South American Silver shares slump on Bolivia mine rules

TORONTO Thu Jul 12, 2012 4:40am IST

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TORONTO (Reuters) - Shares of South American Silver Corp SAC.TO fell almost 25 percent on Wednesday, a day after Bolivia's leftist president said he would revoke the company's concession for its Malku Khota project due to violent protests over the mining property.

Bolivian President Evo Morales said late on Tuesday that he had signed a deal with anti-mining protesters under which the government would take back all the concessions granted to South American Silver's local subsidiary.

It is the second time in less than a month that Morales has moved to seize control of a foreign-operated mining project.

Canada expressed concerns with the Bolivian government's actions in a statement issued late on Wednesday, warning that Bolivia's action would send a negative signal to Canadian and all foreign investors.

On Thursday in La Paz, Canadian officials will meet with representatives of the Bolivian government and the company involved. Senior Canadian officials in Ottawa will also meet with Bolivia's ambassador to Canada at the same time to discuss the matter, the Canadian government said.

The Vancouver-based miner has contacted the government for clarity on its plans but has not yet received an official response, chief executive Greg Johnson told Reuters.

"We strongly object to the government's stated course of actions," he said, adding that the company will pursue all legal, constitutional and diplomatic avenues.

Malku Khota is a silver-indium-gallium deposit. The exploration-stage project was expected to produce some 13.2 million ounces of silver a year, according to a preliminary economic assessment.

South American Silver, which has invested some $16 million in the project since 2007, said it has the support of 43 out of 46 indigenous communities in the project area.

"Mining is a resource capital intensive business and security of title is one of the most important elements for people considering investment," said Johnson. "This sends a troubling signal to both investors and developers if they can't be confident that those investments are going to be respected."

Violence flared at Malku Khota last week as authorities negotiated with peasant farmers on the release of five Bolivian employee hostages. One man was killed and at least a dozen were injured.

The move to nationalize the project is likely to further delay Bolivia's evolution into a global economic participant, said National Bank analyst Paolo Lostritto in a note to clients.

Lostritto cut his price target for the company to $0.60 from $2.85 and downgraded the miner to "Sector Perform". South American Silver, whose stock has fallen more than 70 percent this year, also owns the Escalones project in Chile.

"We believe that Escalones has excellent exploration potential, but the market is likely to require some time to digest the negative events that transpired in Bolivia," said Lostritto.

Shares of the company closed down 24.5 percent at 37 Canadian cents.

MINING REFORMS

Mining has played a key role in Bolivia's economy since the colonial era. The Andean nation mainly produces tin and silver, but is also home to the world's largest undeveloped lithium and potassium resources.

Morales has nationalized the natural gas industry as well as the telecommunications and electricity sectors, arguing Bolivia's poor should benefit more from the country's rich natural resources.

The government is working on a sweeping reform of mining legislation aimed at bolstering the state's role in the industry and giving it a bigger slice of the sector's profits.

Last month, violent clashes between rival miners broke out at the Colquiri project operated by commodities giant Glencore (GLEN.L), leading the leftist government to take over operations at the tin and zinc mine.

Colquiri is the largest of five mining concessions held by Glencore's Bolivian subsidiary.

A handful of Canadian mining companies operate in Bolivia, including Pan American Silver Corp (PAA.TO), which holds a 50 percent stake in the San Vincente mine, a joint venture with state-owned mining firm CorporaciĆ³n Minera de Bolivia.

Orvana Minerals Corp (ORV.TO) owns the Don Mario mining complex in eastern Bolivia, while Apogee Silver Ltd (APE.V) is developing the Pulacayo-Paca silver project in the south.

(Reporting by Julie Gordon and Euan Rocha; Editing by Peter Galloway and Marguerita Choy)

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