John Price
Managing Director
AMI
When First Quantum’s $10bn Cobre Panama project was officially suspended by Panamanian courts earlier in 2024, many were shocked. The project was world class in its design, construction and operation. It contributed directly to 3% of the nation’s tax revenue, 5% of GDP and 70% of exports in 2023. How could the political class turn its back on such a vital project, given the shaky fiscal reality facing Panama? Some blame corruption, others cite political interference, but there is a simpler explanation, and one that all mining investors need to heed as they enter new jurisdictions.
Not all countries have the right to call themselves ‘mining nations’. To be considered a mining nation, a country must have a legacy of mining history, a legacy that engenders an understanding by both the voting public and the political class that the economic contributions of mining outweigh the environmental and social costs, particularly if the latter are mitigated effectively. If that consciousness does not pervade a nation, then at the first sign of trouble, political support for mining can, and often does, buckle. First Quantum faced this dynamic in Panama, Barrick faced it in the DR, Anglo-gold Ashanti and Minesa faced it in Colombia.
Miners must face the fact that the vast majority of voters have never seen a mine. What they know of mining is limited and often mis-informed by critics who oppose mining for a variety of reasons from legitimate concerns over the environment and community to the selfish pursuit of power and hefty payoffs. For decades, miners directed all of their efforts of persuasion at the executive branches of governments, who held sway over mining regulations. With the proliferation of smart phones and the erosion of Presidential power, miner concern shifted to vociferous local communities who became the greatest source of project opposition. To their credit, miners today dedicate more time, monies and skill into integrating their project with the needs and aspirations of local communities.
Now, there is an increasing awareness among miners of the fickle nature of national political support for their projects. Even in ‘reliable’ mining jurisdictions like Chile, the protests of the urban middle class, not to mention well organized groups of students and indigenous leaders, have tested political and judicial support for mining.
The once tried and true country risk metrics like corruption levels, FDI levels, bond premiums, international arbitration signatories, economic stability, economic freedom indices and the like may be missing the point. To properly predict the risk of collapsing political support for your mining project, you should consider two questions: 1) How effective is the voice of public opposition at eroding political support for a project? ; and 2) How much of a ‘mining nation’ is the jurisdiction in question?
Today, three of Latin Americas largest mining jurisdictions, Brazil, Chile and Peru are all nations with strong civil society and civic engagement with opposition parties controlling congress. Furthermore, the executive branch, both by constitutional design and by virtue of low approval ratings, governs with a weak mandate. When their voters unite in anger on an issue, politicians tend to bend to their will. The same can be said of the political dynamic today in Colombia and Panama. In Argentina and Ecuador, executive leaders face strong opposition, but their popularity helps them defend difficult policies (austerity in Argentina, tougher security protocols in Ecuador).
At the other extreme are leaders whose popularity and political control of congress (Abinader in the DR, Bukele in El Salvador, AMLO in Mexico) enable them to legislate and govern with near impunity. In the cases of Nicaragua, Cuba and Venezuela, political power is also exercised with unconstitutional judicial authority, coercion, and torture, earning them the title of dictatorships. Miners who choose to operate in these jurisdictions are obliged to partner very closely with government, heeding to their wishes ahead of the general public, potentially creating reputational risk for the miner.
National governments (and provinces in the case of Argentina) are responsible for setting mining regulations and taxes. Generally speaking, the larger the economic impact of mining in a jurisdiction, the more carefully and consistently a government treats the mining sector. Chile and Peru have the most respected mining laws in Latin America, which miners leverage fairly effectively to defend their projects, even when political support wanes or central governments find themselves under political siege, as has been the case in Peru recently. In Suriname and Guyana, all political parties understand the importance of mining. Governments in both countries have often made life easier for informal mining than the formal sector but they almost never oppose new mining projects. In Bolivia, mining is at the core of the nation’s history and despite plenty of political interference over the years, miners can usually count on political support.
