Global Infrastructure and Inflation Boost Latin America’s Mining Frontier

The developed world has made two strong economic responses to the pandemic. The first was loose monetary policy, with countries like the UK and US, printing extra paper money to fund stimulus programmes. The second was infrastructure, with hundreds of billions of dollars being pledged to ‘green’ public works programmes broadly termed, Build Back Better. Latin America is far from the minds of these elite, rich-world policymakers when they sign up to environmental targets or launch quantitative easing programmes. Yet the region is being reshaped by these policies.

As the largest copper producer in the world, it will be the main supplier of the immense amounts of red metal needed to make the hundreds of millions of electric vehicles that politicians so glibly envision. EVs use four times as much copper as traditional vehicles, which is why the metal’s price is already at an all-time high in anticipation of the inevitable shortfall. Gold also climbed to record highs following the pandemic, as investors looked for a real store of value amid the massive increase of fiat money supply. With signs that inflation is now growing across the western world – even in traditionally deflated Japan – demand for the yellow metal looks set to grow. Again, Latin America, with its outsized gold reserves, will feel the impact of the policy.

[quote]All along the Andes you see incredible deposits…[/quote]

In Mexico, Peru and Chile – three of the region’s most important mining jurisdictions – high prices have encouraged populist lawmakers and presidents to increase taxes or restrictions on miners. That’s pushing investors to look towards some of Latin America’s frontier mining jurisdictions. We spoke to the CEOs from Lundin Group of Companies – a series of listed mining firms that are independent from each other, yet all count the Lundin family as a major investor – to discover the challenges and realities of Latin America’s mining frontier.

Promising geology

As any miner will tell you, if a country hasn’t got the right stuff below ground, then it doesn’t really matter what its politicians do above it. Chile, Peru and Mexico have done well because their elites have created relatively stable regulatory conditions for international mining companies to feel comfortable investing billions of dollars in long-term projects. But they also have incredible geological endowments. Argentina, Ecuador and Guatemala clearly haven’t done that. As a result, few mines have been built in those countries. For example, mining accounts for roughly 1.5% of GDP in Argentina and Ecuador, compared to 15% in Peru or Chile. Yet geologists are optimistic that these frontier mining jurisdictions hold just as much copper and gold as their more mature neighbours.

“All along the Andes you see incredible deposits”, says Wojtek Wodzicki, CEO of NGEX Minerals, a Canada-listed explorer that has already made three major discoveries in the mountain range. “Chile and Peru have exploited that, with their long history in mining, whereas Ecuador, Argentina and Colombia probably have much more to be found. An area with promising geology but little exploration equals opportunity.”

These aren’t just empty words from Wodzicki. He has overseen an exploration team that has found billion-tonne copper deposits in Argentina. Indeed, he is using this approach for one of NGEX’s current projects, Valle Ancho. “It is a greenfield project in Catamarca, which is the best-ranked mining province in Argentina. The Lundins have a good history in Catamarca with the Alumbrera copper-gold mine developed in the 1990s so the people there know how mining, and the Lundin Group, works. At Valle Ancho, the land package is 100,000 hectares on the Argentine side of the Maricunga gold belt. They have found 100 million ounces of gold across the border in Chile, so we are delighted to pick up a block of ground with the same geology but less exploration. It’s a very early-stage project but has promising similarities to the land package where we made our three previous Argentine discoveries. We expect to find heap leachable gold and also large copper targets at depth.”

Bargain hunting

The most enticing aspect of Latin America’s frontier mining markets is not just that they have good geology but that it is going cheap. Countries like Ecuador, Guatemala and Argentina have got a history of political instability, with poor judicial security. As a result, they receive low levels of foreign direct investment (FDI). For example, Ecuador attracts around $1billion of FDI per year, which is just 1% of its GDP. That inability to attract investment hampers the development of mining, which is capital intensive, in these jurisdictions.

[quote] one of the advantages of frontier mining jurisdictions like Guatemala is that you can pick up amazing assets for a great price….[/quote]

That creates opportunities for brave investors, explains Jack Lundin, CEO of Bluestone Resources, a Canada-listed miner developing a gold project in south-east Guatemala. “We were able to buy Cerro Blanco for $20 million back in 2017, when $250 million had already been spent on the project.” Jack Lundin notes that Bluestone’s bargain is reminiscent of the deal that another of the group companies, Lundin Gold, got in Ecuador for the Fruta del Norte (FDN) deposit. “Something similar happened with FDN, which we bought for $250million when Kinross had already invested considerable sums. So, one of the advantages of frontier mining jurisdictions like Guatemala is that you can pick up amazing assets for a great price. Then of course it is down to us to develop it.”

The success of Lundin Gold, which is now Ecuador’s first operating large-scale gold mine, shows that these ambitious projects in frontier markets can be developed, says Jack Lundin. But the key is to “look for world-class assets because if it is a great deposit then it can make money at any point in the cycle.”

Together Peru and Chile control 40% of global copper production. A similar share of world output that 13-country Opec has for oil. Belatedly the Davos elite will realise how important Latin America is to delivering the green revolution they have promised their voters and shareholders. Perhaps one day, internal Latin America will become as relevant to geopolitics as the Middle East is today. In the meantime, the region’s frontier mining markets offer an incredible opportunity for investors. And the countries themselves. Ironically the grand policies planned for the developed world could help the likes of Guatemala, Ecuador and Argentina mine themselves to a post-pandemic recovery.