Latin American Mining: Trends, Opportunities and Strategies

Transcription

1 Latin American Mining: Trends, Opportunities and Strategies This address was given by Jose Blanco, Chairman of the Australia-Latin America Business Council and Senior Partner of Blanco Partners, at the Latin America Downunder Conference that was held in Sydney on May 28-29, I would like to begin by taking a moment to highlight why the Latin American region ranks as one of the best mining environments in the world and why it should figure more prominently than it does on the radar of Australia s mining and METS companies. The principal reason is that the region is blessed with abundant mineral resources, producing 45% of the world s copper, 50% of the silver, 26% of the molybdenum and equally high percentages of zinc, gold and iron ore. Latin America s geology and its relatively attractive operating environment are such that five of its countries consistently rank in the Top 10 global destinations for mining investment. The region s mining potential is reflected in the fact that in 2013 it captured 27% of the global exploration budget. Furthermore, even though Latin America has maintained its share of the global exploration budget at close to 25% for over a decade, it is generally acknowledged that much of the region is unexplored. However, Latin America s mining credentials are not limited to exploration. For more than 4 years, the region has also led the way in the development of projects. In 2013, Latin America was credited as having 229 committed development projects, with an average investment of 780 million dollars. These figures equate to Latin America having a 29% share of global committed development capex. Despite such a successful track record and strong growth prospects, it has to be acknowledged that Latin America is not immune to the general slowdown that has impacted global mining activity. It too is grappling with the impact of lower commodity prices, persistently high input costs and reduced availability of funding. It too has experienced a fall in investment in exploration and development. Beyond the global issues, the region is also having to address a range of additional factors that are more domestic and are impacting on the development of its mining sector. However, despite the undoubted challenges that exist in the region, I believe that Latin America has weathered the mining slowdown better than most other regions and that it continues to offer some of the best opportunities for growth - be that for exploration or development, mining products or services. I also believe that the current market volatility and challenging trading conditions have created an exciting opportunity for well-managed, cashed up and ambitious companies to profit by making astute investments and thus positioning themselves for the sector rebound that will invariably occur further down the track. Taking advantage of the opportunities on offer requires accurate market intelligence, the ability to interpret it correctly and the willingness to act on it.

2 The starting point has to be the acknowledgment that Latin America is not a single homogeneous market and an appreciation of the specific situation in each country, as the scenarios do vary. In Chile, the mining sector s growth is constrained primarily by the scarcity of water and energy in the north; in Peru, the major obstacle appears to be community activism; in Colombia, illegal mining is an ongoing concern; in Argentina, sovereign risk has impacted investment sentiment; and so on from country to country. Understanding the regional trends and country specific scenarios is essential to identifying the opportunities that are on offer throughout the region. One of the primary trends is the focus on cost reduction and improved productivity. Across the board, mining companies are re-evaluating the way that they operate, and the push is on to drive performance improvement through greater use of technologies, rationalisation of supply chains, more effective management and reporting systems, and other operational enhancements. Innovation is the new catchcry and mining companies are racing to identify cost cutting measures and value adding products and services. Mining companies are clamouring to engage with suppliers that can help them to weather the current supply/demand imbalances; that can offer technologies that enhance mine design and operation; that can enhance water and energy efficiency; and much more. At the same time, industry focus has also shifted to quality in terms of where money is spent. Weaker equity markets, reduced cashflows and far more demanding investment and lending parameters mean that the criteria applied to asset evaluation have been tightened and that only those projects that meet more stringent standards are being worked on. M&A activity is showing signs of picking up. Those companies that are finding the going tough are opting for mergers or other forms of alliances to guarantee their survival, but companies with strong cash positions or access to funding are targeting acquisitions, with a clear preference for early stage or already producing assets. Behind the increased activity are a variety of players, including Chinese companies and private equity firms, both international and local, who are estimated to have accumulated 10 to 15 billion dollars to invest in mining projects. Amongst the Latin American players, Chilean firms are the most active, with one of the pioneers being Mineria Activa, a joint venture between Chile s largest investment bank, LarrainVial, and a team of mining professionals. Launched in 2008, the firm today operates several funds and employs around 40 mining professionals. In 2012, the then Piñera government gave Chile s nascent private equity sector a major boost through the launch of the Fenix funds, a scheme that involved six funds managed by local financial institutions receiving a total of 150 million dollars to invest in exploration projects in Chile. The aim, however, is not only to encourage exploration but also to develop a risk capital market for mining in Chile. Progress on both fronts continues to be made and, today, there are a growing number of domestic players targeting the sector, including many of the family offices that control Chile s largest fortunes. Examples include Haldeman Mining Company, which is controlled by the Solari family; Minera Fuego, which is controlled by Isidoro Quiroga, who made his fortune in salmon-farming; and Andes Iron, which is backed by Carlos Delano, a shareholder in Penta Group, one of Chile s largest financial holdings.