In countries where mining is less economically important, political support is far less steadfast. In Brazil, there are legacy mining jurisdictions like Minas Gerais where miners are hosted by friendly state governments, but national environmental movements can help drive Brasilia to ban projects in the name of protecting green spaces. Today’s Lula administration is driving up the settlement costs of the historic lawsuit against Vale, caused by the collapse of its ill-maintained tailings damn that proved devastating to life and community. In Colombia, the department of Antioquia where mining first began in the country, local leadership is generally supportive of mining, but in Bogota, the political class has little stomach for the controversies that inevitably befall the sector. Before the Cobre Panama project began producing, Panama had a minimal mining sector, and as such, its political class and citizens had no clue about the economics of mining. The post-COVID quarantine malaise and angst among Panamanians who suffered a 17% economic decline in 2020 was effectively directed against the mine and politicians abandoned the project like a hot potato.
When one combines the lenses of the above two questions, then a clearer understanding of today’s (and recent history’s) political support (or lack thereof) for mining projects comes to light.
Taking a closer look at specific jurisdictions
Guyana
The nation prides itself as a mining nation. An estimated 10% of Guyanese men have toiled in the bush as an informal miner at some point in his life, supporting families with their earnings. Political support for mining has always been strong. However, Guyana is well on its way to becoming an energy nation, buoyed by the highest oil reserves per capita in the world. Over time, the weight of mining will matter less and less to the political class. With the world watching, including those concerned about environmental preservation, more pressure will come to bear on Guyana to protect its rainforests and rivers, which are removed from its oil fields but are the exploration lands of its mining sector. Guyana may no longer be a ‘mining nation’ 10 years from now.
Suriname
In spite of its impressive gold deposits and reliance on mining revenue, especially among informal miners, Suriname has set a course very similar to Guyana. Roughly 5 years behind Guyana in the process of exploring and extracting oil, Guyana will begin earning petro-dollars in 2025 and the political fascination with energy will eventually outgrow that of mining.
Dominican Republic
When the newly elected Danilo Medina administration turned against Barrick’s Pueblo Viejo project in 2012, the gold miner realized it was not dealing with a mining nation. Though the mine site itself is one of the oldest in the Americas, modern Dominican Republic was not a mining nation. The Danilo government was elected on the promise of spending 3% of GDP on education, a big increase. But Danilo inherited empty coffers and rising debt from outgoing President Lionel Fernandez, his political godfather. Barrick had sunk $4bn into building Pueblo Viejo, an admirably designed megaproject and was just about to open the mine when Danilo took office. The new government stopped progress and demanded more from Barrick. Allegedly, the Danilo government spent lavishly on media campaigns against Barrick and against mining to turn the screws and extract more money from their long term contract. Barrick read the situation and partnered with the government, offering very favorable terms and used their tax paying heft to steer the project to full operation by staying close to the levers of power in the government.
Mexico
Under AMLO, Mexico has been a challenging place to mine for several Canadian operators. While Mexico has a long history of mining in core jurisdictions and thus little local opposition, it has often been difficult to obtain the support of the national government. AMLO sequestered Mexico’s highly lauded fondo minero, a 7.5% royalty tax that went straight to local mining municipalities. AMLO redirected those funds to build the Morena party in northern states ahead of mid-term elections (2021). Then the government stood idly by as organized crime and Mexico’s allegedly corrupt mining unions both wreaked havoc on several mining projects. When the promise of lithium deposits in Mexico invited foreign interest, the AMLO administration declared a government monopoly on such assets. Though Mexico is a mining nation, under AMLO, the concentration of political power in one man and one party brought unprecedented political risk to the mining industry.
Not every mining jurisdiction in Latin America can be neatly summarized by answering these two fundamental questions related to political risk, but they are prescient enough to contemplate ahead of mining investments in a new jurisdiction. At AMI, we approach mining risk through the lens of 7 different areas of risk, including political risk. Our whitepaper on Latin American mining investment risk sheds some light on our thinking. To enquire as to how we might help you assess investment risk ahead of a project or monitor project risk ongoing, reach out to us.
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