Latin America continues to be an important jurisdiction for mining investment. In spite of the downturn and difficulties faced by the industry, the region has become and remains attractive and is certainly a part of the world to continue watching.
With abundant strategic natural resources, it has been the target of much foreign direct investment in recent times. In a complex global economy, considering the demands of China, Brexit and the changes in the US after the elections, to name but a few events, many continue to see this region as one with a promise of growth.
Economic and political variations have always characterised the region and have certainly played a role in the amount and speed of investment that Latin America has received, particularly in long-term activities such as mining and energy.
Some countries have a track record of stronger institutions, while others still show weak agencies and episodes of low-quality institutionalisation. Nevertheless, it can be stated that the region has improved substantially and has come a long way, evolving from economic instability to a more reliable economic and political framework.
Along these lines, the region started a process of shifting from populist-orientated governments to a more moderate business-orientated environment (eg, Colombia and Argentina with President Macri’s election and, reinforcing this trend in another way, the recent presidential election in Chile).
In parallel with these political trends and shifts, the downturn in commodities and mineral prices, and scarce access to financing, have resulted in a substantial decrease in exploration over the whole region and, in addition, budget reductions in most of the mining companies have obliged companies to focus primarily on more efficient and fewer operations. The exception to this trend has been lithium exploration, which substantially increased in the ‘lithium triangle’ comprising Bolivia, Chile and Argentina during 2016, remained steady through 2017 and continues in 2018, although probably with a gradual change of actors towards production in the few projects that have been feasible until now. If predictions about the use and demand for electric cars and battery usage become reality, we shall certainly see a substantial increase in lithium production, which will necessarily result in investment in the construction and operation of processing plants.
Regarding the mining legal framework, Latin America has a long-standing tradition of mining legislation in most countries, with a concession system regime based generally on the public utility of the activity. Natural resources belong to the state (either federal or provincial depending on the political organisation of the country) and are granted to specific entities through an administrative law concession. During the 1990s most Latin American countries modernised their legal frameworks, mainly aimed at including foreign investor-friendly legislation to attract long-term investment in the sector. These regimes proved to be quite successful during that decade. In recent years, more jurisdictions have started to add to the trend of legislative reform to promote the sector, one notable example being Ecuador.
In parallel, an awareness of sustainable development has started to grow and to coexist with the mining sector.
The current trend relates to the identification and impact of the benefits that the mining sector can bring to communities and how they can effectively transform the lives of the communities and stakeholders involved. These issues are indeed at the heart of any discussion and play a crucial role in any project to be developed. In addition, certain environmental accidents (eg, the Samarco case in Brazil) have increased communities’ concerns and issues of trust in relation to regulatory agencies, which in general need to be more efficient and improved.
The mining industry faces big challenges all around the world and Latin America is certainly no exception. With projects located in remote areas, as well as others near more populated regions, the interaction and joint work of government, companies and communities has become the new norm.
Specific aspects for analysis
Despite the current state of the industry, and even when mining continues to run at a slow pace, it can be stated that in general terms the mining sector has grown in some of the traditional mining countries, such as Peru, and also in other non-traditional mining-orientated countries, for example, Argentina regarding lithium, and new players are starting to be included in the region (eg, Ecuador and Panama with Cobre Panama – one of the largest open pit copper projects – owned as of 2013 by First Quantum Minerals).
When investing in the mining sector in Latin America, there are some aspects that may vary from country to country and that can become relevant to understanding the business environment, legal implications and social perceptions. All those factors are to be considered and weighed up when deciding upon an investment.
Federal and unitary or centralised states
The political organisation of a country represents the way the country is constitutionally organised and how the territory is divided and governed. Certain countries have a federal system whereby there is a federal government that coexists with provincial governments and the sphere of power and competence is mainly set by the constitution. The main Latin American countries with a federal system are Argentina, Brazil and Mexico.
Other countries have a centralised system, meaning a central government and certain territorial decentralisation, although the main competence and power lies within the central government. Examples of this kind of system include Chile, Colombia and Peru, although each has differences.
