start here

start here

The Daily IKN email digest, get all daily posts sent to you next day (& no ads)

I say things on Twitter

11/1/11

IKN130 Regional Politics section

"Regional Politics" is one of the several regular sections that make up The IKN Weekly. As more than one reader of the Weekly took time out yesterday to write in and say "hey, good Regional Politics section this week" I thought I'd share it here (though a different respected reader took time to write and tell me why I was wrong about Argentina). The only changes are the deletion of specific stock names.

Regional politics

Mining & industrial plant leasers SKC on the state of the local industry
Here’s an example of the background stuff I tend to read here and there. This one is chosen because 1) it’s pretty typical of the general sentiment 2) it’s not directly mining but it makes clear that the mining industry in LatAm is a big growth driver and 3) the international growth aspect of the firm in question is interesting. SKC is a plant/machinery leasing company based in Chile, with a decent reputation and client base in the Central and South regions, but let’s not get too heavy on the preamble, here’s the report from Chile’s Diario Financiero (7) translated by your author and dated October 25th 

“There’s non-stop activity and we haven’t seen any let-up in investments”, says Alvaro Santa Cruz, CEO of Sigdo Koppers Comercial (SKC) regarding whether the international economic situation has affected companies with which he has a relationship, mainly in the mining and industrial sectors.

The executive says that, “Independent of the feelings of worry about what could happen in Europe and the rest of the world, we firmly believe that the mining sector will continue growing.”

So much so that he believes that in the next 12 months there will be an increase of between 10% and 12% in the volume of activity, this without adding new projects that may emerge. “Today the banks are a little more demanding (regarding credit facilities) but there is no credit crisis. There are still lines of credit available.”

Copiapó and Calama
The company is beefing up its presence in the North (of Chile) due to the growth in the mining sector. Santa Cruz commented that due to this SKC was opening a 4500 m2 branch in Copiapó that entailed an investment of $3.5m Also, next year they expect to begin the construction of a branch in Calama which will be an investment and surface area similar to that of Copiapó. The idea is that the mining sector will continue to increase its importance to the company.

International Development
The commercial subsidiary of the SK group is also raising its international profile. In Peru for example, as well as Lima, Arequipa and Chiclayo the company is going to open in Trujillo. “We’re going to open a couple of premises more focused on the mining sector”, he said. They are also growing in Brazil, having been in business in Curitiba for one year. In Brazil the company is mostly connected to the industrial sector. “We’re looking at Colombia. We’ve done some studies, but it’s a project that we’ll look at in 2012”, Santa Cruz added, saying that the mining sector in Colombia still had a lot of work to do to bring it up to speed.

Correa at Quimsacocha
Last Tuesday President Rafael Correa of Ecuador made a site visit to the IAMGold Quimsacocha project (8). The visit was political in nature of course, as he took time to point out to the media in tow that the project wouldn’t affect the nearby lakes and ensuing downstream water supply (the word ‘Quimsacocha” in Quechua means “two lakes”), that the rigged consultancy amongst locals that we reported on a couple of weeks ago was indeed rigged and “illegal” (rigged it certainly was, ‘illegal’ is debatable) that mining will be a big growth sector in Ecuador and all the other statements we’ve seen and heard before. The sanitized version of the visit is that above, but there were also incidents reported including the arrest of a 57 year old man who threw stones at the Presidential motorcade (apparently there was a rain of stones at one point, but only one capture), a strong police presence to keep protesters out of Correa’s face and a large crowd who booed and drowned out Correa as he tried to make a speech from the steps of the local municipal building.

In effect, the visit was a microcosm of the country’s attitude towards mining with the national government making the right kind of noises and the locals vehemently opposed to seeing a large mine set up in their vicinity. This split in opinion isn’t going away and won’t go away even if the now (in)famous negotiations on contracts with the big five mining projects (including Quimsacocha of course) are ever decided upon and get signed. The other negative that needs to be clearly underscored here is that Correa has been making the same mining-friendly noises for at least three years, but the progress made by his government on bringing large-scale formal mining to the country has been precisely and exactly zero.

The call on Ecuador remains AVOID, written in capitals bold-typed and underlined. If the country ever gets its act together then we can re-examine that call but even if the current negotiations with ther big mining companies reach a conclusion (so much for “signed in October”, no?) we’d still be a long way away from seeing a mining project get through the on-ground protests and oppositions it would be certain to attract and start producing metal (be it copper, gold or whatever).

