Mining operations in Latin America have had a rough couple of years, with low prices, political scandals and environmental disasters forcing the industry to take a hard look at processes and – hopefully – change them for the better. Melodie Michel reports.
Far from the dust of Chile’s mining region, Santiago airport’s duty-free shops sparkle with the auburn shine of the country’s biggest export: copper vases, earrings and kitchenware sell well in this last Chilean pit-stop, and, here at least, price is not an issue. At the headquarters of the country’s top copper producers, however, price volatility has caused headaches over the past two years.
Copper lost 57% of its value between January 2011 and January 2016, when it hit a record low of US$1.94 per pound. Other metals produced in South America fared a little better, with gold ending 2016 at around US$1,150 per ounce, down from its 2012 high average of US$1,164, but having recovered slightly from the average US$1,060 recorded in 2015. Silver also found some light relief in 2016, as did iron ore. But for all, volatility remained high, and ﬁnancing became tougher to get.
Erich Michel, Americas head of MUFG’s commodity and structured trade ﬁnance business, tells GTR: “With most commodity prices down to their lowest levels in years, we decreased our capacity, prompting us to make some tough decisions. As a result, we opted to shift our emphasis towards the importance of relationships, and how we could best differentiate between the types of relationships. For example, do we want to be a critical partner to our client, or do we need to potentially exit or scale back our exposure and capacity commitments? Virtually every bank I am aware of, was confronting similar issues.”
Deloitte’s Tracking the trends 2016 report expresses the sector’s woes by listing the difﬁcult questions miners are having to ask themselves: “Have the world’s demand factors for commodities irrevocably changed? Do we need new mining approaches? Is the traditional proﬁt model shifting? Can we afford to take out more costs? Is our ﬁnancing model broken? How can we reduce unsustainable debt levels?” It appears no one knows the answers to these questions yet.
This identity crisis of sorts over the last year has been made worse by a series of political and social issues in Latin American commodity-producing countries. Peru, for one, has been forced to face the appalling consequences of illegal gold mining within its borders, with over 50,000 hectares of deforestation, polluted rivers, crime waves and sick indigenous communities. On top of the environmental and social impact of the practice, Peru is losing billions in potential tax revenue from the illegal production of gold – which is estimated to represent about 15% of the country’s gold exports every year.
At the end of January, the country launched an initiative to curb this worrying trend, incorporating illegal mining and related activities into its law against organised crime and starting a new formalisation programme for miners.
The objective is to turn 60,000 small illegal mining operations into legal production capacities within three years, but history is not on Peru’s side: the government’s previous formalisation programme saw 70,000 miners register, but only 161 operations (about 3,000 miners) completing the process.
In Colombia, indigenous protests for land rights against mining giants have escalated, with one group winning a year-long court battle in early February 2017. The Colombian Constitutional Court ordered the immediate suspension of mining permit allocation on the Resguardo community’s territory, and for these lands to be delimited and titled within one year. Any future mining activities proposed will only be allowed with the participation of the Resguardo.
It is estimated that over 343,000 hectares of mining concessions already overlap with Resguardo lands.
The ruling will serve as a precedent for other similar battles in Colombia, and further disruption to mining operations are to be expected: some 29.8% of the national territory of is occupied by 768 indigenous reserves. At the time of writing, members of the Wayuu community had blocked a railway line used to transport coal from the Cerrejon open-pit coal mine (owned by BHP Billiton, Anglo American and Xstrata) for several days, but which was stopped with the brutal intervention of the riot police.
Brazil is only just seeing the end of its deepest-ever recession, which all started with a corruption probe into many of the country’s ﬂagship companies. One of the highest-proﬁle victims of the investigation was arrested at the start of 2017: Eike Batista made his fortune buying gold-rich lands tipped by his father, mining giant Vale’s former chief executive, and his trial will likely make more mining heads fall.
Batista is accused of having paid US$16mn to former Rio de Janeiro governor Sergio Cabral in exchange for support of his many Rio-based endeavors. The mining and energy companies he founded released statements saying he no longer has any role in their administration and they expect no negative impact from his trial, but if there’s one thing the two-year-old Car Wash investigation has proved, it’s that no one is safe.
In the face of these issues across the region, political risk insurance (PRI) seems a good option to protect ﬁnanciers, but according to Michel at MUFG, the solution has many limitations.
“Political risk insurance in the past has proven to be difﬁcult,” he says. “For past events, such as the Argentina default in 2001, coverage on political risk insurance was claimed, but ultimately payments were not made as the Argentine market opened up within a six-month period, even though companies couldn’t pay their debts anymore. The devaluation of the local currency pushed many companies into default, the banks were down on that money, and yet couldn’t get anything from PRI.”
He explains that instead of opting for insurance, the bank not only reviewed client relationships, but also moved towards deals with a more structural component, including risk mitigation, and origination and distribution possibilities.
The immediate effect of the region’s liquidity squeeze was the shelving of the majority of new commodity projects.
“I would say that about 80% of new projects have been delayed. In Chile there were 17 projects and 12 were put on hold,” says Sebastián Resano, vice-president of business development, Latin America, for commodity ﬁnance software company Kynetix.
Delaying the release of new supply of commodities into the market helped to stabilise prices, and the start of 2017 marked a rebound in the value of all metals in particular. This was helped in large part by stronger-than-expected demand from China and high expectations about Donald Trump’s plan to spend US$1tn on infrastructure in the US within his ﬁrst presidential mandate.
