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Accurately assessing political risk: What Argentina can teach us

by Sara Patterson, President of Windward Global and Independent Commentator

July 15, 2012 (TSR) – A great deal of bombast is dedicated to the importance of diversification within an investment portfolio, with opinions ranging from the relatively sane recommendation that 10% be made up of junior resource stocks to the slightly more eccentric suggestion that one ought to stuff bullion under the mattresses and stock up on rifles.  And it’s not difficult to guess which school of thought results in a better night’s sleep.  A less-discussed facet of diversification, however, is that of geography; spread investments across different regional areas of focus, urge many market soothsayers, in order to diffuse socio-political risk.

What’s often missing from this strategy, however, is actual risk assessment.  On the spectrum of true socio-political risk, there are inhospitable climates-and then there are mere passing squalls.

The nationalization of Argentinian oil company YPF in April-and much of President Cristina Fernandez’s subsequent rhetoric-prompted speculation regarding the immediate and long-term future of mining companies operating in Argentina.  Rather than being a harbinger of an over-arching trend, however, the move was ultimately more akin to Argentina’s 1948 nationalization of railways-an attempt by the government to secure control over vital economic resources owned by foreign entities.

And given that precious metals play little, if any role in the country’s current energy crisis of sorts, the sector’s more level-headed players simply shrugged and moved on, as evidenced by Yamana Gold’s June proposal to buy Extorre Gold Mines Ltd.  The friendly takeover would build Yamana’s portfolio of high-grade gold and silver deposits in Argentina, representing an estimated 10 percent of the company’s total gold equivalent production and delivering a commentary on Yamana’s level of confidence in the region’s future.

And the juniors, as ever, follow closely, with Samco Gold announcing the completion of its 64-hole first-phase drill program on the Monserrat sector of the El Dorado Monserrat property, located adjacent to AngloGold Ashanti’s Cerro Vanguardia gold mine on July 3 (notable results including 4.0 meters grading 9.5 g/t Au and 65 g/t Ag from 106 meters, and 3.5 meters grading 8.2 g/t Au and 82 g/t Ag from 73 meters). Golden Arrow Resources, which holds a 1% NSR on Yamana’s Gualcamayo mine, has sustained a strong level of field activity as well, with bonanza silver intercepts reported from its Jujuy-based Chinchillas project in July.  Minera IRL has meantime sealed agreements with local townspeople on the way to brining its Don Nicolas project to a production decision,  while plenty more gold and silver mining, exploration and development in this exciting and highly prospective area of Argentina, in mining-friendly Santa Cruz province, continues apace.

This is not to say, of course, that Argentina is wholly without its challenges-legislation in Chubut has leveled considerable restrictions on miners, increasing mining royalties and threatening the economic viability of Pan American Silver’s proposed open-pit project in particular.  A problematic false paradox surfaces, however, when one extrapolates such extremity to the whole of the country.  With the ink still fresh in Chubut, the legislation’s efficacy-and its ultimate outcome-has yet to be determined, and thus can hardly be seen as a writ-in-stone precedent.

As with most cases in the natural resource sector, the situation in Argentina calls for tactful examination on a more detailed basis; one does not, after all, generalize the entirety of Canada with every Inuit dispute, though the Argentinian state of affairs certainly has more current heft.  There is a tendency within the sector to start stuffing the mattresses and stockpiling the ammunition at every provocation, as if every rumble is the harbinger of an apocalypse.  Where both Argentina and the market as a whole are concerned, we must step away from this kneejerk mentality if we are to follow fully informed strategies.

One is often warned by the overused expression to avoid not seeing the forest for the trees; the contemporary natural resource sector, however, needs more of the converse.  Investors too frequently stare into the gloom and doom of tangled timber rather than scrutinizing the flora and fauna for their individual viability.  And in the development of a complex and multifaceted situation, such details-vitally including the positions and tactics of both majors and juniors-carry far more weight than broad strokes of despondency.

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AUTHOR: Sara Patterson 

Sara Patterson specializes in viewing the operations of junior exploration companies in North America and Europe and generating market commentary. She is the President of Windward Global, an Investor Relations firm specializing in the natural resource sector, and holds a degree in Journalism and Mass Communication and Geology from the University of North Carolina at Chapel Hill. She is also an independent commentator for her site, Poke the Bear and Kitco.

NOTE: The companies mentioned within this column represent the opinions and interests of the author and do not constitute buy/sell recommendations by The Santos Republic nor our Founder & Publisher who also works with commodities.

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