This article is an extract from GTDT Mining 2022. Click here for the full guide.

Latin America continues to be an important jurisdiction for mining investment. In spite of the downturn and difficulties faced by the industry and the countries themselves, the region remains attractive for investors and is certainly a part of the world to continue watching.

With abundant strategic natural resources, it has been the target of much foreign direct investment in recent years. In a complex global economy, many continue to see this region as one with a promise of growth, especially in the current energy-transition scenario.

Economic and political variations have always characterised Latin America and have certainly played a role in the amount and speed of investment that the region has received, particularly in long-term activities such as mining and energy.

Some countries have a track record of strong institutions, while others still have weak agencies and instances of poor governance. Nevertheless, it can be stated that the region has improved substantially and has come a long way from economic instability to a more reliable economic and political framework. The unforeseen covid-19 pandemic, and its effects, are being seen in this region with increasing inflation and social unrest. It may be stated that some countries will deepen their levels of poverty and continued social unrest.

In parallel with political trends and shifts, the former downturn in commodities and mineral prices (except for gold), and scarce access to financing, which resulted, in recent years, in a substantial decrease in exploration over the whole region. Additionally, budget reductions in most of the mining companies forced them to focus primarily on more efficient and fewer operations. This scenario is now changing very quickly and most of the majors are looking with interest to the region. We had already witnessed a change regarding lithium exploration, which substantially increased in the lithium triangle comprising Argentina, Bolivia and Chile and, during 2016, remained steady through 2017 and continued in 2018, 2019, 2020 and 2021, although probably with a gradual change of actors in production in the few projects that have been feasible until now. Noteworthy is the interest shown by Chinese and Russian investors in the region.

Regarding the mining legal framework, Latin America has a long-standing tradition of mining legislation in most countries, with a concession regime based generally on the public worth of the activity. Natural resources belong to the state (either federal or provincial, depending on the political organisation of the country) and are granted to specific entities through an administrative law concession. During the 1990s, most Latin American countries modernised their legal frameworks, mainly with the aim of including foreign investor-friendly legislation to attract long-term investment in the sector. These regimes proved quite successful during that decade. In recent years, more jurisdictions have bolstered the trend of legislative reform to promote the sector, one notable example being Ecuador.

In parallel, an awareness of sustainable development has started to grow and coexist with the mining sector. Environmental, social and governance concerns are an essential topic for all mining investors and Latin America presents many challenges in effectively implementing such principles.

The current trend relates to the identification and impact of the benefits that the mining sector can bring to communities and how they can effectively transform the lives of the communities and stakeholders involved. These issues are at the heart of any discussion and play a crucial role in any project to be developed. In addition, certain environmental accidents (eg, the Samarco dam collapse in Brazil) have increased communities’ concerns and issues of trust in relation to regulatory agencies, which generally need to improve and be more efficient.

The mining industry faces big challenges worldwide, and Latin America is no exception. With projects located in remote areas, as well as others near more populated regions, the interaction and joint work of government, companies and communities have become the new norm.

 

Specific aspects for analysis

Despite the current state of the industry, and even while mining continues to operate at a slow pace, in general terms, the mining sector has grown in some of the traditional mining countries (eg, Peru) and in other non-traditional mining-orientated countries (eg, Argentina, regarding lithium), and new players have been introduced in the region (eg, Ecuador and Panama with Cobre Panama – one of the largest open-pit copper projects owned, since 2013, by First Quantum Minerals).

When investing in the mining sector in Latin America, some aspects may vary from country to country that are relevant to an understanding of the business environment, legal implications and social perceptions. All these factors should be considered when deciding on an investment.

 

Federal and unitary or centralised states

The political organisation of a country represents the way the country is constitutionally organised and how the territory is divided and governed. Certain countries have a federal system whereby a federal government coexists with provincial governments and the sphere of power and competence is mainly set by the constitution. The main Latin American countries with a federal system are Argentina, Brazil and Mexico.

Other countries have a centralised system; namely, a central government and certain territorial decentralisation, although the main competence and power lie within the central government. Examples include Chile, Colombia and Peru, although each has differences.

