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By Americas Market IntelligenceOctober 2018

©2018 Americas Market Intelligence | www.americasmi.com

Managing Mining Riskin Latin America

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Table of Contents

Legal Notice

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Wherever possible, Americas Market Intelligence (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 in this document.

Credits:

COVER PHOTO: Workers from the Shougang mine—located in Marcona, Peru—protest in front of the Peruvian Work Ministry in Lima. Courtesy of Getty Images.

Legal Notice ..........................................................................................................................................................................................................1

Introduction ..........................................................................................................................................................................................................2

Risk #1: Political Interference .................................................................................................................................................................4

Risk #2: Regulatory Instability ................................................................................................................................................................9

Risk #3: Security .............................................................................................................................................................................................13

Risk #4: Local Community Opposition .........................................................................................................................................16

Risk #5: Reputation .....................................................................................................................................................................................19

Risk #6: Operational ....................................................................................................................................................................................23

Risk #7: Economic ........................................................................................................................................................................................26

About the Authors ........................................................................................................................................................................................30

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Introduction

Why? Americas Market Intelligence has spent over 15 years analyzing Latin America’s mining investment environment and we felt it was time to showcase some of our knowledge in an informative report. It is our aim to assist miners and financiers in their efforts to anticipate the many forms of risk that their projects face in Latin American and Caribbean jurisdictions. We hope that this whitepaper will provide insightful guidance for an industry that has no choice but to embrace risks but can ill afford to operate without understanding, measuring and mitigating said risks.

Why now? Mineral prices continue to recover from their 2013 collapse and most large-scale miners have resuscitated their balance sheets. A five-year hiatus of exploration activity has left Latin America with a shortage of scalable mining projects. In such an environment, more capital will need to fund early-stage projects with longer ROI timeframes, exposing investors to higher levels of risk. That raises the costs of doing things wrong as well as the returns on doing things right.

Who is AMI? Americas Market Intelligence (AMI) is a team of Latin America-focused consultants who began serving strategic investors in 1992. We started working with mining interests in 2002, including miners, mining equipment providers and project financiers. From 2007-2011, our team joined Kroll consulting where we were schooled in the particularities of risk consulting. Since 2011, we have operated as the leading independent market intelligence firm in Latin America under the brand, AMI.

We help analyze pre-investment risk by executing country and counterparty risk assessments. Once a project breaks ground, we monitor, anticipate, and advise our clients on how to mitigate future risk as well as better engineer their CSR, PR and government relations assets to confront risk. We become the partners of our mining clients, their ears and eyes on the ground conducting discreet intelligence to complement their own risk management efforts.

You can learn more about us and our consulting services, as well as read our regularly published Perspectiva insights at http://americasmi.com.

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How AMI looks at mining riskTo bring some structure to the nebulous notion of risk, we divided our analysis into seven areas of risk:

1. Political Interference Risk2. Regulatory Instability Risk3. Security Risk4. Local Community Opposition Risk5. Reputation Risk6. Operational Risk7. Economic Risk

Although we discuss each of these risks separately in this whitepaper, it will become abundantly clear that they all overlap. Risk challenges need to be analyzed and tackled simultaneously. A security breach upon a mine’s perimeter may appear to be the delinquent act of certain individuals but until the true motives and alliances of the culprits are understood, catching them in the act is only a temporary solution.

If one boils down the conceptual sources of these seven risks, an even simpler formula can be found. All project risk emanates from three basic sentiments:

�� Economic self-interest of the many stakeholders impacted by a mine, from local vendors, unions, and competing businesses to the executive branch

�� Political power, which may be enhanced by opposing or extorting a miner

�� Stakeholder distrust, which often stems from the historic misconduct of past miners in a region or the malfeasance of political leaders whose promises were never kept

A holistic approach is needed both to analyze risk and to mitigate it. Miners generally deal with risk through three different approaches: Government Relations, CSR and Public Relations. To optimize these three separate budgets and managerial teams, their actions need to be coordinated and continuously fed with market intelligence, otherwise their actions may be more hindrance than help.


Most mining investors analyze political risk at the time a property is acquired. It is much harder to forecast future political dynamics which could lead to interference in a mine’s viability. Risks of political interference include obstacles at the local, national and even international level that hamper investment in a particular project or in the mining sector as a whole. These risks can originate from ambitious individual political agendas, opposing political interests, local power struggles or international influence.

Individual political ambitionsDespite the economic gains produced by mining, some Latin American political leaders have reversed their support of mining projects when they conflict with their own ambitions or when too much political capital is required to continue supporting a project.

In French Guiana, mining operations were long frozen by political decrees inked in France. In a territory plagued by unemployment and where the sustainable exploitation of an impressive mineral endowment could have been responsibly regulated, the personal ambitions of key ministers in Paris prevailed during the Hollande Administration. Mining projects were successively blocked by the short-lived presidential aspirations of economy minister Arnaud Montebourg, who sought the support of the Green Party, and the ephemeral run of energy minister Ségolène Royal for the UNDP presidency. More recently, the Montagne d’Or mining development was contested by Francois de Rugy within 24 hours of his nomination as State Minister for Ecological Transition in the Macron government. De Rugy, who had never voiced concerns over mining reforms in French Guiana, used the issue to strengthen his environmentalist credentials after replacing the charismatic and popular Nicolas Hulot. When a new administration takes over, as in France, a close monitoring of political continuity is mandatory for potential investors.

To address political interference risks, careful profiling of key political actors is needed to understand the strategies they pursue to serve their political ambitions. If a primary obstacle

The greatest risk of political interference is felt during political campaigns when potentially irrevocable positions are voiced in a race to win popular support.

Latin America Mining Risk #1Political Interference

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is the public perception of mining, then a broader education campaign that distinguishes responsible modern mining methods from illegal mining is required and is best developed and funded in cooperation with other miners. Furthermore, the economic benefits of mining royalties should not only be communicated to the national and local governments who receive the said funds but also to the urban voters who rarely appreciate the tax contributions made by mining.

Political campaigns and party alliancesThe traditional paradigm of left (anti-mining) versus right (pro-mining) no longer stands up under scrutiny in Latin America. Political interference and, conversely, support can come from any political stripe. That said, the dynamics of political alliances and party politics still impact mining policies in most countries because of the emotional baggage and economic weight the industry has long held in Latin America. Case in point is the stand-off between Canadian mining major, Kinross, and the government of Ecuador. In 2013, President Rafael Correa of Ecuador was ill-advised to apply a windfall tax designed for the oil sector on the country’s largest gold mine, Fruta del Norte, owned by Kinross. The miner

threatened to abandon the project if the windfall tax was levied, but the Correa administration ignored the miner’s plea for economic mercy. The departure of Kinross from Ecuador was a blow to Ecuador’s reputation and cost the administration hundreds of millions in unrealized royalties. Despite his left-wing politics and anti-gringo rhetoric, Rafael Correa soon afterwards reversed his stance on mining and began to embrace the sector. He went on to create a separate mining ministry which led the passage of a rash of regulatory reforms to attract new investors.

