The implications
Elon Musk has a very clear picture of what he thinks the future holds, whether it be a citadel on Mars, a half-hour flight from New York to Tokyo, or public transport via the Hyperloop. But when he arrived in Chile in late December 2017, rumours quickly began circulating that he was there to strike a new Lithium-supply deal for Tesla. On the back of an already-huge investment, he still faces well-publicized challenges in getting his Model 3 into mass production. However, regarding broader, more general mining investment, what are the challenges faced by miners in Latin America and what does the future hold?
One can pull up a plethora of news articles from almost any year in recent history and the headlines will generally follow the trend that Latin America 'is the primary destination for mining investment', or that it 'continues to grow as a destination for mining investment' and that even in a downturn 'the region remains a top attraction for investment dollars'.
This in a region which is widely reputed to produce:
One reason for the positivity is that still only a small percentage of its cumulative mineral reserve is being exploited. However, whilst both opportunity and challenges exist across the region, for the sake of column inches this article will focus on Peru, Chile and Argentina.
Fig 1 - Fraser Institute regional mean investment attractiveness scores, 2016 and 2017
Source: Fraser Institute Annual Survey of Mining Companies 2017
The Fraser Institute's Institute Annual Survey of Mining Companies is an attempt 'to assess how mineral endowments and public policy factors such as taxation and regulatory uncertainty affect exploration investment'. As shown in Figure 1 above, in the 2017 edition Latin America and the Caribbean ranked lowest in the 'regional' category, below Africa, Asia, Oceania, Europe, United States, Australia and Canada in ascending order.
Fig 2 - Transparency International corruption perceptions index 2017 - selected countries
Rank in 2017 Country
Source: Transparency International
Furthermore, as shown in Figure 2 to the right, Transparency International uses their Corruption Perceptions Index to 'rank 180 countries and territories by their perceived levels of public sector corruption'. Most of those in Latin America fall into the bottom (bad) half and, although Argentina just scrapes through into the top half, only Chile sits comfortably at number 26. So it's not as if Latin America is perceived as the greatest or most trustworthy business environment
While the region enjoys a period of relative political stability, mining companies still have major challenges gaining social approval. Disruption can come mainly from local communities, but such is the resentment against mining in some regions, some miners have found that they're not just seeking interaction with the local communities, but seeking peace with groups that have travelled purely to take a stance against mining activity and who have no interest locally.
Fig 3 - nonferrous exploration budgets by region, 2017
Source: SP Global Market Intelligence
So why should the region demand so much attention? As Figure 3 highlights, Latin America's geological wealth and relative political stability continue to attract the bulk of global exploration efforts, with the region's aggregate budget increasing 20% year-over-year, to almost $2.4billion in 2017.
Moreover, outside of the social landscape, all three of the focus countries for this article have mining-friendly governments:
In Peru, their new President Vizcarra said recently that he was in favour of promoting mining development as long as it is done in an environmentally responsible way.
Argentine President Macri has also introduced pro-business policies.
Despite this, international mining companies are still reluctant to invest in Argentina amid a lack of regulatory clarity. With the uncertainty and fiscally-unfavourable environment for miners left over from the previous administration, it may take some time for investors and miners to regain confidence in the security and potential for long-term investment.
But once it does, you'd have to imagine that the potential is huge. Despite sharing a good chunk of the Andes with Chile, the relatively modest investment in Argentina actually lies in stark contrast to Chile's. According to the Argentinian Ministry of Energy and Mines, from 2007-2015, the period of Cristina Fernandez's rule, just US$10.5billion was invested in Argentine mining, compared to US$80.5billion in Chile and US$52billion in Peru across the same period1. Mining companies are planning to invest about US$65 billion in Chile over the next 10 years2, and in just the next four years, mining investment in Peru is expected to reach US$20.8 billion, according to the Peruvian Ministry of Energy and Mines3.
So when you see that, according to the Argentina Chamber of Mining Companies, just 15% of the country's mineral deposits have been exploited4, you get a sense of why Macri has repealed the non-mining-friendly legislation and why miners and investors are having a close look.
Sitting in the famed 'lithium triangle', Argentina is home to around 65% of global reserves of lithium5 which, together with Cobalt, make up about half a battery's cathode. It is presumed that as cathode technology evolves, Nickel and Cobalt will be largely interchangeable, but lithium should remain integral to battery production for a long while to come. There is obvious use of rechargeable batteries in hand-held devices but the interest, and the bulk of forecast use, is in electric cars and in 'big batteries', the storage facilities largely used to support renewable and sometimes intermittent power sources.
Is this just the electric car market talking it up? It would seem not; the UK's plan to ban sales of new diesel and petrol cars looks like it will be brought forward from the already earmarked 2040. Paris wants to ban combustion engine cars by 2030, and Germany's federal council passed a resolution banning combustion engine cars, also by 2030. This is perhaps why Credit Suisse have forecast that sales of rechargeable batteries will treble to $59 billion by 20256.
So the future looks positive for potential Argentine mining investment, to sit rightly alongside the already well- developed investment amongst its neighbours. As that investment activity and expansion increases, Willis Towers Watson is well-positioned to advise on, and implement, suitable risk transfer strategies to support investment decisions. With major offices in Argentina, Brazil, Chile, Colombia, Mexico and Peru, we are present in the principal mining territories. From early needs such as M&A advisory, or D&O placement, we work across all of the operational risks to ensure our clients can continue with their growth objectives. And as your business grows and the workforce grows, we also have one of the largest Human Capital and Benefits practices, which enables us to provide our mining clients with all of necessary risk and human capital solutions.
Based in Lima, Tom Holliday is head of Mining for the Latin American region at Willis Towers Watson.
1 latam-investor.com 2 www.reuters.com 3 www.mining.com 4 latam-investor.com 5 Re-Charging Argentina's mining industry: Engineering and Mining Journal, February 2017 6 www.ft.com
