Wednesday, July 13, 2011

BCM rejects your reality and substitutes their own

Canada's Bear Creek files suit in Peru over mine

Note: I am not a lawyer or a Peruvian, nor do I play either on TV.

Y'know, on the one hand, if the Santa Ana deposit can simply be taken away from BCM, then I would strongly suggest that all miners in Peru should be revalued at a much lower multiple. After all, it means that property rights can be usurped at a moment's notice... and a mine is nothing other than property.

So if I were doing valuation calcs based on a DCF NPV, for example, on Rio Alto's La Arena, I would replace the old 5% discount factor with a 10% - to include a 5%/year threat of government confiscation - and guess what, now your mine is only worth 68% of what it was (assuming a 20 year mine life). So RIO is only worth 68% of what it was, same for the rest of your mining industry, and say goodbye to FDI because the miracle of compound discounting makes your country yield 32% less profit, at a higher initial risk.

On the other hand, from what Otto says, it's the reality on the ground, tuff shit BCM, you lose, period. I guess the Aymara down there are a lot like the Mohawks up here.

Now, when the Mohawk Confederacy starts a big war up here and screws things up, like at Douglas Creek Estates, our government steps in, yes it confiscates the property at the centre of the problem, but then it provides monetary compensation to the developer for the confiscation. Canada's government can take your shit away too, but they're more or less required to give you money as compensation. Of course even in Canada the government doesn't volunteer free money to you, you have to go to court; but the law takes care of you once you get there.

It'll be interesting to see, re: this court case, if Peru also believes in compensation for loss of property. Maybe BCM can get Peru to hand over the capex for Corani as a settlement, since that's essentially what they took away from BCM. In fact, maybe BCM shareholders should also seek standing in this suit, since taking away Santa Ana without compensation would mean extreme share dilution is necessary to move Corani forward, which means economic injury to shareholders.

(Feel free to forward this post to BCM's officers, if you like that idea. I'm not concerned cos I didn't buy BCM until after it puked to $4.)

If BCM gets nothing whatsoever for losing Santa Ana, though, that means Peru essentially doesn't even have a legal system that recognizes property rights - at least not to the point of requiring compensation for loss of property. Hoo baby, now that will make their market tank.

So anyway, I haven't checked Otto's blog to see if he's posted anything, nor checked my email. (I saw silver and gold were up strongly this morning so I don't care so much about the particulars of the market.) I'll be happy to read his opinion, since obviously he lives right there. But I'm just interested, from a property rights angle, to see how this plays out. Because this affects things like the discount factor you use for a DCF calc, and I want to know if I should knock my RIO target down from $3.50 to $2.39.

And because DCF NPV calcs are the lifeblood of real analysts (while rogue Peruvian bloggers simply use cash flow multiples), I'm sure the real analysts out there will be watching this case's progress as well.

Note, btw - I understand that Humala didn't confiscate Santa Ana. Garcia did. Because Humala wasn't the prez. Garcia was. Humala has a chance to win over the entire mining & investment class in Peru with one stroke of the pen by offering a monetary fix to the Santa Ana problem. So this is also going to be a test of how cunning (or stupid) Humala is. He's been given a slam-dunk opportunity to get the rich on his side. I'm suspecting, mildly, that coming from the military he's not a total moron, at least from the standpoint of thinking strategically; and Nadine seems the cunning type too.


  1. David Icke. As they say where i grew up, "he's a card, inne?"

    BCM: it's all very complicated and i've purposely kept away from delving into the deep end of the politics about the affair because there are so many nuances and levels of interaction to understand that it becomes a quagmire. When you live the situation you understand it, if you don't you won't ever. So I've kept the BCM thing to the actionable information deliberately all this time.

    The next moves are the interesting things though. I think that BCM will have a good shot at monetary compensation for Santa Ana, which will give the incoming Humala govt a way out without looking too bad. The mine will not be built. Ever. Get that one straight.

