The principle of risk and return is as relevant to mining as it is to picking stocks. From 2003 to 2013, rising precious and industrial metals pricing created yet another bonanza in Latin America, a region rich in mining history. More than $100 billion was invested in new mines and revived fields in a region with some of the lowest extraction costs anywhere. After almost three decades of muted prices, Latin American politicians began the decade of boom with modest royalty demands. As prices rose, so did the expectations of voters and the fiscal appetites of governments. From 2004-2014, fiscal spending across Latin America grew at a remarkable 16% per year, measured in USD, much of it paid for with mining and energy royalties. Like any organization that grows unchecked, resource rich Latin American governments became bloated, wasteful and frequently corrupt. The majority of South American nations dropped in global competitiveness rankings and rose on corruption indices during this decade of bounty.
As resource prices have levelled and dropped (since 2013), governments tax revenues have fallen, jeopardizing their ability to placate an expanding middle class who expect more from their leaders. At the same time, the mining industry, facing falling equity prices and cost cutting pressures, is in no mood to continue acquiescing to Latin populist calls for higher royalties. A challenging risk environment in many Latin American jurisdictions has grown even tougher. With less room to maneuver than in the past, miners need to heed the lessons of the last decade as they strive to keep their Latin American fields profitable and their reputation in good stead.
The Importance of Managing Above-Ground Risks
Across the world, miners today recognize that the risks above the ground are greater, and more difficult to mitigate than the traditional operational risks below ground. Above-ground risks can be divided into several categories. A few risks are at the mercy of market forces, such as pricing and F/X, often addressable through skillful financial engineering. Force Majeure (acts of god) are beyond one’s control but can be mitigated with insurance policies in many jurisdictions. However, most above-ground risks are influenced by politics and the relationship between miner and host government, local actors and public opinion. How well those relationships are managed will influence a variety of other above ground risks including labor, taxation, legal, transport, security, environmental, cultural, infrastructure and operational risks.
Political risk must be measured and addressed at both the national level, where negotiations begin, and at the local mine site level, where neglected (by both host government and miner) local actors can prove disruptive and stubborn. Centuries of highly centralized political rule across most Latin American jurisdictions has created a predictable formula of cooperative (if onerous) national governments failing to trickle down even a modest portion of royalties to the local municipalities near the mines. Often unqualified for a high skilled mining positions, locals face dislocation and inflated living costs when mines are built. Their frustration is easily exploited by opportunistic politicians, labor leaders and others eager to score political points.
Contact Americas Market Intelligence for deeper insights and strategic data on the Latin American mining industry as well as other key areas, including payments, healthcare, logistics, resources/infrastructure and more.