Buenos Aires, Argentina May 26, 2008

Upon my arrival at home last Friday, my wife approached me with the following question: “What is the UNASUR?” Initially, I really did not know how to respond… I already have answers to some of her questions related to domestic issues such as why she cannot spend more money, why I have my clothing all messed up, who ate something, and others … but explaining the UNASUR really left me with no immediate answers at all.

To give you a little background, last Friday twelve South American countries formally ratified the Union of South American Nations Treaty (UNASUR), a regional integrative initiative going back informally to 2004. UNASUR hopes to strengthen Latin American and Caribbean unity by working together to create solutions to persistent regional problems while at the same time respecting the sovereign rights and territorial integrity of the individual member states. UNASUR hopes to achieve these goals through the development and implementation of policies addressing a diversity of issues such as those related to politics, economics, social and cultural issues, the environment, energy, infrastructure development and more. It is hoped that through addressing these concerns, solutions will also be found for the ongoing problems related to persistent poverty, social exclusion and inequality.

The members of UNASUR are Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Perú, Surinam, Uruguay and Venezuela. To give you an idea of the importance of the region constituting this union: it includes 388 million citizens with a combined GDP of $ 1.9 billion, (3.5% of the world’s GDP).

UNASUR will be headquartered in Quito, Ecuador and consist of four main bodies: the Council of Heads of State and Government, the Council of Ministers of Foreign Affairs, the Council of Delegates, and the General Secretariat. It will also create a South American Parliament, seated in the city of Cochabamba, Bolivia.

One of those most delighted by the creation of this new union was Brazilian President Lula who pointed out that: “we shall move forward with innovative projects and will fully attain the goal of financial and energetic integration, as well as that of realizing the improvement of regional infrastructure, and the creation of a social cooperation agenda.” Lula, as always, has in mind ambitious ideas where of course, Brazil takes the lead in initiatives.

In reality, the creation of UNASUR has taken many by surprise as it has happened at a moment in history when the union of so many countries seems unimaginable.

Relating to this idea, we should be mindful that this union was created at a time when many Latin American countries have reached a powerful level of macroeconomic and institutional consolidation; achieving international recognition as having gained the much desired investment grade for many of its countries.

The establishment of regional blocks is more viable now with the consolidation of the economy and institutions within these countries, coupled with a long-term vision. The regional blocks of the past have not reached significant achievements in the long run due to difficulties within their individual countries, recurrent crisis and political instability. Mercosur serves as a prime example of these kinds of problems.

In the instance of UNASUR, there is a political and ideological fragmentation among many of the signatory countries. There are countries with serious internal problems such as Bolivia. Venezuela and Argentina are plagued with internal issues as well, but to a lesser extent. There are also member state conflicts such as those between Colombia, Ecuador and Venezuela. Additionally, there are ideological divisions between several countries that make it very difficult to imagine how those countries could go forward with the successful coordination of policies.

UNASUR’s successful unification of regional forces having benefits realized by all member states will depend in part on the influential leadership of Brazil coupled with the lessening of individual differences between countries.

This brings us to the question: what benefits could UNASUR bring investors in the region? I think that there are no short-term benefits. However, if UNASUR is able to successfully establish itself, it can then contribute to the development of the regional financial market (one of its main stated goals) creating one with stronger depth and liquidity than other financial markets of the region. More importantly, UNASUR can contribute to the strengthening of the regional economies, underpinning their growth and development which will benefit the investor who will then find less risk and more profitability in their investments in the region.

The UNASUR has just been born. It will be necessary to give it time to grow and develop. We hope that the countries comprising this new group allow this to happen.

We will meet again tomorrow,

Horacio Pozzo

Editor’s Note: A new community in South America is born with a variety of diverse and complex objectives spanning cultural, social and economic realms… another aim is the social inclusion, the civic participation, the strengthening of democracy for all… Horacio’s wife is asking questions and Horacio finds he does not know how to respond. If you want to know, keep on reading… Enjoy, and send your comments to the editor here: paola@latinforme.com

This is all very new and a bit of a shock. The last time the Ecuadorian government changed its mining laws was way back in the early 1990s. Then the World Bank was keen on it deregulation. Critics said it was pushing for Ecuador to let in the internationals at the expense of the environment and local communities.

