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- Pessimist:
Things are so bad, they cannot possibly get
worse…
- Optimist: Sure, they can!
Since sometime in 2006 we have had
this theory of "The Coming Wave of Resource
Nationalizations". The latter has an "s" to impress upon
you that we are talking about all natural resources in all countries. Not
literally, but we believe it will be a worldwide sweeping event encompassing
all classes of natural resources. It sounds scary, yet it will be akin to a
depression – it's merely a recession when your neighbor loses his job
and will only turn into a depression when you lose yours. We also believe
that this will be the Chapter One of what some call the (coming)
"Resource Wars".
As is often the case with this type of forecasting, it is hard
to find a practical angle to it, especially in the near term. To boot, some
brilliant thinkers made good arguments against this theory, but here were are
anyway, so you decide how much stock to put in it.
Back in 2006 our thinking was that
such a wave could be brought about by higher metal prices as well as
worsening economic and social environment. For metal prices, we loosely
marked $50/oz silver and $2000/oz gold as potential trigger levels. We had
also identified the period of "around 2010" as a possible timeframe
in which this process would initiate. Those were general parameters we set as
ones to look for if this scenario were to unfold. Recent developments, such
as the push for a "new global currency" lead us to adjust our
thinking. Before jumping into it we want to make it clear that this is not
an attempt to pass judgment on any individual, group, government or their
actions. We're simply trying to figure out what is likely to happen and
its potential effect investment portfolios. More on that below, but
first the "What? Why? and When?" of it.
WHAT
Let's define what we mean by
"Nationalization". We agree with Wikipedia's definition, but for the
purpose of this discussion we'd like to broaden it just a bit. In this
context, by "nationalization", we mean not only outright
expropriation of private property but all other forms of "creeping"
or indirect nationalization which ultimately leads to increased control of
natural resources by governments at the expense of current stakeholders in a
non-free market way. These may include any flavor or combination of increased
taxation, excessive/retroactive taxation, breach of contracts, delay or
revocation of permits and licenses required to exercise legal owner's rights,
support or tolerance of other groups/interests' illegal activities to the
detriment of property owners, and so on. For instance, two of the more
popular tactics used to push this agenda today are allegations of
environmental irresponsibility and unpaid back taxes.
Certainly, natural resource
exploitation or, by another name, extractive businesses can be messy, and its
participants are far from perfect. Especially from the point of view of
paper-pushing bureaucrats, who have long lost the concept of "If it
can't be grown, it has to be mined". Indeed, resource developers
may be offside in any given situation, so we are not suggesting that some of
these claims may not be valid. But, more often than not, when a government
decides to "get more of its fair share",
there is little or no recourse for resource companies, foreign or domestic.
In recent history there are numerous examples to that end in Russia, Zambia,
Mongolia, Venezuela, Zimbabwe, El Salvador and other places considered
"safe" (see list of countries at the Wikipedia link above). If
a country changes the rules mid-game or otherwise pursues policies that put
your favorite XYZ Resources company out of business or perhaps merely (by
'making life difficult') drives its balance sheet and your share position
deep into the red, you decide if it should be classified as nationalization.
This is not a new development by
any stretch. Countries all over the globe do this with some regularity and
always have, but it has been criticized by free trade/free market proponents;
which until recently included much of the west. Going forward it will become
pervasive, systematic and acceptable by the economic and political
establishment at large. In that light, we almost titled this article
"The Coming Competing Resource Nationalizations" as a play on all
too familiar "Competing Currency Devaluations", also known as the
race to the bottom. It is when governments deliberately devalue their own
currencies to gain economic advantage over their trading partners.
WHY
One reason we have not shared this
theory sooner was a contra-argument made by some very successful industry
experts highly respected by this writer. They correctly pointed out that
nationalization has been tried in the not so distant past in various resource
rich countries and spectacularly failed to achieve intended results,
therefore it is unlikely that they will do it again, at least in the near
future. We agree that this is a rather logical and common-sense
conclusion.
We are not going to dispute it and
we'll leave it for the reader to sort out. However, we have a few arguments
of our own to back our reasoning. In
no particular order they are:
- We have an
unshakeable faith in human nature. If history is any guide, one thing
has always happened - when things get tough, people put
self-preservation first and everything else (in this case property
rights) is pushed aside. This is the same reason why many moons ago
we figured that EU and especially the Euro will not survive the test of
time.
