interests of local indigenous communities.”

Although Morales met with groups on both sides, he ultimately sided against the company. “These resources belong to the state, and therefore to the Bolivian people,” Morales said. “We have to remember our history and Mother Earth, which is natural resources.”

Morales further blamed company officials for instigating violence between indigenous clans. “These companies pit brothers, in-laws, cousins, neighbors, brothers against one another,” he said. “We cannot understand why some people use and confuse others.”

Two months later, Supreme Decree No. 1308 was issued and company officials, after retaining two law firms and financial advisers under a U.K.-Bolivia treaty, declared a six-month “cooling off” period. They are now offering negotiations for the mine in which they planned to invest $50 million by 2015.

But negotiations have yet to begin. Barring a resolution by April, South American Silver has said it will pursue arbitration under the UN Commission on International Trade Law for full compensation.

Current CEO Philip Brodie-Hall has expressed optimism in recovering losses, citing “substantial” technological investments in the mine’s exploration. “We are confident the international arbitration process gives us means to recover the full value of our project,” he said in a statement.

July witnessed additional discord after India’s Jindal Steel and Power abandoned its El Mutun project near the border with Brazil with $2.1 billion in announced investments since work first began in 1989. The government claimed Jindal ignored part of its 40-year contract obligations signed in 2007—to the tune of $600 million—while the company invoked lax legal securities and production schedules; both sides disputed provision of operational gas supplies.  

Regardless, six Jindal employees were arrested, equipment was confiscated, and production at one of the world’s largest iron ore deposits was brought to a standstill. Company officials decried Bolivia’s “criminal proceedings” and “intent to victimize” the business and its workers.

Immediately after relations began deteriorating, Bolivia confiscated $36 billion in financial guarantees from Jindal; the seized assets remain under international arbitration.

Irregular Regulation
The San Cristobal zinc, silver and lead mine owned by Japan’s Sumitomo Corp.—Bolivia’s largest foreign investor—has also been menaced by protesters. One of the country’s biggest mines, the southwest Potosi operation produces 1,300 mt of zinc-silver ore daily, according to company officials.

During the 2010 unrest in which rioters threatened to cut the mine’s power supply, Mining Minister Jose Pimentel told local radio daily losses were $2 million. Nonetheless, work continues; Tokyo-based company officials said the site also produces 300 mt of lead-silver ore per day.

But U.S. gold and silver company Coeur d’Alene Mines, which also continues production near Potosi through subsidiary Empresa Minera Manquiri, offers an even more striking contrast to competitors. The San Bartolome silver mine was developed with local cooperatives and COMIBOL; it employs more than 300 people, according to a company statement, while contributing $22 million to the local economy.

Most significantly, in 2011, the Idaho-based company received public assurances, widely reported in the media, that Bolivia’s second-largest silver producer would not be nationalized, so long as Morales was president.

Under a 1990s deal with COMIBOL, Canada’s Pan American Silver likewise runs the San Vicente project with less controversy, producing more than 3 million oz of silver in 2012. The same has been true of Canadian miner Apogee Silver Ltd. with its Pulacayo-Paca project and The China National Gold Group.

Vancouver’s New World Resources Corp. similarly enjoys a “positive” relationship with COMIBOL, in a 60:40 joint venture with its Lipeña-Bonete copper-gold concession in southwest Bolivia while successfully navigating a “difficult political environment,” said CEO John Lando. But the Vancouver-based company’s Bolivia presence, he added in a statement, differs from other foreign companies, having partnered with a “successful” private Bolivian mining company, Empresa Minera Marte S.R.L.

And while New World Resources “looks forward to the future development work by our partner at the Lipeña copper-gold project, the company is currently focused on acquiring new projects in jurisdictions with clear mining codes, and long standing track records of respecting investment,” Lando said.

Although Bolivian resource nationalization is a highly erratic enterprise, note analysts, the outcomes are usually the same. “Jindal was not actually nationalized like Sinchi Wayra and Malku Khota (which were) struggling with outbursts of violence from indigenous groups that wanted the state to take part,” Bernardo Prado, a La Paz mining consultant told The Financial Times. “But in the three cases the government’s hardline position did not help and now they are all in the hands of COMIBOL.”

None of this seems to have deterred South Korea’s state-owned Kores, which discovered some $8 billion in silver, copper and indium reserves, COMIBOL officials have reported.

Future, Past and Present
Kores officials announced that COMIBOL will have 50% ownership in a joint venture, followed by construction of the country’s first lithium plant.

Bolivia is estimated to have more lithium than any other country on earth.

But the Fraser Institute, a Canadian think tank, still ranks Morales’ Bolivia third from the bottom in a survey of 65 countries in foreign mining industry appeal and 57th for security investment; only Venezuela and Zimbabwe were lower.

Frustrated foreign mining companies are now learning the hard way how poor Bolivia’s past—despite being one of the planet’s most mineral-wealthy countries—keeps colliding recklessly with attitudes about its future.

Bolivia, for one thing, wasn’t always a landlocked nation: Through the departure of Spain’s conquistadores and 1809 independence, the country lost significant chunks of land through wars with neighboring Chile, Paraguay and Brazil.

In the end, a local saying may sum it up best. “Good comes from far away,” according to a historic Bolivian proverb, “evil is close at hand.”

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