Now is a great time to invest in Latin American mining

The Latin American wealth of its metals

Investors love the Latin American wealth of its base metals and precious metals. The blessed regions are Chile, Peru, Brazil, and Mexico. According to US Geological surveys, Chile has the largest copper and lithium reserves and is the seventh-largest in silver reserves. Peru has the largest silver reserves, it is the third world in copper and zinc reserves. Fourth largest in Nickel reserves and fifth largest in Gold reserves. For its part, Mexico has large reserves in fourth place for Zinc, fifth for lead and sixth in reserves for Copper and silver, likewise, Mexico is within of the 10 largest gold producing countries. Finally, Brazil has the second-largest reserve of iron minerals, a third-largest reserve of nickel, fourth largest reserve of tin, and seventh-largest reserve of gold.

However, Latin America is likely to have more mining riches than statistics suggest as combinations of political and economic factors have avoided an extensive exploration plan in Argentina and Ecuador. Given that the largest mines in Peru and Chile are located in the Andes, it seems reasonable that their neighboring neighbors to the Andes Mountains also possess mineral wealth.

Mining provides about 15% of GDP (gross domestic product) for Chile and something similar for Peru and about 1% for Argentina, even though they share a large part of the Andes with Chile and probably also their minerals. In recent years, both Argentina and Ecuador have changed their mining policies and opened up to investments, creating interesting new markets in the region.

About the risk “over the mine”

Mining investors analyze the projects' potential about “over the mine” and “under the mine” risks. Latin American geology indicates that it has interesting projects even with risks "over the mine" that usually make it difficult to carry out. Latin America was ruined by political instability since independence with frequent periods of military rule, and many countries only returned to democracy after 40 years.

Political instability hampered mining investments in the region because a relatively stable and efficient state is needed to create a fair mechanism for the continuous transaction between the country's citizens - the last owners of the metal - and the mining company. Mining has a massive impact on the environment of local citizens, while there are also political and economic consequences of extracting non-renewable resources to export them for profit. In many Latin American countries the role of the state as an arbitrator is complicated by the fact that strong indigenous communities have alternative concepts of land ownership such as ancestral community territories. Those rights are recognized by their constitutions but are not clearly defined, leading to a legal impasse between miners and community members due to a greater distribution of benefits in the proposed projects.

There were costly lessons for mining companies, who need to have proper relationships with the community. That begins when they evaluate a potential project since there are great differences in local attitudes towards mining. For example, in central Peru, which has a long mining tradition, typically fewer protests are seen than in the north and south of the country. But miners ultimately need to follow minerals, and therefore it is also important for investors to choose firms that have a well-thought-out strategy with communities. Last month in Lima we interviewed Víctor Gobitz, CEO of Buenaventura, a non-ferrous Peruvian company, and he explained how the firm has learned to work with local groups. “If a miner only tries to exchange money for land, 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, sewage treatment plants, energy, etc.

Not only are the miners becoming more susceptible to handling these problems, there are also signs that many Latin American states are improving their ability to regulate this complex transaction between investors and citizens. The Fraser Institute of Canada publishes a global ranking of mining jurisdictions. The mineral endowment is evaluated as well as the policies to assign an attractiveness score for investors. Latin America and the Caribbean had an outstanding performance in the last report with the attractiveness of the average investment of the region rising 16% in 2018 more than any other region. This is even more important considering the negative weight of disastrous cases such as Venezuela, Nicaragua, and Guatemala. It is not surprising that Chile, Peru, and Mexico are the top 3. However, Ecuador and Colombia also made great improvements, climbing to the middle of the regional table, beating Brazil. However also as with community protests, the reality of economic policy can differ greatly within countries. The score for Argentina was poor, undermined by the extreme anti-mining policies of some individual provinces, although others like Catamarca were excellently evaluated. Therefore, investors need to understand the local reality of their projects.

These improvements in land policies are not a case of luck, reflecting the general trend of improvements in Latin American institutions as their young democracies in the region begins to mature. Except for sad cases like Venezuela, many other states in the region are gradually becoming more efficient, less bureaucratic, and now thanks to the repercussions of a long list of scandals in the region, slightly less corrupt.

According to S&P Global, Latin America received 28% of the global exploration budget. Six countries, Peru, Mexico, Chile, Brazil, Argentina, and Ecuador together accounted for 90% of the region's total budget, the report explained.

The fact that industry investors are targeting Latin America for future projects shows that the region is fertile ground for profit-hunting investors.

Extract from the original report of LATAM Investor

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Dedy Skwoyra.

Chief Investing.

AXL Capital Management