The end of the commodities supercycle continues to have a dampening effect on several South American economies, especially those that previously relied on high hydrocarbons prices to achieve high rates of growth.

As well as hitting government earnings and rates of economic expansion, the commodity price fall has also led to some significant currency devaluations, increasing inflationary pressures thanks to higher import costs, says provider of critical information, analytics and expertise IHS Markit country risk analyst Peter Low.

“Against this backdrop, several countries have sought to cut State expenditure and promote international investment in mining, infrastructure and other large development projects to rejuvenate their economies and shore up growth,” he tells Mining Weekly.

Miners in South America will remain focused on improving operational performance over the coming years and are expected to maintain austerity strategies, focused on cost-cutting and divestment, to better withstand mineral price volatility and improve balance sheets.

Divergent regulatory policies, meanwhile, stand to either improve or worsen the industry’s welfare. Stabilising mineral prices, albeit muted, will, however, create a buyer’s market for some mining assets in South America, as overleveraged firms shed core mines.

“We expect metal prices to remain supported over the coming quarters, registering a moderate uptick in 2017, as markets gradually tighten, with upside risks stemming from additional Chinese infrastructure investment,” Fitch Group-affiliated market intelligence firm BMI Research analyst Molly Shutt tells Mining Weekly in an interview.

Prime asset sales will attract investment over the coming quarters, particularly in countries with competitive operating costs and established mining industries.

BMI pointed out that, as at the end of September 2015, year-to-date mining investment, merger and acquisition activity in Latin America rose by 7.6% to $2.2-billion. Among the key deals was diversified miner Anglo American’s $1.5-billion divestment of the niobium and phosphate business in Brazil to mining company China Molybdenum in April.

IHS Markit global insight head of commodities analysis Jason Kaplan tells Mining Weekly that higher raw material prices are an opportunity for well-funded companies to take on the assets of firms looking to write down debt. However, he notes that the higher commodity prices are also causing some of those companies to look at the profitability of assets they had put up for divestment. “Some are now reconsidering whether to continue with the divestment, given the higher forecast profits,” says Kaplan.

Macroeconomic Reform
According to Low, the economic downturn, coupled with the weakening or replacement of left-leaning governments across Latin America, has broadly improved the political outlook for the mining sector.

Most national-level administrations now favour the sector’s expansion, with governments in Argentina, Bolivia, Brazil, Colombia, Ecuador and Peru, among others, all seeking to make the local investment environment more attractive. These countries have moved to reduce the overall regulatory burden (although legislative changes have been slow and have not been improved in Brazil) and/or by offering a range of incentives to mining investors, he says.

“However, such efforts face ongoing environmental and local community-related challenges from the judicial sphere – especially in the case of Colombia – as well as from a range of community and environmental-related protests in countries such as Peru, Ecuador and Bolivia,” Low states.

BMI notes that, with varying approaches to macroeconomic reform set to either improve or exacerbate key operational and regulatory challenges facing miners in the region, miners in Latin America are set to contend with several important political and operational risks as the region gradually recovers from the impact of the commodity price bust over the coming years.

Shutt expects Chile, Mexico and Colombia to remain least exposed to challenges, owing to relatively stronger existing infrastructure, established mining industries and little likelihood of government intervention.

Peru and Argentina are also expected to move in this direction, as they are supported by new leadership focused on conventional macroeconomic policies that encourage foreign investment.

Conversely, the Venezuela government’s quick move to nationalise mining concessions, in response to escalating violence during mining protests on September 1, underscores the country’s poor trade and investment outlook and could create significant legal challenges for the few foreign companies operating there.

“Government efforts to expand mining investment are expected to provoke repeated, but largely localised, incidents of unrest in Ecuador, Bolivia and Peru, and, increasingly, in Colombia. Demonstrations and temporary site invasions in Chile are also not uncommon, though these are more frequently driven by labour-related contracting disputes than by environmental concerns.

“The threat of project cancellations because of such protests is, however, offset by the broad support for mining investments at national level, though projects can be delayed and altered if challenged by communities through local courts,” Low points out.

Kaplan adds that one risk stems from the strength of countries’ tendencies toward resource nationalism. Countries such as Australia and South Africa are looking to enhance the value of their natural resources and have discussed or enacted laws on commodity trade.

