ISSUES....
Inside,
confidential, off the record
Latam gold market alert
At
last the markets are opening their eyes with the moves of the
latin American leftist governments of Bolivia and Venezuela, nationalization
of the gold mining industry is in the works, slowly but surely,
and with the gold prices at sky rocket prices, the aspiring dictators
are looking for an additional source of income. Myra P. Saefong
of Market Watch has eye the Latin American moves with the following
article:
Latin American
moves
Nationalizing natural resources may add fuel to gold's rally,
but sink shares
By Myra P. Saefong, MarketWatch
Last Update: 2:20 PM ET May 10, 2006
SAN FRANCISCO
(MarketWatch) -- Moves by Venezuela and Bolivia to nationalize
their countries' natural resources could soon spill into the mining
sector, likely boosting prices for metals that are already at
multi-year or record highs, while pressuring shares of companies
with interests in Latin America.
"A great leftwing, socialist rising is occurring in Latin
America, which will push higher all mineral prices," said
Ned Schmidt, editor of the Value View Gold Report.
"Venezuela and Bolivia are only the beginning," he said.
'A great leftwing, socialist rising is occurring in Latin America,
which will push higher all mineral prices.' — Ned Schmidt,
Value View Gold Report
Indeed, early this month, Bolivian President Evo Morales said
the move to nationalize the country's hydrocarbons sector was
just the beginning. "Tomorrow it will be the mines, the forest
resources and the land," he said. See related story.
"These political stunts could lead to disastrous consequences
if carried out," said Thomas Hartmann, an analyst at Altavest
Worldwide Trading.
The price citizens of Venezuela and Bolivia are paying for having
elected Hugo Chavez and Evo Morales will only steepen, "as
it appears likely that both leftist leaders will expand state
interference in the energy sector into the mining industry,"
said Brien Lundin, editor of Gold Newsletter. "Production,
as well as economic growth, will decline as a result."
Peru may even enter the picture with the 2006 presidential candidate
Ollanta Humala already saying he would force foreign-mining companies
to renegotiate contracts and candidate Alan Garcia saying mining
companies could face higher taxes and royalty payments, according
to CNN.
The prospect of nationalization could further feed a rally in
metals that's already lifted gold futures to more than 26-year
highs above $700 an ounce. Silver prices have climbed above $14
an ounce to their highest levels since 1983, and copper's reached
record levels above $3.60 per pound. See Metals Stocks columns.
Mine game
In Bolivia, the biggest concerns are for silver, tin and zinc
production; in Peru -- it's copper and gold; and in Venezuela
it's gold, aluminum, copper, nickel and zinc.
Venezuela
has one of the largest undeveloped gold deposits in the world
-- the Las Cristinas deposit, which has gold reserves of 13.6
million ounces, according to Crystallex (KRY : 4.89, -0.09, -1.8%
) , which has exclusive rights to develop the deposit.
"That would be a nervous situation," said Brent Cook,
an independent exploration analyst who's been in the minerals
exploration business for over 20 years. "Chavez hasn't gone
to take it over yet, but they haven't built it yet," he said.
Crystallex expects to start gold output at the project in the
first quarter of 2008.
Bolivia, on the other hand, is actually not a major mining country,
"accounting for only 7.1 metric tons of gold in 2005 and
negligible copper," John Hill, an analyst at Citigroup, said
in a recent note to clients.
Still, Apex
Silver Mines (SIL :17.21, -0.49, -2.8% ) is developing its San
Cristobal silver, zinc and lead project in southwestern Bolivia
with production expected to start in the third quarter of 2007.
"The greater concern is potential spillover to Peru,"
which is a major producer of gold and copper, said Hill, pegging
2005 gold output at 207.8 metric tons, or 8.2% of global production,
and last year's copper output at 510,000 metric tons, or 3% of
global production.
Miners with exposure in Peru include Newmont Mining (NEM :58.30,
+0.37, +0.6% ) , Barrick Gold (ABX :35.23, +0.36, +1.0% ) , Phelps
Dodge (PD :99.16, +1.86, +1.9% ) and "potentially Inco (N
:68.85, -0.70, -1.0% ) should its acquisition of Falconbridge
(FAL :48.48, +0.97, +2.0% ) proceed," he said.
