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2017 Report on Mining Industry of Latin America by Americas Market Intelligence

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This Latin American mining industry market research report from Americas Market Intelligence (AMI) was presented by AMI managing director John Price in Lima, Peru in October 2016.
This Latam market research report looks the downward trend in Latin American commodities and the impact of competitiveness in driving investment in the region, comparing countries that enacted reforms in this area versus those that did not and the projected growth or contraction in both cases.
AMI’s Latin American market intelligence report also details growth drivers in Latin American economies like undervalued currencies and demographics. It then does a jurisdiction analysis of different countries—Peru, Argentina, Colombia, Chile, Ecuador—in terms of their mining laws to break out strengths and weaknesses while highlighting risk areas. The Latin American mining market intelligence report also offers best practices for mining investors targeting Latin America for all phases of operation, including pre-investment, build-out and operating phase.
About Americas Market Intelligence
Americas Market Intelligence (AMI) is the premier market intelligence company for Latin America, providing powerful insights for companies to succeed in a wide range of verticals in the region, including payments, healthcare, logistics, resources/infrastructure, Cuba, consumer and more. Its customized research reports deliver data-based clarity and granular strategic direction based on expert sourcing.

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2017 Report on Mining Industry of Latin America by Americas Market Intelligence

  1. 1. 1 LAC eco-political trends and mining risk analysis Presented at MILA conference in Lima – 2016.10.24
  2. 2. 2 Legal notice Wherever possible, AMI has verified the accuracy of information provided by third parties, but does not under any circumstances accept responsibility for such inaccuracies should they remain unverified. It is expected that the reader will use the information provided in this report in conjunction with other information and with sound management practices. AMI therefore will not assume responsibility for commercial loss due to business decisions made based on the use or non-use of the information provided.
  3. 3. 3 ca About AMI
  4. 4. 4 More than two decades of seeking to understand the region 1993 1995 1997 1999 2000 2002 2003 2006 2007 2011 2015 InfoMex is founded in Mexico City First studies conducted in South America, name changed to InfoAmericas Office opened in Sao Paulo Tendencias launched, the most widely read regional intelligence newsletter Office opened in Miami InfoAmericas joins the Global Intelligence Alliance (GIA) as its Latin American member Five industry practices are introduced AMI consultants complete their 1,000th client engagement in Latin America InfoAmericas is sold to Kroll, forming Kroll’s first market intelligence division Key members of the former InfoAmericas team form AMI, with offices in Miami and Mexico City AMI launches Sao Paulo affiliate office 2,000th client engagement completed
  5. 5. 5 We deliver the intelligence You need information to make smart business decisions Growth Opportunity Benchmarking Market Assessment Customer Research Investment Viability Partnering Strategic Planning Risk Competition Unethical competitors Political Reputational Economic Regulatory Performance Market Share Best Practices Brand Awareness Customer Satisfaction
  6. 6. 6 How AMI supports natural resources and infrastructure investors Political Risk Competitive Risk ReputationalRisk EconomicRisk Pre-investment phase Reputationalduediligenceof companiesandindividuals Counterparty risk assessment Operating phase Competitive risk monitoring Political and regulatory risk monitoring Strategicplanning researchsupport Strategicpartner duediligence