In April 2017, left-leaning Lenin Moreno narrowly defeated former banker candidate Guillermo Lasso. Surprisingly, miners in Ecuador breathed a sigh of relief. Lasso’s broad coalition of supporters included indigenous anti-mining interests and environmental NGOs, to whom he promised to restrict mining, especially in Páramo regions

The traditional paradigm of left (anti-mining) versus right (pro-mining) no longer stands up under scrutiny in Latin America.


(above 2800 meters) and reinforce the consulta previa framework. President Moreno, by contrast, has largely continued Correa’s pro-mining investment stance, albeit with some concessions to indigenous groups. Mining policy is now decided by technocrats who cut their teeth in the private sector.

The greatest risk of political interference is felt during national political campaigns when mining often takes center stage and potentially irrevocable positions are voiced in a race to win popular support. In Brazil, the national elections in October 2018 may reactivate debates over the reform of mining royalties in the country. In November 2017, the Temer administration approved a modest hike of fiscal rates on mining compared to demands from some politicians: iron ore royalties rose from 2% to 3.5% (instead of the 4% initially expected) and gold royalties increased from 1% to 1.5% (instead of 2%). Some presidential candidates find these rates still too low and would tighten regulations and fiscal levies on mining companies.

Some politicians have built their candidacies on the back of mining and energy companies. The rise to power of Evo Morales in Bolivia or Ollanta Humala in Peru relied heavily on openly anti-mining rhetoric which generated support among indigenous groups, Andean rural communities, urban students and other anti-mining groups. Once Ollanta Humala became president, a six-month period of tension between the new government and a well-coordinated mining industry led to higher royalty levels accepted by industry and stricter regulations overall, but these policies proved less onerous than the changes pledged by Humala during his campaign.

One of the soundest ways to mitigate political interference risk is to bring in politically influential local business leaders as project investors, being

sure to build alliances through them to all viable political parties. It is important to exact a sizeable economic participation from local investors to ensure their commitment to the project.

Local political power—distrustful of mining investmentsMost daily political interferences are not exerted at the national level but rather at regional and local levels. While national governments in Latin America generally support mining investment, local communities and governments can be openly hostile to miners. Their opposition can stem from factors ranging from fear of environmental degradation and competing local economic interests to a strong and historically validated distrust of the national government and any projects it supports.

Over the last decade, more than 70 local referenda about extraction sector projects were conducted in Latin America, provoked by local opposition, particularly to mining. In the Cocachacra district, close to Arequipa, Peru, farmers staged a months-long strike and violent protests over the claim that the “Tía María” local mining development—expected to generate 3,000 construction jobs, 650 well-paid permanent posts and add more than $500m a year to Peru’s exports—would kill their livelihoods by polluting rivers. Similar protests have come to plague other projects in Peru, including Las Bambas and Conga. In 2017, more than 200 local mining disputes raged across Latin America (see map on page 5). Most remain unresolved today. Local conflicts which test the political will of national government support for mining have become one of the most prolific and challenging risks to mining investment today.

Oftentimes, competing local interests are threatened by a mine’s development. Small-scale farmers, who draw water from the same source upon which a future mine will also rely, worry that the mine will contaminate the water and threaten their crops or livestock. Some mines border pristine wilderness in the Andes which may be sacred to indigenous people or adjoin a national park or some other important tourism draw.

To address political interference risks, careful profiling of key political actors is needed to understand their political ambitions.

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However, some competing interests are less scrupulous in their origins. In Venezuela, Ecuador and Colombia, illegal operators predominate in gold mining. In the state of Bolívar, in eastern Venezuela, illegal miners employ gangs to resist efforts by the national government and military to root out informal miners. Of the dozens of ongoing local conflicts in the region, more than a handful are fueled by illegal mining interests wielding influence to foster opposition to proposed projects. In Antioquia, companies such as AngloGold Ashanti face a range of oppositions. In Gramalote, mining operations are hampered by a coalition of farmers. In Quebradona, the Catholic establishment worries that a new mine will unsettle a conservative community where the first Colombian Saint, Laura Montoya Upegui, lived. Additionally, wealthy finca owners and cafeteros are eager to protect their economic influence and prevent local wage increases. Local coalitions between corrupt politicians, local businessmen can derail the most promising mining operations.

In some cases, the miner may achieve healthy relations with the local community, but the historic animosity between that community and the national government is so strong that opposition to the project is unflappable. Often, the hatred of national governments in local mining communities stems from generations of failed promises to pass mining royalties down to locals in a meaningful way. This lack of trickle-down economic benefit has proven problematic in Colombia, Peru and the Dominican Republic, for instance. Feeling neglected by their national governments, local communities may try to disrupt the mine in hopes of motivating the miner to advocate on their behalf or finance their local infrastructure needs directly through its own CSR budget.

Before investing in a mining project, due diligence efforts must assess the local political environment. What is the history of prior mining development in the area? What are the concerns of locals with regards to mining? What are the competing economic interests in the area, legal and otherwise? How motivated and effective is their leadership for marshalling opposition to a mine? How fair and transparent is the sharing of royalties by the national government and how likely is any shortcoming bound to foster project opposition? These are just some of the questions that miners need to ask before bidding on a mine. An example of the importance of local due diligence can be found in Brazil, where several junior mining companies invested in the states of Parás and Goiás without implementing adequate due diligence and monitoring processes. Now they seek to divest, having given up trying to navigate the bureaucratic and political delays thrust in their path by uncooperative (and allegedly corrupt) local governments.

Local communities and governments need to be treated with the same partnership status as the national government. Anything less only plays into the hands of unscrupulous stakeholders who wish to profit from historical mistrust between local and national governments. Also key to keeping the peace is monitoring the different local players who seek to disrupt the mine. Knowing ahead of time their plans and actions helps miners reach out to them or to local allies to head off conflict before it materializes.

International InterferencePolitical interference can also come from external sources including foreign political pressure, compliance with cumbersome international conventions and NGOs.

Over the last decade, more than 70 local referenda about extraction sector projects were conducted in Latin America, provoked by community opposition, particularly to mining.

To mitigate political interference, mining investors must understand and address the seeds of that opposition before they gain a public voice, by partnering with local communities and host governments.


Foreign political pressure can emanate from a neighboring country that shares a border near a mine, as well as from a lender nation that can wield considerable influence at the presidential level. Although Latin America has few border disputes, there are some lingering ones that have become heated when natural resource wealth is discovered in a border region. A case in point is the 100-year-old claim by Venezuela to the Essequibo region in western Guyana which has always contained sizeable gold deposits. Bilateral relations descended to a new low when Exxon announced the discovery of an off-shore oil field containing an estimated 1.4 billion barrels. Further complicating the diplomatic row is the fact that the Cuyuni river, which defines 102 km of the border between Guyana and Venezuela, is a largely lawless smuggling lane and illegal mining center where the military sometimes intercedes across the border in pursuit of criminals.

Over the last decade, China became the largest bilateral creditor of Latin America, lending over $37 billion in 2010 alone—more than all other government lenders combined. Like the aid and loan schemes of the U.S., the U.K., France, Holland and Japan, Chinese loans oblige the client state to source materials, expertise and services from Chinese suppliers. The financial aid purchases political leverage that Chinese investors, particularly SOEs (state-owned enterprises), have been known to put to their advantage in competitive bids for resources.