This difference in a country’s political organisation is highly relevant, especially in the natural resources sector. These resources belongs to the state, as this has been the historic concept in all Latin American legal regimes. Therefore, natural resources originally belong to the provincial states (provinces or states in a federal organisation) or to the central state. This is no small difference, since the granting authority for mining concession will be vested in the provinces or states or the central state, as the case may be.
Provinces or states within a federal country usually have their own constitution and legislation, while in certain areas also being bound by federal laws. Sometimes these boundaries are not clear. However, and apart from specific legal considerations, the main impact on natural resources is the power to rule and decide on the specific policies related to the mining industry, even within the scope of a federal or national resources policy.
In recent times, this has become a major difference in some countries (eg, Argentina, for which the Fraser Institute in its Investments Attractiveness Index began considering the investment environment in the country, in particular examining mining provinces).
Countries with a federal organisation have, in a way, proven to be more complex to deal with, since mining policy may differ within the boundaries of the same country.
National mining companies
Another feature consider is the fact that in certain countries (eg, Chile and Peru), the existence of national mining companies and mining companies owned by local investors has played a significant role in the approach to the sector. Codelco and the Luksic Group in Chile, or Hochschild in Peru, are examples of national companies in the sector.
This is a fact acknowledged by researchers and poll consultants, although opinions are not unanimous as to how this might affect the perception of a country’s mining by its general population.
Nevertheless, it is a fact that communities have shown in recent years that the general perception of mining is that it is mainly conducted by foreign companies that take away from the country a non-renewable resource, owned by the people, and relevant for future generations. In our view, the real issues lie in the effective benefits that mining projects can provide in the near and long term for affected communities, even after closure of the mine, regardless of who is exploiting the resources or has access to the profits. This would explain why in some countries where the state, either national or provincial, has created national mining companies (eg, YMAD in the province of Catamarca in Argentina) they have not always been successful per se.
Mining public policy and state interaction
Countries that have shown a long-term and steady mining policy have seen many positive results. Chile is certainly the best example of this statement and Peru can also be mentioned as a country on its way to becoming a real mining country, despite any sensitive social issues.
Countries that have balanced economies and stable political and legal frameworks are proven to be the ones considered for investors over others that lack these features. In this sense, the public policies that governments establish and that the state, as such, honours, would be the main drivers to attract investment in the mining sector. Policies that promote a sector and are sustained and successful throughout different governments’ terms are a key factor.
In addition, the different legal frameworks used to regulate activity may affect the way long-term investments settle. Legal regimes that provide for a more discretionary role of the granting authority seem to be less reliable in the view of investors when considering the country as a potential target.
In summary, the way the state, through its different agencies and bodies, interacts and intervenes in the sector is crucial. The existence of due controls, compliance with the laws and the correct exercise of the faculties and discretionary power acknowledged by law is a guarantee for investors and for the community’s confidence in the system.
Communities, indigenous peoples and social conflict – perception of the industry
As part of the evolution and development of international environmental and human rights law, community participation has gained a significant role in Latin America. Many laws started to acknowledge this right (which derived from various concepts), especially the consultation scheme it utilised. Today, even when most countries have included consultation as a key concept and right in the extractive industries, there are still many areas of uncertainty in terms of procedure. When and how to conduct consultation proceedings is not always crystal clear.
Latin America has never been a calm region in terms of social conflict, as evidenced by history. However, today the region has found much stability with the exception of certain countries (eg, Venezuela).
Causes for social conflict vary substantially from country to country. Mining may be one of these causes in certain countries (eg, Peru and Colombia, where informal mining and other factors play a significant role).
In recent years and, depending on the country, the issues related to indigenous peoples and their interaction with the mining sector have also played a significant role.
Environmental protection and water resources feature highest on the agenda of all communities as regards the mining sector. Accidents that may occur in the industry (eg, the Veladero spills in the province of San Juan, Argentina or the Samarco case in Brazil), as well as the lack of specific regulation (eg, mine closure in Argentina) do not help to build confidence within communities and therefore reinforce the negative perceptions of the industry.
