One of the themes of the current gold bull market is the leveling off of new mine supply after many years of steady increases. South Africa and the major growth regions of the past (Nevada, Western Australia) are now in decline and there is not enough being developed elsewhere to grow global production. One of the most important regions of emerging growth for the industry is South America. Peru is now the fifth largest gold-producing country in the world. Since 1992, gold production in South America has doubled and now totals 18% of new mine supply. While there are no districts as prolific as the Carlin Trend of Nevada or the Wits Basin of South Africa, there are many areas across South America that nonetheless have very good potential. We have visited a number of gold companies in Brazil,
Argentina, Chile and Ecuador this year to further assess the geologic potential and gauge the geopolitical risk.
Chapada processing plant showing the SAG mill (top background) and ball mill (left foreground). Mills are used to grind the rock into fine particles before further processing to extract the gold and copper. Ore moves through the SAG mill before being fed into the ball mill. |
Brazil
Brazil led the world in gold production in 1693 under Portuguese rule. The country has never regained that prominence and it wasn't until 1989 that foreign companies could own a majority of a mining operation. From a commercial perspective, Brazil can be divided between north and south. The Amazon region to the north has poor infrastructure, a large indigenous population, and is more environmentally sensitive. It is not a favorable area for mine development, and most of the mining there comes from small-scale artisanal or illegal activities.
Southern Brazil is home to CVRD, one of the largest diversified mining companies in the world. Infrastructure is extensive, while the business culture and level of education make it a very good place to develop a mine.
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Gold occurs widely throughout Brazil, although the deposits there tend to be low in grade. In fact, we visited the world's lowest grade mines in three categories: open pit gold, underground gold and copper/gold.
Kinross' Paracatu mine processes rock with grades so low that others might consider it waste. However, Paracatu is a large, near-surface deposit that has been free digging (i.e., no drilling and blasting needed), which dramatically reduces costs and enables low grades to be viable. Since buying out their partner two years ago, Kinross has proceeded to dramatically expand the deposit through exploration in an area previously thought to be barren. They are now constructing a plant that will boost production to over 500,000 ounces per year (from 200,000) over a 30-year life (the average life of a gold mine is around 10 years). Yamana's Chapada mine is enjoying a successful start of production this year. The high metals prices have certainly helped this low-grade copper/gold porphyry. Equally important is the level of engineering and metallurgical expertise the company has come to rely on in Brazil. While mine labor is very tight throughout the world, there seems to be more skilled people available in Brazil. Unlike Chapada, Yamana's Jacobina mine is proving to be problematic. Underground mining at grades of 2.3 grams gold per tonne leaves little margin for error, as this is about half the grade required to operate an underground mine in Canada. Unfortunately, a sill pillar collapsed in a mined-out area in January, which severely hampered operations and caused their first-quarter cash costs to escalate to $470 per ounce. They have since corrected the cause of the failure and are modifying the mill to save costs. Their goal is to find higher-grade mill feed with their 2007 drilling; however, even if successful, we believe this mine will continue to be a difficult one at current gold prices.
Unlike some provinces in Argentina, Chile has a positive and constructive attitude toward mining. Meridian's Minera Florida mine is located south of Santiago. This processing plant produces a gold/silver/zinc concentrate. It meets environmental standards and Meridian has plans to upgrade and expand the facility. The valley below is rich with dairy farms and vineyards for wine making. The mountainous area adjacent to the mine properties hosts one of 25 worldwide biodiversity centers.
