Adios, Socialistas

There is a new reality various governments still dreaming of imposing 'windfall taxes' and other measures of this type on companies involved in the extraction of resources will have to face. So-called 'resource nationalism' is a constant threat mining companies have to live with. They are usually sitting ducks, since they cannot simply move their assets elsewhere. Usually a mine (or an oil field) involves very long range planning and a huge upfront capital commitment. As a result it often appears easy to blackmail mining companies. The calculation from the point of view of greedy politicians is that the companies will rather live with a much smaller profit than lose the entire value of their investment.

It becomes a bit more complicated when the investment necessary to build a big mine hasn't been undertaken yet. Ecuador has followed in the footsteps of a few other Latin American countries and has elected a distinctly left-wing government. Similar to Venezuela and Bolivia, the government immediately ripped up all agreements the previous government had made with regard to mining, as the resources of the country are held to belong to that mythical collective, 'the people'. All foreign-owned mine developments ground to a halt consequently. The government at first enacted a new mining law that simply made things impossible for miners. It then promised it would enact reforms that would once and for all clear up the legal fog in which mining has been mired since then and provide a more 'investor-friendly' framework, but it has so far failed to deliver.

 

Meanwhile, mining companies that were about to develop large projects were engaged in direct negotiations with the government in order to gain clarity on the status of their properties (actually, no longer 'their' properties, but those of the aforementioned 'people').

Now the putative developer of the biggest mining project in the country, Kinross Gold, has walked away after two years of fruitless negotiations, during which the government has played hardball with the company throughout. Specifically, the government would not back down from demanding a 70% 'windfall tax'.

Fruta del Norte (FDN), the project in question, is one of the biggest and best (in terms of grade) undeveloped gold projects in the world. The fact that Kinross nevertheless took the hard decision to abandon it speaks for itself (previously, Iamgold abandoned its large Quimsacocha project in Ecuador). The recent decline in the gold price has probably helped this decision along, but the new management at Kinross is on a mission to no longer invest in projects that do not promise to generate a decent return.

As the Financial Post reports:

 

“Kinross Gold Corp. has abandoned plans to develop the massive Fruta del Norte project in Ecuador after refusing to pay a 70% windfall profits tax demanded by the government.

It is a major disappointment for the company. Fruta del Norte was acquired for more than US$1-billion in 2008, and was expected to become one of the Toronto-based miner’s cornerstone operations. But more than two years of fruitless negotiations convinced Kinross that it was not going to get a deal that would generate good investor returns.

The Ecuadorian government played hardball with Kinross from the beginning, insisting on the monstrous windfall profits tax and never backing down. That was by far the biggest sticking point in the negotiations, chief executive Paul Rollinson said in an interview Monday. He is certain that walking away is the best move for shareholders. “It really was a tough decision, but I do think it was the right decision,” he said. “I’m not prepared to sign anything with a 70% windfall profits tax.”

 

The concession reverts to the government in early August – notably, the government prohibited Kinross from selling the property. In other words, the property never was the company's property, in spite of the fact that it was acquired for $1 billion. It has essentially been confiscated.

However, the shoe is now in the other foot. Now it is the government that can no longer hope to gain any revenue. The employment and other benefits Kinross would have provided will no longer materialize. These benefits would have been quite significant. Mining companies are extremely sensitized this days to the need to keep the locals happy. Many anti-mining NGOs tend to wage a propaganda war against mining companies, claiming that they bring only destitution to communities, but that is of course complete hogwash. In Ghana, whole villages are holding prayer meetings where they inter alia pray for the continued health of Anglogold-Ashanti and moreover also pray that it will hopefully find more gold. They now have employment, road, schools, hospitals, and so forth, all of which were and are provided by the company.

In Kinross' press release we find hints that it was engaged in similar activities in Ecuador. The press release also informs us of the theft:

 

“Any possible sale of the project is currently subject to the prior approval of the government, and the government has also indicated it will not support efforts by Kinross to solicit a potential new partner, or a buyer. As previously disclosed, when the current economic evaluation phase of the project expires on August 1, 2013, the La Zarza concession, which contains the entire FDN mineral resource, will revert to the government.

The Company intends to focus on assisting its employees and its local stakeholders during a transition period as it reduces its level of activities in Ecuador in the coming months. "I want to acknowledge our outstanding team in Ecuador for their dedicated efforts in establishing FDN as a model for responsible mining," Mr. Rollinson said. "I also want to thank our local stakeholders and the communities of Zamora-Chinchipe, including members of the Shuar Federation, who have partnered with us on a wide range of training, business development and community investment initiatives over the past several years as we worked together to advance this project," he added.

