For
centuries Latin American mining has captivated international investors.
Tales of Birú, a magical gold-laden land that we now know as Peru, were
enough to convince Spanish conquistador Francisco Pizarro to lead a
risky expedition against the Incas. In the short-term the mission was an
outstanding success with Pizarro ransoming captured Inca emperor
Atahualpa for 13,000 pounds (lbs) of gold and twice as much silver. In
today’s prices that is almost $3billion worth of gold though the silver
comes to a paltry £6million. In the following years waves of fresh
investors scoured the region looking for similar pots of gold but often
with less success. The mythical El Dorado, for example, first believed
to be a king, then a kingdom, finally turned out to be a waste of time
and money for the British, Spanish and German investors that backed
expeditions to find it.
After Latin American countries gained
independence, roughly 200 years ago, international mining investors had
to change their approach. But the lure of Latin America’s mining sector
remains just as strong. It has the planet’s largest reserves of copper,
lithium and silver with plenty of gold to boot. While modest local
demand – it has less than 10% of both world population and GDP – makes
it a natural exporter. The region’s metal wealth is nothing new – just
ask Pizarro – but what has changed are the conditions above ground.
Latin America has emerged as a mining-friendly jurisdiction with a wide
range of international mining companies listed on Canadian, US,
Australian and British stockmarkets. The development of solid
democracies across the region since the 1980s has allowed many Latin
American countries to finally develop fair systems to manage
international mining investment. Of course, profiting from mined metals
is a risky business – Pizarro ended up being hacked to death, spending
his final moments daubing himself with a cross in his own blood. But
from solid, London-listed majors producing a steady flow of earnings, to
aspirational explorers looking for that next big find, Latin America
has plenty to offer MoneyWeek readers.
Latin America’s metal wealth
The
best thing about Latin America for mining investors is that it is
incredibly rich in base and precious metals. The region’s mining
powerhouses of Chile, Peru, Brazil and Mexico are particularly blessed.
According to the US Geological Survey, Chile has the world’s largest
reserves of both copper and lithium and the seventh-largest silver
reserves. Peru has the world’s largest silver reserves, third-largest
copper reserves, third-largest zinc reserves, fourth-largest nickel
reserves and fifth-largest gold reserves. Mexico has the world’s
fourth-largest zinc reserves, fifth-largest lead reserves, sixth-largest
copper reserves, sixth-largest silver reserves and is also a top-ten
gold producer. Finally, Brazil has the world’s second-largest reserves
of iron ore, third-largest reserves of nickel and fourth-largest
reserves of tin and seventh-largest reserves of gold.
“Moreover, it is likely that Latin America has even more mineral wealth than the official statistics suggest …”
Outside
of the established powerhouses, you also have world-class metal
deposits scattered around the region. So, for example, the Dominican
Republic has the world’s third-largest gold mine, while Guatemala has
its second-largest silver mine. Argentina and Bolivia form part of the
‘lithium triangle’ with Chile that together holds around 54% of global
resources -that is to say potential reserves. While Bolivia also has top
ten reserves of zinc and lead.
Moreover, it is likely that Latin
America has even more mineral wealth than the official statistics
suggest as a mix of political and economic factors have prevented
international miners from extensive exploration in Argentina and
Ecuador. Given that most of Peru and Chile’s largest mines are found in
the Andes, it seems reasonable to suppose that their neighbour’s
stretches of the mountain range are also rich in minerals. We
interviewed Argentina’s then Mining Secretary, Daniel Meilán, in Buenos
Aires last year and he left us in no doubt of the country’s mineral
potential. “Mining makes up roughly 15% of Chile’s GDP and something
similar for Peru. Here in Argentina it is just 1%, despite the fact that
we have a wider share of the Andes than Chile and therefore probably
more minerals.” We will soon get to find out, as in recent years both
Argentina and Ecuador changed their mining policies and opened up to
investors, creating exciting new frontier markets in the region
Copper, lithium and gold
Latin
America isn’t just rich in metals – it’s rich in the right metals.
Copper and lithium have exciting medium-term prospects while gold miners
present an interesting opportunity. That’s confirmed by in a recent
study from the market intelligence division of ratings agency, S&P
Global, which notes that “for the first time since 2014, base metals
matched gold as the top Latin American exploration target, with each
garnering 42% of planned spending.” The rise in base metals exploration
is being driven by bullish long-term views on copper. As the commodity
supercycle began to unwind in 2012, investors turned sour on copper. Its
rise had been powered by massive Chinese demand but conventional
thinking figured that the infrastructure glut in the Middle Kingdom,
combined with efforts to move its economy away from heavy industry,
would limit future global copper use. However, the rapid growth in
electric vehicles has transformed the outlook for the red metal. A
battery-powered electric vehicle uses about 83 kg of copper compared to
just 23 kg in an internal combustion engine. Hybrid vehicles, like the
Prius are normally somewhere in the middle. Consultant McKinnsey
estimates that yearly electric vehicle sales will hit 4.5 million in
2020, up from 1.2 million in 2017. That would still just be 5% of annual
light electric vehicle sales, leaving plenty of room for further
growth. Copper has been hit by worries of a trade war between China and
the US, and prices are still 40% below their 2011 peak.
Another
clear winner from the transition to low carbon energy systems is
lithium. It’s already established as the battery of choice for electric
vehicles. While the search for renewable energy’s holy grail – a cheap
efficient battery that can store excess electricity produced by
intermittent sources such as wind farms and solar panels – may yet give
lithium another boost. At present Australia has managed to become the
world’s largest producer despite the fact its lithium is made mined from
ore – a more expensive process than extracting it from the
lithium-heavy salt brines found in the lithium triangle. That’s because
historically Australian has been more welcoming to lithium investors
than Chile, which treats the white metal differently to copper,
Argentina or Bolivia. Now that’s starting to change, with Argentina in
particular receiving a mix of international investment.
