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Latin America overview

Florencia Heredia

Allende & Brea

Thursday 04 July 2019


Latin America continues to be an important jurisdiction for mining investments. The region has become attractive for investors specially in new sectors like battery minerals in certain jurisdictions.

With abundant strategic natural resources, it has been the target of large-scale foreign direct investment in recent years. In a complex global economy, recognising the demands of China and its trade war with the United States, the current trend towards protectionism and Brexit, many continue to see this region as offering continued growth.

Economic and political variations have always characterised the region, playing a role in the quantity and speed of investment that it has received, particularly in the case of long-term activities such as mining and energy.

Some Latin American countries have a track record of possessing stronger institutions, while others still show weak agencies interspersed with episodes of low-quality governance. Nevertheless, the region has improved substantially, evolving from economic instability to adopting more reliable economic and political frameworks.

Along these lines, the region started a process of shifting from populist-orientated governments to a more moderate business-orientated environment (eg, Colombia with President Ivan Duque, Argentina with President Macri, President Piñera in Chile and recently President Bolsonaro in Brazil – all of whom reinforce this trend).

In parallel with these political changes, the downturn in commodities and mineral prices, and scarce access to financing, have resulted in a substantial decrease in exploration over the whole region. Additionally, budget reductions in most of the mining companies have obliged companies to focus primarily on more efficient yet fewer operations. The exception to this trend has been lithium exploration, which substantially increased over recent years in the ‘lithium triangle’ – comprising Bolivia, Chile and Argentina – which continues in 2019 through a gradual change of actors involved in production. If forecasts about the use and demand for electric vehicles and lithium battery technology usage are correct, a substantial increase in lithium production can be expected, resulting in investment for the construction and operation of new 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 generally based on the public worth 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 administrative law concessions. During the 1990s, most Latin American countries modernised their legal frameworks, which sought to include foreign investor-friendly legislation to attract long-term investment in the sector. These regimes proved to be successful during that decade. In recent years, more jurisdictions have added 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 and Brumadinho cases 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 around the world and Latin America is no exception. With projects located in remote areas, as well as others near more populated regions, the interaction and combined work of government, companies and communities has become the norm.

Specific aspects for analysis

Despite the current state of the industry, even when mining runs at a slow pace, it is generally true that 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 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 its territory is divided and governed. Certain countries have a federal system whereby a federal government coexists alongside 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 centralised systems – where a central government allows some territorial decentralisation – although the main competence and power lies within the central government. Examples of this 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, which has been a 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 signifficant since the granting authority for a 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 they are also bound by federal laws. Sometimes these boundaries are unclear. However, 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. This fact has become a major difference regarding certain countries.

Countries with a federal organisation have, to a certain extent, 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 to 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 polling agancies, 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, which is 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 a mine closure, 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.

Mining public policy and state involvement

Countries with a long-term and steady mining policy have seen many positive results. Chile is the best example of this and Peru can also be mentioned as a country on its way to becoming a real mining country, despite 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.

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 – industry perception

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 clear.

Latin America has never been without social conflict; however, today, the region is experiencing greater 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 some 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 and Brumadinho cases 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, identifying 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 automation and digitalisation, have reached the mining industry. These trends have a multiple effect in the technical, environmental, social and business structural aspects.

However, innovation is not easy for mining companies, they need a long time to consolidate and make profits out of large risky investments. Despite that, the search for new techniques improving working conditions can benefit projects in many ways and also save money once in place. At a social level, there are new ways of community interaction (eg, hackathons or brainstorming events for industry problem-solving), and new ways of raising finance for mining companies (eg, crowdfunding).

Further 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

An overview of some Latin American countries follows.

Argentina

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 the past administration removed to some extent, the country from the consideration of mining investors.

