Mining in Latin America
By Rafael Vergara, Carey Abogados
Rafael Vergara at Carey Abogados explores the many issues currently facing the Latin American mining industry, including environmental concerns, community relationships, indigenous rights and regulatory developments.
The end of the commodity super-cycle has hit quite heavily worldwide, and Latin America is no exception. The situation is even more complex and difficult considering that, as anticipated, costs have increased in the regional mining sector over the past few years, especially those related to labour, energy, supplies in general and taxes. Accordingly, mining companies in the region are focused on reducing and managing costs, improving efficiency and achieving potential growth. So, industry consolidation, automation technology, owner-operated mines and investment in energy assets are some of the steps that companies are taking to lessen the impact of rising costs. In the prevailing environment of global economic uncertainty and absent any optimism about the current status and the future of the economy, some companies have gone even further, shutting down or divesting from non-core or underperforming assets. A few new exploitation projects are being developed, but nothing compared to the enormous pipeline of new initiatives seen until two or three years ago. Many of those initiatives, which amount to more than US$100 billion, are presently under review; definitively frozen; or on hold, waiting for better economic winds and commodity prices.
Nevertheless, in 2015 Latin America remained the most popular exploration destination, attracting 28 per cent of global spending. Six countries – Chile, Peru, Mexico, Brazil, Colombia and Argentina – accounted for the lion’s share of the regional total. Gold reclaimed its position as the top Latin American exploration target, with its share in overall budgets rising to 42 per cent. Additionally, an increasing interest in lithium has been seen, due to its application as a raw material for car batteries.
The region is being targeted for inbound investment; this is partly due to the scale of opportunity where much of Latin America is yet to be subjected to comprehensive exploration and partly as a result of the relatively attractive regulatory environment of countries such as Chile, Peru, Colombia and Mexico, which are well positioned to supply the global market.
Over the past two decades, mining investment in Latin America has grown exponentially, and although the region covers only one-sixth of the earth’s land surface, its ore-rich territory produces a significant amount of minerals and metals, accounting for 45 per cent of global copper, 50 per cent of silver, 26 per cent of molybdenum, 21 per cent of zinc and 20 per cent of gold. Therefore, Latin America is still an important base for the world supply of metals and a substantial global mineral reserve.
In the regional context, the mining industry has seen uneven development, which in some ways could explain different problems in each of the countries where mining is performed. There are a number of countries (such as Chile, Mexico, Peru and Brazil) that are more developed in mining whereas others (such as Colombia) show incipient growth and potential. Despite the efforts and geological potential, mining is still running slowly in Argentina, although hopes have been bolstered by the impulse announced by recently elected President Macri. Ecuador is another country with a very incipient mining industry (non-oil and gas) but with vast geological potential. In that sense, there are big expectations about the future of the Fruta del Norte gold project, recently acquired by Lundin. Finally, there are other countries (such as Venezuela) where private investment in mining is absent.
Nevertheless, mining continues to play a significant role for the economies in the region, especially in Mexico, Peru and Chile, and is gaining increasing importance in Brazil and Colombia, as well as in Argentina. In Chile, for example, the mining sector represented 13 per cent of GDP in 2015. Investment in mining continues to come largely from outside the region, especially from Canada, USA, the UK and Australia, and not only from large companies but from younger companies as well, particularly in gold exploration. We have also seen important investments from China – including the purchase of big mines and companies – and, again, old players from Japan. To complete the scenario of investors, there are some Latin American companies doing exploration in the region as well, such as Vale and Votarantin, from Brazil; Mineros, from Colombia; Codelco and Antofagasta, from Chile; Grupo Mexico and Peñoles, from Mexico; and Buenaventura, Hochschild and Minsur, from Peru. Peru continues to be considered the hottest among hotspots, as it offers the most investment and project opportunities, whereas Chile is also noted as offering a stable operating environment with clear rules, favourable trade agreements, existing infrastructure and high-quality resources, although social conflict and legal uncertainty have spread significantly in recent years, placing a damper on investors’ perception of the country.