International organizations and global regulatory regimes can also influence the development of mining operations. An example can be found with the ILO 169 - “Indigenous and Tribal Peoples”

convention. Its ratification by most countries in Latin America has set off new obstacles for mining investments by encouraging NGOs to demand prior consultation (“consulta previa”) with communities not only for extractive operations but also for any preliminary exploration.

Similarly, environmental NGOs have shifted in nature from predominantly local organizations with micro interests to large global networks with significant means of influence both online and on the ground. International environmental NGOs have brought unprecedented attention to the use of harmful chemicals in mining operations, thereby obliging some host governments to ban their use.

Mining is no longer seen as a simple extractive exercise that brings a natural resource to market. This is especially true in Latin America, where a 500-year-long search for mineral wealth has left an indelible mark on the region’s history, society and geography. Political interference is simply a tactic used by those who choose to voice their opposition to mining.

To mitigate political interference, mining investors must begin to understand and address the seeds of that opposition before they gain a public voice by partnering with local communities and host governments. Winning the hearts and minds of a nation of voters and their political leaders requires an effective public relations campaign that hammers home two consistent messages: i) modern mining methods are environmentally safe and ii) mining delivers unrivaled economic benefit to local communities as well as the national public coffers.

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Mining projects can endure for decades, leaving an indelible mark on both the surrounding community and the environment. In Latin America, mining carries complex historical baggage not found in other parts of the world. As a result, extractive industries are closely regulated in Latin America. In a project’s planning stage, time-consuming studies are required to predict and measure the impact of a mine on the economy, social fabric and the environment. In recent years, regulations in Latin America have grown more onerous for miners. From 2010 to 2017, the number of permits required to launch a mine in Peru quadrupled.

Regulatory and legal risks can stem from several factors: the absence of predictable property rights and fiscal pressures on national or state governments being a couple of root causes. Regulatory risk can also originate from a corrupted rule of law and lack of transparency. Such environments enrich the few who control regulators and key government entities but ultimately tax and discourage foreign investment.

Land and minerals property rightsThe most important regulatory feature is the clear definition of ownership regimes over land and mineral production. Two models compete. The first is a lease or “régalien” system in which the state owns the mineral title and the miner derives his or her right to extract minerals from a tenure granted by the government. This model predominates in Latin America. In Brazil, however, mineral ownership corresponds with land ownership. Under this system, he who owns the land has the right to hold, extract, or dispose of the minerals. This system, commonly referred to as the claim or “accession” system, allows a mining company to obtain private mineral rights by discovering the minerals and registering its claim at a designated office.

From the initial stages of prospection, miners need to protect themselves against a sudden change in the rules governing property and ore ownership. If there is a political change, holding onto secured land or mining rights can get complicated. In Brazil, for example, a proposed reform under debate might require foreign miners to share ownership with a local partner.

Latin America Mining Risk #2Regulatory Instability


In Venezuela, foreign investors can at best hold 45% of a joint venture with a state entity, exposing investors to future government manipulation, even expropriation.

When it comes to leasing agreements, it is recommended to pursue a license of at least 20 years. An initial term of five years for exploration should be automatically renewed if discovered resources show signs of a commercially viable mining site. Governments may try to include clauses to condition the renewal of the license to a code of good behavior and to the acceptance by the local community of resource exploitation. Though well intended, such clauses are flawed by their subjectivity and can be manipulated by corrupt regulators and government officials.

Even when agreements on land property and management of resources are signed, they can be readjusted by new governments. For example, in Tanzania, the modification of regulations in terms of export of unprocessed mineral ores from the country hurt mining companies’ profitability. Similarly, the Indonesian government introduced changes to its mining regulatory regime in 2014, which included a ban on the export of certain unprocessed minerals to encourage mineral processing within the country. Similar developments could occur in Latin America and should be mitigated within concession agreements.

Fiscal regimes and revenue distributionA sudden hike in royalties and taxes will also jeopardize a mining operation. In Ecuador, the Correa administration attempted in 2013 to impose an oil sector designed windfall tax on mining companies. This move led to a

confrontation with Kinross, owners of the Fruta del Norte project. Both sides ended up losing big after a two-year standoff. Kinross left the country, selling its construction-ready Fruta del Norte development for just US$240m, about 25% of what it paid to acquire the project in 2008. In another case, IAMGOLD divested its Loma Larga project and left Ecuador, and shortly afterwards, International Minerals sold its Río Blanco gold project. As a result, the Ecuadorian government lost both valuable foreign investment and tarnished its international reputation, leaving gold sites to be developed by environmentally hazardous illegal miners.

The renegotiation of royalties is not uncommon when mineral prices rise above historic averages. Regulatory risk is present in all levels of government and in regulations from the local to national level. When local governments do not receive their contracted share of royalties (a common occurrence when mineral prices drop), then they will pressure the miner by applying dubious regulatory enforcement. In Colombia, the Santos administration perceived that royalties were being misused by a few mining municipalities and passed legislation to distribute all royalties across the country. Local mining communities have been furious ever since and with few exceptions have worked in coordination to oppose mining projects. Today more than 50 local referenda are planned to oppose mining across Latin America.

Required assessment—environmental licensingAn Environmental License is typically granted by a national ministry or regulator. Multiple environmental impact assessments are required covering: impact on fauna and flora; impact on protected habitats; impact on water supplies; among others. Submitting all needed preliminary research and respecting a rigorous scientific

Miners need to protect themselves against a sudden change in the rules governing property and ore ownership. If there is a political change, holding onto secured land or mining rights can get complicated.

Today more than 50 local referenda are planned in opposition to mining projects across Latin America.


methodology is always a lengthy process. However, it is crucial to meticulously follow assessments and submission processes to avoid litigation from NGOs or cause environmental hazards that would damage a company’s reputation.

Moreover, environmental licenses are often complemented by a range of additional authorizations depending on the neighboring geography and type of exploitation planned. An underground water prospecting and exploitation permit can be requested, as well as a surface or underground water concession for ongoing usage. If the site is in a forested area, a forestry exploitation permit may be required. Additional important assessments include a wastewater release permit application and an atmospheric emissions assessment.

During the long run of high mineral prices (2003-2013), almost every mining jurisdiction in Latin America increased its demands for pre-development environmental studies and assessments. The shift took many countries from an under-regulated status to, arguably, an over-regulated environment. In French Guiana, miners face onerous assessments both to develop their mines as well as build roads and infrastructure to access them.

Required assessment—social licensingSome miners have been caught off guard by the rigidity of environmental assessments. But a more common obstacle to investment recently has been assessments to get a “social license” to operate. These require collecting socio-economic criteria assessing the impact on the economic well-being and traditions of communities living on site.

Politicians sometimes push for increased consultation of indigenous communities to gain electoral support. Yet prior consultation has become more than a populist strategy since the ratification by most Latin American countries of the International Labor Organization Convention 169. This text grants indigenous peoples the fundamental right to decide on projects to be carried out in their territories (or where their lands are affected) and to participate in the decision-making processes.