A final point. After last week’s note which, like today, covered Ecuador in the ‘Regional Politics’ section and mentioned XXXXXX along the way I had two mails from subscribers wanting to know whether I was warming up again to the idea of buying XXXXX. The answer to those mails which gets repeated here is that no, I’m not considering XXXXX as a buy in the short-term or even medium-term. What we’d need from XXXXX to make it attractive is its own deal with the government on tax and royalty burdens, signed sealed and delivered, before it could seriously be considered a buying opportunity again. That kind of timesecale is likely counted in years, not days or weeks or even months. My thoughts regarding XXXXX last week didn’t make that time distinction and as such (and by the looks of the couple of mails received) may have caused confusion, so here today I want to shine the light clearly. I got out of XXXXX at a loss, it sunk much lower in the weeks after that sale and even though I note that the stock put in a bit of a low volume rebound last week I have no interest whatsoever in buying back. I made the mistake of hanging in too long on XXXXX and thinking Ecuador would be able to turn around its political risk profile in the time I held the stock, which was a failure in judgment but hardly likely to be the last one I ever make. However, in the words of Seneca the Younger, “Errare humanum est, perseverare autem diabolicum”.

Minas Conga, Peru
The gold mining project known as Minas Conga in Cajamarca, owned by the Yanacocha consortium (the operator NEM and partner BVN, with the IFC as minority holder), has been making headlines in the last couple of weeks due to a protest by locals against the project. The Congas project has been a contentious one for years (not just this year) but received its enviro permits late in 2010 and then got the formal green light from both boards of directors and the project is now supposed to be in construction (if it weren’t for the protests). Yanacocha SA (the main mine is close to Conga) wants to invest U$4.8Bn at Conga to bring the new deposit online by 2015 as the main Yanacocha pit is starting to deplete, while locals oppose the project because they say it will drain the local water supply to nothing and ruin the agricultural land around the region (9). In the last couple of weeks things have come to a head with road blocks and marches that were mostly pacific but a couple of violent flashpoints were reported as well.

So far so normal for Cajamarca. This region hosts some of the biggest gold mining operations in Peru (GFI Cerro Corona is another) but can also be a pretty fractioned and politically difficult region in which to operate. Political risk is a not a blanket “good” or “bad”, but varies from area to area, even village to village, depending on the attitude and culture of the local community groupings. In the case of Conga, those against the project have been organizing their protests for at least three years but now the Humala government with its Consulta Previa (pre-consulting) law is in power, the locals have found a legitimate platform and traction for their cause at the very same time as construction activity is beginning to ramp up at the site....hence the uptick in protests, the roadblocks, etc.

What happens from here is interesting from a test-case point of view, as (along with the Tacna protests against Southern Peru’s expansion plans and Anglo at Quellaveco mentioned a couple of weeks ago on these pages), it will be one of the first serious tests the government policy. That kicks off next week with a round-table meeting due to start between miners and locals (10) that the government (via the Mining Ministry) will sit in on, rather than lead. This return to negotiations between the two sides may well lead to an eventual government-led negotiation period, because both sides seem rather intransigent up to now (in typical fashion the mining company maintains it has complied to the letter of the law and in typical fashion the local communities are looking for a monetary compensation for the arrival of the mining company, said to be around the 200 million soles (U$74m) mark). Both sides accuse each other of the flipside of their demands, both claim blackmail and skulduggery, and from the outside looking in it seems the whole process is sorely in need of arbitration.

A personal call on this would be that in the best of cases, the government starts its formal arbitration process and after a few weeks Yanacocha concedes some ground and agrees on some level of financial compensation for the affected population, who then sign guarantees of support for the project and the whole thing goes ahead. That’s a best case of course and right now I’d give it a 50/50 chance of happening that smoothly. But Minas Conga is definitely a test case that a lot of major mining companies will be closely following, as it will give plenty of clues as to whether the new government policies will be effective. We’ll also be watching this space carefully in what’s left of 2011.

Argentina and repatriation
This one has made plenty of headlines and has been fodder for plenty of analysis notes, too (including of course the Flash update from last Wednesday afternoon which you can find in Appendix 1 underneath) so before noting a bit of fine-print, let’s cut to the chase with some what-you-need-to-know bullet points:

  • The new repatriation rule really is no biggie for mining companies (producer or explorer, large or small) in Argentina and does not stop any company from remitting profits back home

  • It’s not really about mining and much more about the crackdown in the exchange trade in dollars in Argentina. We note today the news reports (11) about how the market for dollars will be restricted by the Argentina tax office (AFIP) temporarily. No dollars from internet or phone banks none from cash machines and if you want dollars tomorrow and go to a bank teller window, you also have to justify your purchase and explain why you want dollars. It’s all about capital flight from Argentina and all about how the Central Bank (BCRA) has had to intervene by selling dollars to the market in order to prop up its currency.

