Latin America has the planet’s largest reserves of copper, lithium and silver, with plenty of gold to boot. While modest local demand, the region comprises less than 10% of both world population and GDP, makes it a natural exporter. Nobody doubts Latin America’s geological wealth but its political instability can worry mining investors. Mining is a long-term industry, where investors need stable regulations and taxes over the lifetime of projects that can last 30 years or more. Latin America has made great progress from its ‘forgotten decade’ in the 1980s, when war, dictatorships and default made long-term investing difficult and it now boasts some of the best mining jurisdictions in the world. However, the recent outbreak of protests in the region have alarmed investors.
The unrest started in Ecuador, when an uprising of indigenous groups and students was triggered by a proposal to cut fuel subsidies forced the government temporarily to flee the capital. Soon afterwards in Chile, Latin America’s most-developed country, planned metro price hikes were met with a campaign of arson followed by mass protests. In early November, violent protests forced Bolivia’s left-wing president from power. And towards the end of the month, Colombia had joined the fray with a general strike and mass protest that also turned nasty. We investigate how the political turbulence could impact mining.
The biggest shock came from Chile, Latin America’s most developed economy. Long seen as an oasis of stability in the region, it is the world’s largest copper producer and has a large and sophisticated mining industry. The initial spark for the unrest, was an increase to metro fares, but they spread to include the legitimate grievances of the working and middle classes in a country that has the highest inequality in the OECD and a rigid social and educational hierarchy that keeps most of the best jobs for a small upper class. To quell the protests the president had to replace the entire cabinet and agree to rewrite the constitution.
Mining wasn’t directly hit by the unrest but some fear it will be hit by tax or regulation changes in the wake of the protests. Yamana Gold, an NYSE-listed goldminer, has two producing mines in Chile, but Executive Chairman, Peter Marrone, isn’t worried. “There is always a risk of political unrest in any jurisdiction. You can see protests across the world, from Hong Kong to Paris. Clearly, in many societies a dislocation has occurred and there is a disparity that people want addressed. In Chile, many feel that the fabric of the social safety network needs to be strengthened. But it won’t impact mining because Chileans realise just how much the sector provides for the country. It pays better wages and higher taxes than most other sectors. As a result, there is no real demand from elected politicians or the general public for structural mining reform in Chile. In fact, Chileans are keen to protect the goose that lays the golden eggs. But that is not to undermine the significance of the protests. It’s clear that there are issues that Chile needs to fix. This is true in many parts of the world where similar protests are taking place. It’s positive in Chile that there is a consensus for a solution among both the government and opposition parties.”
Clearly Marrone has his reasons to assuage investor concerns, but his take is shared by Quinn Markwith, Latin America economist at London-based consultancy, Capital Economics. “Fundamentally, our medium-term view on the economy hasn’t changed. It doesn’t seem likely that the protests will have a long-lasting impact on investment. A large amount of investment relates to mining and shouldn’t be affected by protests in the capital. Chile’s strong public finances also mean that future spending to appease protesters is not worrying. So, we’re still comfortable with our 2021 GDP forecast of 3.5%.”
Protests in the frontier
It makes sense that in a country like Chile, which has grown wealthy from mining, there is little demand to disrupt the industry. As we explore in our article on Brazil, there is similar support for mining in Latin America’s largest economy. However, the protests are far more threatening to the region’s frontier mining jurisdictions, where the sector still hasn’t had time to demonstrate the benefits it can bring.
Take Ecuador for example. Unlike Chile or Brazil, where mining is well-established and enjoys widespread support, Ecuador’s nascent industry has fragile roots in the country. Its first large-scale commercial mines only opened last year. Home to untapped reserves of gold and copper, the country is now the centre of a modern-day gold rush as the world’s majors jostle for concessions. But if the protests continue, they could dampen that enthusiasm.
the protests are far more threatening to the region’s frontier mining jurisdictions, where the sector still hasn’t had time to demonstrate the benefits it can bring… “
Javier Robalino, Managing Partner of Ferrere in Ecuador, a leading South American corporate law firm with extensive mining experience, admits the country’s embryonic mining industry faces challenges. “Ecuador is a young country in mining terms. If you look at our Andean neighbours it’s clear that Chile, Peru, Colombia and even Bolivia are far more developed in large-scale mining – especially for metals.” As a result, says Robalino, there is less appreciation for the industry. “In Chile most people see mining as a force for good in the country – something that drives economic growth and social development. We need to convince Ecuadorians about the benefits of mining.”
In Ecuador protests broke out against the government’s decision to remove fuel subsidies. A powerful alliance of indigenous communities and students persuaded president Lenin Moreno to back down and reverse the move. In itself the subsidy isn’t that important for international investors. Yet it raises fears that the government could struggle to implement its IMF-backed reform programme. In turn that could threaten the government’s other market-friendly initiative – mining.
However, Robalino says investors shouldn’t be overly alarmed. “Nothing in the current political discussions suggests that Ecuador will change its treatment of international investors or mining in particular. If anything, there is recognition that we need mining to generate tax revenues. Of course, you can get particular protests around specific projects. But on a national basis mining was strongly defended by the Constitutional Court in 2019 and is here to stay in Ecuador.”
The protests caught a lot of Latin American analysts, including this magazine, by surprise and in the following months pundits raced to quick but imperfect conclusions. But clever theories were quickly confounded by events, as the political turbulence spread across the region. In short, the catch-all narratives that describe this as a reaction to ‘neo-liberal’ policies are probably too simplistic.