This difference in a country’s political organisation is highly relevant, especially in the natural resources sector. These resources belong to the state, as this has been the historic concept in all Latin American legal regimes. Therefore, natural resources originally belong to the provincial states (provinces or states in a federal organisation) or the central state. This is no small difference, as the granting authority for mining concession will be vested in the provinces or states or the central state, as the case may be.

Provinces or states within a federal country usually have their own constitution and legislation, while also being bound by federal laws in certain areas. Sometimes these boundaries are not clear. However, apart from specific legal considerations, the main impact on natural resources is the power to rule and decide on the specific policies related to the mining industry, even within the scope of a federal or national resources policy.

In recent years, this has become a major difference in some countries, including Argentina, for which the Fraser Institute, in its Investment Attractiveness Index, began considering the investment environment in the country, in particular examining mining provinces.

Countries with a federal organisation have, to some extent, proven to be more complex to deal with, since mining policy may differ within the boundaries of the same country.

 

National mining companies

Another feature to consider is the fact that in certain countries (eg, Chile and Peru), the existence of national mining companies and mining companies owned by local investors have played a significant role in the approach to the sector. Codelco and the Luksic Group in Chile are examples of national companies in the sector.

This is a fact acknowledged by researchers and polling consultants, although opinions are not unanimous as to how this might affect the perception of a country’s mining sector by its general population.

Nevertheless, it is a fact that in recent years, communities have shown that the general perception of mining is that it is mainly conducted by foreign companies that take away from the country a non-renewable resource, owned by the people, and relevant for future generations. In our view, the real issues lie in the effective benefits that mining projects can provide in the near and long term for affected communities, even after the closure of the mine, regardless of who is exploiting the resources or has access to the profits. This would explain why in some countries where the state, either national or provincial, has created national mining companies (eg, YMAD in the province of Catamarca in Argentina) they have not always been successful.

Another aspect to consider is the role or position that the mining sector has in the respective country and also in relation to other industries (eg, agriculture, tourism). Countries with a strong history of agriculture tend to be less receptive to the mining sector.

 

Mining public policy and state interaction

Countries that have shown a long-term and steady mining policy have seen many positive results. Chile is the best example of this, and Peru is on its way to becoming a serious mining country, despite any sensitive social issues.

Countries that have balanced economies and stable political and legal frameworks have proven to be the countries considered by investors over others that lack these features. In this sense, the public policies that governments establish and that the state, as such, honours, would be the main drivers to attract investment in the mining sector. Policies that promote a sector and are sustained and successful throughout different governments’ terms are a key factor.

In addition, the different legal frameworks used to regulate activity may affect the way long-term investments settle. Legal regimes that provide for a more discretionary role of the granting authority seem to be less reliable in the view of investors when considering the country as a potential target.

In summary, the way the state, through its different agencies and bodies, interacts and intervenes in the sector, is crucial. The existence of due controls, compliance with the laws and the correct exercise of the faculties and discretionary power acknowledged by law is a guarantee for investors and the community’s confidence in the system.

 

Communities, indigenous peoples and social conflict – perception of the industry

As part of the evolution and development of international environmental and human rights law, community participation now plays a significant role in Latin America. Many laws have started to acknowledge this right (which is derived from various concepts), in particular, the consultation scheme. Today, even when most countries have included consultation as a key concept and right in extractive industries’ projects, there is still much uncertainty in terms of procedure. When and how to conduct consultation proceedings is not always clear.

Latin America has never been without social conflict; however, today, the region is experiencing greater stability (with the exception of certain countries, eg, Venezuela).

Causes for social conflict vary considerably from country to country. Mining may be one of these causes in certain countries, for example, Colombia and Peru, where informal mining and other factors play a significant role.

In recent years, depending on the country, the issues related to indigenous peoples and their interaction with the mining sector have also played a significant role.

Environmental protection and water resources feature the highest on the agenda of all communities as regards the mining sector. Accidents that may occur in the industry (eg, the Veladero spills in the province of San Juan, Argentina or the Samarco dam collapse in Brazil), as well as the lack of specific regulation (eg, mine closure in Argentina), do not help to build confidence within communities and, therefore, reinforce the negative perceptions of the industry.