However, from a general perspective, it is worth noting that, with the increase of their mining revenues, several governments in the region are trying to get a bigger piece of the pie, through phased-in hikes to windfall taxes or royalties. Additionally, the contribution made by the mining industry to each country, through the creation of employment, infrastructure and payment of general taxes, sometimes either go unrecognised or are perceived as insufficient by the people and, accordingly, some governments have echoed the dissatisfaction of the population. This has been the case despite efforts by the companies, especially during the past few years, executing direct agreements with the local communities whereby the companies have committed to investments in infrastructure, education or healthcare, to use local goods or services or to train and employ the local workforce. Sometimes, the companies have made additional direct contributions focused on certain specific social areas of such communities, either under a shared administration or trust, with a long-term view toward strengthening their relationship with the local people and environment.
Nowadays, environmental concerns, and community relationships and indigenous rights, are the most important issues on the agenda of any mining prospect or project in Latin America.
There is increasing consensus in the mining sector on the need to develop policy frameworks that ensure that investment turns into opportunities for sustainable development. As such, sustainable development seeks to integrate environmental and development concerns involving an integrative approach to human development, considering social, economic and environmental objectives. Mining in the context of sustainable development must integrate sustainability criteria into all the phases of the mining project, from exploration to development, operation, and extraction, closure and even beyond. The incorporation of closure and post-closure phases into the mine life cycle entails a significant change.
In this regard, one of the biggest challenges is to find the appropriate source of water for mining projects. Companies are focused on reducing water consumption in their mining processes and finding water sources to supply future mining projects, including the use of seawater, even going as far as constructing pipelines to transport water from the coast to the mine, over considerable distances.
Similarly, the complex energy situation has led some mining companies to look for alternative sources of energy, including possible investment, such as non-conventional renewable energies opportunities (solar and wind farms) and/or building their own power generation plants (including LNG facilities) mainly to secure their needs, but also to supply third parties, as the revenues appear interesting.
Yet another environmental impact aspect of the mining sector is related to abandoned mining sites. Contamination originating in some of these sites has become a major problem and a safety concern, given the risks to human health and ecosystems posed by the chemicals and heavy metals disposed in soils, especially if they are located next to populated areas. Some Latin American countries have made enormous efforts toward identifying abandoned and/or inactive mining sites. For instance, Peruvian authorities have identified 8,600 abandoned and/or inactive mining sites, while the Mexican and Chilean authorities have identified 2,368 and 651 sites respectively.
Community Relationships and Indigenous Rights
The mining industry has understood the importance of the relationship with the stakeholders in keeping abreast of environmental and social developments: not only the companies and the state, but also all the financiers and service providers, have a better understanding of the risks of a precarious relationship with the communities surrounding the projects and the opportunities appearing when such relationships are positive and constructive. Everybody in the Latin American mining industry has comprehended the relevance of establishing and safeguarding its relationships with the communities affected by the projects, and with other social actors, not only at the initial phase of the feasibility studies and environmental assessment, but also during the life of the projects, harvesting fruits such as better management of risks and more positive results at the site.
Mining players have realised that mineral resources and reserves, appropriate technology and political stability are not enough, as an essential part of the equation is the good relationship with the communities. Whereas this was not so critical 10 years ago in Latin America, now it is extremely relevant for a mining project to be successful, whether entailing exploration or exploitation. Thus, it is increasingly common to see relationships with the communities near to the prospects or projects starting quite early on, through information on the developments, meetings, visits to the site, an open–door policy and consultation, etc.