A mining company’s “social license to operate” (SLO) has therefore become a dynamic threat, obliging miners to constantly monitor the demands and attitudes of local communities. Globalized social media has created a platform for local communities to vent their frustration, capturing the imagination of many urban voters in their countries and abroad—further straining the reputation of miners. High-profile accidents, such as tailings dam failures and cyanide contamination, often sloppily reported by amateur journalists or concerned citizens, aggravate the well-rooted anti-mining sentiment present in many countries.

In Peru, Southern Copper’s on-again, off-again $1.4 billion Tía María copper project faced this gradual escalation of regulatory demands. For years protesters marched and blocked highways in opposition to the proposed mine, arguing it could pollute and drain key waterways. In response, Southern Copper reworked its project several times to gain approval from regulators. Victory seemed within reach in August 2014 when the Peruvian government declared that Southern Copper had complied with all the demands brought forward by locals and environmentalists. Yet, fresh demonstrations broke out in March 2015 and forced Southern Copper, tired of ongoing “anti-mining terrorism” in the area, to withdraw its participation in the project.

Southern Copper took a legal/compliance approach that did meet all regulatory requirements, but it clearly failed to recognize the local angst behind the political pressures that brought on those regulations. By contrast, in Colombia, Red Eagle Mining swiftly gained the support of the regulators and local community by engaging in a small-scale underground project. Regulations did not prohibit open-pit mining, but the local community voiced its strong objection

In many cases regulatory risks are caused by old-fashioned red tape, which grants negotiating power to mid-level bureaucrats looking for a bribe.


to open pits, so Red Eagle adjusted their plans and went underground with their mine. Gran Colombia Gold took the opposite approach by trying to enforce a top-down strategy relying on support in Bogotá and disregarding local demands for environmental protection and economic development. As a result, after years of conflict, the company’s open-pit Marmato project is in jeopardy after the Colombian government forced the company to halt operations until further consultation with locals is realized. The legal counteroffensive from the company, seeking $700 million in compensations, may never bear fruit.

Red tape and corrupt rule of lawRegulatory risks, leading to additional costs and delays, are not always the direct result of local demands or quantifiable objective environmental or social requirements. In many cases, they are caused by old-fashioned red tape, which grants negotiating power to mid-level bureaucrats looking for a bribe. In other instances, red tape delays are intentionally driven by higher level politicians and national government officials looking to extract a larger bribe or deliver a political/economic punch against the incumbent government that supports the project.

In Brazil, red tape is notorious, but the country also has an autonomous judiciary system. Most state governments promise an official response within 30 days after receiving any kind of permit application or request. Some miners have taken to suing governments that do not comply with the 30-day limit. The method is quite effective in some mining states in Brazil.

Some jurisdictions operate under a “single window” approach where miners go to one office to obtain all their permits. But others stand out as old-fashioned and complicated. Mexican miners complain that they must submit the same paperwork to multiple regulators and government offices. A similar criticism is made of French Guiana where the mining code combines Napoleonic rules and features like the “precautionary principle” that requires lengthy preliminary assessments for any mining development.

In conclusion, regulatory risks are really a manifestation of deeper political and social opposition to mining and a historic distrust of the sector. Miners who focus on a legal approach to managing regulations fail to see that regulatory risk will never end so long as influential figures oppose your mining project. Regulations in Latin America are not written for the long term but rather as a tool to achieve a shorter term political or commercial end. Combatting regulatory risk ultimately requires a more comprehensive effort to build support for one’s mining project from all influential players operating in a jurisdiction, including public opinion. Only once a mine earns its license to operate will it achieve regulatory stability.


Several Latin American jurisdictions have seen their security environment degrade over the last decade as criminal organizations gain influence and power through drug trafficking, extortion and other illicit activity. Mining plays a small but important role in feeding organized crime. Illicit groups rarely steal directly from miners. In Mexico, Brazil, and Honduras, for instance, some gangs are known to extort the vendor suppliers of mines, extracting a “war tax” to guarantee their safety. These costs are passed onto the mine via invoices for real goods and services billed at inflated numbers. In Colombia and Chile, the criminal environment is said to work through lawyers and local indigenous representatives to engage the mine in elaborate extortion schemes, usually triggered by environmental damage. Across the region, mines are big shiny targets that can attract unwelcome and often dangerous attention.

Mining companies often struggle to mitigate safety and security risks because their internal organizations are split into different silos. Without a planned and integrated approach to the collection and sharing of intelligence, different divisions act alone, creating operational security vulnerabilities.

To ensure long-term security, miners need to understand the root causes of security issues

threatening their properties. Sound security mitigation begins by mapping and analyzing the motivations, political alliances and power exercised by the many different stakeholders within and near the mine, including: unions, communities, local businesses, government, political opposition, organized crime, civil society, and employees (non-union).

Risk source: Organized crimeOrganized criminal groups are apolitical and generally only motivated by money. They need to be viewed as a business, not as a simple security threat. Like any sizeable enterprise, criminal organizations manage different lines of business, each in pursuit of profits. If one business division, such as drug trafficking, is shut down by strong enforcement, revenues must be found in other areas, like kidnapping or extortion.

The fact that local organized crime has little to no history of meddling with a mine is no assurance that a mining operation will be safe in the future. The arrival of an international miner may well awaken the interest of criminal groups. Rising mineral prices and profits may open their eyes to the merits of illegal mining or extorting a miner.

Latin America Mining Risk #3Security


Or the decline of another illegal business activity may oblige gangs and cartels to take interest in the local mine. Therefore, any due diligence of the local environment ahead of a mining investment must consider the presence and power of organized crime.

Risk source: Illegal minersIllegal miners are known to mobilize local community opposition to industrial mining. Illegal miners sometimes work in league with or are financially controlled by criminal groups. Such links have been proven in several cases in Colombia where cocaine producers and distributors help finance illegal mining to help launder their drug proceeds. Far more innocuous are small-scale informal miners who pilfer gold from larger miners. In Guyana, some porkknockers — the local term for informal miners — are known to disrespect mining concession boundaries and poach gold deposits in shallow fields along river banks.

Armed with fresh land title data that they obtain from corrupt government officials, unscrupulous porkknockers purportedly poach concessions before miners are able to build proper perimeters to protect their property. Prudent due diligence of the practices of informal miners, combined with a sensible policing strategy with official help, can limit these early losses.

Risk source: Unions Mining unions can be some of the most aggressive of all organized labor in Latin America. In Mexico, the PRI (Partido Revolucionario Institucional) traditionally funded unions who in turn could be controlled by government. When the PRI lost the presidency in 2000 for the first

time in over 70 years, their purse strings were severed, as was their control over unions. The national mining union split into factions, some of which began collaborating with organized crime who paid their bills. Torex Gold’s operations in Guerrero were undermined from an operational security perspective in recent years, owing directly from a dispute with its union, which purportedly has ties to organized crime.

Other sources of risk Road blocks are a commonly utilized tactic by mining opponents to stymy mining operations. Access to Gran Colombia Gold’s mine in the department (province) of Caldas was blocked for 42 days by independent miners, costing millions in lost productivity. In the past, miners relied on the national government to quell such disruptions, often with heavy-handed policing by the army. But today, smartphones and social media provide a PR weapon for local communities mounting a road block. Emboldened by their impunity, opponents frequently push road blocks into more aggressive or invasive tactics at the mine’s perimeter, complicating the security operations of a mine.