“judging from the desperation in Latin American gold juniors investors
are likely to get more for their money at the moment…”
Finally,
you have gold. Alex Black, a mining industry veteran who helped
investors strike rich in Peru when he turned Rio Alto, his last company,
from a penny stock gold explorer into a billion-dollar miner, told us
that he’s never seen such tough financing conditions. “Trying to raise
$20million for mine development now is like asking for $250million in
2014. We have more than 5 million ounces and a market cap of less than
$50million, so investors can get an ounce of gold for under $10.” Of
course, a CEO is going to talk up his company to a journalist but the
S&P Global report backs him up. “Although financings are moving in
the right direction, the $9.6billion raised in 2017 and $9.4billion
raised in 2018 remain well below the $19.4billion raised in 2011.
Capital offerings targeted primarily for exploration purposes in 2018
were down slightly compared with 2017 and 2016, with the totals for all
three years returning to 2012 levels, when equity markets were just
beginning to shun the industry.” One theory is that the proliferation of
cannabis stocks and crypto currencies have diverted more speculative
capital from gold explorers. Gold’s main use is not industrial, so it’s
impossible to know if the price will be higher or lower in a few years’
time. But it’s always good to have some in your portfolio for
diversification and judging from the desperation in Latin American gold
juniors – the small companies trying to develop projects – investors are
likely to get more for their money at the moment.
Above ground risk
Mining
investors judge potential projects on ‘above ground’ and ‘below ground’
risk. Latin America’s geology means it has plenty of exciting mining
projects yet the above ground risks have often made it difficult them
difficult to realise. Latin America was blighted by political
instability ever since independence, with frequent periods of military
rule and most countries only returning to democracy within the last 40
years.
The political instability hindered mining investment in
the region because you need a relatively stable and efficient state to
create a fair mechanism for the ongoing transaction between the
country’s citizens – the ultimate owners of the metal – and the mining
company Mining has a massive environmental impact on local citizens,
while there are also political and economic consequences of extracting a
non-renewable resource to export for profit. In many Latin American
countries, the state’s role as arbiter is complicated by the fact that
strong indigenous populations have alternative concepts of land
ownership, such as ancestral community territories. Those community
rights are recognised in many Latin American post dictatorship
constitutions but not clearly defined, leading to a legal standoff as
miners and locals vie for a greater share of profits in proposed
projects.
These political issues can have a direct hit on
investors’ pockets. Investors in US-listed precious metals miner, Tahoe
Resources, learnt that first-hand when it was forced to cease operating
Escobal, the world’s second largest silver mine, because of opposition
in Guatemala. Its shares plummeted and was bought out by a rival for a
knockdown price earlier this year. Even well-established mining
jurisdictions, such as Peru, can have problems. For example, one of the
country’s most important mining investments, the $7billion Las Bambas
copper mine, has spent two months this year under a blockade from angry
members of the neighbouring communities.
Those costly lessons
have taught mining companies that they need to get community relations
right. That begins when they assess a potential project, as there are
big differences in local attitudes to mining. For example, central Peru,
which has a longer mining tradition, typically sees less protests than
the north or south of the country. But ultimately miners need to follow
the minerals, so it’s also important for investors to pick firms that
have a well-thought out community strategy. Last month in Lima we
interviewed Victor Gobitz, CEO of Buenaventura, a Peruvian non-ferrous
metals miner, and he explained how the firm has learned to work with
local groups. “If a miner just tries to exchange money for lands it is a
big mistake. You need to create a long-term relationship based on
generating employment for local workers and providing some social
infrastructure such as drinking water, energy, sewerage and so on.”
“Those costly lessons have taught mining companies that they need to get community relations right…”
Not
only are miners becoming more adept at handling these issues, there are
also signs that most Latin American states are improving their ability
to regulate this complex transaction between investors and the citizens.
The Fraser Institute is a Canadian think tank that publishes a global
ranking of mining jurisdictions. It judges both the mineral endowment
and the policy framework to score the overall attractiveness for
investors. Latin America and the Caribbean was the standout performer in
the latest report, with the region’s median investment attractiveness
jumping 16% in 2018, more than any other region. That’s even more
impressive considering the negative weighting of disaster cases such as
Venezuela, Nicaragua and Guatemala. Unsurprisingly Chile, Peru and
Mexico were in the top three. However, Ecuador and Colombia also made
big improvements, jumping into the top half of the regional table and
overtaking Brazil. However, just as with community protests, the reality
of mining policy can differ greatly within countries. Argentina’s
national score was poor, dragged down by the extreme anti mining
policies of some individual provinces, yet others, such as Catamarca
scored excellently. So, investors need to understand the local reality
of a company’s projects.
This improving policy landscape isn’t
down to luck. It reflects the trend of general improvement in Latin
American institutions as the young democracies across the region begin
to mature. Barring sad cases, such as Venezuela, most other states in
the region are gradually becoming more efficient, less bureaucratic and
now, thanks to the repercussions of long-running, region-wide graft
scandal, slightly less corrupt.
Readers may be sceptical of
international rankings. They may even suspect a pro-Latin America bias
on our part. However, LatAm INVESTOR’s optimism is shared by
international mining companies, with Latin America attracting more
exploration capital than any other region in the world. According
toS&P Global, Latin America received 28% of the total global mining
exploration budget. “Six countries, Peru, Mexico, Chile, Brazil,
Argentina and Ecuador, together accounted for the lion’s share (90%) of
the region’s total budget”, explains the report.
The fact that
industry insiders are targeting Latin America for future projects shows
that the region is fertile ground for profit-hunting investors.
0 Comments