3 There is also growing institutional involvement, with prime examples being IMT Exploracion Minera and Fondo Minero, both of which are managed by domestic investment banks. This newfound culture of mining investment in Chile could well undergo exponential growth if Chile s new government goes ahead with plans to reform the country s concession system. According to the Bachelet government, the current system of concessions acts as a barrier to new players who wish to participate in Chile s mining industry. The current rules have allowed huge swathes of northern Chile to be carpeted with claims that owners can hold almost indefinitely in exchange for a minimal fee and with no obligation to explore or mine. Moreover, ownership is highly concentrated with just ten companies holding almost 40% of the nation s mine and exploration concessions between them. Although details of the reforms have yet to finalised, the government has said that it wants to proceed at a fast pace and that its aim is not to strip concessions from current holders, but to find the means to encourage them to explore and develop them or, if not, let them go. The investment trend evident in Chile has not gone unnoticed elsewhere in the region and comparable developments are emerging in markets such as Mexico, Peru, Colombia and Brazil, to name a few. New players are diversifying into mining and are increasingly willing to invest cross-border. Benefiting from the expansion of this investor base requires an understanding of who s who and an ability to engage with the new players at the right level. As companies enter the region and expanded across borders, they will need to have on board senior managers and directors that are more representative of their new strategic and operational model. The demand for experienced, well-connected, multi-cultural and multi-lingual personnel will intensify. Beyond Chile, Peru is today probably the most exciting mining environment in Latin America. This ranking stems from the nation s excellent geology, low exploration penetration, substantial project pipeline and somewhat lower operating costs. However, the development of Peru s mining sector faces a number of challenges, including inadequate infrastructure and, more significantly, growing community activism motivated by a range of factors. For some, opposition to mining stems from a genuine desire to protect traditional ways of life or the environment. For others, anger at not receiving the full economic benefits promised by government. This community activism and the related tightening of environmental standards is prevalent throughout the region, but probably has its strongest manifestation in Peru, where many of the mining projects are of significant scale and are being developed in areas that encroach upon communities that have lived on the land for centuries. To varying degrees throughout Latin America, securing and maintaining a social license to operate is a growing challenge and has become of paramount importance for both mining companies and governments. The motivation for mining companies to address the challenge is obvious. A social licence to operate is now just as important as a legal one. In the case of governments, the motivation stems primarily from an appreciation of the contribution that the mining sector can make to economic growth and to their ability to finance the growing expectations that their constituents have in areas such as infrastructure, education, healthcare, jobs and more. The increased complexity and cost of securing the required social licence represents an opportunity for those firms that have experience in dealing with the process. In this regard, Australian mining companies and advisory

4 firms should be well-positioned to benefit from the experience that they developed from dealing with indigenous communities in Australia. Addressing the social licence challenge and the overall push for sustainable mining will require a thorough understanding of local issues, a comprehensive strategy for engaging with all relevant stakeholders and, just as importantly, finding the right local partners to help navigate through the process. Mining companies across the region also increasingly have to respond to growing resource nationalism, as governments look to extract greater revenue from them to meet their budgetary obligations. Examples include Mexico which is in the process of introducing a new 7.5 percent mining royalty and Chile where the Bachelet government proposes to increase the corporate tax rate from 20 to 25 percent and to require companies to pay tax on all of their profits, not just those paid out as dividends. Moving forward, I believe that what Latin America s mining sector has to offer is of such a scale and so compatible with the strengths of Australia s mining and METS companies that Australia needs to significantly ramp up its commitment to the region. Business is becoming increasingly global and companies cannot afford to limit their activities to the convenience and comfort of their home markets. The new operating paradigm will increasingly favour those suppliers that are leaders in their respective fields, that have global coverage and that enjoy strategic relationships with their customers. In that context, Latin America s mining credentials make it an essential hunting ground. In exploiting the opportunities that the region has to offer, companies need to be more adventurous, more strategic and more committed. Generalised or stereotyped assessments of the region s markets will not suffice. What is required is in-depth market intelligence and strategic planning that builds on the region s network of FTAs and regional groupings; that anticipates industry trends and cross-border investment flows; and that connects Australian business to the region s capital markets and business elite. Companies need to look beyond the traditional Chile-Peru-Brazil axis and to assess and operate in less well-known markets. They need to understand and to make optimal use of the interaction and increasing trade and investment connectivity between markets in the region. Companies also need to cease treating the Latin American region as a secondary market - one which is on the radar, but not a critical part of the overall business strategy. The opportunities on offer easily justify a wholehearted commitment and the investment of the time and money needed to make the region a core operating environment. Companies that are serious about the region need to ensure that their boards and senior management ranks include individuals with experience of doing business in Latin America. They need to develop a pool of executives that have the linguistic skills, cultural understanding and market know-how required to operate in the region, and just as importantly, who also have the company s trust and support. Companies also need to commit to bolstering their presence in the region and, where appropriate, to developing a manufacturing capability in the region. Simply relying on exporting to the region is unlikely to deliver the platform that is required in order to capture significant market share.

5 Planning needs to have a mid to long-term perspective and to target regional penetration, not just single market success. In many instances, it may need to involve partnerships and alliances with local players. For some it may also need to involve engaging with government and other institutions that can impact business success. In short, Australia s mining sector companies should treat Latin America as a core priority. They need to duplicate in Latin America the type of presence - in terms of operations, relationships and profile - that they have in Australia. Is what I am advocating an ambitious goal? - Definitely! Is it a realistic one? - Yes, given the proper commitment and resources, both human and financial! As should be evident, the rewards on offer are considerable. The question is whether Australian business has the foresight and courage to accept the challenge and to do the hard work.