Effective benefits, including basic infrastructure and, in general terms, an improvement of the quality of life of those communities affected by mining projects, would erase much of the grounds for social unrest and conflict.

In line with this, there is currently a trend towards territorial zoning that identifies the specific mining areas to be developed in accordance with a sustainable development plan agreed with the relevant communities. Science and geography are also playing a larger role, with specialists working on mining policies assessing how the industry will affect certain demographics in the future. Mining can be considered a global industry with local impacts.

 

Innovation and impact in mining

Trends in innovation, which include digitalisation and automation, are also being seen in the mining industry. These trends have an effect on the technical, environmental, social and business structural aspects of mining projects.

However, innovation is not easy for mining companies, which need a long period of time to consolidate and make profits out of large, risky investments. Despite this, the search for new techniques that may improve working conditions can benefit projects in many ways and also save money when in place. At a social level, there are new ways of community interaction (eg, hackathons or brainstorming events for industry problem-solving) and raising finance for mining companies (eg, crowdfunding).

Finding more innovative ways to conduct business will be part of the challenge that mining companies will face in Latin America in the coming years. It will be interesting to see how the industry accommodates the trends in innovation while balancing the local procurement and training expectations of local communities. Robust and long-term public policies will be required to meet these needs.

 

Latin American countries

The general mining policies of some Latin American countries are outlined below in alphabetical order.

 

Argentina

With a promotional regime enacted in the 1990s that attracted large-scale mining investors, Argentina gained a position for the first time among the countries with mining activity in the region. However, exchange-control restrictions and other economic and politically discouraging measures of different administrations, as well as the absence of a long-term consistent mining policy, means that some mining investors have distanced themselves from the country.

There has been an increase in lithium exploration and deals started significantly in 2017, which continued in 2018, 2019 and 2020 and consolidated in 2021, despite the covid-19 pandemic in the north-west of the country, that include relevant players such as Livent and Galaxy (today Allkem) in the Salar del Hombre Muerto. Of note is the merger of Australian companies Orocobre and Galaxy, creating Allkem, announced in late April 2021, with two relevant lithium projects in Argentina to be further developed. While the lithium market is quite specific, it is expected that this trend will be followed in connection with other minerals; specifically, copper, gold and silver, for which the country has major potential. First Quantum’s Taca Taca copper project in the province of Salta continues to be one of the promising projects in the country as well as Jose Maria and Filo del Sol, owned by the Lundin group in the province of San Juan.

A return to the country by major Rio Tinto, acquiring the Rincon lithium project in the province of Salta, has been received with much enthusiasm at both national and provincial levels.

Repeated spills in the Veladero project, owned by Barrick, some years ago caused much concern and new protocols for environmental controls and precautionary measures have been considered. The closure of the emblematic Bajo de la Alumbrera project in the province of Catamarca is expected, although to some extent related to the nearby Agua Rica project owned by Yamana, which should be developed in the near future. After the merger with Goldcorp, Newmont continues with the Cerro Negro project located in the province of Santa Cruz.

Argentina is a very agriculture-orientated country, particularly with regard to cattle, and whether it could become a mining country remains to be seen.

The administration of President Alberto Fernández, which took office in December 2019, has expressed support for the mining sector, particularly the development of the lithium sector. In this respect, some additional promotional measures to support and foster growth in the mining sector have been enacted; in particular, to mitigate the negative effects of exchange controls and related restrictions, although still supporting intensive investments, especially copper projects, these measures, however, would need to be further complemented.

 

Brazil

In spite of the iron-ore market’s cyclical difficulties, Brazil, the industrial giant of Latin America, still focuses on this mineral and existing reserves because of increasing future demand from Asian countries. However, companies have had to adjust to the market situation and reduce costs in all aspects of their operations, and, consequently, also have had to disinvest in certain areas.