Effective benefits that include basic infrastructure and, in general terms, improvement of the quality of life of those communities affected by mining projects, would erase much of the grounds for social unrest and conflict.
In line with this and in more recent times, there is a trend towards territorial zoning that would identify the specific mining areas to be developed in accordance with a sustainable development plan agreed with the community.
Innovation and impact in mining
The trends in innovation, which include digitalisation, automation, etc also have reached the mining industry, This trend has a multiple effect in the technical, environmental, social and business structural aspects.
However, innovation is not an easy task for mining companies, which need a long period of time to consolidate and make profits out of large risky investments. Having said this, the search for new techniques that may improve working conditions can benefit projects in many ways and also save money when in place. At the social level, there are new ways of community interaction (eg, hackathons or brainstorming events for industry problem-solving), and we are starting to also see new ways to raise finance for mining companies (eg, crowdfunding).
Many more innovative ways to conduct business will be part of the challenge that mining companies will also face in Latin America in the coming years.
Latin American countries
A brief review of the situation in some Latin American countries follows, in alphabetical order.
With a promotional regime enacted in the 1990s that attracted large-scale mining investors, Argentina gained a position for the first time among the countries with mining activity in the region. However, exchange control restrictions as well as other discouraging measures of recent years removed the country from the consideration of mining investors.
The government of President Macri issued policies that included the removal of most of the restrictions for exchange controls, other macroeconomic measures, the holdouts settlement and the abrogation of export tax for the main minerals, making the country start to look attractive for many sectors including mining.
There was an increase in lithium exploration and deals during 2017, continuing in 2018, in the north-west of the country. While the lithium market is quite specific and particular, it is expected that this trend will be followed in connection with other minerals, specifically gold, copper and silver, for which the country has major potential, and as the markets for financing and prices start to ramp up. First Quantum’s Taca Taca copper project in the province of Salta continues to be one of the promising projects in the country.
Repeated spills in the Veladero project owned by Barrick have caused much concern and new protocols for environmental controls and precautionary measures are being analysed. The forthcoming closure of the emblematic Bajo de la Alumbrera project has been now replaced by an extension of the mine underground.
Argentina is a very agriculture-orientated country, particularly with regards to cattle, and whether it could become a mining country remains in question. However, there is no doubt about the geological and human potential that the country possesses, which, in conjunction with adequate public policies both at provincial and federal levels, could help develop the mining sector and contribute significantly towards the country’s economy. In this regard, during 2017 the Macri administration enacted the New Mining Federal Agreement, which recreates the federal agreement of the 1990s, although in a new framework that aims to harmonise mining conditions and the environment in the provinces. This new agreement is expected to be passed by the National Congress and provincial legislature during 2018.
A final comment in connection with lithium exploration, which has been increasing in recent years: it is expected that during 2018 projects will start to evolve into future production with real feasibility. The expansion of the FMC, Salar del Hombre Muerto project has been a sign of this process, although very few projects seem to be at the stage of starting real production for the time being.
In spite of the iron ore market’s cyclical difficulties, Brazil, the industrial giant of Latin America, still focuses on this mineral and existing reserves in view of an increasing future demand from Asian countries. However, companies have had to adjust to the market situation and reduce costs in all aspects of operation and, consequently, also disinvest in certain areas.
However, Brazil has extensive areas to be explored, with potential discoveries to be made and certainly remains a strong mining jurisdiction. Infrastructure in such a vast region is an issue that certainly needs investment and modernisation; some are of the opinion that this area could attract investment with the creation of public and private partnerships. After a major political crisis, the current government has a much more pro-business and non-interventionist approach in general and specifically towards the mining sector.
In past years there was much discussion about mining code reform, which was not passed in the end. However, in 2017 the current government temporarily decreed a rise in mining royalties from 1.4 to 4 per cent. For this rise to be permanent it had to be approved by Congress, which did not finally approve it. In November 2017, a new autonomous regulatory agency was created: the National Mining Agency, which replaces the National Department of Mineral Production, with the objective of expediting the granting of mining permits.