But this is the age of resource nationalism. Just a few days ago, the pendulum started to swing the other way. President Rafael Correa’s government is already in the throes of redoing oil deals as world prices reach records. Now it is mining’s turn. Here’s another yet reminder to check company risk when investing!

Dire mining news hits the headlines

Just about unanimously, Ecuador’s parliament voted to suspend 80% of the 5,000 mining concessions and impose a moratorium on new ones. There is absolutely no mention of the world ‘compensation’. And it gave the government six months to re-write the country’s mining legislation. That grabbed the newspapers!

According to Reuters, the assembly’s president, Alberta Acosta, said that: “What’s at stake here is to define the future of large-scale metallic mining in Ecuador.” So the assembly passed the mandate by 95 to 1, with 25 abstentions.

Quite a few international mining companies operate in Ecuador. Around 40 is the estimate. The figure of $220bn put on the mineral reserves there is quite an attraction! They’ve been investing around $100m a year. At this stage output is relatively low. Many of the mines are in early stages.

A lot of these companies are Canadian. There’s Ascendant , Aurelian Resources, Dynasty Metals & Mining and IamGold, for a start. Of course, on the news their share prices headed south in a rush, halving or worse.

Boy, are they not happy! “The government …is saying ‘Let’s get our hands in the cookie jar, too,” was the bitter response of Midas Management’s Tom Winmill, a big investor in Aurelian, when speaking to Bloomberg.

Millions wiped off capitalisations

With nice understatement Haywood Securities analyst Eric Zaunscherb described the situation as being “fraught with negative actions.” We can see what he means!

More to the point was Dynasty’s spokesman William McCartney with his “it’s devastating and could affect everybody. We’ve just had millions of dollars of market capitalisation wiped out.”

A foretaste of what is coming might be taken from comment from Ecuador’s MPs. Acosta’s was: “The new mining law will favour serious entrepreneurs, not the speculators.” Another, from a member of Correa’s party was: “In Ecuador concessions were handed out for the price of a sick chicken!”

Continues below

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Finally, after three years, comes our third “slingshot” market alert!

This place has the SAME level of foreign direct investment as China… a CHEAPER workforce… and dirt- cheap industrial land…

Merrill Lynch called this place a “ten year buy”… Industry Week describes it as being “where China was 10- 12 years ago”…

If you guessed the identity of this country, you could double your money in 12 months… and make THREE times your money by the endo of 2009!

Can you name the country? The answer may surprise you…

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Also on the cards at this stage is a limit of three concessions per company.

The assembly has the power to make laws without the need of the President’s sanction. However, he sounds sympathetic to their cause. He came to power last year vowing to increase state control of the country’s national resources and the economy. A US trained economist, he spoke a lot about mining with social, environmental and economic responsibility. This includes protection of the country’s water resources and containment of pollution.

Local environmentalists are cockahoop.

Carlos Zorrilla, executive director of Defensay Conservación Ecológica de Intagwas was quoted by Reuters as calling the assembly’s decision a victory of “right over might.” At one point he was forced to go temporarily into hiding because of his anti-mining and environmental activism against Ascendant Copper’s Jinin project. He was saying in the stories that all this could “lead to an Ecuador free of large and medium scale metal mining in the near future.” 

So, who is going to carry out the large-scale mining that is currently done by foreign groups? These days it’s increasingly hard to lay your hands on all the things you need for mining. That extends right through from skilled workers and specialist equipment to the money. This will no doubt present a few dilemmas for the Ecuador government, as it is for resource nationalists the world over.

A worry for the miners is Ecuador’s links with neighbouring Venezuela. No good for the short term is augured here! President Hugo Chavez is into nationalisation in a big way.