  7. 7. 7 Unmatched on-the-ground intelligence network Over 300 assets in 110 cities Having collaborated together on an ad-hoc basis for over a decade, AMI and Southern Pulse have formalized an operative alliance. Together, our two firms bring to our clients a network of over 300 consultants and investigators across more than 100 cities in 28 Latin American and Caribbean countries. Complex investigations that delve into local political, competitive and security issues relies on local human intelligence. Since the 1990s, our firms have carefully built a network of reliable and trustworthy affiliates whose relationships penetrate all levels of political and corporate circles. Since 1993, our combined firms have conducted more than 3,000 market intelligence cases including: • Competitive intelligence • Political risk monitoring & analysis • Due diligence & background checks • Fraud investigations • Security risk analysis & monitoring Robust collaboration Wider network
  8. 8. 8 Leading trends shaping LAC
  9. 9. 9 LAC’s most important commodities are trending low Low oil prices hurt the currencies and fiscal balances of Venezuela, Ecuador, México y Colombia but are a blessing to the Caribbean and Central America Coffee Wheat Gold Copper Historic highAverageHistoric low Silver Soy bean Wheat Iron Oil Natural gas Source - EIU
  10. 10. 10 Competitiveness matters With the commodity windfall gone, LAC must compete for investors and decrease waste Countries that reformed themselves in the past will now reap the relative benefits 2.1% 2.6% 2.3% 3.4% -4.2% -1.2% -7.0% 35 57 61 69 75 106 132 10 40 70 100 130 160-8% -6% -4% -2% 0% 2% 4% Chile México Colombia Perú Brasil Argentina Venezuela 2016 GDP growth Doing business in (World Bank) ranking Sources– EIU, IMF, World Bank
  11. 11. 11 Mid-2016 marks the bottom of the down-cycle Over $1 trillion USD of regional GDP disappeared but will recover by 2019 Latin America Nominal GDP (USD Billions) Sources – IMF, AMI analysis $2,416 $1,772 $1,720 $1,938 $2,104 $1,304 $1,152 $1,065 $1,127 $1,224 $599 $644 $546 $678 $798 $377 $291 $190 $307 $353 $258 $240 $246 $266 $291 $203 $192 $217 $244 $293 $577 $219 $206 $300 $360 $336 $329 $346 $363.18 $375.89 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 2014 2015 2016 2017 2018 Brazil Mexico Argentina Colombia Chile Peru Venezuela ROLA
  12. 12. 12 Short term growth driver – undervalued currencies Falling commodities combined with Brexit triggered currency overselling. Currencies will rise (vis-à-vis the USD) towards their historic average… unless the Fed grows hawkish Source – EIU Big Mac index -52.9% -40.0% -39.7% -33.6% -32.9% -29.9% -18.3% -5.1% -27% -20% 1% -15% 15% -16% -20% 22% Mexico Peru Colombia Argentina Venezuela Chile Costa Rica Brazil Ten-Year Trailing AVG August 2016 Index
  13. 13. 13 Population by age group in Latin America for 2010 and 2020 2010 2020 57 mi 83 mi 255 mi 296 mi 104 mi 105 mi 160 mi 149 mi 60+ 25-59 15-24 0-14 Sources – ECLAC, AMI analysis 99 mi 97 miMillennials (14-32) Millennials (24-42) Long term growth driver – LAC’s demographics Fewer children, more working women = consumption growth through 2030 100 million millennials are now of working age
  14. 14. 14 Even more than an economic crisis, this is a fiscal crisis South American governments have not cut costs in line with the fall in tax revenue Fiscal deficit/surplus as % of GDP Sources – World Bank -2.3% -2.6% -1.8% 0.6% 2.3% -0.9% -4.9% -10.4% -3.5% -4.0% -2.2% -2.1% -5.3% -20.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% Brazil Mexico Argentina Chile Peru Ecuador Venezuela 2012 2015
  15. 15. 15 Scarcity breeds pragmatism South American governments are shifting policies towards a pro-business stance Examples of LAC’s political shift to the right • Argentines elected a pro-business President who has moved quickly to unwind over a decade of destructive populist policies. • Brazil’s congress impeached Dilma. President Temer and a center-right cabinet are aggressively pursuing fiscal discipline and economic reform. Federal prosecutors deepen their investigations. • Peruvians elected a proven technocrat who promises to foster more investment in Peru. • Venezuelans elected an opposition party dominated congress in their December 2015 elections. • Bolivians denied Evo Morales the opportunity to run for a fourth consecutive term in office. • Ecuadorians denied Rafael Correa the option to seek another term in the 2017 elections.