Brazil has extensive areas to be explored, with potential discoveries to be made, and it certainly remains a strong mining jurisdiction. Infrastructure in the vast region needs investment and modernisation. Some opine that this area could attract investment with the creation of public-private partnerships.

Brazil is a big player in Latin America and is a country with many unexplored areas that are likely to continue to be included on investors’ shortlists.

 

Chile

Chile is, without doubt, the foremost mining country in Latin America, having been so for decades. Since 1974, with the enactment of the Foreign Investment Statute regulation to attract foreign investment, the country has shown increasing growth in the mining sector, albeit at a slower pace over the past few years.

Mining is part of the Chilean identity and national sentiment. Codelco, the national copper giant, has been key to building and maintaining this sentiment, and has started an ambitious plan for its modernisation.

Additionally, the Salar del Atacama is one of the biggest lithium reserves worldwide, where companies such as SQM and Albemarle have agreements for its exploitation with the national agency Corfo. With regard to lithium, and despite regulation of this sector making lithium not freely available to third parties, the country has a crucial role in the international arena. In this time of energy transition, the role of this mineral becomes extremely relevant making the country one of the main producers in the world.

Further, owing to the history of the sector in the country, which mostly relates to policies to promote investment, local mining companies have emerged and consolidated their position with regard to internationalisation. The Luksic Group, the Antofagasta Group and Lundin are examples of such companies.

In recent times, environmental issues and indigenous peoples’ rights have become a major part of the agenda for mining projects and the government; a trend that will probably continue. Since 2019, there has been a growing social movement in the country and general unrest that has resulted in the government agreeing to constitutional reform in 2020. The effects of the covid-19 pandemic have delayed some of the measures and policies to be implemented, although the process has started and with new left-wing president Gabriel Boric, elected in March 2022, new measures and certain different views would probably be accelerated.

 

Colombia

Colombia is a success story from a general perspective. It has undergone many changes in the past decade, transitioning from a very difficult jurisdiction in which to do business to quite an attractive region for mining investors. For many years, it was impossible not to reference guerrillas and drug cartels when discussing Colombia. Fortunately, the situation has changed significantly and the country ranks reasonably high in investors’ surveys.

Abundant mining resources and political and economic stability are key factors promoting the sector. National Development Plan (2010–2014) was launched, and mining and energy were considered relevant drivers for economic growth.

As in many countries, environmental and social aspects are essential components of mining projects, playing a more significant role, in particular, indigenous peoples’ rights and their interaction with mining projects must be considered. Specifically, in the case of Colombia, reserve areas where mining is restricted or prohibited are taken seriously and territorial zoning has consequently been established. No environmental licences for mining projects can be granted for the paramos reserve protected areas.

The country continues on its path towards consolidating mining, especially in carbon, gold and precious stones, and even with challenges ahead, it appears to be on the right path. In this regard, and despite the covid-19 pandemic, there has been a series of rounds for tender proceedings in respect of different areas of the country for exploration of minerals of different types.

 

Ecuador

Ecuador is a country with huge mining potential, as approximately 90 per cent of its territory remains unexplored. This fact alone has undoubtedly made the country a good prospect for mining investors.

Ecuador has gone through a process of legislative reforms to include and promote the mining sector in the country and the government’s agenda. As a result of this state policy, a number of projects are currently in place, the main one being the Lundin Gold Fruta del Norte project, which will probably be the first of many to come. In this regard, in April 2020, Newcrest Mining Limited announced an acquisition agreement completing the acquisition of the gold prepay and stream facilities and an offtake agreement in Fruta del Norte for US$460 million.

 

Peru

Peru is a country with a strong mining tradition and, together with Chile, represents one of the two best-established mining jurisdictions in Latin America. With the reforms conducted in the 1990s, mainly with the enactment of a promotional regime (the Promotion of Investment in Mining Act 1991) and amendments to the General Mining Law of 1992, investments in the mining sector started to grow significantly. In fact, even when most countries started to mandatorily increase their tax burden on mining projects, as of approximately 2010, to have a greater share in profits, the Peruvian government took the path of agreeing to an increase with the private sector and consequently minimised the impact or alteration of tax stability conditions granted to projects.