But most experts believe this optimism to be premature, not only because no related documentation has been signed by the new president as yet, but also purely because of the time it takes for government decisions to translate into commodity ﬂows.
“Despite all the talk and expectations, it could take several years until construction on, for example, a manufacturing plant begins to emerge from a greenﬁeld,” says Michel. “For the time being, I don’t really see any signiﬁcant increase in demand on natural resources in the US. Sure, there could be more demand for copper and iron ore in the next two to three years, but, for the time being, the actual demand is limited. The market is reacting based on perception rather than reality.”
Mining companies, meanwhile, are doing everything they can to cut costs. Chile’s Codelco, for example, laid off 4,000 workers at the end of 2015. But the mining industry is notorious for its strong unions, and threatened employees know how to put up a ﬁght.
As GTR went to press, workers at the world’s largest copper mine (BHP Billiton’s La Escondida mine in Chile) had been on strike for a week, leading the company to call force majeure on its delivery contracts. On the bright side, the move sent copper prices to a 20-month high.
2017 will see a number of labour renegotiations in Latin America’s mines, including Chile’s Collahuasi mine (owned by Glencore and Anglo American), El Teniente (owned by Codelco) and Zaldivar (owned by Antofagasta and Barrick Gold Corp). Together these three facilities are expected to produce almost 1 billion tonnes of copper this year, and analysts worry that workers’ actions could create signiﬁcant disruption in the market.
Advancements in technology
While their hands are more or less tied on the labour front, companies have other options to achieve greater efﬁciency, as technological advances make their way
to the region.
“On the technology front I see a lot of momentum with the internet of things (IoT), with interest from mining companies and producers,” says Resano at Kynetix.
According to him, most solutions in Latin America are at proof-of-concept stage, with a number of start-ups having scored venture capital to develop mining-speciﬁc products.
“Now with one device you can track the trucks at any moment. You have sensors that tell you how much is left in a barrel and where, so you can get that information to the headquarters in Santiago and say ‘we need to buy this for next week because we are running out’,” Resano explains.
Recent examples in other regions are an indication of how focused the approach needs to be: in 2015 Goldcorp started using a Cisco IoT solution at its Éléonore gold mine in Canada. The system tracks people and equipment inside tunnels to ensure appropriate ventilation and avoids the energy spend of pumping air into areas without any workers.
IoT solutions could be instrumental in avoiding environmental catastrophes – something the region could really use. In 2015, Brazil had its worst mining disaster ever at the Samarco iron ore facility, when a dam holding 32 million cubic metres of mineral waste broke, contaminating the River Doce, ﬂooding its valley and killing 19 people. Just a few months ago, Barrick had to suspend operations at the Veladero gold mine in Argentina for over two weeks after ice damaged a pipe carrying cyanide-saturated process solution, causing some of it to leak. The company was allowed to resume work at the start of October and says the leak didn’t contaminate water in the area.
“There are many sensors you could use to monitor the level of liquid in the ‘cleaning pool’: when it gets to a critical level it can automatically set off an alarm and warn everyone of a potential environmental issue,” says Resano. “Imagine if you could integrate everything from the mine to ﬁnal delivery. You put a sensor where the copper is produced to monitor all ﬂows: quality, temperature, location, etc. That has a lot of implications, including helping companies get ﬁnancing.”
Kynetix recently launched Sentinel, a blockchain-based platform aimed at commodity exchanges. Its goal is to connect physical commodities with ﬁnanciers by hosting information from producers, warehouses and logistics companies and making it accessible to the exchange. In 2016, Kynetix teamed up with the London Metals Exchange (LME) to create LME Shield, a solution allowing metal owners to lodge their warehouse receipts on the Sentinel platform, with electronic transfer, pledging and administration functionality.
LME Shield is already available in 19 jurisdictions, including Brazil and Chile. Resano explains that Kynetix is working to integrate IoT information into the platform for even greater transparency. “With technology providing the information, you could validate a smart contract placed on the blockchain every two months or so, saying that if there’s any change in the quality, etc, something will be adjusted, depending on what the sensors provide. It’s all part of having security, trust and transparency,” he says.
On the ﬁnancing side, such progress could be a game changer. “There is no question the inventory storage and transportation industries have been revolutionised by the use of sensors, bar codes, x-rays and other measurement and detection systems,” says Michel at MUFG.
One metal has countered the low-price trend observed elsewhere in recent years: lithium has seen high demand due to the increased production of electric cars, which use it in batteries.
Tesla recently announced the construction of a ‘gigafactory’ in Nevada, with plans to make one million electric cars by the end of the decade. This is expected to double production capacity for lithium-ion batteries, with some experts pointing out that there may not be enough lithium in the world to meet demand.
This is good news for Latin America, as most of the world’s lithium is found in salt ﬂats located in the Andes mountains between Chile, Bolivia and Argentina. Chile’s Atacama desert produces 40% of current global supply, with many greenﬁeld projects expected to come online in the next decade. Even state-owned copper giant Codelco is getting in on the action with two lithium projects.
Meanwhile, Argentina expects to triple production by 2019 and is actively looking for foreign investment to help turn its resources into revenue. Many contracts have already been signed by Canadian, Chinese and Australian ﬁrms in the country.
And in 2016, Bolivia became the world’s largest lithium exporter by making its ﬁrst shipment to China: at 10 tonnes for US$70,000, the transaction shows how much potential there is for the sector to grow. Watch this space.