Luis Carlos Rodrigo Prado of Rodrigo, Elías & Medrano addresses the current legal, social, political and economic issues facing the mining industry in Latin America.
Mining has existed since the dawn of time. The evolution and development of mankind has been related to the control of minerals and their use for different purposes: from the Stone Age to the Bronze Age, and then to the Iron Age, and today reaching incredibly sophisticated and efficient uses for titanium, nickel and other complex metals. However, our relationship with mining has not only been positive and, not too long ago, society realised that for all the progress derived from mining activities, several externalities were generated by the industry. Environmental issues and, more recently, social aspects, have become a necessary and significant concern in connection with mining.
The challenge is how to find the right balance between reasonable regulations and requirements to allow mining to continue providing the indispensable minerals and metals for our development, as well as the dynamism and economic contributions it brings to remote, typically less-developed areas where it takes place, and making sure that the environmental and social impacts derived from the activity are duly controlled, mitigated and, in the end, clearly surpassed by the benefits. Fortunately, the environmental and social themes raised by the film Avatar remain fictional, but most Latin American countries are going through a great struggle to reach the above-mentioned balance, and the industry is suffering while it is being established whether they can achieve this balance or not.
For the past decades, mining has been the most important engine of Chile and Peru’s economic growth, also providing significant contributions to Brazil, Mexico and more recently to Argentina, Colombia, the Dominican Republic and Panama, among others. Nevertheless, every day this dynamism faces increasingly strong challenges based on environmental and social concerns. Undoubtedly, political instability that we are seeing in the region increases these pressures even further.
It is in this challenging environment that not only the better-known American, Australian, Canadian, European and South African mining companies, but also Japanese, Korean, Indian and Chinese investors, are trying to acquire, develop and operate world-class projects all over the region. Perhaps even more interestingly, Brazilian (Vale, Votorantim), Mexican (Grupo Mexico, Peñoles), Chilean (Antofagasta Minerals), Peruvian (Buenaventura, Hochschild, Minsur) and Colombian (Mineros SA) mining companies are also investing in other Latin American countries.
For all the growth and frenetic activity that mining went through just a few years ago, the lower prices of minerals, the economic slowdown in Europe, China and the US, the drying up of financial markets and sources and the clear inclination of governments to get more tax income from mining mean that we currently face a reduction in mining investments all over the region. A couple of years ago, Chile had a pipeline of investment in different mining projects of around US$100 billion, while in Peru more than US$60 billion was almost committed in several projects; but due to the above, as well as to new governmental laws and regulations imposing more obligations, a good part of said investment is on hold, being reconsidered by companies or stopped altogether. Most feel that the region is following the path of Kafka’s Mr Joseph K, creating a labyrinth of environmental, social, legal, municipal and other permits and licences almost impossible to understand and comply with (mainly due to the problems of increasing red tape).
Although Peru, for example, continues to see acquisitions such as the one performed by Minmetals of the Las Bambas project for around US$6 billion from Glencore Xstrata, or additional investments by Chinalco in its recently started Toromocho operation totalling US$5 billion in this same project or Freeport’s Cerro Verde’s expansion for another US$5 billion, the fact is that other investments, like the US$4 billion in Quellaveco or a similar amount for the first stage of the La Granja project, among others, are under review. Besides the change of circumstances related to prices and other factors, the decision to stop or review investments is also related to the creation of a number of new additional requirements in terms of permitting, prior to the start of project construction, imposed by Mr Humala’s administration, as well as to the difficulties in dealing with social and political challenges that mining faces in Peru.
In the case of Chile, decisions to stop investments or to delay them are derived not only from more aggressive opposition by environmental NGOs, but also from the increase in taxes and elimination of longstanding stability tools by the new administration of Ms Bachelet. In Argentina, such decisions stem from the overall negative business environment under Ms Kirchner’s government, and the opposition to mining from several provincial administrations.
In the case of Colombia, although the country’s general business outlook is positive, mining faces great problems, starting with the suspension of the granting of mining titles and continuing with the challenging environmental and social demands, which is also the case in Brazil and Ecuador. Countries like Venezuela or Bolivia do not offer a sound business environment to attract investment, and are not receiving it.
However, several countries are starting to suffer the consequences of the decrease in mining investment and its economic effects, and therefore they have realised that it is necessary to stop the never-ending delays in permitting and licensing, as well as the overwhelming and increasing requirements and obligations. Thus, Peru, Colombia and others have just started to pass new norms deregulating certain licensing procedures in order to facilitate investment. This will hopefully help in making sure that some important projects go ahead, but usually once you lose momentum it is not easy to regain it.
I believe that we all agree that entrepreneurial activities, and especially mining, cannot be pursued at any cost just because they bring economic benefits to the country where they take place. Nowadays, governments, civil society, communities located in the area of influence, companies, politicians and NGOs agree that it is necessary not only to operate with the highest technical, safety, environmental and health standards, but also to engage communities and respect their culture, traditions and concerns, as well as to provide significant contributions to them and countries as a whole. On the other hand, it is essential to fight illegal mining with more determination. This plague, still seen in some places as a “social” issue, has become an industry, involving billions of dollars, underage labour and links with money laundering and violent groups. Moreover, in many Latin American countries it undoubtedly generates the worst environmental and social damage stemming from mining activities; but NGOs and international organisations do not provide the critical condemnation and efforts that are required to eliminate it.
In order to achieve the right balance, and to ensure that mining is a positive industry for society as a whole, enforcing strict social and environmental obligations (especially on those performing mining illegally) but also providing a clear, reasonable and efficient process for permitting and licensing projects, countries need to make sure that they do not fall into the trap of allowing political manipulations to control consultations and interrelations between companies and communities, nor to over-regulate the permitting process, allowing bureaucracy to prevail over efficiency in granting licences and moving projects forward. Hopefully, Latin America is on the right path towards understanding this, and towards making the most of what seems to be an excellent opportunity for attracting investment, especially now that other parts of the world are going through a serious economic slowdown.