In Search of El Dorado [U.S.-Latin Trade magazine]
by Hope Katz Gibbs
U.S.-Latin Trade magazine
Design by Kevin Jolliffe
FOR SIXTEENTH- CENTURY SPANISH EXPLORERS in Latin America, the search for precious metals was a crowning obsession. Cortes sent back streams of silver and gold from Mexico, Pizarro conquered Peru in order to do the same. Nothing intrigued the conquistadores, however, as much as the mythical city of El Dorado, a fabled place rich in jewels and gold.
El Dorado was never found, of course, and over the years colonists suited themselves to acquiring precious metals via the time-honored method of digging them out of the ground. Today, with new mining techniques opening vast tracks for exploitation, U.S. and Canadian mining companies are searching, once again, for the magic of El Dorado.
And the mountains of Latin America are very much for sale.
“The combination of mining technology, better communication in Latin America, the spirit of democracy and favorable attitudes toward foreign investments has met an audience that’s been waiting for a new world to explore and develop,” says Sandy Lawrence, president of Miami-based International Investment Conferences. “All of the conditions have come together.”
In April, Lawrence’s firm held an international conference in Miami called “Investing in the Americas,” which was attended by 1,469 would-be mining investors along with ministers from 16 Latin American countries. “The Investing in the Americas conference could not have happened at any other time in history,” says Lawrence.
For industry observers, investing in Latin America appears to be one of the hottest trends in the mining industry today. It’s estimated that in the last few years Latin America drew more than half the international-exploration dollar, of U.S. mining companies—as well as a growing slice of exploration funds previously earmarked for the United States.
As a group, North American firms, including many Canadian companies, heading into Latin America at an unprecedented rate, are bringing with them new technologies and new capital. Consequently, Latin America’s export of metallic minerals is expected to double from its current US$25 billion level to $50 billion by the end of the decade, according to the Colorado School of Mines International Institute.
The movement south is due in part to the fact that U.S. and Canadian mining companies are frustrated by the length of time it takes to get new projects up and running domestically. Environmental concerns, combined with red tape, slow the process. In Latin America, the combination of looser environmental standards and newly liberalized investment laws is expediting the process. This year, for example, it took only 12 months for Newmont Mining Corporation of Denver-the second-largest U.S. mining firm to open a new mine in Cajamarca, Peru. In Colorado, it would have taken closer to five years.
Another element frustrating U.S. firms is a bill now before Congress to strengthen the 1872 Mining Law, including a proposed increase in gold-mine royalties from 2% to as high as 8%. Other proposed changes include: holding fees on each claim; separate suitability determinations for each mining proposal; and much tougher requirements for land rehabilitation after mining operations cease. Gold mining in particular will be affected by the new regulations.
“The gold rnining industry is at a public-policy crossroads as Congress and the Clinton Administration debate proposed reforms of the 1872 Mining Law,” says Michael Brown, vice president of public affairs at the Gold Institute, a Washington, D..-based lobby group. “Unfortunately, much of this debate has occurred without considering the growth of international competitiveness in mining, and trends in exploration spending. U.S. gold production appears to have peaked and many hold that future growth opportunities are in the nations of Latin America.”
Though virtually all
the nations of Latin America-and several in the Caribbean-hold large mineral reserves, the hottest spots for mining in Latin America are currently Chile, Mexico, Peru, Argentina, and, most recently, Bolivia. These are all countries that are privatizing their mining sectors, and that have changed their laws to accommodate foreign investors.
“Most foreign countries are reducing or eliminating royalties on metal mining,” says Dr. Fred Barnard, geologist and founder of Mining Evaluation Profiles, which publishes an industry information guide called MiningPro Files. “The reason Latin America is popular now as a target for mining investment is because state control of industries, including mining, has given way to a philosophy of free enterprise and global markets.”
Much of the rush into Latin America has taken place in the last two years. In Chile, where 40% of foreign revenues still come from the export of copper, foreign investors for the first time are forming joint ventures with the formerly state-controlled industry. In Peru, the first successful privatization following the Fujimori presidency was the sale of the vast HierroPeru iron mine to Chinese investors.
In Mexico, new laws are permeating foreign investment in silver and gold mines. And in Argentina, where two years ago there were no more than five foreign investors, today there are 25 companies active in the mining field.