Brazil is a big player in Latin America, and is a country with many unexplored areas that most probably will continue to be included on a shortlist for investors. In August 2017, the government authorised the exploration of minerals in the Amazonian reserve, which covers approximately 4 million hectares. Existing relevant projects can be quoted as an example of activity in the sector, for example, Expansao de Minas-Rio, Anglo American.
Chile is without any doubt ‘the mining country’ in Latin America and has been for a number of decades. As of 1974, with the enactment of the Foreign Investment Statute regulation to attract foreign investment, the country has shown a rising growth curve in the mining sector, although with a slower pace over the past few years.
Mining is part of the Chilean identity and national sentiment. Codelco, the national copper giant, has been key to building and maintaining this sentiment. It is also worth mentioning that Codelco has stated an ambitious plan for its modernisation.
Additionally, the Salar del Atacama is one of the biggest lithium reserves worldwide, where companies such as SQM and Albemarle have agreements for its exploitation with the national agency Corfo. In connection with lithium and despite the regulation on this sector that makes lithium not freely available to third parties, the country certainly plays a crucial role in the international arena.
In addition, owing to the history of the sector in the country, mostly related to policies to promote and foster investment, local mining companies have emerged in recent years. Having consolidated their position in the country they have embarked on a path to internationalisation. The Luksic family with the Antofagasta Group and Lundin are examples of such companies.
One of the main factors for Chile, being host to so many investments, both foreign and local, lies in its steady and consistent mining policy and legal framework, which has lasted for many years. The country has been able to build confidence and respect by honouring its laws and policies.
In recent times, environmental issues and indigenous peoples’ rights have become aggressively part of the agenda for mining projects and the government. This is a trend that will probably continue to grow and certain developments may be seen in this light. It is interesting to note that what has actually changed somehow is people’s perception of the mining industry, which is still a big part of the national identity.
This country is a success story from a general perspective. It has gone through many changes in the past decade, transitioning from a very difficult jurisdiction to a quite attractive region for mining investors. For many years it was impossible to avoid considering guerrillas and drug cartels when referring to Colombia. Fortunately, for some time now, the situation has changed significantly and the country ranks quite high in investors’ surveys.
Abundant mining resources and political and economic stability are key factors promoting the sector. A National Development Plan (2010–2014) was launched, and mining and energy were considered relevant engines for the growth of the economy.
As in many countries nowadays, environmental and social aspects are essential components of mining projects, playing a more significant role, in particular indigenous peoples’ rights and their interaction with mining projects are to be considered.
Specifically in the case of Colombia, reserve areas where mining is restricted or prohibited are taken seriously and a territorial zoning has consequently been established. During 2016 the ‘paramos’ reserve protected areas were finally identified and determined. Within the areas identified as ‘paramos’ no environmental licences for mining projects are to be granted.
A very relevant change for the sector was the Constitutional Court’s ruling establishing that each municipality can decide, based on public referenda, whether to allow mining activities within its jurisdiction.
The country continues in its path towards consolidating mining, especially in carbon, gold and precious stones and even with challenges ahead seems to be on the right path.
Ecuador is a country with a huge mining potential, since approximately only 10 per cent of its territory has been explored so far. This fact alone has undoubtedly made the country a good prospect for mining investors.
Ecuador has gone through a process of legislative reforms to include and promote the mining sector in the country and in the government’s agenda. In recent years an investment stability regime was implemented together with the necessary tax incentives to make the country competitive. In addition, the Ministry of Mining was created in 2015, which has given important relevance to the area.
As a result of this state policy, a number of exploration projects are currently in place, the highlight being the Lundin project Fruta del Norte, which will probably be the first of many to come.
The country continues to consolidate its position as a new potential mining country in the region.
Mexico is a leading world producer of silver and also has a rich geology. Around 70 per cent of mining exploration concessions in Mexico are vested in foreign investors, mainly Canadian companies. However, the country lost some of its mining attractiveness owing to the energy reform approved mid-2014 where mining became subordinate to the extraction and exploitation of hydrocarbons, and a new taxation regime for minerals was created. Today the government is working to improve these conditions.
