Lithium Cartel?

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A recent article says that Argentina, the world's largest lithium producer, will consider creating an OPEC model cartel for lithium in combination with Bolivia and Chile. Behind this is a view that between them, Argentina, Bolivia and Chile together will control the lithium market in the near future. Argentina is said to have about 10% of the world's lithium reserves, with Chile having about 25%, and Bolivia holding about 50% in the world's largest salt flat. A ton of Lithium currently is said to be worth about U.S.$6,000 - up from about U.S.$2,500 seven years ago. See 'Argentina, Bolivia, Chile to form OPEC model cartel on lithium' - reading time 2 minutes.

I see this as an interesting development in the context of 'country risk', a topic I have been focusing on in the past several days. If an OPEC type lithium cartel is formed, could the next step in such a process be Lithium Industry Nationalization in the three countries - or as a minimum, a change in income tax laws in those countries that would see corporate income tax increases as a way to subsidize and increase in the standard of living of their populaces. I will be surprised if increased corporate income taxes are not on the agendas of many developing countries - the only question being one of timing. In a developing country it seems there always has to be a balance or 'tension' between the Governments of those countries acting in a manner so as to attract external capital investment, but at the same time keeping their respective populaces 'acceptably' happy - i.e. not pushed to demonstrations and rebellion.

Governments change over time, and from my perspective the operative word is the underlined 'but' in the previous paragraph. When you hear someone use 'but' in a sentence, disregard everything that was said before the 'but'. In simple terms, the value of all outstanding shares of a company is the present value of all its future expected after-tax free cash flows discounted to infinity. As a practical matter, at a 10% discount rate, really means for the next +/-25 years. 25 years is a long time, and I think a meaningful question is:

Are the equity markets (and stock analysts) factoring in country risk to an appropriate degree as they currently express their respective opinions with respect to the value of the listed securities of companies who principally operate in one or more of the developing countries?

I don't know the answer to this, but believe the analysts who do research reports on such companies would say they do - but do they really research and understand those countries government structures, politics, and economics at a level where they are capable of meaningfully opining on 'country risk'? They will, to a person, almost certainly tell you they do. However, I suggest that to be on the safe side 'country risk' is an area where - as an investor - you ought to seriously consider doing a lot of your own research in order to reach your own informed opinion.

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On June 29 I wrote about country risk and its impact, or potential impact, on equity prices under the heading Peru - Gold! A recent article titled 'Silver Mining in Peru: Looking Forward Through Crisis' - reading time 4 minutes - likewise focuses on Country Risk to mining and other foreign ventures. This article cites three circumstances where outgoing President Alan Garcia recently "conceded to the demands of protesters" by rescinding the mining concession of Bear Creek Mining Corp. (BCM.V), cancelling a $4 billion hydroelectric plant proposed by a Brazilian consortium, and rescinding a $950 million copper project.

The article suggests that what has happened to Bear Creek is "a culmination of months - or possibly years - of political unrest in the country, and represents a very uncertain future for foreign investment (in Peru) in the natural resource sector. Frankly, I think it is too early in the game to make such a statement, as newly elected President Ollanta Humala has yet to be sworn into office. That occurs on July 28. Humala is widely assessed as leaning socialistically to the left - perhaps significantly so. Notwithstanding, I see things Peru's and every other developing country's government has to walk an increasingly difficult tightrope between improving the social condition of its citizens while at the same time gaining and retaining the confidence of international investors and attracting foreign capital to assist in the development of its country's economic base. As I see things, I wouldn't write off the Bear Creek investment in Peru just yet, but I plan to monitor that situation carefully over the next weeks and months as but one proxy for the tensions that exist in Peru and other developing countries vis a vis resource (and other) companies that have invested to date - and importantly plan to continue to invest - in those countries.

Interestingly, or so I think, the article quotes a Peru-based 'Conflict Management Advisor' with On Common Ground (an international consulting company which specializes in the management of social issues in the resource industries with a particular focus on mining) as saying "issues which cuminated in this crisis have been developing for years", and Chris Thompson of Haywood Securities as saying "My sense at the moment is that the (Peruvian) projects that are most at risk are those in the development stage" and "Exploration and development oriented projects are probably more affected by broader-based weakening appetites for exploration internationally".

Once again, I think of the Bear Creek situation in Peru as something for resource investors (and investors in all equity sectors) to think carefully about as a possible proxy for other, perhaps similar, developments going forward. From my perspective, we are seeing the world economic and country specific societal structures changing at a pace I would not have envisioned as late as two years or even one year ago. Country risk is, to me, simply one more 'risk' that needs to be considered more carefully today than it was yesterday.