  16. 16. 16 Key jurisdiction analysis
  17. 17. 17 Peru – leading the recovery of LatAm mining investment PPK’s victory combined with tested mining laws inspires investor confidence Strengths • PPK government serious about lowering corruption, more infrastructure and less mining red tape • Peruvian mining laws encourage investment • Legislation pending to formalize 70,000 miners • Established political class supports mining • Qualified mining labour pool Strengths • PPK government serious about lowering corruption, more infrastructure and less mining red tape • Peruvian mining laws encourage investment • Legislation pending to formalize 70,000 miners • Established political class supports mining • Qualified mining labour pool Weaknesses • Royalty trickledown is inconsistent or ineffective • Local communities target their anger re: lack of royalties at the mining companies • 2012 mandate for special treatment of indigenous can delay permitting • Over 200 permits per mine on average • Coca production funds illicit groups Weaknesses • Royalty trickledown is inconsistent or ineffective • Local communities target their anger re: lack of royalties at the mining companies • 2012 mandate for special treatment of indigenous can delay permitting • Over 200 permits per mine on average • Coca production funds illicit groups Local political & social risk Security risk Risk areas
  18. 18. 18 Chile – maturing democracy = stronger civil society Miners must contend with non-elected political players and an independent judiciary Risk areas Legal risk Local political & social risk National political & regulatory risk Strengths • The most admired mining laws in the region • Efficient permitting process • Easy to secure mining rights & defend them • Established political class supports mining • Qualified labour force. Professional services support. Strengths • The most admired mining laws in the region • Efficient permitting process • Easy to secure mining rights & defend them • Established political class supports mining • Qualified labour force. Professional services support. Weaknesses • Anti-mining environmentally focus civil society is well organized, allied with indigenous groups and popularly supported • Most mining assets located in arid regions – water usage is often controversial, even conflictive • Independent judiciary unafraid to adjudicate mining conflicts Weaknesses • Anti-mining environmentally focus civil society is well organized, allied with indigenous groups and popularly supported • Most mining assets located in arid regions – water usage is often controversial, even conflictive • Independent judiciary unafraid to adjudicate mining conflicts
  19. 19. 19 Argentina – mining now enjoys strong federal support The decentralized jurisdictional model now works against Argentina Local political & social risk Operational & bureaucratic risk Strengths • Macri admin named mining one of four pillars for FDI development. Sec. Meilán promoting aggressively. • Passed reforms: no more export taxes & royalties, re- permitted open-pit mining • Wants to legislate cohesive federal-provincial accord • Similar geological construct as Chile but less developed Strengths • Macri admin named mining one of four pillars for FDI development. Sec. Meilán promoting aggressively. • Passed reforms: no more export taxes & royalties, re- permitted open-pit mining • Wants to legislate cohesive federal-provincial accord • Similar geological construct as Chile but less developed Weaknesses • Strong environmental movements led to recent bans on open-pit mining and some chemical use • Decentralized mining legal environment • Some provincial restrictions operate in violation of more liberal federal codes • Provincial alignment challenging if transfer payments aren’t maintained, or Macri loses political capital Weaknesses • Strong environmental movements led to recent bans on open-pit mining and some chemical use • Decentralized mining legal environment • Some provincial restrictions operate in violation of more liberal federal codes • Provincial alignment challenging if transfer payments aren’t maintained, or Macri loses political capital Risk areas
  20. 20. 20 Colombia – mining struggle to compete with other interests In contrast to hydro-carbons, mining does not enjoy widespread political support National political & regulatory risk Security risk Strengths • Under exploited geology – large proven deposits • Consistently pro-investment governments • Improving infrastructure • March towards peace has dramatically improved security, even if some regions remain vulnerable Strengths • Under exploited geology – large proven deposits • Consistently pro-investment governments • Improving infrastructure • March towards peace has dramatically improved security, even if some regions remain vulnerable Weaknesses • Property title rights can be challenged • Environmental permitting is slow and sometimes challenged after initial approval • Uncoordinated agencies cause delays • Even if peace is rescued, serious security issues continue, especially near Venezuela border • Total tax burden double that of Peru or Chile • Informal mining abounds, hurts industry Weaknesses • Property title rights can be challenged • Environmental permitting is slow and sometimes challenged after initial approval • Uncoordinated agencies cause delays • Even if peace is rescued, serious security issues continue, especially near Venezuela border • Total tax burden double that of Peru or Chile • Informal mining abounds, hurts industry Risk areas Legal risk