Owing to low prices in the mining industry, activity has decreased in general overall. Mexico has such geological potential and will probably remain to be considered by investors despite the factors mentioned above.
The states of Sonora, Chihuahua, Durango, Sinaloa, Zacatecas, Jalisto, Guerrero and Oaxaca host the main and biggest gold mines in the country.
As a general trend, social and environmental matters are playing a key role.
Peru is a country with a strong mining tradition and, together with Chile, represents one of the two best-established mining jurisdictions in Latin America. With the reforms conducted in the 1990s mainly with the enactment of a promotional regime (Promotion of Investment in Mining Act 1991) and amendments to the General Mining Law of 1992, investments in the mining sector started to grow significantly. In fact, even when most countries started to mandatorily increase their tax burden on mining projects, as of approximately 2010, in order to have a greater share in profits, in Peru the government took the path of agreeing an increase with the private sector and consequently minimised the impact or alteration of tax stability conditions granted to projects.
Being a country rich in many resources, mining has an extremely important role in the country’s economy and it could be further stated that it is one of the engines of its economic growth. Antamina and Cerro Verde are two of the country’s main projects.
However, mining is an industry that may awake social conflict and Peru is no exception to this statement. Currently, and according to many analysts, most of the causes for social unrest lie in the mining sector and a number of mining projects have been paralysed as a result. The causes of these social conflicts are related to economic, labour, social and environmental issues and among them informal mining has a key role, as well as other industries or sources of manpower.
It is interesting that initiatives related to community development funds in certain regions and projects have not always been effective in addressing communities’ needs and expectations and also show that they have not been well handled for various reasons.
After President Kuczynski’s resignation, Martín Vizcarra has held office since 23 March 2018. Though too early to tell, it is believed his administration will continue and improve the policies to develop the mining sector in all possible areas of the country.
The China factor
China has become a big player in the natural resources sector and Latin America is one of the targets for investment by Chinese companies. China exports manufactured goods to Latin America, and Latin America exports commodities to China. To some extent this could also result in an opportunity for more cooperation and innovation. The China–Latin American relationship could potentially result in a huge capital injection for the region. Nevertheless, the deceleration of the demand for metals from China has had an impact on the minerals market, which has also been seen in Latin America.
Cultural differences certainly play a role, and with time such differences may be overcome and transformed into opportunities. Even when China has already invested in the mining sector and has a presence in some countries (eg, Peru), this relationship is expected to continue evolving and will be interesting to watch. Recent evidence of this trend is the joint venture entered into between Barrick and Shandong for the Veladero and Pascua Lama projects, both located in the province of San Juan, Argentina and the latter also being a binational project with Chile. However, an announcement has been recently made regarding the closure of the Pascua Lama project on the Chilean side, meaning that the project will not take place, at least at present.
Mining can be a very important contributor to the economy of Latin America. The mining industry can provide not only materials essential for all sectors of the economy of a country, but also employment and government revenues.
Latin America represents approximately 48 per cent of the world’s copper reserves, 50 per cent of the world’s silver reserves, more than 60 per cent of the world’s lithium reserves, 20 per cent of the gold reserves and an undetermined percentage of the world’s potash reserves.
These approximate figures give an idea of the huge geological potential that the region has. In addition and, despite certain issues in particular countries, there is also a good environment for long-term investment.
Many will argue that certain reforms should be addressed in order to adapt and adjust to more current times, and therefore make countries more competitive. This is very true. The way forward should include adaptations and improvements in areas such as environmental, taxation, public transparency initiatives, concession regime and code innovation, the closure of mines and its related impact on communities, as well as other more specific local measures.
The new governments in Latin America are showing strong evidence of taking this route and aiming to promote mining policies that contemplate the sensitive issues that the extractive sector entails.
It will be also crucial for governments in Latin American countries to address these issues and take relevant measures in a timely and expeditious way, since the times to come require very dynamic policies in a constantly changing world.