Can Colombia Attract Mining Investors?

The economics for mining gold and other precious metals is in flux. Emerson’s Juan Carlos Bravo, a member of the metals and mining industry team, looks at its impact on the Latin American country of Colombia.

Emerson's Juan Carlos BravoColombia is the world’s tenth-largest coal producer and it supplies 55% of the world’s emeralds. As reported in an article, Digging deeper, by The Economist on August 3rd, Colombia’s government announced a new National Mining Agency that will begin accepting requests for mining. The government wants promote investment in the largely untapped mining resources of that country, especially gold, but with tighter controls. Next year, the government will submit for congressional approval a new mining code, which will ban digging in protected areas and set up bidding rules.

It will seek to formalize the role of unlicensed, small-scale miners, giving them a special tax rate, and try to distinguish them from the gangs that extort them and mine gold illegally. So far, the new rules seem to have pleased nobody. Unions and environmentalists held marches across the country on August 1st, demanding stricter environmental safeguards.

In my opinion, the biggest challenge is to convince investors to come and invest in Colombia. As we have seen in Peru, mining companies are cautious when facing government intervention and local community opposition. Also, specific to Colombia, the country’s endemic violence has traditionally caused investors to look elsewhere for opportunities. It has improved quite a bit lately, but they will have to demonstrate that it can be sustained.

Very recently, we have seen flattening commodity prices and increasing production costs, which are reducing profit margins. This is causing the mining companies to shy away from new mining endeavors while continuing to invest in existing mines.

Source: Google Finance – Market Vectors Gold Miners ETF Trust (NYSEARCA:GDX)

Let’s take the gold industry as an example. As explained in the Wall street journal article, Gold Chiefs Are Melting Away, gold-mining stocks have not performed as well as the gold price—in part because exchange-traded funds have leached away investment dollars. It also reflects cost inflation eroding profit margins and project delays impeding growth. Ultimately, the miners are stuck between rising costs and a flat gold price. This means they are paying very low dividend yields, and shareholders no longer see the reward commensurate with the risk. The article concludes by saying that gold mining CEOs face an unenviable challenge in rekindling investor interest.

Colombia has the same challenge and need to think in terms of investor’s interest. There are several challenges they can’t control such as economic uncertainty regarding certain commodities and investors seeking returns in line with risks. But they still have an opportunity to attract investors if they create the economic incentives and implement measures such as tax breaks to align the risks and benefits along with the regulations that balance the interests of miners, unions, and environmentalists.

Colombia may one day have a golden future, but they will have to work on it.

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