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Investment crucial for growth of South American mining industry

26th July 2013

By: Sashnee Moodley

Senior Deputy Editor Polity and Multimedia

  

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The fulfilment of the South American mining industry’s potential for growth lies not only in the resource-rich areas of the continent, but also in the ability to articulate the several challenges and the eagerness of government to help on this, given the complexity of such kinds of investments.

Global strategy consultancy AT Kearney South America partner Dario Gaspar states that local governments and mining companies need to invest in infrastructure, qualified personnel and energy requirements for the diverse mining expansions on the continent.

He states that Brazil and Chile, which have the most mined iron-ore and copper respectively, remain the two most mined areas on the continent. Brazil accounts for most of the investment in the mining sector and Chile is increasing its output.

According to audit, tax and advisory firm PricewaterhouseCoopers, in 2011, South America took up 32.6% of the world’s $98-billion of investments in the mining sector. According to the Brazilian Mining Association Instituto Brasileiro de Mineração (Ibram) Brazil will receive an investment of $75-billion between 2012 and 2016 and this represents 18.75% of the total over the next four years.

Minas Gerais, an area in the south-east region of Brazil, will make up 35% of invest- ment in the continent’s mining sector between 2012 and 2016. Pará, a state in northern Brazil, accounts for 24% of investment, according to Ibram’s 2012 information and analyses of the Brazilian mining economy.

In Chile, diversified mining company BHP Billiton reported last year that its Escondida copper mine was expected to produce fine copper at a rate of about 1.3-million tons a year during the second half of 2014 and the first half of 2015, compared with the slightly less than 820 000 tons produced in 2011.

The most productive region on the continent is Ancash, in northern Peru, where almost a third of the Peruvian copper was extracted in 2011.

Gaspar adds that there is also potential for further growth in the mining industry, but will depend on the global demand and how countries are going to address several issues that have accumulated in previous years. These issues include lack of resources.

“For instance, Brazil achieves full employment – 6% of unemployment – and is facing flattened growth, infrastructure needs and changes in mineral rights,” Gaspar says.

AT Kearney’s Sao Paulo principal Carlos Higo adds that like other countries around the world, there is the increase in mining royalties, in Brazil, from 2% to 4% and the Peruvian government’s announcement in 2011 of three new mining royalty or tax schemes to fund antipoverty initiatives and infrastructure projects.

In the case of Peru, Higo believes that this is a positive sign for the sector, as this new Peruvian tax scheme will help maintain the mining sector’s competitiveness and provide government with an additional $1-billion a year in revenue.

The Brazilian new mineral rights are being discussed.

Peruvian President Ollanta Humala announced in May that the funds would be used to support infrastructure investments.

Colombia, the 26th largest country in the world, has created a National Agency for Minerals to attract more foreign investment. Major gold mining companies that operate in Chile, such as Barrick Gold and Goldcorp, have resulted in an expected growth in gold output at a yearly average rate of 1.8%, according to the first quarter of Business Monitor International’s ‘2013 Chile Mining’ report.

Meanwhile, AT Kearney’s Johannesburg principal Tim Dröge believes that Chile’s mining sector will grow owing to invest- ment in gold mining and diversification away from copper in the mining sector.

He adds that Peru, the 20th largest country in the world, maintains one of the strongest project pipelines in the Americas region, with copper projects accounting for the largest proportion.

Further, despite not being a top-ten producer, continued investment in the gold sector in greenfield and existing projects will ensure that Brazil remains an important contributor to global gold supply, Dröge states.

He further predicts that global mining giant Vale will remain the most significant mining company in Brazil and the largest iron-ore producer in South America, adding that it will maintain its dominant position with expansions at its main Carajás iron-ore mine, in Pará, which supplied 109.8-million tons of iron-ore a year in 2011. This will increase Vale’s total ore production in Pará to 230-million tons a year once the expansion is complete.

Sector Challenges
Gaspar cites a lack of infrastructure as a major concern in the South American mining industry. Willis Mining Market Review Spring 2013 reports that South America will have to invest about 9% of its gross domestic product in infrastructure every year from now until 2020, to eliminate the gap between it and South-East Asia.

Attaining qualified personnel is another challenge.

“Like Peru, Colombia’s rich mineral resources have delivered substantial revenues, despite labour issues and development problems. Meanwhile, Brazil is now at full employment, observing labour cost increases and labour scarcity,” Gaspar says.

The South American mining sector is also operating amid expensive energy costs and the sourcing of cheap and reliable electricity is a hindrance to the sector.

Natural disasters, such as the earthquake that hit Chile in 2010, which halted almost one-fifth of the country’s copper-mining capacity, and the availability of water also pose a threat to the industry.

Further, South American governments are urging mining companies to comply with the countries’ mining sector legal requirements to achieve transparency and attract more foreign investments.

South American governments and society have also increased the demands for mining companies to reduce the impact of mining operation on the environment and increase their contribution to local communities and the economy.

“Environment management plans are being implemented and companies not only seek to comply with environmental laws but also strive to become references in sustainability. From 1990 to 1995, 45% of the mining companies adopted measures in addition to those required by the licensing process. Today, 93% of the mining companies perform actions that go beyond the legal requirements. An example is Brazil, where the mining sector contributes, with greenhouse-gas emissions of less than 0.5%,” he highlights.

In 2010, the US Geological Survey noted that South American mining led the global industry in some areas. Brazil was the world’s leading producer of niobium and tantalum, the third-ranked producer of iron-ore, in gross weight, and the regional leader in the production of bauxite and crude steel.

Chile was the world’s leading producer of iodine and lithium and copper, in terms of mine output and refined metal. It was the second-ranked producer of arsenic and the third-ranked producer of boron.

Meanwhile, Argentina, Bolivia and Peru were also among the world’s leading producers of base and precious metals and industrial minerals. Argentina was the world’s second-ranked producer of boron and Bolivia was the second-ranked producer of antimony. Peru was the world’s leading producer of silver, the second-ranked producer of bismuth and copper, the fourth-ranked producer of lead and the region’s leading producer of tin, according to mine and metal production.

Edited by Megan van Wyngaardt
Creamer Media Contributing Editor Online

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