As it is a country rich in many resources, mining has an extremely important role in Peru’s economy and it could be further stated that it is one of the engines of its economic growth. Antamina and Cerro Verde are two of the country’s main projects.

However, mining is an industry that can cause social conflict, and the industry in Peru is no exception to this. Currently, and according to many analysts, most of the causes of social unrest can be attributed to the mining sector and a number of mining projects have been halted as a result. The causes of the social conflict relate to economic, labour, social and environmental issues, some of which concern informal mining as well as other industries or sources of manpower.

In past years, the different administrations have produced strong and consolidated policies to develop the mining sector in all possible areas of their country and it could be stated that these policies will continue.

During the past few months, the country has undergone social unrest and the population has evidenced strong opposition to president Castillo, who was elected in 2021. The increase in the price of fuel, and to some extent, inflation, are eroding the weak power of the Castillo administration.

 

Covid-19 pandemic

The effect and impact of the covid-19 pandemic have continued during 2021, despite vaccinations having started in many countries, including across Latin America. While, at this stage, the after-effects of the pandemic seem to be under control, as in many parts of the world, we can certainly state, however, that it has resulted in serious social, political and economic consequences for many countries.

We are facing a new world of social distancing, mandatory isolation periods and border controls, which may continue to a varying degree.

Countries may very likely concentrate on protecting themselves and try to guarantee access to raw materials, etc, without having to depend much on other countries. This means that we face some sort of deglobalisation in an effort to depend less on Chinese manufacturers.

As tends to happen in a major crisis, analysts agree that existing trends will be strengthened and invigorated. The role of robots, automatisation and innovation will be consolidated in many projects. These advances may also bring major concerns with respect to employment and local procurement.

The role of the state may be also redefined to some extent, although it is too early to make any valuable speculations in this regard.

As for the measures undertaken to deal with the health crisis brought on by the covid-19 pandemic, most Latin American countries have adopted similar measures to control and deal with the pandemic. Regarding the mining sector, projects adapted to working under certain restrictions and protocols during 2021. Currently, in 2022, the situation has become normal and restrictions are being reviewed and lifted periodically, depending on each jurisdiction and its health conditions.

 

Conclusion

Latin America represents approximately 48 per cent of the world’s copper reserves, 20 per cent of the world’s gold reserves, more than 60 per cent of the world’s lithium reserves, 50 per cent of the world’s silver reserves and an undetermined percentage of the world’s potash reserves.

These figures highlight the large geological potential that the region has. In addition, and despite certain issues in particular countries, the environment for long-term investment has improved.

Many argue that certain reforms should be implemented to adapt and adjust the mining industry in light of current concerns and to make countries more competitive. This is true. Changes and improvements should be made in areas such as the environment, taxation, public transparency initiatives, concession regimes and mining-code updates, mine closures and the related impact on communities, as well as other specific local measures. The new governments in Latin America are showing strong evidence of taking this route and are aiming to promote mining policies that contemplate the sensitive issues associated with the extractive sector.

In addition to Latin America’s own structural issues, the covid-19 pandemic may have a major impact on the economies of all countries that will contribute to the slow growth the region was already experiencing. However, the mining industry may counteract this, by providing essential materials for a range of sectors, as well as creating employment opportunities and boosting government revenues. The interaction with the Chinese market and the Biden administration in the United States, with its increased focus on climate change and multilateralism, will play a role in the development of Latin American countries.

Finally, a note needs to be made in connection with the Russian invasion of Ukraine that began on 24 February 2022. This event is definitely a game-changer in world geopolitics that will impact not only worldwide energy supplies but the minerals sector as well. While the conflict’s effects can not be fully measured at this stage, some Latin American countries are starting to see its impact with the increase in fuel prices and the scarcity of gas. The next few months, during which this conflict hopefully comes to an end, will be relevant in assessing the conflict’s aftermath in the world and in the Latin American region.

It is crucial for the governments of Latin American countries to address the issues outlined here and take relevant measures in a timely manner, as dynamic policies are required in a constantly changing world.