  21. 21. 21 Ecuador – running out of $, Correa tries to befriend mining Dollarization limits monetary policy. Ecuador needs investment and must limit imports. Legal risk National political & regulatory risk Strengths • Correa admin has changed (again) it stance on mining, seeking to attract new investments • Useful amendments to tax laws implemented • Opening 25 concessions to attract $750m Strengths • Correa admin has changed (again) it stance on mining, seeking to attract new investments • Useful amendments to tax laws implemented • Opening 25 concessions to attract $750m Weaknesses • Ecuador does not recognize jurisdiction of foreign courts in any legal conflict with the state • Arbitration must take place in LatAm • Balance of payments crisis triggers import restrictions, causing delays to miners • Capital gains tax increases add to burden • Correa grip on power loosening – may lead to power vacuum and unpredictable investment climate Weaknesses • Ecuador does not recognize jurisdiction of foreign courts in any legal conflict with the state • Arbitration must take place in LatAm • Balance of payments crisis triggers import restrictions, causing delays to miners • Capital gains tax increases add to burden • Correa grip on power loosening – may lead to power vacuum and unpredictable investment climate Risk areas
  22. 22. 22 Guyana – a wild west backdrop, but friendly to mining Despite a conflictive history as a young democracy, Guyana has always welcomed mining Operational & bureaucratic risk National political & regulatory risk Security risk Strengths • Granger admin has embraced US, IMF, World Bank • Supportive of mining – trying to formalize sector • Elected on anti-corruption, improvements made • International arbitration the norm. Local courts respect foreign court decisions • Broad public support for mining, prospector culture Strengths • Granger admin has embraced US, IMF, World Bank • Supportive of mining – trying to formalize sector • Elected on anti-corruption, improvements made • International arbitration the norm. Local courts respect foreign court decisions • Broad public support for mining, prospector culture Weaknesses • Poor infrastructure. Mines reached by plane, boat • Informal mining abounds, hurts sector reputation • Money laundering infiltrates many local suppliers • Lack of technical support and equipment operators • Very strong political party rivalry could politicize future large scale investments. Weaknesses • Poor infrastructure. Mines reached by plane, boat • Informal mining abounds, hurts sector reputation • Money laundering infiltrates many local suppliers • Lack of technical support and equipment operators • Very strong political party rivalry could politicize future large scale investments. Risk areas
  23. 23. 23 Mining investor best practices
  24. 24. 24 Pre-investment phase Research the entire risk eco-system. Build partnerships to ward off future risks. • Assess attitudes beyond exec branch including senate, house leadership and opposition. • Build bridges to mining experts in all areas of gov’t Government relations • Include powerful and politically neutral local investor or two investors connected to leading parties. • Include development bank with loans to government Co-investors • Political risk analysis should include deep dive on local players – political, NGO, labor, religious, community leadership. • Identify money links to national players Local community • Profit based (vs production based) will create fewer conflicts when prices rise again • Negotiate guaranteed payments to local community Royalties & taxes
  25. 25. 25 Build-out phase Use the leverage of monies spent to form political allies, build partnerships, connect locally • Work with gov’t to build a mining education / training facility near the mine to enhance long term employability of locals, and foster community support Training • Establish local outreach office outside mine in local community • Build (or support) local committee made up of govt, labor, NGOs, other to administer local royalties Local relations • Invite political leaders from all branches, including opposition to visit the mine along with press. • Set expectations re: future tax flows Government relations • Get out ahead of local sourcing complaints by hiring locally, and publicizing • Work with politically connected local suppliers Procurement
  26. 26. 26 Operating phase Utilize intelligence & influential partnerships to anticipate and mitigate risk • Develop advisory board that includes powerful local business leaders, influential civil leaders, local mining experts • Use board to build bridges Advisory board • Monitor locally and nationally • Focus on anticipating problems so they can be proactively mitigated • Align with gov’t & community relations budgets • Control your IT assets Intel program • Build program and budget around the mitigation of perceived threats – adjust over time • Energy sector = best practices Gov’t & community relations • Work with other formal miners to foster industry wide best practices • Cooperate on efforts to educate politicians, journalists, NGOs and public Industry cooperation
  27. 27. 27 About AMI AMI is Latin America’s leading independent market intelligence consultancy Our founding partners helped pioneer the field of market intelligence in Latin America Our consultants have advised over ½ of the region’s 100 largest strategic investors over a span of two decades AMI consultants have conducted close to 2,000 client engagements in Latin America since 1993 Our consultants have worked in every market in Latin America Our holistic approach to market intelligence is unique. We combine market research, competitive intelligence, political analysis and economic forecasting in our studies. Few others do the same in Latin America AMI is an affiliate of the Global Intelligence Alliance (GIA), the world’s leading independent Market Intelligence network with 26 representative offices spread across six continents. John Price, MD +1 (305) 441-9300 jprice@americasmi.com

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