Kinross' decision to cease the development of FDN will result in a charge of approximately $720 million in the second quarter. Approximately $700 million of the charge is expected to be non-cash, reflecting the Company's entire net carrying value of the FDN project, and approximately $20 million represents accrued severance and closure costs.”

 

(emphasis added)

There is speculation that Ecuador could 'maybe' persuade the Chinese to come in as buyers and developers of the project, but that naively assumes that Chinese gold mining companies will be happy to agree to getting robbed instead of Kinross. Why would they? And if the government decides it should offer better conditions to the next would-be developer, it could have just as well offered those to Kinross. It seems to us the FDN resource will remain undeveloped for many years to come.

 

Market Reaction

Naturally the stock of Kinross was sold down after the news hit, but one actually wonders why. Of course it is not exactly great news that a $720 million write-off will have to be taken, but on the other hand, developing FDN would have cost another $1.4 billion and once those costs had been sunk, who knows what the Ecuadorian government might have come up with next. You cannot trust socialists that they will respect property rights. Post war social democrats in Sweden argued e.g. that the citizens should possess exactly that property which the parliamentarian majority of the day thinks they should possess, since “property” is but a “functional concept.” (according to Gerard Radnitzky in 'Is Democracy More Peaceful than Other Forms of Government?').  In fact, the Ecuadorian government's refusal to let Kinross sell FDN speaks for itself in this regard.

Clearly this is a case where it was better to simply take the loss, as bitter as it may be to lose such a great deposit. From the point of view of shareholders, proof that the new management takes a very tough-minded approach to the generation of returns should probably be considered to be worth much more than than FDN, especially at KGC's current share price.

 


 

KGC

KGC's already battered shares got whacked again after the FDN news were received – via StockCharts – click to enlarge.

 


 

Of course these days gold stocks get whacked on any and all news, simply because they are mired in a bear market. So this initial reaction may not necessarily be indicative of the market's ultimate assessment.

With lower commodity prices (gold is by far not the worst case in terms of price declines) governments elsewhere should take heed. What has just happened in Ecuador could become an example others will follow. The mining industry is under immense pressure from shareholders not to waste any more capital merely on the notion that companies should get bigger. Shareholders want to see returns, and a number of CEOs who have come to be seen as bad stewards of capital have been booted out over the past year or two. The new crop of managers has new priorities, and they do not include letting governments that cling to an outmoded and failed ideology grab the vast bulk of their expected profits.

 


 

ECUADOR ELECTIONS RESULTS - RAFAEL CORREA

Ecuador's socialist president Rafael Correa: overplayed his hand.

(Photo via globedia.com, author unknown)

 


 
 

Emigrate While You Can... Learn More

 

 

Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

12 Responses to “The Limits of Resource Nationalism”

  • Hans:

    AustrianJim, thank you for pointing that out…Everyone has heard of organ harvesting, now
    we have Corporation harvesting…

  • AustrianJim:

    With the Chevron lawsuit, Ecuador is also sending a message that even if you do successfully do business there, they will try to tag you for some additional funds on your way out of the door.

  • Bogwood:

    Being a semi-retired semi-scientist I am attracted to biophysical economics. This post dances on the edge of the economics TOE,for those of us coveting our neighbor’s reality. The socialist argument is important. Over the last 200 years we have financialized more and more activities traditionally not done for wages. There was probably a U-shaped curve for wage labor, division of labor and we are way down the wrong side of the curve. Take Christmas as just one example. There were increasing mandates and feature creep abetted by central governments,public schools for instance, or houses,or cars, or health insurance,all now uneconomic.
    The family,extended family, tribe tended toward non-market face to face,the nation state tended toward wage labor. During the 1930s it became clear that the new balance(non-farm) could not sustain itself. The demographic adjustment starting in the 1800s came home to roost. We have never actually recovered(without debt).
    Gold may be an economic Boson. Objectively there could be nothing more egregiously stupid than a gold mine. The above ground stock to flow is huge, there are huge human,energy and ecological wastes, all so the average human could have 1.2 ounces each instead of one ounce each. So the Ecuador government has blindly stumbled over an economic truth. But there are arguments on the other side. There seems to be a need to mine gold in order to set a price. This is probably unnecessary. Somewhere in this Ecuador story is a nugget of truth–the true role of wage labor and the “creation” of wealth.

    • ManAboutDallas:

      Wow! Spoken as only a “semi-scientist” could do. I stand in sides-splitting-with-laughter awe of you.