Finally, acts of God are more related to safety than to security. Some mines are vulnerable to earthquakes, mud slides, flooding or pandemics such as the Zika virus. For such risks, insurance may be the most practical mitigation tool, in addition to well-executed health and safety protocols.

Mitigating mining security risks in Latin America In parts of Mexico, local and state police are so corrupt that organized crime can only be stopped by federal police and military forces working together with a mine’s own security forces. The state of Guerrero, ranked the worst in Mexico in terms of police corruption, is also an important

Sound security mitigation begins by mapping and analyzing the motivations, political alliances and power exercised by the many different stakeholders within and near the mine.

Road blocks are a commonly utilized tactic by mining opponents to stymy mining operations.


mining jurisdiction. Given that Guerrero is home to more than 20 different criminal groups, ranging from gangs to drug-producing cartels, any large investor in the state, mining or otherwise, may find its operations extorted by these illicit groups when operating there.

Before initiating a new mine, investors are wise to thoroughly assess not only the security history of the mine site and local environs but also to look deeper for the presence of illicit groups, including organized crime, illegal miners and nearby drug-smuggling corridors, whose financial interests may intercede with a future mine. Even legitimate competing interests like farming or indigenous groups may resort to violent tactics if they feel threatened by a new industrial mining project. Security threats are often the result of a much more fundamental economic threat or opportunity perceived by local interest groups.

In very few Latin American jurisdictions can local or even state police be relied upon to subdue local security threats, which may be beyond their grasp or dictated by illicit groups that make a practice of buying their impunity. National police or the military rarely make effective security allies because their tactics are often heavy-handed and tend to exacerbate local community frustrations. Every mine should be self-sufficient and rely on its own security personnel and strategies for protection. Directing an in-house security apparatus requires sound management and a constant feed of local intelligence that identifies both opponents and allies of the mine and monitors problems before they escalate into violence.

Lastly, self-sufficiency on the security front should not preclude miners from allying with other local businesses as well as building bridges with local power brokers and political forces. The more local players are aligned with the interests of the mine, the less likely they will work with or even tolerate illicit groups who oppose or threaten a mine.

In very few Latin American jurisdictions can local or even state police be relied upon to subdue local security threats, which may be beyond their grasp or dictated by illicit groups that make a practice of buying their impunity.


The collapse of metal prices in 2013 shifted the investment risk focus from national governments to local communities. With the decrease in royalty incomes, national governments became stingy about sharing taxes with local communities, exacerbating an historic rift. Over the last five years, angry communities learned to fight back and have resorted to a series of opposition tactics, including local referenda in which residents vote on the fate of a mining project.

Armed with smartphones, local communities can broadcast their conflicts with mining sites and any heavy-handed policing by national police or the military. In a period when national governments across Latin America suffer record low approval levels, few leaders are willing to risk political capital to quell a local protest that interrupts a mine. Today, a network of support for these local opposition efforts comes from NGOs who bring proven fighting tactics to local communities. Local community opposition campaigns have had serious consequences in recent years for mining interests in Colombia, Guatemala, and Argentina. In Colombia, a failed local referendum can weigh upon the degree of support of local authorities who in turn can refuse to deliver much needed permits. Such was the

case in Cajamarca,Tolima, where the absence of crucial permits triggered the suspension of La Colosa mine in 2017.

Community expectations tainted by historic mine managementNew mining investors often fail to research the history of the mine and the impact of misdeeds by former miners on community relations. For example, in Minas Gerais, Brazil, Anglo American’s community relations crisis near its Minas-Rio property did not begin with recent pipeline spills but was already plagued by alleged corruption practices under previous owner Eike Baptista. The purported legacy of corruption created unreasonable financial expectations among stakeholders that Anglo American rightly refused to meet. It took more than a year for Anglo American to move forward with environmental licensing as unscrupulous local power brokers regularly lobbied city and provincial governments to halt the project, supposedly in search of kick-backs. It is claimed that extortion attempts were so frequent that Anglo American threatened to leave the state.

Latin America Mining Risk #4Local Community Opposition


Competing economic activityCompeting economic activities near the mine can produce natural opponents to a mine’s development. Farmers who rely on ground water and fear contamination, or tourism interests that worry a mine will spoil a region’s natural beauty, are two examples. Large employers (manufacturing, farming, services) worry that a mine will compete for labor and drive up wages.

In Colombia, several mining companies have faced opposition from the rice and flower industries concerned about water rights. After being repeatedly ignored by government, some growers reportedly turned to local criminal groups and/or corrupt practices to boost their opposition efforts against proposed mines.

Guyana Goldfields and its comprehensive agreements with overlapping economic actors is an interesting case of a good practice. The mining company signed an infrastructure-sharing agreement with nearby logging companies and built a road with them that serves both interests.

It is essential for a mining company to engage at an early stage with local economic actors to understand their concerns and political influence. Only by knowing their needs and fears is it possible to develop constructive relationships with them and find viable solutions to their concerns. A preventive approach is almost always less expensive than repairing broken bridges in the future.

Local procurement agreementA powerful tool for winning local support is to make a strong commitment to purchasing from

local vendors. The trickle-down effect of goodwill is impressive. Local vendors to the mine, along with employees, become credible advocates of the project and help defend the miner’s interests in the local community.

In Ecuador, Lundin Gold developed an award-winning local catering policy that ensured a high percentage of food consumed at the mine came from local vendors. Lundin began by reaching out to local suppliers one at a time to formally vet them and their product/service. In exchange for contracts with the mine, the local vendors had to formalize their businesses, i.e. become tax paying, regulation abiding companies. All the major stakeholders got a win: the miner, the local suppliers and the government.

Small-scale and informal minersFrequent conflicts with informal miners can plague community relations for the mine. Turning a blind eye to informal mining operations can expose miners to reputational risks if, for example, mercury leaks into a river. Such a strategy also creates a space for other small-scale miners to trespass on the property. Conversely, confronting informal miners head-on and adopting a zero-tolerance policy will likely antagonize local residents since some have mined informally for decades, sustaining the community with their small production.

To prevent illegal miner incursions onto its property, Gran Colombia Gold helped authorities break up an arms trafficking ring that was impacting their Segovia mine. Illegal miners, backed by criminal groups, retaliated by blocking the mine and locking down two mining towns. The conflict gained national and international press coverage, damaging the miner’s reputation.

Engaging with and including informal miners in a revenue-sharing agreement can be very effective, not only for improving community relations but also for gaining political allies.

A powerful tool for winning local support is to make a strong commitment to purchasing from local vendors. The trickle-down effect of goodwill is impressive.


After 42 days of lost production, a compromise was eventually reached by which Gran Colombia incorporated small mining collectives into its operation. Locally based small-scale miners signed individual contracts which allowed them to operate within the mining site in accordance with the government’s health, safety and environmental requirements. In return, the company retained between 10% and 60% of the per-ounce spot price of the gold those miners produced.

Engaging with and including informal miners in a revenue-sharing agreement can be very effective, not only for improving community relations but also for gaining political allies. Companies that adopt this constructive strategy benefit from the support of informal miners when standing up to criminally financed illegal mining.

