As Latin America’s largest economy, Brazil dominates regional investor portfolios, yet its mining industry has global importance. Brazil has the world’s second-largest reserves of iron ore, the third of nickel, the fourth-greatest stores of tin and the seventh-most gold. When it comes to iron ore, the country has done an excellent job of turning its extensive reserves into a modern, world-class mining industry, led by local champion Vale. The US Geological Survey (USGS) lists Brazil as the second-largest producer of iron ore in the world, which shows it is making the most of that natural resource.
However, a quick scan of latest reports from the USGS suggests that Brazil isn’t reaching its potential in other metals. Despite having the planet’s third-largest reserves of nickel, it is only the eighth-ranked producer. In gold, the disparity between reserves and production is even more marked. Blessed with the world’s seventh-largest gold supply, Brazil is only the 13th-most important producer. For local policymakers looking to get the maximum benefit of Brazil’s natural endowment for its people, those figures suggest there is work to be done. Meanwhile, investors will spot an opportunity.
Brazil’s rich geological endowment and solid regulatory framework mean that it is already classed as a tier one mining jurisdiction. One man well placed to assess its relative merits is Michael W. Scherb, the founding partner of Appian Capital, a UK-headquartered, private equity mining firm that has a big focus on the region. “Latin America is Appian’s top jurisdiction, with most of our capital employed there. We like the region because if you benchmark it against Africa, Latin America outperforms on a risk/reward basis. Within Latin America we have our core of tier one mining countries: Peru, Chile, Brazil, Colombia and Mexico. And within that core, Brazil and Mexico are two of our preferred destinations.”
Latin America is Appian’s top jurisdiction, with most of our capital employed there…”
Appian’s first fund rose $400million to invest in mining projects. Around 70% of that went to Latin America, with Brazil receiving the lion’s share. Indeed, Appian made three investments from Fund One into the country. “When we made our first investment, Avanco, Brazil was out of favour with investors. We were quick to spot that Avanco was a good site with a high-grade copper deposit and, despite the negative sentiment towards the country, we decided to back the project all the way through to production and then exit, which was a good result for shareholders. Our second investment in Brazil is Minerecao Vale Verde (MVV), a copper and gold mine that was spun out of a Canadian gold producer. When it comes into production in 18 months’ time it will be the first mine in the Brazilian state of Alagoas, so it’s very important for that state. Finally, we have Atlantic Nickel, a previously bankrupt asset that had $1billion spent on it by the former owners. We had to spend a lot ourselves to turn it around through the Appian approach of technical improvement and efficient capital allocation. First production was in October 2019 and the mine is now shipping nickel concentrate to Trafigura.”
It’s clear that Brazil has been good to Appian. But it’s not the only one. Peter Marrone has built Yamana Gold (NYSE: AUY) from an 80,000 ounce per year gold producer in 2003, when he took it public, to an output of more than 1 million ounces today. Yamana is now spread across the Americas, with mines in Canada, Chile, Argentina and Brazil but its first operation was in the South American giant. “In Brazil in 2003 there were lots of opportunities for gold mining but not that many companies exploring for gold, so it allowed us to make a difference”, recalls Marrone, who is Executive Chairman of the US-listed gold producer. “In Brazil, we mine in a large reef system that is similar to systems that are in West Africa but very rare in Latin America. It was a great opportunity because it was a geological system that was undervalued in Brazil and offered us long-term potential.”
Tier one mining jurisdiction
What’s striking about both companies is that they’ve enjoyed their success outside of Brazil’s traditional forte of iron ore. But, as they both readily admit, Brazil’s success in iron ore has helped improve the mining jurisdiction for other metals.
“We’ve been impressed by the strong mining culture and knowledge in Brazil”, says Scherb. “We tend to find mine workers have either been taught by the country’s impressive technical universities or by Vale, which has an excellent training programme. The quality and efficiency of the Brazilian workforce has been a pleasant surprise for us.”
Marrone shares Scherb’s positive assessment, with particular praise for the institutional backdrop. “The most important thing is that there is strong support for mining across Brazilian society. Previous attempts to increase royalties failed because of a lack of political and public support. Brazil also has an established mining code. Mining regulations aren’t perfect but the sector is regulated by strong public institutions.”
Mining hasn’t just benefited from the iron ore industry. Wider economic growth in Brazil has also improved conditions for the sector. An interesting example of this is Cabral Gold (CVE: CBR), a Toronto-listed gold junior, with a project in the Brazilian interior. “One of the traditional challenges for miners in Brazil was the poor infrastructure”, says Cabral Gold CEO, Alan Carter, “but that has improved tremendously in recent years. In Para state we’ve seen the main highway that cuts this region become paved, and there are plans for a railway. Improvements in infrastructure in Para are largely being driven by the soy industry which has become very important in both Para and Mato Grosso over the last 15 years. But mining is an indirect beneficiary of the improved infrastructure. When I first visited the project ten years ago, I could only get there by boat or plane. We can now drive, which makes it far easier to develop.”
Areas for improvement
Of course, no mining jurisdiction is perfect and, if Brazil wants to replicate the success that it has enjoyed in iron ore with other metals, there are some policy areas to address.
“We would like to see some changes to the regulatory framework and I am confident that they will happen eventually”, says Marrone. “In general, there is too much bureaucracy at a state and national level. I’m optimistic that will change because the Brazilian people themselves increasingly recognise that excessive bureaucracy is holding their country back from achieving its impressive true potential.”