Argentina, with its mineral-rich Andes mountain range, is a case study in how to encourage the industry. Last year, concerned with the limited investments being made in local mining, the Argentine federal government took its show on the road with a conference organized by the World Trade Center of Denver. Entitled “Argentina: New Incentives for Mining Investment,” the conference included an appearance by Argentine finance-minister Domingo Cavallo, and attracted 280 executives from 130 firms worldwide.
In what has since become known as the “Denver Plan,” Argentina announced a series of reforms aimed at boosting foreign investment in mining. The reforms streamlined federal and provincial rules regulating the industry—including a clear limit of 3% for provincial royalties on mining—and created a more attractive investment environment by guaranteeing investor income-tax rates for 20 years. The tax rate is currently 30%, lower than the U.S. corporate tax rate, which is 35%
plus state tax rates. In Canada, the tax rate ranges from 40% to 45%.
Partly because of the new program, about $20 million was invested in Argentina last year, and several hundred-million-dollar mining projects are now in the works. Argentine mining secretary Eduardo Maza has gone so far as to project that $1.5 billion-mostly from foreign investors—will be invested to exploit the nation’s mineral reserves over the next five years. Among the biggest projects announced this year is a $500 million deal to develop the Bajo de la Alumbrera deposit by Canada’s International Musto Explorations, Ltd.
Another attraction for U.S. and Canadian mining companies to invest in Latin America is that many countries have abolished requirements to include the government—or local investors—as majority partners. In Mexico, for instance, companies were formerly required to hold a minority 49% position, with 51 % of company shares held by Mexican citizens.
In 1992, Mexico abolished this requirement; now, foreign investors can own 100% of a mine. Largely because of these changes, Mexico’s mining sector is expected to grow 5% in 1994, with 150 exploration projects now under way and $100 million in new investments this year, according to the Energy Secretariat. Venezuela had a similar requirement, which was abolished in 1990.
Here, too, investors are now allowed to own and control the entire mine. Again, investors are lining up—including Venezuelan magnate Gustavo Cisneros, who is planning a $100 million investment in gold mines in a joint venture with South African partners.
Altogether, government officials predict $1 billion in investments by Canadian, Venezuelan and South African companies by the end of the decade.
In some countries, the new laws are permitting foreign investment in mining for the first time in decades. Investment changes occurred in Bolivia when that country’s National Congress approved a new mining code in April 1991. The new law permits foreign firms to operate within the country’s 50-kilometer border belt in joint venture or service contracts with Bolivian miners.
The new code also replaces mining royalties with a tax on profits, a change that permits most foreign firms paying taxes in Bolivia to obtain tax credits in their home countries.
Not all of the Latin American countries have been ready to change their policies when it comes to foreign investment. Brazil, Latin America’s biggest country—and the one with the highest tonnage of mined minerals—changed its constitution in 1988 so as to restrict foreign mining capital to minority partnerships with Brazilian-controlled companies. Since then, foreign investment in mining exploration has plummeted, from $57 million in 1988 to $9 million in 1992. In the last six months, the government has tried, but failed, to amend the constitution.
Going for the gold
Mining in Latin America is, of course, not limited to the precious metals used for jewelry. Besides the copper kingdom of Chile, Jamaica and Brazil both boast substantial production of bauxite (from which aluminum is made); Bolivia and Peru produce tin, zinc and lead; and Brazil mines tremendous quantities of iron ore. Nonetheless, the a search for gold remains perhaps the most alluring, if for no other reason than the place which gold holds in the mythology and imagination of the world—and because of its high value.
In the United States, mining companies with a heavy dependence on gold production are among the most interested in exploring Latin America. U.S. gold production, which saw an enormous rise in the 1980s. has since fallen off due to high production costs.
“Gold-mining companies are now in a period of low profitability, depleting hedging positions and faltering growth prospects,” according to an industry report by Goldman Sachs. “The U.S. gold mining industry appears to have matured just as the commodity cycle turned down and the supply/demand balance shifted. The year 1988 was probably the watershed year for the industry. Consolidation has already started to occur as the industry struggles with rising environmental regulation and other cost pressures.”
The report found “alarming parallels between the gold industry and the U.S. petroleum industry. Since 1988, major producers have spent more of their exploration dollars in foreign countries than in the U.S. Now, oil production is at its lowest level in 30 years.”