Argentina
Unlike most Latin countries, indigenous Indians in Argentina did not mine gold and the country never developed much of a mining culture. This lack of mining history has both advantages and disadvantages for developers. Argentina has not seen as much prospecting, exploration and discoveries as other countries, even though it has favorable geology (particularly in the west). At the same time, a lack of understanding causes many in Argentina to take a negative view of mining. Investors must be aware of the attitudes toward mining in each province. For example, the governments of La Rioja, Chubut, Mendoza and Rio Negro have all enacted bans on open pits or the chemicals necessary for processing gold ores. These provinces have agriculture or tourist industries that they believe would be harmed by mining. While these fears are unfounded, in areas never exposed to mining, the anti-mining non-governmental organizations (NGOs) have become adept at spreading misinformation that sways public opinion. One of the few major discoveries of this precious metals cycle is Aquiline's Navidad silver deposit in eastern Chubut province. Chubut has a three-year moratorium on mining which was enacted to block development of Meridian's Esquel project, located in western Chubut. The remote location of the Navidad project and the boost it would bring to the economy may entice Chubut to take a friendlier stance toward mining. We visited the Gualcamayo project in the pro-mining province of San Juan. The site is located in the rugged canyons in the foothills of the Andes. Yamana is in the planning stages of a mine at Gualcamayo that will become one of their core assets. Yamana also recently launched an unsolicited bid for Meridian in which one of their objectives, if successful, will be to use the good will the company has built in San Juan to lobby for a permanent end to the moratorium in Chubut.
View of Gualcamayo property. The gold deposit is located high on the canyon walls, partially obscured by clouds. Yamana plans to excavate an open pit with a shaft that will drop the ore to the base of the canyon, where it will be conveyed to the processing facility. This will enable them to avoid trucking down steep canyon roads. |
Ecuador
While there have only been a handful of major gold discoveries so far in this bull cycle, two of them are in Ecuador. This is a country, with no formal metals mining industry, that is sandwiched between Peru and Colombia, two prolific metals producers. Aurelian's Fruta del Norte discovery, located at the edge of the Amazon Basin, is turning out to be one of the most spectacular gold deposits ever found. It is a low sulfidation epithermal vein deposit with similar mineralogy to others around the world. What makes this unique are multiple episodes of gold deposition superimposed on one another that created very thick zones of high-grade ore. The other significant discovery is Iamgold's Quimsacocha deposit located at the top of the Andes near Cuenca, Ecuador's third-largest city.
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Anomalous outcroppings had been drilled in the past with poor results. Iamgold picked up the property in 1999 and, in 2004, drilled the discovery hole by targeting deeper areas further away from the outcrops. The company has initiated a pre-feasibility study to determine how best to develop the deposit. They have several challenges as the rock is potentially acid-generating, the site is at the headwaters of the drainage system that feeds Cuenca, and the ores are metallurgically complex.
Geologists responsible for the Quimsacocha discovery examining the discovery outcrops on the Andean plateau at an elevation of 12,000 feet. |
With these discoveries, Ecuador could be on the cusp of becoming a major gold mining destination. As with many Third World countries around the globe, the only thing holding the industry back is uncertainty about government policies. The country has had eight presidents in the past 10 years. Rafael Correa is the newly elected populist president who has befriended Hugo Chavez, effectively kicked Occidental Petroleum out of the country, and neutralized Ecuador's Congress in order to rewrite the constitution. Why would anyone invest there? First, mining is a difficult business that requires special skills. Most of the major oil companies thought that metals mining was a logical place to invest their windfall profits in the 1970s and 1980s. |
They spent lots of money, underestimated the risks and challenges, and today there are no oil companies left in the mining business. Likewise, most governments aren't able to acquire the skills and capital needed, which is why mining companies are often able to operate in countries with high business risk. Second, in many instances the reports we read in the press do not accurately portray the mood, outlook or political reality within a country. This is a key reason for traveling to controversial areas that have good geologic potential. In addition to visiting with in-country personnel of five mining companies, we had the opportunity for a one-on-one discussion with Ecuador's former vice minister of mines who remains very much engaged in the business.
Ecuador's economy has little diversification. The largest industry is oil and gas, which is in a worrying decline. The rest of the economy is mainly agriculture, dominated by bananas, flowers and shrimp. Ecuador also has a large immigrant population working in the United States and Spain, whose repatriated earnings are a major driver of the economy in Ecuador. This is also a hot social issue in Ecuador, as the separation of many families is taking its toll. Madrid flights from Guayaquil pack the airport with friends and family seeing their loved ones off.