  • It is ultimately an inflation fighting exercise by run by the Argentine government, as tighter controls on dollars = less capital flight = more power for the BCRA to intervene and prop up the currency = a stronger (or better put “less weak”) Peso = more buying power per banknote = prices don’t rise as quickly as they might. Whether or not this will work as a policy is beyond the scope of this publication about junior mining companies in LatAm, the fact is that they’re trying it.

  • Other regional countries apply the same rules as the new Argentina Executive Decree (a good example being Brazil, which imposes the same kind of small transaction tax on money movements as Argentina and is a near carbon copy of what companies will go through in Argentina in the future) with nary a word spoken against them.

  • This move may presage further tightening on transactions in foreign currency for companies (in our case the miners) because you can never say never, but anyone who shouts, states or even implies that those tightening measures are bound to happen doesn’t have the first clue on the subject.

  • Further restrictions on foreign currency transactions in Argentina are unlikely in the short to medium term, i.e. the attention span that the market is using and will continue to apply in the future.

  • This issue, badly understood by the prophet of doom English language media and analysis brigade, has thrown up a good buying opportunity in many Argentina exposed stocks, including of course our own covered stock XXXXXXXXXXXX, which has a great buy/add price on offer right now (I’ve personally taken advantage of that).

Now for a bit more and some background is needed here. Firstly, it’s interesting to note how the demonization of the Cristina government quickly moved from the original call from Northern press and its anal yst community of “Mining money can’t leave Argentina!! Sell!!”. When that was clearly pointed out as false, the anal yst talk went to “It’s the first move in a tightening that will lead to...” and you can add the rest yourself. The fact is that it might lead to a situation further down the line that puts more restrictions on the remittance of revenues (mining and other) out of Argentina, but for one thing that’s unlikely because even a heterodox economic model such as Argentina’s isn’t going to commit financial suicide and for another, even if the eventual policy hardens to such extremes it’s not going to happen for plenty time yet.

Second up: What we saw last week was a pretty classic example of how the Kirchnerites (or K people, or Frente Para la Victoria sub-section of the Peronist movement, or whatever else you’d like to call them) operate their political powers. The normal way the Kirchnerites (led by Cristina herself of course) move is to:

1)      Move by surprise and hit the market or opponents over the head with a large piece of 2x4 introducing a new rule or law or decree when nobody was expecting it.
2)      Wait for the critics and push back from their extreme and unannounced move.
3)      Negotiate to a more moderate position that leaves its opposition satisfied that it has gained some relief, while holding on to all the policies it wanted to install in the first place.

Last week and this week is part 1) and we’ll now go through the yelps and cries and accusations of how Argentina is a Chávez-modelled authoritarian police state while part 2) gets into gear. Give it a couple of weeks and part 3) of the K plan will come to the fore, things will settle down and it’ will be business as usual. And if you don’t believe me, don’t buy XXXXXX or any other Argentina exposed mining stock for that matter. I won’t hold it against you.

The fact remains that the new regulations as stand are of minor importance to the mining community in Argentina and that we’re not going to see remittance restrictions placed on revenues from mining companies operating in Argentina in the foreseeable future (by which I mean that even if restrictions are applied, it will be long, long after the time when the market has forgotten all about this issue-du-jour and has bought back all the stock it sold in its panic). Or in the simplest of terms, this is a buying opportunity. You don’t have to hold the stock you buy for years on end and you don’t have to like the CFK government’s policy or way of doing things. You don’t have to go and live in Argentina, either. You don’t even have to visit the place if you have a strong ideological complaint with the direction it (or any other LatAm country for that matter) goes about its business. You just need to know that this is a buying opportunity...for a bunch of juniors we follow...it’s business...it’s nothing personal. For further reading, this article (12) is recommended, written as it is by an Argentine mining journalist. He got it right the day after everyone in the English language was either still getting it wrong or just adapting their original, erroneous prophet-of-doom calls and making them even worse.

China looks at Chihuahua
Stories about how China is looking to the Latam region as a prime destination for its investment cash nowadays have a bear defecates in tree-covered location ring about them, but all the same it’s good to track down some micro-regional action have an idea about some specific places that may eventually attract Sino-dollars. For example Chihuahua in North Mexico, as this short report (13) makes clear:

Mexico City, Mexico, Oct 25 (UPI): Chinese business executives have announced their interest in investing in the Northern State of Chihuahua, bordering with The USA.

The Chinese met with the regions’ governor, César Duarte, to whom they stated their interest in bringing investment to this northern region of Mexico.

“For us it is of great importance to know of your interest in making investments in Chihuahua”, said Duarte.

He added that, “We are set on converting ourselves into a viable bridge for Asia products, specifically those of China, to The USA.”

The investors told the governor of their desire to put resources towards different types of projects that include the sectors of mining, rural development and water.