In Mining

Venezuela has experienced diverse forms of turmoil since the beginning of the millennium. Relationships with Western countries, especially the U.S., have become increasingly tense, reaching peak intensity during President Donald Trump’s tenure, when strong sanctions were imposed on key Venezuelan figures and companies.

But winds seem to be blowing in the opposite direction under President Joe Biden, impelled by a need to dissociate the fuel supply chain from Russia. President Nicolas Maduro met with Biden administration representatives in March and U.S. flagship energy conglomerate Chevron has been allowed to renegotiate four joint ventures with PDVSA, the Venezuelan state-run oil company. President Maduro even signaled that he intended to apply for a U.S. visa to attend a salsa music festival in New York City. Another meeting is scheduled for the second half of the year. Perhaps a change in policy from the western world towards Venezuela is on the horizon, and mining should be a key source of interest by international miners and investors.

To review the state of business in Venezuela and opportunities for investors from across the globe, AMI sat down with Alfonso Antonio De Caro, a Venezuelan mining expert, former head of planning and control for the Venezuelan Mining Corporation and former head of the Venezuelan National Mining Inspection Office.

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The Arco Minero and the State of Mining in Venezuela

In 2016, President Maduro announced plans for the Arco Minero, which designated 112,000 square kilometers of rainforest south of the Orinoco River for mining gold, copper, diamond, coltan, iron, bauxite, and other minerals. The estimated value of the minerals in region was put at US$2 trillion, which immediately triggered a migration of groups with little regard for best practices or the rule of law, and now Venezuela is the Amazon country with the highest number of illegal mines.

“Amazonas and Bolivar states, where the Arco Minero is located, comprise roughly one-third of the country’s area. For the government to be effectively present it needs boats, helicopters, and resources that it cannot access given the international sanctions,” says De Caro. “The government has developed a census of artisanal miners to find ways to support them across all stages of the value chain: extraction, smelting, and trading. At the moment this is the main policy directed towards countering illegal mining,” he explains.

AMI has just released a new report that, for the first time ever, quantifies above-ground risk for mining projects in 16 key mining jurisdictions in Latin America. Readers will find that Venezuela ranks poorly across 7 key areas, including reputational risk, safety and security. Operational risk is also poorly ranked due to limited access to reliable sources of energy and water, infrastructure, and local suppliers, all of which increases operating costs. “Sanctions have brought a shortage of oil and specialized equipment, hindering the ability of industrial miners to operate,” says De Caro.

Private participation in mining is limited to shareholding of less than 45% of the capital stock of mixed companies: the state must hold majority ownership. Compañía General de Minería de Venezuela, or Minerven, the Venezuelan state-run ferrous metals mining company, has been sanctioned by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) since 2019. But there are other plausible partners, according to De Caro: “Ferrominera, which produces iron ore, Bauxilum, which produces bauxite, and Carbozulia, which produces coal, are not sanctioned.”

“Venezuela Is not for the Risk-Averse

On October 8, 2020, the Venezuelan National Constituent Assembly approved an “anti-blockade” law, reportedly to overcome the financial, economic, and commercial consequences of U.S. Sanctions. It ranks as a constitutional law and was passed to allow President Maduro to promote investments in projects or alliances in strategic sectors, including mining, under strict provisions of confidentiality.

According to De Caro, “international investors can come to Venezuela, but they must closely negotiate with the government and understand the limitations existing on the ground. Sanctions have cut off the country from the SWIFT system. Transactions must be carried out in non-USD currencies and barter has become common practice. The country is not for risk-averse investors, but others may find a window of opportunity,” observes De Caro.

A notable project arising from the Arco Minero initiative was Siembra Minera, approximately 18,950 hectares in southeast Bolívar State that includes gold, copper, and silver, among other minerals. The mine was to be developed jointly between the Venezuelan government and Canadian miner Gold Reserve, with the government pledging $110 million to facilitate the early startup of the pre-operation and construction activities, but such funding is yet to be provided. The project seems to be doomed and sets a worrying precedent for international miners as the Venezuelan government is a forced partner in all mining endeavors.

De Caro sees things differently: “Siembra Minera was a casualty of international sanctions, as the company was suddenly forbidden from providing technical expertise or even meeting with government representatives. There is little more the government could’ve done. It is like the western world sacrificed the project to promote political ambitions. But the country is very much interested in developing the mining industry.”

Political, Economic, and Social Circumstances Can Change Very Quickly

The Maduro government and representatives of the Unitary Platform, an opposition political alliance made up of civil society, trade unions, retired military personnel, political parties, and deputies of the 2016-2021 National Assembly, have undertaken conversations and negotiations in Mexico City since August 2021. The talks are aimed at resolving Venezuela’s long-running political and humanitarian crisis, which has seen some six million people flee the country.

“Discussions currently revolve exclusively around free elections. But there are other needs in the country, and the incidence of illegal mining can certainly be one of them. People should be thinking about effective management and best practices, and less about taking power and politics,” De Caro says.

Thorough research to evaluate reputational risk in Latin America is a sound policy before investing in the region—and it’s absolutely crucial in jurisdictions such as Venezuela.

Contact us to explore how we can help you understand the minutiae of mining in Venezuela and appropriately assess the risks involved.

Beyond Venezuela, our due diligence research can also help you weigh the potential risks and rewards of an acquisition or even a greenfield investment.

Given the situation in Venezuela and other jurisdictions, you may also want to consider working with us for a political risk assessment. In this area, our work covers everything from local mayoral politics and province or state level politics, to actions of local NGOs, unions and community groups, as well as illicit players whose influence can loom large in remote locations.

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