As we traveled through Ecuador, the topic of politics was inevitable and we heard a full range of opinions - from those who thought Correa would not survive his first term to those who believed that despite the controversy, the nation is ready to move forward under this leader. Another failure is unacceptable. Correa's approval rating stood at 62% as of mid-July. Part of his popularity stems from voters' disdain for the concentration and abuse of power by the ruling party. In order to dismantle this power structure, Correa has called for the constitution to be rewritten by an assembly which will be elected on September 30. As we understand it, the aim of the new constitution is not to mimic Chavez's fascist agenda in Venezuela. Instead, some of the objectives will be to broaden the power base, upgrade the eligibility requirements for congress, and increase transparency in order to reduce the potential for corruption. It will also mark a new starting point to move forward.
Prior to being elected president, Rafael Correa was a U.S.-educated economics professor. We assume he knows the vital role free markets and the rule of law play in developed economies. While his rhetoric so far has been anti-business, the actions of government speak otherwise, as they have serviced their debt and enabled preferential tariffs with the United States to be extended. He has also toned down his anti-U.S. comments recently. It is unfortunate the country must endure many months of inaction while the government retools. The state has no money and Correa does not have the means to improve the lives of his constituency without business development. We believe that, ultimately, the revised laws under the new constitution will be fair to both government and business. Correa has announced the formation of a new Ministry of Mines, separate from the Ministry of Energy. A permanent mines minister has yet to be appointed. This acknowledges the importance and potential of mining to Ecuador. The mining code was written in 2001 under World Bank guidance. It is missing some key provisions that are common in other mining jurisdictions, namely some form of government royalty and proper incentives to develop properties. Nationalization is not on the agenda; rather, a process of negotiation is now under way to make the mining code more equitable.
Presidential Palace in the capital city of Quito. |
There are two risks to a positive political outcome for the mining industry. One is that Correa and the assembly are not able to engineer a constitution that achieves the needed changes, Correa loses his popularity, and government becomes further paralyzed. Plans are for the constitution to be ratified in the spring of 2008, so the outcome will evolve over the coming year. The other risk is the influence that NGOs have in Ecuador. |
Mining in Ecuador consists of individuals or small-scale cooperatives which have little regard for the environment.
Ecuadorians currently seem to largely lack the vision of a modern mine with environmental controls and state-of-the-art technology. Because of this, anti-mining NGOs have gained a foothold and there are many in government who are aligned with them.
These are organizations that receive their mandate and funding from environmental groups in Canada, the United States and Europe. The more radical groups have paid peasants to be bussed into mining projects to block roads and protest. Corriente Resources is developing a copper project in southern Ecuador in which such a protest turned violent when local villagers who support the project clashed with the outsiders. The government shut down the operation in order to avoid further chaos. There were protests at Quimsacocha the week before we arrived that have hampered Iamgold's ability to move the project forward. NGO activity is a wild card that developers must deal with around the globe. Hopefully, Ecuador will provide the means to keep them from disrupting legitimate and responsible development.
Quick Facts*
Brazil
Capital: Brasilia
Population: 190,010,647 (July 2007 est.)
Languages: Portuguese, Spanish, English, French
Natural Resources: Bauxite, gold, iron ore, manganese, nickel, phosphates, platinum, tin, uranium, petroleum, hydropower, timber
Argentina
Capital: Buenos Aires
Population: 40,301,927 (July 2007 est.)
Languages: Spanish, English, Italian, German, French
Natural Resources: Fertile plains of the pampas, lead, zinc, tin, copper, iron ore, manganese, petroleum, uranium
Ecuador
Capital: Quito
Population: 13,755,680 (July 2007 est.)
Languages: Spanish, Amerindian languages (especially Quechua)
Natural Resources: Petroleum, fish, timber, hydropower
*Taken from the CIA World Fact Book, 2007
Represents the opinion of the author and may differ from those of other persons. The opinions of the author are not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.