True to form, Bolivian President Evo Morales on Saturday nationalized two electric distribution companies, Electropaz and Elfeo, owned by Spanish utility Iberdrola. Since 2006, Morales has by decree nationalized energy, mining, communications and power generation companies in his bid to shake off European and American influence in Bolivia. This latest manifestation of resource nationalism is hardly surprising, with previous asset seizures affecting France's GDF Suez, U.K.-based Rurelec and Spain's Red Electrica. Remaining foreign mining interests were put on notice in June 2012, when commodity giant Glencore, through subsidiaries, lost tin and zinc assets. Morales, who marked the summer solstice by sailing across Lake Titicaca in a reed ship, announced recently the beginning of a new era of peace and love.
Risk consultants Maplecroft classified Bolivia, along with Venezuela, Guinea, Zimbabwe and the Democratic Republic of Congo, as extreme risks in terms of resource nationalism. Bolivia has few checks, if any, on executive power and President Morales can authorize expropriation by decree. Severe failures of rule of law are evident in Morales's Bolivia, notably the jailing of a New York businessman for 18 months without charge, despite evidence that he was extorted. The businessman was released and granted house arrest only after U.S. politicians intervened earlier in December.
Morales argued recently that economic progress following the nationalization of hydrocarbons is visible and palpable and allows the government to assign resources for given needs. But his rationale for nationalization goes beyond the well-worn "to help the needy." He spoke of the U.S. dollar promoting an "economy of death," and a "commodification of nature and a new mechanism of colonization." Apparently, the expulsion of foreign interests from Bolivia is not enough for Morales, as he demanded that "the North pay the climate debt owed to the nations of the South."
Morales's recent action toward foreign investors is not likely to endear every attendee of the upcoming Community of Latin American and Caribbean States (CELAC) summit, especially not the European contingent from the more than 60 heads of state who will be present. Morales's words at the January 25-26 summit will likely reinforce the trend of dwindling foreign investment in Bolivia. Its mining exports are expected to fall by 20 percent in 2012, and the share of private mining companies has fallen from 60 percent of mineral exports in 2011 to 48.7 percent in the first half of 2011.
It is difficult to believe that mining output will improve given the executive climate in Bolivia and the declining demand for industrial metals. While Morales provides his political allies with five-storey buildings featuring indoor soccer fields, outside investment is drying up. Much like the advanced economies which have been intoxicated on unmanageable debt for the last 30 years, Bolivia will burn through the proceeds from royalties and taxes on foreign operations until all foreign interests are gone.
It would be advisable for investors to review their positions for exposure to Bolivia, and any other state with a high probability for expropriation. Two mining concerns which present themselves at this time are Coeur d'Alene Mines (NYSE:CDE) and Pan American Silver (NASDAQ:PAAS). Coeur's subsidiary Empresa Minera Manquiri operates the San Bartolome mine in Bolivia, which contains 38.4% of Coeur's proven and probable silver reserves. After seizure rumors in 2011, Coeur claims to have received assurances from the Bolivian government that their assets would not be taken. Pan American's San Vicente mine, run by subsidiary PASB, contains 6.25 percent of Pan American's proven and probable silver reserves, and 8.9 percent of that for zinc. Royalties and taxes on these companies' operations in Bolivia have increased regularly, often with the hint of a government takeover used as a negotiating tool.
Morales's new era of peace and love has only just begun.
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