    • SavvyGuy:

      Bogwood wrote: “There seems to be a need to mine gold in order to set a price.”

      This is true, as the price of the main is discovered at the margin. I also agree with Bogwood’s point that the modern non-farm economy cannot sustain itself without endlessly perpetuating debt, so long as interest payments thereon can either be rolled over into new debt or paid with depreciated value, or both.

      When only 2% of the population produces enough food, the remaining 98% need something to do. So there are a lot of unnecessary “jobs” that exist only because suppressed interest rates enable the expansion of debt, and that creates job opportunities that would otherwise be economically unnecessary. If this sounds like circular logic, it is…like any good old-fashioned Ponzi scheme.

  • Kreditanstalt:

    We Kinross shareholders have IMMENSE patience. We need it. I think that, after cancelling their Tasiast project and now this, they will be learning something about the importance of shareholder value.

    Socialists are collectivists. Everything is about “groups”: evil capitalists, deserving labour, the rich, the poor, the working class, the exploiters, the 99%, the 1% and so on. They believe in something airy but convenient that they call “the common good” and, in catering to this whimsy, they like to deny the role of capital. Perhaps they should ask the North Koreans or the Venezuelans about attracting foreign capital…

  • Hans:

    We have been warning investors for years to be deeply concerned
    about the nationalism of not only miners but oilers as well…

    With the exception of North America and Euroland, most other parts of
    the world entail more risks than rewards…

    Asia, Africa, Australia and South America are in general to be avoided
    in its in entirety, with the notable Chile and Columbia as the exception…

    As a former shareholder of Kinross, I can only say, that this is one poorly
    operated company…They purchased a mining interest, in a nation whom has
    a lengthy history of treating it’s foreign oil and gas operators as a source
    of state revenue…The management should have been able to evaluate the
    risk and make the proper decision…With the exception of two countries, every
    nation in South American should be a no go zone…

    As for the poorly operated Kinross, it’s assets will be available for sale on Ebay
    no later than 2020…

    • I would point out though that Kinross has new management now, and it is evidently eager to fix the mistakes the old one made. The campaign to get rid of Tye Burt worked….

      • Hans:

        Mr Tenebrarum, TB is gone, however, the company is 2 billion in debt
        and has negative FCF…

        If there is a sharp decline in Au, then Kingross is unlikely to be able to
        finance it’s debt obligations..

  • No6:

    Australia’s Minerals Resource Rent Tax, a replacement for the proposed Resource Super Profit Tax, levied on 30% of the “super profits” from the mining of iron ore and coal in Australia, was introduced on 1 July 2012.

    In May 2012, budget, it was claimed it would bring in $3 billion for the financial year, in October 2012, the figure was reduced to $2 billion dollars, on 14 May 2013, the receipts are announced that they were expected to be $200 million.

    Of course the new projects abandoned would have been worth slightly more than 200 mil.

  • This is off topic,but just too juicy:

    http://finance.yahoo.com/video/90k-square-foot-versailles-makes-165700640.html

    Am I the only one to see the bubble handwriting on the wall?!Construction was halted in 2009 when the moron who owns it almost went bankrupt and now he’s back at it again. I smell foreclosure again!

    • worldend666:

      I assume he is a moron because he has more money than you sir? :)

      His money, his to spend how he pleases. What would you spend 100m$ on?

