Latin America has been worse hit by Covid-19 than any other region on earth. According to the FT, Peru and Ecuador have the world’s highest amount of excess deaths per capita, while Brazil has the second-largest total of coronavirus deaths. The botched public health response has also exacerbated the economic impact. According to the IMF, a combination of a 9.4% drop in 2020 GDP, followed by a weak recovery of 3.7% in 2021, means Latin America will greater economic damage than any other region in the world.
But there is one bright spot among the carnage. Latin American metals mining looks set to benefit from the pandemic. The economic crisis has pushed investors towards gold helping the yellow metal reach a new record high. Meanwhile copper prices, which were initially supressed, are now above pre-pandemic levels, supported by the green nature of stimulus packages in the EU and China. Latin American mining benefits from several long-term fundamental drivers while the pandemic looks set to give the sector a further boost.
The immediate impact of coronavirus was disastrous for Latin American mines. Despite being categorised as a strategic industry by governments that realised the importance of keeping the flow of export earnings coming as other revenues dried up, many mines, particularly in Peru, were forced to close. When they did reopen, it was with elaborate coronavirus measures, such as keeping workers in a 7-day quarantine before they enter camp, that added to costs. Analysis of 15 gold majors by S&P Global Market Intelligence found that costs increased by 2.5% in the second quarter of 2020. However, the shutdowns cut supply, which eventually led to higher metals prices that outweighed those extra costs. Moreover, other impacts, such as lower oil prices and falling local currencies have given a further boost. As a result, profit margins have increased for gold and copper miners across Latin America.
Metals were also given a boost by the unprecedented stimulus unleashed by governments in response to coronavirus. In the first few months following the World Health Organisation’s declaration of a pandemic in March, more than $13trillion of stimulus measures were announced around the world. For the first time, emerging markets like Chile and Colombia, engaged in quantitative easing, while developed countries tried everything from wage compensation to boosting infrastructure programmes.
“gold should receive more support in the years to come. That’s good news for Latin America, which produces 12% of the world’s yellow metal…”
The first direct impact of this splurge of money printing and borrowing was that gold’s value against paper currencies, like the dollar, began to rise. In addition to gold’s typical function as a safe haven during crisis, this was also a case of simple arithmetic. The yellow metal is priced in dollars, so if there is a finite amount of gold and a sudden increase in the amount of dollars then it makes sense for the paper money value of gold to increase. Indeed, analysis from the World Gold Council reveals a massive increase in demand for gold from financial products, such as ETFs, which were responding to increased investor interest. That helped gold climb 34% since from the start of the year to August to reach a record nominal price of $2,061. It has since cooled off to around $1,921. Buying an asset when it’s near a record high is never normally a good idea, yet if you take inflation into account then gold is still well below levels it reached in 1980 and 2011.
Indeed, with stimulus packages set to be extended in the UK, EU and the US, gold should receive more support in the years to come. That’s good news for Latin America, which produces 12% of the world’s yellow metal.
Clean energy demand
The region is even stronger in copper, where it produces 44% of global output. Indeed, just two countries, Peru and Chile account for 40% of global copper production, a similar level of market domination that 13-member cartel Opec has with oil. Here prices will be supported by the green nature of Covid-19 stimulus packages in the EU and China, where incentives for electric cars will boost demand for copper. Indeed, the general trend for working from home and the shift to 5G networks is also bullish for copper.
Coronavirus is merely accelerating a shift that was going to happen anyway. Working from home, electric vehicles and upgrades to telecoms infrastructure were all going to grow – now they will grow more quickly. That’s why US electric carmaker Tesla has been the standout stock performer this year, overtaking Toyota to become the world’s most valuable auto firm despite making a fraction of the cars. Analysts debate whether Tesla’s early EV lead will be overhauled when the established auto producers switch to electric. But either scenario will be good for the raw materials that go into EVs. A battery-powered EV uses about 83kg of copper, compared with 23kg in an internal combustion engine car. With hybrids like the Prius somewhere in the middle. But it’s not just copper that should benefit. Cobalt, nickel and lithium are also heavily used in different parts of the electric car and battery.
To give us some idea of the impact EVs will have on metal demand let’s run through the numbers for nickel. Today there are between 4 to 5 million EVs on the road. By 2030 that will have risen to between 40 and 50 million. At present the world consumes 2.34 million tonnes of nickel per year, with just 5% being used in EVs. By 2030 the growth in EVs will have added 1 million extra tonnes of annual demand.
Latin American mining’s competitive edge
The coronavirus factors mentioned above apply to miners around the world – so why are we so bullish on those in Latin America? The first is that Latin America, which accounts for roughly 10% of world GDP and a similar share of the planet’s population, produces outsized amounts of metals. In addition to its strong position in gold and copper, it currently accounts for 20% of zinc output, 51% of silver and 20% of iron ore. In lithium, which is set to be another beneficiary of green stimulus, the lithium triangle of Chile, Argentina and Bolivia holds more than 50% of global reserves. The mismatch between the region’s output and domestic demand makes it a natural exporter.