The government of President Macri issued policies that included the removal of the restrictions for exchange controls, other macroeconomic measures and the holdouts settlement, 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, it is expected that this trend will be followed by other minerals, specifically gold, copper and silver, for which the country has great potential, and as the markets for financing and prices start to gather pace. 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 a few years ago, caused concern and new protocols for environmental controls and precautionary measures have been and are still being analysed. The forthcoming closure of the emblematic Bajo de la Alumbrera project was first replaced by an extension of the mine underground. Currently, a recent joint agreement has been entered into by and between Yamana Gold, Glencore, and Newmont Goldcorp in order to use Alumbrera’s infrastructure to develop the Agua Rica project.

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 level, could help develop the mining sector and contribute significantly towards the country’s economy.

It is expected that, during 2019, lithium projects will keep evolving 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. Additionally, during 2018, we saw large-scale investment by relevant companies such as Pluspetrol, Galaxy and POSCO, that signify the importance of the country’s role in global production.

Brazil

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. The recent disaster at Brumadinho in the state of Minas Gerais, where Such difficulties could be exacerbated by the ban by the Brazilian National Mining Agency of all dams in the country built by the upstream method, which may lead to a risk in the supply of iron.

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, specifically towards the mining sector.

In recent years there has been much discussion about mining code reform, which ultimately did not pass. 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. Former President Michel Temer issued two decrees to overhaul mining laws going back 50 years, in an attempt to attract investment to the sector and implement rules to rebate more royalties.

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 Brazil is also working together with other countries in the region, such as Peru, under the bilateral cooperation agreement for the efficient use of renewable energy and the improvement of small-scale mining development, signed in March 2019. Existing relevant projects can be quoted as an example of activity in the sector, such as Anglo American’s Expansao de Minas-Rio.

Environmental concerns were raised in early 2019 following a dam wall collapse at Brumadinho, releasing about 13 million cubic metres of mud, destroying hundreds of hectares of forest and killing at least 150 people. This tragedy raises questions about changes in environmental legislation regarding the responsibility of companies that should be based on a European disaster management model.

Chile

Chile is without any doubt ‘the mining country’ in Latin America and has been for 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 Chilean identity. Codelco, the national copper giant, has been key to building and maintaining this sentiment. Codelco has stated an ambitious plan for its modernisation. In this regard, the Chilean Copper Commission (Cochilco) foresees an increase of 88.8 per cent in mining investment for this year.

Additionally, the Salar del Atacama is one of the biggest lithium reserves worldwide, where companies such as Sociedad Química y Minera (SQM)and Albemarle have agreements for its exploitation with the Corfo national agency. In connection with lithium, and despite the regulation on this sector that makes lithium not freely available to third parties, the country plays a crucial role in the international arena. Important events have taken place regarding lithium in the past year, specifically, the agreement entered into between Tianqi Lithium Corporation and Nutrien Ltd, whereby Tianqi agreed to purchase a 24 per cent shareholding in SQM held by Nutrien

Moreover, owing to the sector’s history in the country, which are 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. Furthermore, there was a boom in start-ups during 2018, with almost 200 new businesses now operating in the sector.

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 have lasted for many years. The country has been able to build confidence and respect by honouring its laws and policies. Regarding new legislation, Chile has repealed the Glaciers Law and the Restricted Law on Copper last year. Additionally, it also declared enforceable the bill that creates a new royalty of 3 per cent for metallic and non-metallic mining. 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.

Colombia

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 notions of guerrillas and drug cartels when referring to the country. 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 (2010–14) was launched, and mining and energy were considered relevant engines for economic growth.

As in many countries, environmental and social aspects are essential components in 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. Another environmental policy has been the prohibition on the use of mercury in gold mining, announced by the Ministry of Environment and Sustainable Development by the end of 2018.