The same seems to be happening with gold. The share of total exploration funds spent in the United States by U.S. firms in search of gold declined from 71% in 1989 to 63% in 1992, while Latin America’s share increased from 6% to 15% over the same period.
Perhaps the best example of a U.S. company’s hitting pay dirt in Latin American gold is that of Newmont Mining. Last August, the Denver-based company started production at the Yanaeocha site in Peru, of which it owns 38% (33% is owned by Buenaventura, a Peruvian company, 24% by France’s BRGM, and 5% by the World Bank).
By early this year, the gold mine had already repaid Newmont its initial $37 million investment, and plans are under way to substantially expand production. This year, it is expected that the site will produce 400,000 ounces, of which Newmont’s share will be 150,000 ounces.
“We think Latin America has substantial potential and we are working to develop that potential,” says company spokesman Jack Morris. “We will certainly benefit from the operation in Peru. We are anticipating that in 1995, 9 percent of our total production will be coming from the Peruvian mine. Right now, the Latin American investment is small compared with the rest of our operation, but it is growing.”
Other U.S. companies are joining the gold rush. Denver-based Minproc Engineers Inc. recently helped complete work on a $100 million project on a plateau in La Joya, Bolivia, called Kori Kollo. The mine, operated by Battle Mountain Gold Company of Houston, is expected to produce 240,000 ounces in its first year of operation. Minproc is also completing the construction phase on a gold mine in the Peruvian Andes at Carachugo Sur.
Guillermo Blacker, president of Minproe Engineers Inc. says his company—with annual revenues of $50 million—will continue to seek attractive opportunities in Latin America. “Our focus is on base metals, principally refractory gold and copper-oxide deposits. We will target known resources with proven reserves where our technological innovations can provide an advantage.”
The politics of mining
Further investment in Latin mining-whether intentional or not-is being encouraged by the
Clinton Administration, which is pushing for changes in the 1872 Mining Law.
The law currently states that miners can patent federal land for $2.50 or $5 per acre and then extract minerals without paying royalties to the government. Much of the production occurs on public land administered by the federal government, mostly in Nevada, California, Utah, Montana and Washington State. The proposed reforms to the 121-year-old law will change that, and boost costs substantially, especially in the area of royalties.
“The bill now before Congress would for the first time ever put a royalty on metal mining on public lands,” Barnard says. “Furthermore, the proposed royalty rate of 8 percent is higher than any major mining country on earth. Only countries like Ghana and Turkey have royalties in this range.”
“Look, mining companies are looking for opportunities,” says Karin Mil, an owner of International Resource Linkages, a Denver-based firm that leads mining investment missions and is a repository for information on investment codes, continued mining laws, and labor rates of Latin American countries.
“The trend in the industry is to keep royalties to zero, but that trend is going in the opposite direction in the U.S. Plus, costs are lower elsewhere. Why would a company mine here, when they can get more bang for their buck in Latin America?”
An irreversible trend? It seems that regardless of the outcome of the 1872 Mining Law (a decision is expected in July), investment in Latin America is not going to slow down.
Signs of the trend abound. Denver-based Cyprus Amax Minerals Company, which has Chilean lithium operations, late last year paid the Peruvian government $37 million for an open-pit copper mine in Cerro Verde. Peru, and agreed to invest another S375 million over five years. And other U.S. company, FMC Corp., signed an agreement earlier this year to invest $100 million in lithium mining in northwestern Argentina. In the same area, Crown Resources Corp. of Denver won exploration rights for 450,000 acres lying along projections of gold and copper belts in neighboring Chile.
About the only bad sign is the botched sale of El Abra in Chile, one of the world’s biggest copper reserves. That deal recently fell apart when Lac Minerals of Canada withdrew its $555 million bid for a 51 % stake in the mine, saying that government estimates were exaggerated. Cyprus Minerals of the United States has since offered a winning bid of $330 million to purchase the 51% from Chilean state copper-company Codelco.
More recently, Canadian firms have announced a major move into Cuba, where MacDonald Mines Exploration Ltd. has agreed to purchase mineral rights to 500,000 acres, CaribGold Resources Inc. to 1.5 million acres, and Joutel Resources Ltd. to 1.2 million acres. All are searching for gold.
“As the decade develops, more and more companies will be tempted toward entering Latin America,” says Evelio Garavito, International Investment Conferences’ marketing director for the region. “The common belief is that the investment climate pertaining to mining is now, perhaps, becoming the best in the world.”