“Analysts debate whether Tesla’s early EV lead will be overhauled when the established auto producers switch to electric. But either scenario will be good for the raw materials that go into EVs…”
It is also a low-cost producer. A renewable-energy revolution in Chile, means miners in the country can now access cheap, green solar power. While Peruvian, Ecuadorian and Brazilian operations can access low-cost hydro. Being powered by renewable energy is especially important for miners producing metals such as copper, zinc or lithium for electric vehicles. As EVs become more commonplace their environmental benefits will come under more scrutiny and manufacturers will pay a premium for metals with a low carbon footprint. The same applies with social responsibility. Mining investors sometimes complain that Latin America’s myriad of rules and regulations hold up new projects. But at least that ensures that legal mining complies with global best practices. For example, much of the cobalt that Tesla or Apple currently use in their products is mined in the Democratic Republic of Congo, where child labour is rife. That doesn’t happen in legal Latin American mines, giving cobalt from the region an advantage in the market place.
Latin American taxes are also surprisingly competitive. For example, Chile has a lower fiscal burden for mining companies than Australia, while Peru and Ecuador have cut taxes in recent years. Indeed, Latin American countries have climbed up the rankings of the influential Fraser Institute’s Annual Survey of Mining Companies. Chile and Peru are the top-ranked in Latin America, while Brazil and Ecuador have made the most dramatic improvements in recent years. The region has steadily increased its ‘investment attractiveness’ score in consecutive surveys, which is impressive when you consider that it has basket cases like Venezuela and Guatemala weighing it down.
In mature mining jurisdictions, say Canada, Australia or even Chile, you tend to have older deposits that have been mined for many years or even decades. Over time the grade of these deposits falls, meaning miners have to dig and process more ore to get the same amount of metal, which leads to rising costs. What’s exciting about Latin America is that it is home to some of the world’s latest discoveries of mega deposits. These newly found ore bodies have much higher grades, ensuring low-cost production when the mine comes online.
And more discoveries are on the way. The Andes copper belt has given Chile and Peru the world’s first and second-largest reserves respectively. Yet political and social factors have prevented the exploitation of large stretches of the Andes in Argentina and Ecuador. Now Ecuador has rewritten its mining code and attracted more than a dozen mining majors to set up offices there, while smaller explorers are searching for copper and gold. London-listed copper and gold developer, SolGold’s recent Ecuadorian discovery, Alpala, which is due to begin production in 2025 could become the world’s largest underground silver mine, third-largest in gold and sixth-largest in copper. And that’s just one discovery. To give some idea, mining accounts for 15% of GDP in Peru and Chile yet around just 1% in Argentina and Ecuador. Given that they all share the same metal-rich Andes, indeed Argentina’s stretch is the largest of the lot, it seems fair to assume that there are plenty more discoveries waiting to be made in Argentina and Ecuador. Even in Peru, which has a well-established mining industry, there are $57billion of stalled mega projects – defined deposits that are waiting the construction green light or are held up by social protests or bureaucracy. In recent years Peru has doubled its copper production to 2.5 million tonnes of copper fines per year, making it the world’s second-largest producer. However, if it was to exploit all of its discovered deposits it would be able to double output again to 5 million tonnes and keep that rate of production going for 40 years without any new discoveries.
That matters because analysts predict a crunch in both copper and gold supply in the next few years – perhaps as early as 2023. According to S&P Global Market Intelligence, 2010 to 2019 was the worst decade for copper discoveries since 1990, contributing only 16 major discoveries to a total of 224 over the last thirty years. The commodity price crunch at the start of the decade forced majors to impose financial discipline and stay away from risky greenfield projects. As a result, “the sector faces a drop-off in mine supply in a decade or so, with few major copper developments entering the project pipeline.” Something similar happened in gold, where majors’ gold reserves fell by 26% between 2012 and 2017. Given that it takes between 15 to 20 years to take a gold or copper deposit from discovery to production, mining companies will focus on jurisdictions like Ecuador and Peru, that already have plentiful resources waiting to be developed.
The prevalence of abundant deposits, high ore grades and low energy costs mean that Latin America will make the most of the coming metals boom. Electric vehicles may take decades to become a significant demand driver for metals like cobalt, zinc, nickel, lithium or copper. While gold’s link with dollar inflation can take time to materialise. And in the intervening years the prices of these metals is sure to fall as well as rise. But Latin America’s competitive advantages means that its miners will be best able to ride out the lows and benefit from the highs.
A version of this article was first published in MoneyWeek