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Express 2008-02
April 23, 2008
Singing the Ecuador Blues
11 years ago give or take a month I was busy moving from my home office into a proper office to accommodate my burgeoning newsletter business when I heard the news that a certain Filipino geologist had hopped out of a helicopter flying over the jungles of Indonesia, taking with him Bre-X and its 20 million oz Cinderella story. It so happens to be that this week I am busy moving into a larger office to accommodate the growth of Kaiser Bottom-Fish Online as an information/analysis portal that specializes in the junior resource sector. And the news of the day is that a country known for mysterious helicopter accidents has expropriated all but the dirtiest, most polluting mining claims in Ecuador, taking with it Aurelian's very real 14 million oz Fruta Del Norte gold discovery.
The Mining Mandate adopted by Ecuador's Constituent Assembly on April 18 contains 12 "articles" which together render null without compensation all the claims held by foreign mining companies, in particular those held by resource juniors. Forget the talk that each company will get to keep 3 concessions, which would allow IAMGOLD to keep Quimsacocha, Aurelian keep Fruta del Norte, Corriente keep Mirador, Dynasty keep Zaruma, and so on. Article 3, which cancels concessions affecting watersheds and water sources, is the killer, for all of Ecuador is a watershed that drains either into the Pacific or into the Atlantic via the Amazon Basin. This is the NGO clause that turns Ecuador into a nature preserve.
It won't, of course, end up that way. In his power struggle with Alberto Acosta, patron saint of the NGOs, President Rafael Correa has handed Acosta a ticking bomb. The Mining Mandate suspends everything for 180 days until a new mining law is adopted, a mining law which insider scuttlebutt suggests includes a state mining company with a free ride on all mineral assets. The process of figuring out which concessions actually violate Article 3, or have a progeny that links them to a current or former government employee through 4 degrees of kinship separation and thus violates Article 5, cannot begin until 6 months from now.
Meanwhile all technical personnel is leaving Ecuador for jurisdictions where mine development is still encouraged, guaranteeing that it will be a long time before Ecuador's infant mining industry starts to walk. The border skirmish involving the US backed Colombian military and the FARC narco-rebels hanging out on the Ecuadorean side is bound to escalate, especially now that the Americans are finally being kicked out of their $60 million military base in Ecuador, forcing them to relocate in Colombia between Hugo Chavez's Venezuela and Alberto Acosta's Ecuador. While Acosta and the NGO's slap high-fives over their victory, the people of Ecuador, who have not exactly been winners in the globalization process, will start to feel the pinch of hunger as food prices skyrocket and the rest of the world asks, what exactly do you have for export that we cannot get elsewhere cheaper.
As the situation gets ugly in Ecuador Acosta will feel the populist heat, and, having allied himself ideologically with a tiny minority of foreign preservationists, he will have to explain how turning Ecuador into a paradise for American and European eco-tourists who no longer have the bucks to visit was a good thing. At that point Correa will weigh in with the notion that he was always for mining, and rolling out the red carpet for the NGO's was entirely Acosta's idea. And so Acosta will find himself squeezed out of the picture, and into his shoes Correa will jump with the idea that mining is good for Ecuador, especially if it is controlled by a state mining company that knows how to negotiate deals with foreign mining companies that primarily benefit the good people of Ecuador. But the only foreign mining companies still willing to deal with Ecuador will be the Chinese sovereign wealth backed entities bearing an imperialist mandate to secure raw material supply through economic rather than military means. Correa will welcome these Chinese companies with open arms as socialist blood brothers, and these Chinese companies will finance and build mines geared toward what will have become a pressing urgency to generate foreign currency for Ecuador.
Needless to say, Acosta's dream of Ecuador as a wilderness preserve will succumb to Chinese best practices which would deploy no less a concern for environmental impact than they do in their own backyard. Even the NGO's will turn out to be big losers.
And so it is hard to come to any conclusion other than that the western juniors and mining companies are once again roadkill in a train wreck that is not of their doing. My impulse is to close out the bottom-fish and spec value hunter buy recommendations I made last year in juniors like Channel Resources Ltd (CHU-V), Coastport Capital Inc (CPP-V), Cornerstone (CGP-V) and Radius Gold Inc (RDU-V) on the assumption that Correa would come up with a mining law that made sense. But I hesitate to do so, because the Ecuador juniors have already been badly beaten up, in many cases have the ability to refocus in other jurisdictions, and because this power struggle between Correa and Acosta is a tempest in a teapot whose contents will soon enough be poured down the drain. Without a question Ecuador is on hold for at least a year, but the way the junior market is going, that may be the case for everybody. For now my recommendation is to wait and see, and perhaps take advantage of low priced Ecuador juniors.
For those of you who want to compete with me conducting bottom-fish research I offer the link below to the KBFO Theme Report on Ecuador Juniors:
KBFO Theme Report on Ecuador Juniors
For those of you who would rather research bottom-fish far removed from Ecuador, I offer the link below to a KBFO Theme Report featuring juniors with $5-10 million working capital as of Sept 30, 2007 or later and which represents no less than 25% of the junior's market capitalization. The earlier list I unveiled, which still exists, included only companies with $10 million or more in working capital.
KBFO Theme Report for Juniors with $5-$10 million working capital
The expropriation of Fruta del Norte, temporary as it might turn out to be, is a very demoralizing development for the junior sector because it reinforces the pessimistic notion that speculators just cannot win anymore by betting on the juniors. And this against the backdrop of the financial credit and real estate crisis is knocking prices lower, so low in fact that I catch myself wondering if the juniors as an institution are facing extinction. We've been there before, and while this time could be different, it probably is not.
The web site will still be running during our move, but I'll be offline Thursday night, and hopefully up and running by Monday morning.
*JK owns shares of Channel and Cornerstone
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