Environmental concerns and indigenous claimsThe key to success in managing community opposition based on environmental concerns and indigenous claims is to ask: what are the priorities and fears of project opponents? Based upon historic abuses and water contamination by former (often government-owned) mining operations, local communities are acutely sensitive to environmental issues. As a result, ensuring steady and honest communication and surveying public perception regularly is essential. By polling local communities and communicating directly with residents, miners can help deflect efforts by corrupt local politicians to extort monies in return for peaceful community relations.

Similarly, when engaging indigenous communities, developing an understanding of their unique demands and concerns is crucial. In several cases, miners have wasted CSR budgets building infrastructure or creating social programs that were not deemed a priority by the indigenous. The demands of the indigenous are as varied as those of any local stakeholder and no miner should assume without asking what solution might work.

When to monitor community riskBefore miners and major lenders move forward on a project, they need to study the potential for local community opposition to the mine. This begins with gaining a full understanding of a mine’s history and polling the local community to understand residents’ perception of a mine and its potential development. It is equally important to understand the competing interests near the mine, both legitimate and illicit, and how these groups might influence community opposition. Thirdly, it is important to understand the linkages between the local community and deep- pocketed opponents in the capital who might influence local opposition.

When a mine is being developed, miners are wise to create a process of regular dialogue with the local community, as Lundin did with Fruta del Norte in Ecuador where they set up committees dealing with issues ranging from job creation to security to the preservation of indigenous traditions and invited local leaders to participate in monthly committee meetings. At the same time, it is optimal to conduct discreet intelligence, via an arms-length third party, to understand all the local and national players influencing the community and what impact that influence might have.

In short, miners must pay as much attention to local communities as they have historically done with national governments.

It is optimal to conduct discreet intelligence, via an arms-length third party, to understand all the local and national players influencing the community and what impact that influence might have.


Mining carries immense historical baggage in Latin America that today continues to be exploited for political and economic gain by a variety of actors ranging from political opposition leaders and crooked local mayors to illicit miners and ambitious NGOs. Defending one’s reputation is a full-time task that begins from the moment interest is first shown in a Latin American mining property. Reputationally speaking, miners in Latin America are guilty before being proven innocent.

Today, industrial miners bring remarkable technology and safety protocols to their exploration and mining operations. However, blunders still happen, such as the Samarco dam burst, as well as recent leaks in Anglo American and Norsk Hydro operations, in Brazil. Contamination of glaciers in Chile tarnished the reputation of Barrick Gold in that country. Industrial accidents are common in Latin America, but when they originate from miners, they are even more poorly perceived.

Badly managed operational risks can quickly snowball into a reputational calamity. In its Copiapó mine in Chile, Compañía Minera San Esteban Primera failed to report their safety protocol shortcomings. The more experienced Codelco stepped in to rectify the situation and pulled off a stunning rescue of 33 miners trapped

deep underground. By calling for national and international help and expertly navigating media, Codelco emerged as a hero in a difficult situation.

But neither acts of god nor sloppy operations are the source of most miner reputational burden. Instead, most reputational attacks come from mining opponents, who are better equipped and less tethered than ever to wage reputational battle against mining interests.

Reputational risk is a local affairIn today’s environment of weak mineral prices and challenging fiscal deficits, most national governments happily roll out the red carpet to attract new mining investment. Since mineral prices began falling in 2013, several national governments have shifted—both via elections and economic necessity—from antagonistic to welcoming. We have seen this shift in Argentina,

Latin America Mining Risk #5Reputation

Miners are wise not to hitch their reputation wagon to national governments.


Ecuador, French Guiana, Brazil, Chile, Dominican Republic and even in Venezuela. Certainly, if mineral prices keep rising, then public pressure may oblige these and other governments to switch gears and demand more from miners. However, for the moment, miner reputation risk is predominantly a local problem.

Miners traditionally relied upon national governments, their preferred host country partners, to keep the peace locally, which they did through a combination of transferred royalty payments and coercive actions that were designed to temper local opposition. Scandals happened but were often smothered by national governments who could influence media. Those days are gone. Today, 200 million Latin Americans own smartphones that come with cameras and the ability to upload any video to social media, quickly casting an ugly spotlight on government-sanctioned malfeasance or heavy-handed policing. In this age of digital democracy, national governments across Latin America are under attack as the old ways of doing things, ripe with corruption, are unveiled. Presidential approval levels in Latin America are some of the lowest in the world as voters come to terms with the breadth of poor governance they endure. As a result, presidential power has never been weaker nor more tainted than it is today. Miners are wise not to hitch their reputation wagon to national governments.

National governments lack the physical infrastructure and institutional capacity to govern effectively in many of the remote areas where mines are located. With their reputations in tatters, executive branches are unwilling to resort to blunt tactics to exercise control. Absent a strong national government, the power vacuum is increasingly filled by a multitude of local players, making it even harder for miners to manage their reputations.

Mining opponentsThe checkered history of mining in most of Latin America has taught local communities to be wary of promises made to protect their land, water and way of life. Reputational management begins by winning the hearts and minds of locals and disproving many of the myths that fester in mining regions, based in part on historical precedent but also misinformation, often spread by mining opponents. Regardless of what CSR programs are devised, the process should begin with a thorough surveying of the fears and aspirations of the local community. Without direct contact with the community, miners rely on intermediaries, who bring their own agendas to the table. Ultimately, it is the local community, a body of voters, whose opinions matter most in terms of reputation management.

In the battle to win over the local community and the national population, miners face a variety of opponents, including:

�� Local politicians and community leaders: They feel it is their right to receive personal benefit for supporting the mine and are often the ones orchestrating opposition tactics. In the vicinity of almost every mine in Latin America, there is a crooked local leader trying to extort benefit for himself.

��NGOs: These vary dramatically in their level of professionalism. Many are decentralized organizations with little managerial oversight. As a result, local NGO chapters can be overly ambitious, run by young, impetuous leaders ready to incite local opposition to projects despite little evidence of miner wrongdoing. Today, NGOs are active in training local communities on how to oppose mines in Colombia, Argentina and Guatemala, among other Latin American jurisdictions.

��Workers unions: These are employed directly by the mine or its subcontractors. Union leaders, however, may be working for paymasters who oppose the mine, such as political opposition groups or organized crime. Poor relationships with unions and their impact on miners’ reputation became a serious issue in Mexico over the last six years as the PRI lost influence over some unions to organized crime.

Most reputational attacks come from mining opponents, who are better equipped and less tethered than ever before to wage reputational battle against mining interests.


�� Illegal miners: They view industrial miners as a threat to their business interests and can purchase local and even national political muscle to oppose a mine. In Colombia and Suriname, among others, illegal miners have actively helped repel the incursion of industrial mining into “their” claims. In Venezuela, heavily armed gangs help control illegal miner access to gold in the under-governed Bolívar state near the Brazilian border. The federal government has repeatedly tried to take control of the area using military incursions in the hopes of creating a secure mining environment. Hundreds have reportedly died in firefights. Any miner investing in these properties does so with a perception of blood on their hands.

��Organized crime: It often backs illegal miners or uses them to launder their illicit proceeds, and can influence local and regional police and politicians. In parts of Central America, drug smuggling routes northward to the U.S. have been threatened by the awarding of mining claims, leading to robust opposition to mining.