Michael W. Scherb, founder of Appian Capital, a London-headquartered mining private equity firm with a strong Latin America focus has been following events in the region closely. “What’s fascinating about what’s happening in Latin America at the moment is that the outburst of populism shows no allegiance to any part of the political spectrum. Protests against the right-wing government in Chile were followed by opposition to the left-wing government in Bolivia. Looking ahead it’s clear there won’t be any unified or common reaction to the populism push because the two regional leaders, Brazil and Mexico, are led by right-wing and left-wing governments respectively.”
Mining as a solution
Appian has invested hundreds of millions of dollars in mines in Latin America and Scherb recognises the social impact that natural resources can have in the region. “The other interesting aspect of these protests is how they are linked to commodities. Latin America enjoyed a decade-long boom fuelled by higher commodity prices, but unfortunately that capital wasn’t reinvested wisely. When the boom stopped, citizens suddenly realised that their hopes of an improved life went with it. Persistent inequality has also added to public anger. As economist Albert Hirschman noted in the 1970s, it’s akin to different lanes of traffic entering a tunnel. If your lane is not moving but cars in the lane next you are speeding ahead as they pass through the tunnel, you eventually become frustrated. That’s happening in Latin America now and much of it could have been avoided with better reinvestment of the capital created by the commodity boom.”
Some governments, such as that of Sebastián Piñera in Chile, appear to share Scherb’s view. Early post-protest proposals include using more of Chile’s wealth to improve the health and education provision for its people. However, given the region’s record of poor governance it would seem naïve to hope that all its countries will start managing their commodity riches more wisely. That means if investors want to ensure that their project is politically sustainable it needs to share the benefits with the surrounding community.
Environmental, social and governance (ESG) themes have become increasingly important in the mining industry. This isn’t because miners have suddenly developed a conscience but because protests have postponed or cancelled billions of dollars-worth of projects in recent years. Sophisticated mining companies now develop social strategies before the first drilling rig is used.
But just because they know community relations are important, doesn’t make them easy, says Marrone. “There is no ‘one size fits all’ answer. We study the realities on the ground around each project and adjust our engagement to what’s happening at a local level. No matter where you are based, mining is a large-scale industrial enterprise that involves moving rock and earth. It will always create an impact in terms of dirt, water and tailings, and we need to manage the effect it has on the community. We endorse an approach to mining which properly manages the impact on local communities providing management of risks and creation of opportunity. On the plus side, mining creates lots of good jobs, which can be particularly useful for remote areas. We are here to make a profit but also to create wealth for the local community. We pride ourselves on our excellent health and safety record and communities appreciate that we protect their loved ones when they come to work in our mines.”
as people discuss new forms of capitalism they could look to mining because our industry is all about stakeholder engagement… “
ESG is so important to Appian that it has created the Appian Way Charitable Foundation, which works with its portfolio companies and guides them on reallocating investment from the firm into the regions and communities around its projects. “Mining does a terrible job of telling the world how much good it does”, says Scherb. “Take Appian Capital for example, it has created 6,000 jobs directly and indirectly simply from allocating capital appropriately in the right way.
“It’s a broader theme but as people discuss new forms of capitalism they could look to mining because our industry is all about stakeholder engagement. It’s not a pure capitalism, which is just about profitmaking, but instead mining thrives by including local communities and federal governments in the benefits it brings. So, the Appian Foundation reallocates some of the capital generated by our mines and uses it to bring positive change for local stakeholders.”
If managed responsibly mining, can bring social development for minimal environmental cost. Ultimately, every country can create its own regulations to balance the risks and rewards the industry entails. However, in Latin America it is often not a binary choice between mining or nothing. In the region’s vast, remote hinterlands illegal mining is widespread. While formal, largescale projects can attract protests, a multitude of smaller, informal mines can be wreaking worse damage. It’s particularly common in Ecuador, says Robalino. “The illegal miners are also involved in money laundering, prostitution, violence and drug trafficking, so the country has to take a firm stance against illegal mining. In its place we need to promote formal mining. Because formal miners are the ones who will build infrastructure, engage with the community and protect the environment.”
Latin America’s geological endowment is simply too large for investors to ignore. Yet in an age of informed, empowered societies it is ever more important that mining projects are politically sustainable. Investors have to pick their jurisdictions carefully, says Marrone, whose company has operating mines in Chile, Argentina, Brazil and Canada. “We want to be in countries where there is an established code of mining conduct and preferably mining pedigrees too. Countries where there is a long-standing tradition in support of mining and where societies understand what mining involves, the work that needs to be done and the benefits mining can bring.” But even within the same country there can be huge differences, says Marrone, “the level of support for mining in Argentina varies on a province-by-province basis; some provinces support it, others don’t.”
It’s not just about mining-friendly jurisdictions. Scherb also believes that by picking the right project, investors can protect themselves from problems like the recent protests. “While it is important for us to understand and respect the societies where we operate, [the unrest] isn’t something that overly worries our investors. That’s because Appian Capital selects assets with minimum exposure to political or commodity cycles. The types of assets that we are targeting are close to production. Indeed, Appian becoming involved de-risks the projects because we have the technical expertise and financial wherewithal to bring it to production. So regardless of the bigger macro trends we are going to add value to an asset and then find a path to exit – and that’s what generates the return for our investors.”
Indeed, despite the civil unrest Scherb expects Appian to be busy in the region in 2020. “We know that in the long-run Latin America will always be a good place for mining investors. It is less risky than most emerging markets and offers more reward than the developed ones.” That optimism is shared by Marrone, who is looking to expand a producing mine in Brazil and develop some of Yamana’s recent exploration finds in Chile and Argentina. Even Robalino in Ecuador, believes that Ecuador “can become a serious player in global mining”. In Latin America’s tier one mining jurisdictions, most citizens recognise that responsible mining is the best way for their communities to benefit from the region’s mineral riches. In the frontier markets both miners and governments need to demonstrate the benefits that the industry can bring,