In addition to community relations, another trend that can be observed in Latin America is the deepening of the International Labour Organization’s Convention on Tribal and Indigenous Peoples (Convention 169), subscribed to by the most of the countries in the region. It has given a definitive boost to the legal recognition of indigenous and tribal peoples’ rights. The Convention contemplates a consultation and participation process whereby indigenous peoples are entitled to decide their own priorities for the development process as it affects their lives, beliefs, institutions and spiritual well-being and the lands they occupy or otherwise use, and to exercise control, to the largest extent possible, over their own economic, social and cultural development.
Consistent with the consultation and participation process, the Convention establishes, as rights of the peoples in relation to the natural resources, the right to be consulted before any project is carried out or approved, to discuss to what extent the peoples may be affected by such project, and to be benefited from projects that exploit natural resources, as well as to participate in the utilisation, administration and conservation of such resources. The hurdles that the Convention could place in the path of mining projects, which consequently may affect their financing, revolve mostly around the ambiguity of their terms and binding force.
One of the questions that has been answered differently in the Latin American countries is how the Convention must be applied and what the meaning and extension of the consultation process is, while there some other not answered yet, such as the kind of benefits that indigenous people should receive as participation of the projects. Governments are placing pressure on mining and metals companies to assume a greater role in supporting the broader community through social and logistical infrastructure, community developments, and local hiring and procurement practices, as communities are not just looking for minimal disruption but also to share in the economic and social benefits from local mine operations. They can wield a lot of power to disrupt projects if their needs and interests are not met.
Another trend that we have seen lately is a wave of regulatory changes. In Brazil, the government is still discussing a new Mining Code with the relevant stakeholders. In Argentina, some provinces have approved laws to levy a fee of 1 per cent on the mineral reserves. Argentina has developed local regulations concerning the importance of mining in specific areas. Consequently, Regulation No. 5128 on Royalties, which establishes the apportionment of royalties between the Province and its Subdivisions, is aimed at decentralising municipal governments’ decision-making concerning expenditures and investments. Mining royalties have become an important item of income for Argentina. In the case of Peru, new legislation enacted in 2015, requiring mining companies to consult with indigenous communities before proceeding with exploration or exploitation, has come into effect. Additionally, the government has committed to accelerate the bureaucratic procedures to unlock mining projects and ensure dialogue with communities.
Moreover, these regulatory changes could include some elements of resources-related nationalism, meaning that some governments are seeking to ensure that they retain ownership of their minerals, which is not a new phenomenon. These changes in ownership laws can have significant impact on the reward miners expect to receive for the risk they have taken, as they have paid for 100 per cent of the investment but will receive only a percentage of the future investment returns.
Mining lawyers have adapted to the current trends and assume the challenges of their clients. If, three or four years ago, all of us were focused on the developments of new projects, then most of us are now helping the mining companies to reduce costs, not only echoing the budget restrictions for lawyers’ fees but also accompanying them in the amendment of contracts and legal claims for such purposes. As part of the reduction in costs, the companies have reduced the number of internal counsel or kept them but are redistributing new assignments.
Something that has been relatively active lately is M&A involving mining companies, with some big purchases and sales of assets in the region. Additionally, every day mining lawyers are more focused on environmental, social and community issues, as they are at the the peak of current professional trends and will probably stay for a long period.
On the exploration side, options and joint venture agreements are becoming ever more sophisticated, as often mining properties owned by different individuals must be brought together to make a project attractive and owners of mining concessions require a greater share in project profits through mechanisms such as net smelter return or net profit interest.
In connection with the financing of mining production, mining companies have lately been using other vehicles with increased frequency, such as stock or bond issuances in the domestic or foreign markets, mining infrastructure leases (the latter has been successful particularly in expansions of mining projects currently in production, at conveniently low costs), and the streaming or sale of future production or a royalty over the same is being used as a way of financing.
The outlook for Latin American mining is not as auspicious as it was three years ago, but signs indicate better times in the near future, with a recovery of the commodity prices due to, among other things, an increase of demand for minerals from China, India and other Asian economies. Everything that we do today should be done with an eye towards a better future in our Latin American region.