�� Farmers: They typically oppose mining when they rely on irrigated local water supplies and fear that their livelihood will be threatened by water depletion or contamination that results from mining activity. Collective farmers in Guatemala and farmers in Colombia have been vocal opponents of mining.

�� Indigenous leaders: Fifteen of the 21 nations that are signatories of the ILO Convention 169 on Indigenous and Tribal Peoples rights are located in the Americas, which explains the scrutiny exercised over these rights and the resulting reputation risks for miners. The question of indigenous rights is a flash point for global media. When President Temer tried to open new regions for mining exploration in the Brazilian states of Pará and Amapá, NGOs reached out to celebrities who enthusiastically supported an indigenous cause that equally benefited their own image.

�� Unscrupulous journalists: Underpaid and poorly trained, journalists in Latin America often sell their media access to the highest bidder, either writing fluff for corporate clients and their PR agencies or working against investors, either to extort money or operating in the interests of opponents of investment.

CSR isn’t enoughFor many years, miners brought a playbook of a few well-practiced CSR strategies to each new project, dedicated a finite budget to CSR and let the program operate autonomously and in isolation. These were the “feel good” projects that slapped a coat of paint on what is an inherently dirty business. CSR leadership was kept out of the C-suite and any serious decision-making.

If such an approach was flawed in the past, it is downright reckless today. Local communities have far more power than ever before and are much more sophisticated and ambitious in how they exercise that power than they were just five years ago. Connectivity allows local communities to inform themselves, understand what other communities have negotiated and seek advice from willing NGOs and other natural opponents of mining. There is a rash of local community referenda across Colombia, Guatemala, Argentina, Peru and elsewhere that have halted, cancelled or currently threaten more than 50 mining projects in Latin America.

Miners require a more sophisticated approach to managing their reputation, beginning with investing in robust surveying and intelligence gathering.

Best practice: Investing in intelligence-gatheringBefore investing in a property, the due diligence assessment of an asset should include a reputation audit of mining in the area—and of the buyer’s name. Surveys of the local community should be conducted to gauge their opinion of mining, quantifying both their fears and aspirations related to mining. An understanding of the local power players, their motives and to whom they are answerable is also crucial. The cost

Ultimately, it is the local community, a body of voters, whose opinions matter most in terms of reputation management.


in time and money to win the hearts and minds and understand the motivations of the local community and its stakeholders must be woven into the valuation process.

Before visible signs of investment in a mine take place, community outreach should begin by listening, which includes regularly surveying the community (and the public nationwide) and establishing roundtables to hear the concerns—and yes, demands—of local stakeholders. The same roundtables eventually become a platform through which the miner can convince the most influential people in local communities of the merits of the proposed approach to mining.

Beyond establishing public listening posts, it is important to monitor discreetly any dubious alliances and stakeholders whose interests inherently clash with the mine to initially understand their motives and then mitigate the actions those motives provoke. Links back to greedy litigators in the capital city or opposition parties looking to stain the reputation of the government by association with the mine are the sorts of dynamics that only discreet investigation can uncover. But such monitoring takes time to mount and therefore should be undertaken lightly but on a constant basis, ready to be ramped up or focused on a single issue when needed.

Knowing the facts, conducting one’s own analysis (via respected third parties) of soil and water impact and other crucial environmental data is essential to thwart the actions of unscrupulous journalists working in cahoots with opponents of the mine. Even professional journalists are vulnerable to manipulative forces. With declining investigative budgets, journalists of all stripes increasingly rely on social media and other malleable sources to build their reportage. Miners should invite scrupulous journalists to the mine to show them firsthand how things operate.

For years, a lack of information flow in Latin America induced miners to operate semi-secretly with their plans and tactics, keeping everyone but a handful of people in the national government under-informed. But now we live in

a hyper-informed age, where even a humble local resident can access limitless information about a mining company, a site’s history, the dangers of mining and the level of royalties and other taxes paid around the world. Managing reputations in the internet age requires both greater miner transparency, especially with the local community, and a more robust approach to collecting information to satisfy stakeholders, proactively fend off unscrupulous actors and counter misinformation.

Managing reputations in the internet age requires a more robust approach to collecting information to satisfy stakeholders, proactively fend off unscrupulous actors and counter misinformation.


Veteran miners are well aware of the operational challenges in Latin America, but financiers are not familiar with these difficulties. Each jurisdiction presents its own obstacles which may typically include inadequate infrastructure, conflictive unions and/or inadequate local service providers. Most of these hurdles can be overcome with approaches that reduce their impact on operations. Below we explore some of the best practices we have witnessed to overcome limitations that stem from these challenges.

InfrastructureMost mines in Latin America are set in remote locations and are reached by narrow, unpaved roads. In the gold-rich Guyana shield or at isolated sites in the Amazon and Andes regions, roads are washed out in the rainy season or driving becomes so slow it is inefficient to haul precious cargo by truck. Rivers may offer an alternate route (for heavy equipment being shipped to the mine, for example) while helicopters are often employed to remove processed precious metals. Getting a permit to build one’s own road can require more paperwork than securing permits for the mining concession itself. This is where the influence of a local equity investor can be crucial. Red tape is easily cut with a

call from the executive branch and powerful local business leaders often enjoy better access to the presidency than a foreign investor. In Colombia, the Proyectos de Interés Nacional y Estratégico (PINE) framework enables the national government to fast-track permits, that otherwise would require the authorization of local government. In most LatAm jurisdictions, it is important to scrupulously follow all protocols for impact assessments to avoid litigation from NGOs and political foes.

While building out a mine, the delivery of equipment and arrival of workers at the mine site have major impacts on project scheduling and budgets. Other businesses, such as quarries, loggers or local industries, may be competing for use of the same transport routes. Opponents to a mine or those looking to extort mining operations

Latin America Mining Risk #6Operational

Outsourcing management of customs and import duty payments is often a wise choice but the partnering company should be thoroughly vetted.


will often target supply route bottlenecks (bridges, tunnels, canyons) to form a blockade. Once usage scheduling with parallel industries (like logging) is sorted out, these businesses can be useful allies against common enemies like drug traffickers, illegal miners and others who try to sabotage bottlenecks in access roads.

Criminal and informal businesses are common at port facilities, potentially impacting the importation of mining equipment and exportation of minerals. Outsourcing management of customs and import duty payments is often a wise choice but the partnering company should be thoroughly vetted. Several miners have also opted to build a dedicated export terminal in areas where organized crime is deeply integrated with the traditional logistics infrastructure. Such a tactic has been employed in parts of Brazil and Central America.

Economic actors in the mine’s vicinity can also serve as useful partners in sharing water and energy supplies. Local political opposition to mines is often rooted in competition for resources. For example, the flower industry in the Colombian departments of Cundinamarca and Antioquia often lobbies against industrial mining for fear of loss of access to water. Similar concerns fueled opposition from the farming industry in several Latin American jurisdictions. Some of these fears are unfounded and are best countered with a respected third party scientific assessment of water usage. On other occasions, a mining project can pressure the national government to invest in water management improvements (dams, pipelines, etc.) that benefit all water users in the community. Improvements in infrastructure, including expanded access to electricity and road building, help raise the profile and stature of the mine in the local community.