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • mad_professor-600x399A Historic Rally in Gold Stocks – and Most Investors Missed It
      Buy Low, Sell High? It is an old truism and everybody has surely heard it more than once. If you want to make money in the stock market, you're supposed to buy low and sell high. Simple, right?   Successful stock market investing in two simple steps Photo via slideshare.net   As Bill Bonner once related, this is how a stock market advisor in Germany explained the process to him:   Thirty years ago, at an investment conference, there was a scalawag analyst...
  • bogota-culture-museo-del-oro-1a.jpgGold Stocks Break Out
      No Correction Yet Late last week the HUI Index broke out to new highs for the move, and so did the XAU (albeit barely, so it did not really confirm the HUI's breakout as of Friday). Given that gold itself has not yet broken out to a new high for the move, it would normally be expected to do so, as Jordan Roy-Byrne argues here.   Photo via Museo del Oro / Bogota   The chart below shows the situation as of Friday (HUI, HUI-gold ratio and gold):   The HUI and...
  • gold barGold and Negative Interest Rates
      The Inflation Illusion We hear more and more talk about the possibility of imposing negative interest rates in the US. In a recent article former Fed chairman Ben Bernanke asks what tools the Fed has left to support the economy and inter alia discusses the use of negative rates. We first have to define what we mean by negative interest rates. For nominal rates it’s simple. When the interest rate charged goes negative we have negative nominal rates. To get the real rate of...
  • NYSEWhy is the Stock Market so Strong?
      Dismal Earnings, Extreme Valuations The current earnings season hasn't been very good so far. Companies continue to “beat expectations” of course, but this is just a silly game. The stock market's valuation is already between the highest and third highest in history depending on how it is measured.   Photo credit: Kjetil Ree   Corporate earnings are clearly weakening, and yet, the market keeps climbing. The rally is a bit of a “all of worry” type of...
  • 2-XME, dailyWeekly Resistance Levels in the HUI
      Options Expiration Ante Portas -  Just as a Resistance Level is Reached After we had penned our little missive on the breakout in gold stocks on Monday, it dawned on us that an options expiration takes place this week. Normally, gold stocks decline into the expiration date. Don't hold us to this, but the last time we remember call writers being forced to delta-hedge their way out of trouble in gold and silver stocks right at the end of an expiration week was sometime in 2006. Given...
  • 800px-JuergenHabermasCultural Marxism and the Birth of Modern Thought-Crime
      What the Establishment Wants, the Establishment Gets If a person has no philosophical thoughts, certain questions will never cross his mind. As a young man, there were many issues and ideas that never concerned me as they do today. There is one question, however, which has intrigued me for the longest time, and it still fascinates me as intensely as it did back then: Does spirit precede matter or is it the other way around? In other words, does human consciousness create what we...
  • sir_john_cowperthwaite (1)China – A Reversal of Urbanization?
      Economic and Demographic Changes We have discussed China's debt and malinvestment problems in these pages extensively in the past (most recently we have looked at various efforts to keep the yuan propped up). In a way, China is like the proverbial “watched pot” that never boils though. Its problems are all well known, and we have little doubt that they will increasingly find expression. China's credit bubble is one of the many dangers hanging over the global economy's head, so to...
  • upstep-2State of Fear - Corruption in High Places
      Mr. X and his Mysterious Benefactors As the Australian Broadcasting Corporation (ABC) reports, a money-laundering alarm was triggered at AmBank in Malaysia, a bank part-owned by one of Australia's “big four” banks, ANZ. What had triggered the alarm? Money had poured into the personal account of one of the bank's customers, a certain Mr. X, in truly staggering amounts.   A recent photograph of Mr. X. Photo credit; Peter Foley / Bloomberg via Getty...
  • the worst-1Why All Central Planning Is Doomed to Fail
      Positivist Delusions [ed. note: this article was originally published on March 5 2013 – Bill Bonner was on his way to his ranch in Argentina, so here is a classic from the archives] We’re still thinking about how so many smart people came to believe things that aren’t true. Krugman, Stiglitz, Friedman, Summers, Bernanke, Yellen – all seem to have a simpleton’s view of how the world works.     A bunch of famous people with a simpleton view of how the...
  • the-pantsir-s1-a-combined-short-to-medium-range-surface-to-air-missile-and-anti-aircraft-missile-system-the-system-consists-of-12-surface-to-air-guided-missiles-and-two-30-mm-automatiRussian Aggression Unmasked (Sort Of)
      Provocative Fighter Jocks Back in 2014, a Russian jet made headlines when it passed several times close to the USS Donald Cook in the Black Sea. As CBS reported at the time:   “A Pentagon spokesperson told CBS Radio that a Russian SU-24 fighter jet made several low altitude, close passes in the vicinity of the USS Donald Cook in international waters of the western Black Sea on April 12. While the jet did not overfly the deck, Col. Steve Warren called the action "provocative and...
  • 12-Capital vs consumer goods prod LTUS Economy – Ongoing Distortions
      Business under Pressure A recent post by Mish points to the fact that many of the business-related data that have been released in recent months continue to point to growing weakness in many parts of the business sector. We show a few charts illustrating the situation below:   A long term chart of total business sales. The recent decline seems congruent with a recession, but many other indicators are not yet confirming a recession - click to enlarge.   Wholesale...
  • macriArgentina – The Times, They Are A-Changing
      Our Argentine “Ranch Rebellion” Is Over… for Now… BUENOS AIRES, Argentina – Not much action on Wall Street yesterday. The Dow sold off slightly. Gold and oil were up a bit. How about here in Argentina? “Everything has changed. Everything.”   Mauricio Macri shortly after his election – indicating that he actually has a plan. Photo credit: Enrique Marcarian / Reuters   One of the analysts in our Buenos Aires office explained how the recent...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com