“These mostly just increase the commodity’s price, but, as we saw with Indonesia’s banning of ore exports, it can bring [about restricted] supply. Recently, the Chile government, such as in its dealing with Anglo American, showed it is a supporter of the market economy to drive its resources industry, but we see evidence to the contrary in Bolivia. This could negatively affect development of Bolivia’s resource sector, such as with its nascent lithium mining industry.”

Capital and Infrastructure
Low notes that the recent rally of copper prices has improved the capital investment prospects for projects involving the red metal. In Peru, further expenditure on the $7.4-billion Las Bambas copper mine, operated by China’s mid-tier global resources company MMG, and the potential revival of Anglo American’s $3.3-billion Quellaveco project, in Moquequa, will likely help reverse a downward trend in investment dating back to 2013.

Ecuador’s main developments next year will most likely include the Mirador copper mine, operated by the Ecuador subsidiary of China’s CRCC-Tongguan Investment, EcuaCorriente, as well as other projects in the country’s south, such as Río Blanco, Loma Larga and Fruta del Norte. The two main projects in Argentina (Pascua-Lama and Potasio Rio Colorado) remain long-delayed.

Perhaps the most serious constraint for mining firms remains the limited road infrastructure and largely nonexistent rail networks, especially in the Andean countries.

“Not only does this serve to keep transit costs of heavy equipment and extracted minerals high, but, as domestic transport is heavily dependent on a small number of trunk roads, it also leaves firms vulnerable to serious disruption during antimining demonstrations. Protestors in mountainous areas frequently mount blockades on select roads as an effective means of exerting pressure on extractive firms and government authorities,” Low highlights.

Lithium Rising
Shutt says Latin America’s ‘Lithium Triangle’ is a regional mining bright spot, as rising lithium prices encourage investment in and development of a robust project pipeline over the coming years.

According to research, important lithium sectors in Latin America will experience solid investment and production growth, supported by increasingly open economic policies and a tightening global lithium market, pushing prices up over the coming years.

“We expect lithium prices to continue on a solid upward trajectory, as rising global demand growth outpaces that of production,” Shutt states, pointing out that the US Geological Survey in 2015 estimated that world lithium mine output increased by about 5% to 32 500 t and spot lithium carbonate prices increased between 10% and 15% last year.

Specifically, an improving business environment in Argentina and a stable business environment in Chile will increasingly attract foreign investment in those respective lithium sectors, while complex regulations, underdeveloped infrastructure and resource nationalism will deter investment in Bolivia, the third country of the ‘Lithium Triangle’.

Shutt notes that, for example, on September 26, Chinese firm Tianqi Lithium bought a 2.6% stake in Chile-based Sociedad Quimica y Minera de Chile (SQM) for $209-million and will reportedly seek further shares of the lithium producer. In Argentina, lithium will continue to drive mining investment, accounting for nearly all the country’s $44.2-million year-to-date mining investments, as of September 28.

In March, SQM invested $25-million in junior lithium firm Minera Exar for a 50% stake in the Cauchari-Olaroz project.

Water Worries
Meanwhile, areas in which Shutt expects miners to increasingly come under social and political pressure include water use and contamination in the face of shortages and droughts.

Freshwater shortages and droughts will fuel tension between local communities and miners over the coming years, leading to added environmental regulations and onerous investment conditions.

For example, Shutt points out that, in August, gold miner and explorer Kinross Gold suspended operations at the Maricunga gold mine, after Chile’s environmental regulators shut down the mine’s water system in March, making costs untenable. Chile’s environmental regulatory authority cited environmental damage as the reason behind the water shut-off, although Kinross points to an ongoing drought in the Atacama region resulting in a decline in groundwater levels unrelated to the mine.

On September 15, the provincial San Juan government, in Argentina, temporarily suspended operations at gold mining company Barrick Gold’s Veladero mine to inspect the project’s heap leach area and evaluate nearby water channels for contamination, following a spill.

After the deadly Samarco tailings dam burst in November 2015, top Brazilian iron-ore miner Vale will phase out wet-processing, reducing both the use of dams and the number of tailings created by 700-million tonnes by 2025. The firm will also increase the use of dry ore processing at mines from 40% to 70% and, to improve stability, introduce the separation of tailings where wet-processing is required.

“Community fears over water shortages are invariably at the heart of local opposition to proposed mining developments and cycles of protest often coincide with localised periods of drought, or with the onset of the dry season, in the project area. Ongoing water shortages throughout the region also bring some risk of increased regulation and environmental scrutiny, as demonstrated by Chile’s recent move to increase State powers over the allocation of its water resources,” Low states.