Behind all this is, of course, the current anti-US feeling running through the southern continent. Correa has dismissed his defence minister, army chief of intelligence and commanders of the army, air force and joint chiefs. Why? He said that Ecuador’s intelligence systems were “totally infiltrated and subjugated to the CIA!”

Another lesson to look out for resource politics

He accused senior military officials of sharing intelligence with Colombia, the Bush administration’s top ally in Latin America. He is chafing at ties between US intelligence agencies and Ecuadorean military officials. Thus he is purging his army of alleged friends among his top commanders. More than 100 members of the US military are to leave and he plans to close a US base that surveys drug-trafficking.

Meanwhile, Correa has tried to reassure the hundreds of miners, rioting for return of their jobs, saying that “it is absurd to say ‘no’ to mining.” They booed him as he stood on a balcony of his presidential palace above them. Opposition delegates in the assembly have been speaking of the loss of tens of thousands of jobs.

There were quotes in the papers from an unnamed top mining ministry official that it had “flexibility to apply the decree and interpret some issues.” That does not, however, including undoing the licence suspensions.

So, at a time of rising world shortages here is another event that looks like making them worse. Good for prices, of course. And further lesson to keep a wary eye open on resource politics!

Keep mining – if you can!

Erin and Isabel.

For the tale of the tape, the TSX Exchange tacked on 0.59%, while the TSX Gold Index fell again, this time by 1.8%, and the TSX Venture Exchange, Canada’s largest junior exploration bourse, ended the session down 0.48% with declining issues outpacing the advancers by a 560 to 449 margin on moderating volume of nearly 185 million shares traded.

The selloff of Ecuadorian explorers resumed with a vengeance following Friday’s news that Ecuador will suspend large-scale mining exploration projects while a new mining law is approved to regulate the sector. The time frame is estimated at six months and the overall outcome of a new mining law is unknown. Aurelian Resources fell C$1.31 to close at C$3.73, Dynasty Metals and Mining plunged C$1.39 to close at C$2.66 and Corriente Resources, which halted its shares from trading pending news that it will analyze the situation, resumed trading on Monday and ended the day down C$0.82 to close at C$3.28.

Eldorado Gold has made an offer to acquire Frontier Pacific in a deal valued at around C$157 million. Frontier Pacific shareholders will get 0.122 of an Eldorado share and C$0.01 per share in cash for each Frontier Pacific share held. Frontier management is not going gently into that good night as the team says the offer is too low. We shall see, but in the meantime Eldorado ended the day down C$0.22 at C$7.16, while Frontier added C$0.19 to close at C$0.89.

Lukas Lundin-led Lucara Diamond and partner Motapa Diamonds have recovered 267 diamonds with a total weight of 132.31 carats, including nine diamonds exceeding two carats, with the largest stone being 8.65 carats, from the Mothae kimberlite project in Lesotho. The roughly 9,000 tonne sampling is part of an initial 30,000-tonne bulk sampling program aimed at determining the potential for the Mothae kimberlite to host large high-value diamonds similar to those recovered at the nearby Letseng diamond mine. With a carat count of between 1.3 to 2.3 carats per 100 tonnes, the proof will be in the value of the stones. Lucara ended the day up C$0.03 at C$0.81, while Motapa added C$0.07 at close at C$0.42.

Here comes the ABCP lawsuits. First Quantum Minerals is suing HSBC Bank Canada over the asset-backed commercial paper the company holds. The copper miner has filed suit in British Columbia Supreme Court claiming that HSBC recommended that the company invest $11.3-million of its excess cash in ABCP notes. First Quantum also announced plans to take over Scandinavian Minerals. Of interest to First Quantum is Scandinavian’s wholly-owned Kevitsa nickel-copper-PGE project in northern Finland. The price tag is C$9 per share in cash plus 0.01 of a First Quantum share for each Scandinavian share held. Scandinavian ended the day up C$2.98 at C$9.98, while First Quantum rallied C$0.78 at C$90.14.

Political risk has once again reared its ugly head and the players in Ecuador are feeling the wrath of shareholders, but the takeover news kept the resource sector buoyant. We will see what Tuesday trading has in store.