It’s the media, stupid!

I´m taking a contrarian position on this recession we’re supposedly heading into.

Why? Well, for starters I’m always suspicious when I see the media trying to create news. It happens every August, a notoriously slow month. The major outlets have been out in force, beating the bushes for bears willing to comment, rather apocalyptically I might add, on tepid job growth figures reported by the U.S. Labor Department. Private hiring, which excludes government agencies, only climbed 17,000 last month, the smallest increase since a decline in February 2010.

Well, whoop ti doo and lah di dah!

What, August is some kind of bellwether month for hiring now? I wouldn´t know because I´m always at the cottage along with nine tenths of the world’s population during that time of year.

Sorry if I haven’t taken to hoarding food and ammo in the basement on this kind of news.

The other big story I have trouble with is that slowth, or slow growth, in the U.S. and Europe is going to send the rest of the world into recession.

Gosh, we sure are important aren’t we?

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Friends of this newsletter know that I’m bullish on mining, and South America, in that order.

You’ve heard of South America no doubt. Every banker and broker in Europe and North America has a map of it in their office. It’s represented by the grey, amorphous land mass below the Rio Grande, and usually with the old sailors´warning Here be Dragons scrawled crudely over it in felt pen.

The more absorbed we become in the problems on Wall Street and in Brussels, the more likely we are to forget about South America altogether. But I can assure you it most decidely exists, and GDP growth – or rather lack of it – is not a problem here. On the contrary, growth has been on a tear in the past five years and created a whole other set of problems.

Nowhere is this more apparent than Colombia, a former drug empire which everyone seems disposed towards liking nowadays. I’m not sure what the reason is for all this Colombia-philia, but I suspect it may have something to do with the notoriety of Pablo Escobar and the cartels. Oddly, every millionaire I know suddenly wants to own his own hotel in Medellin. I suppose they’re all armchair kingpins.

Be that as it may, I for one am not too keen on Colombia as a destination for exploration capital these days.

I should explain…

I live in Medellin, where my sideline is providing language training services to the minerals and oil & gas industries. My wife, a Colombian national, happens to be the daughter of a former mayor out in El Choco, a Pacific facing ‘departamento’ which has extremely good gold geology but high political risk. For the past year or so he’s been singing the praises of that region, and quietly handing me tantalising details of this or that property, mostly moose pasture but some of it with past producing assets or present artesanial workings.

Now my pop in law thinks El Choco is a better bet for mineral speculation than neighbouring Antiochia, where the capital city of Medellin is located. ”And you know,” he whispers conspiratorally, ”that the mining department in Antiochia brings gold in from El Choco and counts it among their inventory”.

This is a spin on claim jumping which strikes me as not only a heck of a lot safer but even quasi legal. Use your neighbour’s gold to boost your own production and win government approval and foreign investment capital.

Of course I had to consider the source. This initially sounded to me like jealousy, and I may have ignored it altogether had I not received a strange phone call from the Ministry of Mines and Energy three years ago.

At that time, I was told by a reliable source in the ministry that a proposal was being drafted for the creation of a subindex on Canada’s Toronto Stock Exchange (TSX) listing only Colombian gold miners. I’m not sure what the fate of that proposal was, or even if was drafted, but I suppose it would have just echoed down the hall if and when it got to Bay Street. Still, it shows just how proactive and aggressive the gold mining states of Colombia are prepared to be.

This bit of trivia illustrates two things: First, that the industry at the present time is extremely under-regulated, and second, that there is unprecedented government interest in the sector as an engine for regional economic development.

All of which in turn means that legislation is pending which will more closely regulate the mining industry across the country.

And that has to be bad news for somebody.

That was the concensus reached by the majority of government and industry players last week at the 7th International Colombian Mining Show in Bogota, which I attended. Legislation is currently some ways off, but it’s in the mail, and in the meantime regional governments and grass roots mining groups, one claiming to represent some 2 million private operators across the country, are lobbying like mad.

As an aside, it’s curious to me that this number is virtually the same as what I’ve seen quoted in other countries, notably Ecuador and even Nicaragua. Do you suppose the same ‘artesanial’ miners just kind of flit from country to country just before new mining legislation is about to be written?

That suspicion notwithstanding, there is real reason for foreign mining companies and investors to fear such legislation. But to understand the risks here, the investor must know a few basic facts about Colombia.

The 40 some odd year civil war has displaced a lot of peasant farmers. In other words, they´ve been run off their land by the FARC, by the paramilitaries, by common drug dealers, and even by interested local politicians. So the disenfranchised drift to the cities, where they try to eke out a living as unskilled labourers Naturally, that creates a lot of poverty and urban sprawl.

The government has tried to restore some of those farmer owners, chiefly by setting up local tribunals and regional councils, but somebody always shoots them. The lastest round of murders occured as recently as last May, though it was not widely reported.

Meantime, the outlaw elements out there in the countryside continue to fund their operations with — you guessed it! — low level, artesanial mining. The government does not want to issue mining permits to these people or their proxies, but also recognizes that mining is a prime engine for economic growth out there where it counts.

And then there are the local communities, like those in Santander who nixed Greystar’s multimillion ounce Angostura gold project due to concerns over the region’s watershed.

So the pressure is building for government to develop some kind of cohesive vision for the industry in the coming months. Expect a new, legislative framework for the permitting process, probably some kind of small business program, perhaps even a quota system, the creation of ‘no mine’ areas where the environment is a concern, and probably some guarantees for large scale projects to keep the transnationals pumping investment capital into the country.

Any gold junior with a vested interest, as well as their shareholders, has a right to be concerned. At the same time, I believe there will be new opportunities, and perhaps even a windfall or two, for investors who patiently wait for the other shoe to drop.

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