- Overall
standard of living will go down worldwide (more in the west than in the
east), at least for the broader populace. If in doubt, consult your
favorite doomsday scenario: global depression, peak oil, financial and
currency crises, water and energy crises, peak food, wars, mass
migration, extreme weather events, geo-political instability, etc., all
scheduled to unravel in your lifetime, some sooner than later and some
more than once.
- Governments
worldwide will face mounting pressure from internal sources to
"do something" about the dramatic fall in the standard of
living of their subjects.
- Governments
worldwide will face mounting pressure from external sources,
countries and interests to re-distribute and/or re-dole their natural
resources.
- Governments
worldwide will find it hard to resist grabbing whatever resources within
their reach in order to pay the bills, particularly for foreign
trade. As their currencies lose buying power, trade partners will
demand better means of payment, such as commodities, while the latter
appreciate in value.
- Some countries
will do it because others have ("me too" syndrome), or because
they were adversely affected by nationalization of resources they import
and may be forced to do the same in order to retaliate or out of
necessity. This has been happening in the currency markets and we expect
the same here.
- Strategic
reasons. To date we have seen assets labeled "strategic"
when governments wanted to prevent foreign interests from acquiring
them. A prominent example of this was CNOOC's unsuccessful bid for
Unocal back in 2005, which was subsequently merged into Chevron. More
recently, Chinalco's bid to increase its 9%
stake in Rio Tinto raised similar concerns and was defeated. We submit
that in the future, governments will take control of assets they deem
strategic, whether for military or other reasons.
- The
“green” movement. The push for environmentally
responsible practices is in itself a welcome development. However,
its practical application often leaves us worse off than if we did
nothing to “protect the environment” at all; such was the
case with ethanol mandates in the US. NGOs and political parties are the
main players in this space and that alone should have you questioning
the cause and methods of the whole thing. It’s not surprising that
NGOs succeed in pressuring governments to make poor choices to the
detriment of all actual stakeholders. The most recent example of
this is taking place in El Salvador as we speak. While neither of the
above examples resulted in nationalization of resources, we think it will
in the future.
In this context, whoever said that
“Every movement starts as an idea, turns into business and ends in a
dictatorship” was onto something.
WHEN
This is the most challenging part
to get right, and your opinion is as good as ours in this respect. Earlier
we mentioned that higher precious metal prices could serve as an inverse
indicator of a brewing currency crisis. In light of a tsunami of money
printing worldwide in the last year+, few should disagree that an
international currency crisis of an exaggerated degree is baked in the cake.
That is on top of an economic crisis we have at hand that. The other thing to
remember is that no one will ring the bell when this wave finally arrives. It
is already happening and we expect it to spread and intensify in the coming
years. If in 2000, someone described all that has happened by 2009 and told
us it would still be (for the most part) business as usual or the status quo
would remain in tact, we would personally laugh him
out of town – yet that's exactly what happened. The lesson therein
is: everything takes longer than expected.
Then there is the "boiling
frog" effect – when changes, while dramatic in nature, unfold in a
creeping fashion and thus do not cause a sudden reaction. Given the nature of
this phenomenon and the myriad of variables involved, we think this will be
the likely scenario. Privately, we have been advising junior companies that
ask our opinion to "get as big as they can as fast as they can and
sell". While that would normally be their business model anyway,
in this cycle the looming prospect of nationalization could provide
additional impetus. We reckon we're 3-5 years early, but in mining that is
not a long time.
About eight months ago a friend
with interests in the industry shared the following. The Chinese government
came to the country where his exploration company is developing a project and
offered to build a dam, hydro-power complex, and a few billion dollars in
infrastructure investments in exchange for access to its natural
resources. “How are you going to compete with that?”–
He asked. The answer is: you can’t.
At some point in this cycle
commodities – not currencies - will once again resume their role as the
ultimate means of account settlement in international trade. If not for other
reason, than a temporary backlash against paper instruments that have
completely discredited themselves and everyone is
onto the game. This does not mean barter, (though, it too will have a place
in the bigger picture) but that nations will have to pay for what they buy
with something other than paper printable at will, and the current experiment
with fiat money will go down in history, as did all before it.
Sean Rakhimov
Editor, www.silverstrategies.com/
Also
by Sean Rakhimov
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