All in all, while mining stock investors "have reaped huge
profits this year," a "leftist political trend in Latin
America is forcing many to consider political risk before investing,
or suffer costly consequences," said Gold Newsletter's Lundin.
High risk for miners
Analysts argue over whether the threat to metals production is
extensive, but tend to agree that mining companies will suffer
the greatest blow.
"If anything,
the potential nationalization of mining companies bodes well for
the outlook of the metals," as the "transition from
privately held to nationally held will most assuredly bring about
supply disruptions," said Emanuel Balarie, a senior market
strategist at Wisdom Financial.
But Lundin contends that the "threat of nationalization,
or the reality of it" will not have any great effect on metals
prices. "The resulting declines in production, while significant
for the individual countries, won't be that meaningful in relation
to global supply and demand."
In fact, if nationalization occurs, it would likely be done to
gain access to the cash flow generated by a mine, so the government
would "endeavor to keep the mine operating to maximize the
cash flow," said Lawrence Roulston, editor of Resource Opportunities,
an independent investment newsletter.
Therefore, "it's the mining and exploration companies and
their shareholders who will suffer the most, as massive risk discounts
are applied to their market values," Lundin said.
'At best, foreign companies will need to sleep with one eye open.
At worst, they better be prepared to travel light and fast.' —
Peter Grandich, Grandich Letter
Apex Silver, with its silver, zinc and lead project in Bolivia
has lost one-third of its value since Morales came to power, said
Roulston. "The drop in the company's share price demonstrates
what investors think of the new government of Bolivia."
Companies with advanced exploration or development projects, "could
get hurt," said Cook, pointing out Crystallex as likely to
be one of the biggest hit.
"Banks would be reluctant to lend money" to develop
the Las Cristinas mine given what's been going in Venezuela, he
said.
Goldfields (GFI :25.40, +0.50, +2.0% ) and Hecla Mining (HL 6.41,
-0.21, -3.2% ) are other companies with exposure in Venezuela,
he said.
Given all that, many traders believe that "other avenues
of investing such as the ETFs [exchange-traded funds] will be
safer -- rather than investing in mining operations in South America,"
said John Person, president of National Futures Advisory Service.
Metals menace
China has been a big factor in the metals rally as demand from
the Asian country "overwhelms" metals supplies, said
Julian Phillips, an analyst at GoldForecaster.com.
But "when the politicians see the balance of power shifting
to marginal sources of supply ... the politicians just can't resist
'strutting the stage'," he said. "This is their moment
and they are going to milk it for what it's worth."
All producers of commodities have two completely separate sources
of demand, he said, referring to China as well as the United States.
"They will try to play one against the other," with
politicians in turn trying to "pressurize" the U.S.
and China, he said. "Expect any producer country to follow
Peru and Bolivia."
The threat of Latin American nationalization has helped to 'ensure
that the imbalance in the metals markets is likely to be with
us for many more years.' — Lawrence Roulston, Resource Opportunities
John Stafford, editor of Stafford's Investment Strategy Letter,
said that "political incompetence ... always restricts production
[and] these Socialists represent the debtor class -- so they will
hyper-inflate away the small remaining value of their worthless
paper currencies to pay off debts in cheaper paper currency units."
Against this backdrop, prices for metals will "skyrocket,"
so he advises his clients to invest in North America, not Latin
America.
Lundin, too, recommends that his newsletter readers "avoid
investments" in either Venezuela or Bolivia.
"At best, foreign companies will need to sleep with one eye
open. At worst, they better be prepared to travel light and fast,"
said Peter Grandich, editor of the Grandich Letter.
"A significant part of the natural-resource rally in general
has been on the back of lessening supply, so any nationalization
can only add to the concerns of future supply," he said.
Indeed, the "net result is that the threat of Latin American
nationalization has added one more element to the challenge of
developing new mines -- thereby helping to ensure that the imbalance
in the metals markets is likely to be with us for many more years,"
said Roulston.
Myra P. Saefong is a reporter for MarketWatch in San Francisco.
ISSUES....
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