    And on the subject of Humala, i strongly believe he'll get more authoritarian with the "rebel fringes" of Peru (for want of a better phrase) and situations like that in Nacion Aymara this time are a fact that little statement is a lead-in to some of the deeper and dirtier dealings that have been going on, but i'm not going there.

    The bottom line...the basic reason to own BCM.v..hasn't changed. Corani is in good shape, risk there is very low and once things calm down it's a mine (or at least a saleable asset). BCM is a crazy knockdown bargain at today's prices, just add patience.

  2. i know, I know, I know. Santa Ana will never be a mine, ever, I'm not doubting you, shut up already!

    I'd wonder what the monetary compensation would be. I mean, it would really have to be, at the very least, the capex for Corani, to be fair. I sincerely doubt they'd get even a heavily discounted NAV, though.

    My big thesis is that the Santa Ana situation is a fuck of a lot bigger than BCM. To me it really hurts the value of any property in Peru.

    Going by your statement about Humala vs the Aymara, that there's a lot MORE risk on the horizon in Puno, not more. From the little you've said about the Aymara, I've drawn the inference that they're just your version of the Mohawk Confederacy here in Ontario... and, um, the government up here would NEVER EVER EVEN TRY to go to war with the Mohawks, not even go to war just with the mobsters and criminals that make up the Warrior society. That would turn Ontario into Chechnya overnight, trust me.

  3. i don't agree with that last paragraph of yours.

  4. Probably the inference I drew was incorrect, then. But re: the Mohawks I'm absolutely correct.

    I admit I know nothing of the Aymara, the Santa Ana situation, or their history during the past few decades. But if your second-to-last paragraph above is a suggestion that Humala's going to take a hard line with them, as an investor I'd not like to see that. I much prefer the Canadian way of just giving them everything.

  5. one of the things i've insisted on from way before all this BCM issue is that "Peru = miner friendly" is a really misleading concept that's been unendingly promoted by gringos with more money than sense (esp when they're playing with other people's money). MOST of Peru is and always will be miner friendly, but there are regions that aren't welcoming to the trade. To make things worse, there are regions that are friendly that hold extremely anti-mining enclaves and fwiw i'm going to one tomorrow, namely Cajamarca).

    So what happens? Gringos come up against a case where an anti-mining region pushes back against the sector, the Peru govt (as it freakin well had to do) gives into the local demands and suddenly we get the flipside reaction of the bipolar gringo world....yup, Peru is now "miner unfriendly".

    It isn't. It's the same freakin' Peru of 1 year or 4 years ago. What has changed is foreign perception of the very same nuanced, grey-area world. It's unsurprising that white is now black in the eyes of people that can't be fucked to scratch the surface and learn just a leeetle leeeetle bit about a subject before pontificating.

    In this i don't mean you, IWNATTOS. You're a rarity that will actually listen with open ears and all that shit (so take the compliment).

    Anyway, therein lies the trading advantage. It'll take a few weeks and an example or two of projects moving forward without problems before IgnorantGringo (top candidates; the dumbasses in suits that pass as equities analysts in the Canadian shops) say "oh look, not so bad after all" and get back on board Peru risk.

    So get there first, dude, really is that simple. There's a line De Gaulle used a couple of times about country leadership. I can't remember the exact quote or translation of it, but it was along the lines of "if you want to lead a country, see in which direction it's travelling and then stand in front of it." His way of saying it was much better, but you get the idea.

  6. I don't want to monopolize any more of your time, since you've got your own much more important blog to see to. As well as a wife and kids and stuff.

    Final summation is: to me, the question is whether or not Peru offers compensation. You've got dicks who'll always hate Humala, sure, and I bet he gives them a lot of fodder over the next few years... I'm sure some will hate him for bringing in perfectly fair and justifiable mining taxes, and I bet a dick like Sprott will hate him simply for bringing in an old people's pension.

    But assuming there is a mythical good analyst somewhere out there who shuts up and just does the DCF calcs, my point is the Santa Ana outcome affects the almighty Discount Rate, because at a fundamental level it includes political risk. And you know me, I'm all about the DCF.

  7. my blog isn't important. No blog is important.