A specific example that frustrates Marrone is the six-hour shift limit that Brazil places on underground mine workers. “In Canada or Chile, mining authorities have long recognised the benefits of letting miners work longer shifts. It means that they can be more efficient when working, while allowing them more time off to spend with their families and friends. Indeed, worker associations in Brazil would be delighted if that option was available here. However, thanks to an old piece of regulation that dates back to the days when underground mines had ventilation issues, shifts underground can’t be longer than six hours. A lot has improved in the last few decades, particularly in areas like ventilation and worker health, which we fully endorse. It’s an example of how bureaucracy can stifle productivity in Brazil and how authorities can be slow to improve regulations.”
“Generally speaking, community relations are a lot easier in Brazil than in countries like Bolivia, Ecuador or Peru…”
For a profitable operation like Yamana Gold, these issues can be irksome but they are not critical. However, for cash-strapped explorers, trying to get a project off the ground they are far more serious. “It’s expensive to hire workers”, says Carter, “especially when you are a junior that has to control costs. There is also a plethora of worker benefits that add to the non-salary costs.”
Mining in Brazil is increasingly coming into social conflict with illegal incursions into protected tribal lands and the Amazon more frequent under the government of Jair Bolsonaro. But despite the media storm over the issue, Carter feels that it shouldn’t be a problem for responsible miners. “Generally speaking, community relations are a lot easier in Brazil than in countries like Bolivia, Ecuador or Peru where I have also worked. In Brazil there are some parts of the country that are reserved for indigenous communities, which have been put under pressure from logging, farming and illegal mining. However, most of Brazil is free from those social issues, unlike the Andean countries, where indigenous communities are spread across a wider part of the country.”
It’s great that Brazil has a world-class mining sector to serve as an example for the rest of the industry. But the real opportunities for investors will come in the metals where production still lags the reserve potential.
Scherb, who has already been successful in Brazilian nickel and copper, thinks the country’s gold deposits could reward investors. “Iron ore mining has been a huge success in Brazil, while it is starting to make serious moves in copper. We’ve focused on base metals in the country because that’s where we’ve found the best opportunities. But it’s notable that you don’t have many precious metal winners in Brazil. You don’t have gold or silver champions in the same way that you have Vale. I’m not sure if that’s down to geology or poor application of the latest technology but it’s surprising. We’d certainly be interested in precious metal projects in the country if the right opportunity became available and we are actively looking for gold and want to be a buyer of Brazilian gold assets.”
Marrone built his company on the back of spotting underappreciated Brazilian gold assets and he still thinks there is more to find. “Brazil has a long history of mining but it is still underexplored for gold and copper. That centuries-old mining tradition has not translated itself into modern mining techniques and new approaches so there is an excellent opportunity for new discoveries.” Unsurprisingly, given that he’s trying to attract funding to develop a gold deposit, Carter agrees. “Despite Brazil’s massive potential for gold, there are very few listed goldminers active in the country”, says Carter.
“The current market makes it tough to get financing but, on the flipside, it creates enormous opportunities…”
Of course, for investors it’s not just about the availability of resources. They also need an attractive valuation. And here too, Brazilian gold looks interesting. “It’s very tough market for gold-focused juniors at the moment”, says Carter, “despite the recent increase in the gold price. Valuations are at record lows. Cabral Gold is currently valued at $4 per ounce of gold based on our resources, which is ridiculously low. The current market makes it tough to get financing but, on the flipside, it creates enormous opportunities. When the market does turn – and it will, because it always does – valuations will soar.” With more than a million ounces of annual gold production and a market cap of a round $3.5billion, Yamana is in a completely different position to Cabral. Yet Marrone shares Carter’s optimistic outlook on the yellow metal. “We are in a rising gold price environment, something we believe will be sustained for a prolonged period.” These aren’t just pretty sentiments from Marrone. Yamana Gold is putting its money where its mouth is and pushing ahead with “the phased expansion of Jacobina”.
Scherb’s perspective is unique as Appian is a private equity fund with long-dated capital, which means it can ride out commodity price movements. Yet Scherb agrees on the cyclical nature of the markets – not just for commodities but also for countries. “When we entered Brazil, it was not a destination favoured by international investors. But we are agnostic on market sentiment – we go where we see a value opportunity. The fact it was out of favour meant attractive entry valuations, which created an opportunity for us. That is now changing as investors turn bullish on Brazil and valuations are rising. As a result, we’re now looking at exit opportunities for those assets, so we can redeploy the capital in markets that are less popular. That’s why we are looking for opportunities in Mexico at the moment. Various political and macro factors mean that the market is quite bearish on Mexico, which should help us find some attractively-priced opportunities.”
Appian has ten-year capital with the option of a two-year extension. One of the benefits of having long-dated money, explains Scherb, is that “we don’t have to follow the market because we don’t need to make a quick buck. Brazil went from being a stockmarket darling in the 2000s, to crashing by the middle of the last decade. That type of change in fortune is as cyclical as commodities themselves and our long-dated investment horizon allows us to look at a country like Brazil and say: “it’s out of favour now but it won’t be for the next ten years.” Scherb was unable to comment on Appian’s second fund – potentially much-larger than the first – that is currently being raised. But he signalled that “the next few years will be a great time to deploy capital in Latin America’s mining sector.”
Brazil has already proven that it can reward mining investors. But its rich geological endowment means that it still has plenty more to offer. That’s especially true for metals like nickel, copper and gold, where production lags the world-class reserves.