International Investors Vie for Latin American Gold and Silver

November 23, 2018

International investors have been fixated by Latin America’s precious metals ever since early conquistadores heard rumours of hidden cities of gold. And, judging by the September merger of the UK’s Randgold Resources with Canadian Barrick Gold Corp, and Pan American Silver’s November acquisition of Tahoe Resouces, the obsession continues.

Despite the attraction, miners continue to face many challenges as they mine precious metal in Latin America. As well as the risk whipped up by political instability, institutional corruption and organised crime, gold miners also have to grapple with growing environmental opposition, complex regulation on community relations and widespread illegal mining.

Latin American riches

One man well aware of Latin America’s gold potential is Randgold founder, and new Barrick CEO, Mark Bristow. He says there are “big elephants” to be found in Latin America. Indeed, Latin America is currently responsible for 20% of the world’s gold production, while its expansive reserves suggest there is more to be found.

Peru, home to the Inca empire that so excited the conquistadores, remains a goldmining power today. It was the world’s 6th largest producer in 2017, with its 160 tonnes of production worth around $8billion. Yet, with an estimated 5% of the world’s gold reserves there is ample room for more production, which is why investment in mining exploration in the country is up. Brazil also has around 5% of the world’s below-ground mining reserves yet its yearly output is just 60% of Peru’s, which shows there is plenty of scope for an increase. The final Latin American gold star goes to Mexico, whose 130 tonnes in 2017 made it the world’s 9th largest goldminer. The region’s riches haven’t gone unnoticed by international mining companies with an investment boom since the turn of the century helping combined gold production in Peru, Brazil and Chile rise by 25% since 2001.

Political risk

Of course, it’s no secret that Latin America has plenty of gold but traditionally that has come with lots of political risk. However, there are signs that could be improving. The election of more business-friendly governments across the region, as the so-called ‘pink tide’ of leftist Latin American administrations recedes, bodes well for the mining sector. In Argentina, a new federal mining agreement standardised legislation across provinces, easing conditions for mining companies. Similarly, Brazil approved a new national mining agency at the end of 2017 promising to cut red tape for foreign investors. So far this has been consistently blocked by the senate but the strong showing of right-wing parties in the recent elections suggests the next government will have a more conciliatory attitude.

Latin America has plenty of gold but traditionally that has come with lots of political risk…

Another risk comes in the form of environmental regulations. For example, in Chile they have been particularly strict. Operations at Barrick’s Pascua-Lama project, located on the border between Chile and Argentina, were halted in 2013 after an order from Chile’s environmental agency. A drawn-out, five-year battle ensued, which hit the company’s balance sheet hard. All remaining surface operations at the mine were halted in February 2018, leading the gold company to reclassify 14 million ounces of proven and probable resources of gold to measured and indicated resources, and slash its spending on the project by $429 million.

However, the re-election of business-friendly Piñera in 2017 was good news for the gold mining industry in the country, which welcomed his promises to create a long-term national mining policy for 2018 to 2050, covering taxes, environmental and social aspects. The inclusion of the private sector in this process signals the government’s willingness to listen to business concerns. Indeed, Bristow plans to focus on the under-explored El Indio gold belt which straddles Chile and Argentina.

Community relations

Another risk for miners is the relationship with local communities, which have become empowered in recent years. In 2017 the Colombian constitutional court ruled that local referendums could ban mining and oil extraction, leading to a vote that forced gold giant AngloGold Ashanti to suspend a $2billion project. The public voted 98% against the project, showing the depth of opposition to some mining developments. However, there are positive signs. For example, in October the constitutional court removed the power for referendums to halt energy projects. This is in line with newly-elected, right-wing president Ivan Duque’s campaign promises to facilitate investment in Colombian mining and streamline the legal processes surrounding operations.

One of the most serious challenges is illegal mining…

This isn’t to say that Latin America is a risk-free jurisdiction for miners. One of the most serious challenges is illegal mining. Data released by the Global Initiative against Transnational Organized Crime in 2016, estimated that illegal gold mining accounted for 80% of all production in Colombia, 77% in Ecuador and 28% in Peru. This illegal mining has a negative impact on the workers and local communities, who face dangerous unregulated conditions. But it’s also a challenge for legitimate companies, which are under increasing pressure form international bodies like the OECD to ensure their operations and supply chains have no links with informal mining. Difficult as the situation may be, in the long run it may favour responsible mining companies as it makes them the preferred partner for communities, local authorities and workers.

Latin America’s gold has lured international investors for centuries, leading to an ongoing struggle between international miners and local communities. Foreign capital is needed to develop the region’s riches, yet empowered Latin American citizens expect the industry to create wealth for them. The ongoing tug of war is unlikely to end any time soon. However, it appears to be entering a period of improving conditions for mining companies.