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Now Is A Great Time To Invest in Latin American Mining
Now Is A Great Time To Invest in Latin American Mining
Now Is A Great Time To Invest in Latin American Mining
American Mining
For centuries Latin American mining has captivated international investors. Tales of Birú,
a magical gold-laden land that we now know as Peru, were enough to convince Spanish
conquistador Francisco Pizarro to lead a risky expedition against the Incas. In the short-
term the mission was an outstanding success with Pizarro ransoming captured Inca
emperor Atahualpa for 13,000 pounds (lbs) of gold and twice as much silver. In today’s
prices that is almost $3billion worth of gold though the silver comes to a paltry £6million.
In the following years waves of fresh investors scoured the region looking for similar pots
of gold but often with less success. The mythical El Dorado, for example, first believed to
be a king, then a kingdom, finally turned out to be a waste of time and money for the
British, Spanish and German investors that backed expeditions to find it.
After Latin American countries gained independence, roughly 200 years ago,
international mining investors had to change their approach. But the lure of Latin
America’s mining sector remains just as strong. It has the planet’s largest reserves of
copper, lithium and silver with plenty of gold to boot. While modest local demand – it has
less than 10% of both world population and GDP – makes it a natural exporter. The
region’s metal wealth is nothing new – just ask Pizarro – but what has changed are the
conditions above ground. Latin America has emerged as a mining-friendly jurisdiction
with a wide range of international mining companies listed on Canadian, US, Australian
and British stockmarkets. The development of solid democracies across the region since
the 1980s has allowed many Latin American countries to finally develop fair systems to
manage international mining investment. Of course, profiting from mined metals is a risky
business – Pizarro ended up being hacked to death, spending his final moments daubing
himself with a cross in his own blood. But from solid, London-listed majors producing a
steady flow of earnings, to aspirational explorers looking for that next big find, Latin
America has plenty to offer MoneyWeek readers.
Moreover, it is likely that Latin America has even more mineral wealth than the official
statistics suggest as a mix of political and economic factors have prevented international
miners from extensive exploration in Argentina and Ecuador. Given that most of Peru
and Chile’s largest mines are found in the Andes, it seems reasonable to suppose that
their neighbour’s stretches of the mountain range are also rich in minerals. We
interviewed Argentina’s then Mining Secretary, Daniel Meilán, in Buenos Aires last year
and he left us in no doubt of the country’s mineral potential. “Mining makes up roughly
15% of Chile’s GDP and something similar for Peru. Here in Argentina it is just 1%,
despite the fact that we have a wider share of the Andes than Chile and therefore
probably more minerals.” We will soon get to find out, as in recent years both Argentina
and Ecuador changed their mining policies and opened up to investors, creating exciting
new frontier markets in the region
Another clear winner from the transition to low carbon energy systems is lithium. It’s
already established as the battery of choice for electric vehicles. While the search for
renewable energy’s holy grail – a cheap efficient battery that can store excess electricity
produced by intermittent sources such as wind farms and solar panels – may yet give
lithium another boost. At present Australia has managed to become the world’s largest
producer despite the fact its lithium is made mined from ore – a more expensive process
than extracting it from the lithium-heavy salt brines found in the lithium triangle. That’s
because historically Australian has been more welcoming to lithium investors than Chile,
which treats the white metal differently to copper, Argentina or Bolivia. Now that’s starting
to change, with Argentina in particular receiving a mix of international investment.
The political instability hindered mining investment in the region because you need a
relatively stable and efficient state to create a fair mechanism for the ongoing transaction
between the country’s citizens – the ultimate owners of the metal – and the mining
company Mining has a massive environmental impact on local citizens, while there are
also political and economic consequences of extracting a non-renewable resource to
export for profit. In many Latin American countries, the state’s role as arbiter is
complicated by the fact that strong indigenous populations have alternative concepts of
land ownership, such as ancestral community territories. Those community rights are
recognised in many Latin American post dictatorship constitutions but not clearly defined,
leading to a legal standoff as miners and locals vie for a greater share of profits in
proposed projects.
These political issues can have a direct hit on investors’ pockets. Investors in US-listed
precious metals miner, Tahoe Resources, learnt that first-hand when it was forced to
cease operating Escobal, the world’s second largest silver mine, because of opposition
in Guatemala. Its shares plummeted and was bought out by a rival for a knockdown price
earlier this year. Even well-established mining jurisdictions, such as Peru, can have
problems. For example, one of the country’s most important mining investments, the
$7billion Las Bambas copper mine, has spent two months this year under a blockade
from angry members of the neighbouring communities.
Those costly lessons have taught mining companies that they need to get community
relations right. That begins when they assess a potential project, as there are big
differences in local attitudes to mining. For example, central Peru, which has a longer
mining tradition, typically sees less protests than the north or south of the country. But
ultimately miners need to follow the minerals, so it’s also important for investors to pick
firms that have a well-thought out community strategy. Last month in Lima we
interviewed Victor Gobitz, CEO of Buenaventura, a Peruvian non-ferrous metals miner,
and he explained how the firm has learned to work with local groups. “If a miner just tries
to exchange money for lands it is a big mistake. You need to create a long-term
relationship based on generating employment for local workers and providing some
social infrastructure such as drinking water, energy, sewerage and so on.”
“Those costly lessons have taught mining companies that they need
to get community relations right…”
Not only are miners becoming more adept at handling these issues, there are also signs
that most Latin American states are improving their ability to regulate this complex
transaction between investors and the citizens. The Fraser Institute is a Canadian think
tank that publishes a global ranking of mining jurisdictions. It judges both the mineral
endowment and the policy framework to score the overall attractiveness for investors.
Latin America and the Caribbean was the standout performer in the latest report, with the
region’s median investment attractiveness jumping 16% in 2018, more than any other
region. That’s even more impressive considering the negative weighting of disaster
cases such as Venezuela, Nicaragua and Guatemala. Unsurprisingly Chile, Peru and
Mexico were in the top three. However, Ecuador and Colombia also made big
improvements, jumping into the top half of the regional table and overtaking Brazil.
However, just as with community protests, the reality of mining policy can differ greatly
within countries. Argentina’s national score was poor, dragged down by the extreme anti
mining policies of some individual provinces, yet others, such as Catamarca scored
excellently. So, investors need to understand the local reality of a company’s projects.
This improving policy landscape isn’t down to luck. It reflects the trend of general
improvement in Latin American institutions as the young democracies across the region
begin to mature. Barring sad cases, such as Venezuela, most other states in the region
are gradually becoming more efficient, less bureaucratic and now, thanks to the
repercussions of long-running, region-wide graft scandal, slightly less corrupt.
Readers may be sceptical of international rankings. They may even suspect a pro-Latin
America bias on our part. However, LatAm INVESTOR’s optimism is shared by
international mining companies, with Latin America attracting more exploration capital
than any other region in the world. According toS&P Global, Latin America received 28%
of the total global mining exploration budget. “Six countries, Peru, Mexico, Chile, Brazil,
Argentina and Ecuador, together accounted for the lion’s share (90%) of the region’s
total budget”, explains the report.
The fact that industry insiders are targeting Latin America for future projects shows that
the region is fertile ground for profit-hunting investors.