A 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

Ecuador is a country with 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 country has five strategic mining projects – Mirador, Río Blanco, San Carlos Panantza, Fruta del Norte and Loma Larga. Mining in Ecuador is going through a difficult period, mainly following environmental and social conflicts. However, the Lundin Gold project Fruta del Norte, one of the most important developments, is in the construction phase and steadily progressing. The country continues to consolidate its position as a new potential mining country in the region. New companies have disembarked in the past year, including Anglo American, by entering into a joint venture agreement with Canadian Luminex Resources.

Mexico

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, generay activity has decreased overall. By the end of the first quarter of this year, as reported by the government, production in the mining industry fell by 10 per cent owing to uncertainty over new investment policies. In spite of the factors mentioned above, Mexico has such geological potential and will probably remain being considered by investors such as Minera Frisco and Minera Peñasquito, a subsidiary of GoldCorp, both of whom entered into an agreement to explore and evaluate possible mining operations in the Mazapil Valley. The states of Sonora, Chihuahua, Durango, Sinaloa, Zacatecas, Jalisto, Guerrero and Oaxaca host the main and biggest gold mines in the country. It is expected Grupo Mexico, the country´s largest underground mine, to be reopened in early 2019 after more than a decade’s closure owing to a workers’ strike.

As a general trend, social and environmental matters are playing a key role.

Peru

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, investment in the mining sector started to grow significantly. In fact, even when most countries started to mandatorily increase their tax burden on mining projects, since 2010, in order to have a greater share in profits, the Peruvian 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 could rekindle social conflict. Currently, according to 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. Despite this, according to the government, in light of increased mining investment, employment in private-sector companies is set to increase in the first quarter of 2019. Moreover, the Framework Law on Climate Change was enacted last year.

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 indicate mismanagement.

After President Kuczynski’s resignation, Martín Vizcarra has held office since 23 March 2018. Throughout his administration, Kuczynski carried out policies towards further developing the mining industry by sanctioning decrees favourable to private investment, which led to new companies such as Schwager Service, Teck Resources and Antofagasta becoming interested in Peru. It is estimated that investment will increase by 20 per cent during 2018–19.

Chinese involvement

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 increased cooperation and innovation. The China–Latin American relationship could potentially result in a huge capital injection for the region. Nevertheless, the slowdown in demand for metals by China has had a negative impact on the minerals market, which has also been seen in Latin America.

Cultural differences play a role and, with time, such differences may be overcome and transform 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. Shandong with an investment in Barrick and owner of the Veladero project in Argentina could be one of the relevant players. However, an announcement was made regarding the closure of the Pascua Lama project on the Chilean side, this meaning that the project will not take place, at least for the time being.

Conclusion

Mining can be a very important contributor to the economies of Latin America. The mining industry can provide not only materials essential for all sectors of a country’s economy, but also its 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 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 in an ever-changing world.

Update and trends

On 11 March 2019, Newcrest announced it entered into an agreement with Canada’s Imperial Metals Corporation to acquire a 70 per cent joint-venture interest in, and operatorship of, the gold-copper Red Chris mine and surrounding tenements in British Columbia for just over US$806 million. As reported by the company, this transaction is important because it signifies a first step into one of the world’s foremost gold districts, and gives the company its first operating mine in the Americas.

On April 2019, the merger of Newmont and Goldcorp was approved, creating the largest gold mining company in the world. The transaction was announced in January for US$8,700 million. With projects in the Americas, like Mexico and Argentina, the new company will also expand on exploration.

Important mining investments in the Americas during 2018 include:

  • El Cobre in Mexico (Newcrest participation in Azucar Minerals Ltd);
  • Fruta del Norte in Ecuador (Newcrest agreement with Lundin Gold);
  • Anza in Colombia (Newmont agreement with Orosur Mining);
  • Organullo in Argentina (Yamana Gold agreement with Centenera);
  • Escobal in Guatemala (Pan American Silver agreement with Tahoe Resources); and
  • Miocene (Newcrest JV agreement with Cornerstone Capital) and Gordea (Newcrest JV agreement with Mirasol), both in Chile.

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