Oftentimes, the lack of adequate power infrastructure forces the mine to build its own power supply and power lines. The cheapest option may be diesel-based power generation, but a smarter play is renewable energy (hydro,

solar, wind, etc.) that can be shared, at cost, with the local community. Such alternative energy will remain long after the mine dies down and will help bolster a mine’s green credentials with urban voters and NGOs. In Chile, a thermo-solar power plant allows the Codelco-operated Gabriela Mistral mine to reduce its diesel consumption by 80%. Similarly, Antofagasta Minerals’ Los Pelambres copper mine receives 20% of its energy from 50 wind-powered turbines.

Human capitalThe lack of qualified local service providers needed to run a mine or maintain equipment is a challenge in many of the smaller Latin American mining countries. Unreliable and unprofessional subcontractors lead to project delays and may cause safety hazards that harm workers or the environment. Unscrupulous labor practices by subcontractors can trigger reputational blow-back on miners. Therefore, it is essential to properly screen any local subcontractors and speak to their other clients to understand what to expect.

Miners have shared their regrettable experience of hiring a local IT provider, who, though qualified, was actually working for the government or even organized crime and passed along vital information about the mine’s output and vulnerabilities. In the Guyana shield, technicians

and mining service companies are virtually non-existent and personnel must be trained from scratch or brought in from abroad. An example of best practices can be found in the strategy implemented by Newmont in the Guyana shield. Both

in French Guiana and Suriname, Newmont joined forces with local governments to develop large-scale training of informal miners and small equipment distributors. This approach, although time-consuming, helps raise the quality of operations. It also serves as an excellent CSR tool for building support around mining operations by increasing local content in supply processes.

The cheapest option may be diesel-based power generation, but a smarter play is renewable energy (hydro, solar, wind, etc.) that can be shared, at cost, with the local community.


Developing appropriate human capital is essential when ramping up mining operations. Several jurisdictions cap the number or percentage of foreign workers that may operate in mines even though they are able to provide very limited numbers of qualified employees. This dilemma is acute in Ecuador, Suriname, the Dominican Republic and Guyana where mining history is limited and poaching workers from other miners is commonplace. If there are no mining colleges or training centers, large-scale miners are wise to invest in their own training or co-fund programs with the government. For example, Lumina Gold partnered with the University of Loja in Ecuador to train engineers and technicians. Such training centers ought to be close to the mine because, unlike mining workers in Canada, Australia and South Africa, Latin Americans are wary of pulling up roots, displacing themselves from family and long-established community ties.

Unionized labor in Latin America got its start in the mining sector. Unions can be combative and are often corrupt. In some markets, unions are willing to collaborate with mining management in tough times (e.g., when mineral prices are dropping). Others are more combative in nature, but union leaders will end a strike if their pockets (not necessarily their members’ pockets) are lined. In Mexico, mining unions were traditionally

funded by the long-ruling PRI party, in an effort to mobilize voters in remote locations. When the PRI lost the presidency in 2000, the party’s purse strings were cut and a near-century of cozy relations with organized labor came to a halt. Since then, a few unions in Mexico including at least one mining sector union, have sought other sources of funding, including organized crime syndicates. The Torex Gold Resources mine in the state of Guerrero was blocked for several months by union workers that were purportedly backed by local criminal organizations.

Conflicts between obstinate unions and their miner employers can be mitigated if proactive strategies are adopted. Jaguar mining in Brazil reportedly invited union leaders to attend all of the mine’s finance meetings. The union heads were shown how minimal

and risky the margins of a mining operation can be. This helped demystify the notion that mining leads to easy riches. The union backed off on many of its demands, cognizant that a failure to do so could drive the mine out of business, jeopardizing all of its’ workers’ jobs.

Newmont joined forces with local governments to develop large-scale training of informal miners and small equipment distributors. This approach serves as an excellent CSR tool for building support around mining operations.


In 2012, President Danilo Medina was elected President of the Dominican Republic. He inherited a vulnerable fiscal situation from outgoing President Lionel Fernández, who had overspent, both to buffer his country from the financial crisis and to be re-elected in 2008. Danilo, as he is known to Dominicans, had two choices: either dramatically cut spending, thereby reneging on campaign promises, or renegotiate the contractual terms with the country’s largest foreign investor, Barrick Gold, in a climate of record-high gold prices. The executive branch began protracted negotiations amidst a PR battle that targeted Barrick as an exploitative foreign miner. The renegotiation dramatically increased tax revenue for the Medina administration, helping lift Danilo’s approval ratings to the highest of any leader in the Americas.

A less-than-happy ending resulted from the 2013 stand-off between Kinross Gold and the Correa administration in Ecuador. Before Fruta del Norte was even built out, much less in production, the government wanted to extract a windfall tax from Kinross, much like what oil companies are accustomed to

paying when prices spike. However, the finances of mining are nothing like those of hydrocarbons, and Kinross refused to accept Ecuador’s onerous terms and sold its stake in Fruta del Norte at a large write-down.

Rising mineral prices are a double-edged swordWhat both cases demonstrate is the risk that miners face when mineral prices surge above historic averages. Royalty contracts are often negotiated when prices are low with the future upside of higher prices benefiting the miner, who

assumes the financial risk of developing a mine. Having been through one of mining’s best pricing cycles (2003-2013), some in the industry now lean towards royalty

contracts that share risk and reward with host countries. As prices rise or fall, so do the royalty obligations. Building flexibility into the contracts lowers the downside risk for miners and provides political cover for governments when mineral prices climb, prompting voters to demand more.

Latin America Mining Risk #7Economic

Even rational political leaders may be forced to take painful economic measures when facing capital flight.


In countries where mining (an industry that thinks in the long term) represents a small percentage of economic output, political leaders are more willing to gamble their country’s investment reputation for short-term tax gains. Both the Dominican Republic and Ecuador were immature mining cultures at the time they confronted their largest foreign investors. By contrast, in more mature mining jurisdictions such as Chile and Peru, Guyana and Suriname, host governments tend to be more circumspect before threatening their largest source of foreign direct investment. In 2011, Ollanta Humala was elected on the strength of a populist campaign that promised to extract higher rents from Peru’s formidable mining industry. Miners banded together to form a negotiating committee that mounted a sophisticated campaign combining PR messaging directed at the corporate sector, a legal strategy backed by Peru’s respected mining code and a direct appeal to the executive for restraint by proactively offering higher rents. In short order a deal was reached, and Peru went on to capture record amounts of mining investment under the Humala administration.

Current account deficit dangersDesperate times lead to desperate measures. The aggressive intervention policies begun under President Hugo Chávez were tolerated by many foreign investors (including miners) so long as oil receipts kept Venezuela a profitable market. However, the devastating two-month general strike in 2003 triggered historic capital flight, depreciated the bolívar by 30% and prompted the Chávez administration to impose capital controls to shore up the currency. From that point on, it became increasingly difficult to extract any profits made in Venezuela. Despite Venezuela’s enviable gold deposits, capital controls all but killed investment interest from large industrial miners. For foreign miners operating at the time in Venezuela, capital

controls were the first in an evolving series of challenges they would face.

Latin Americans have limited faith in their governments and legal systems, so they keep about $4 trillion of savings outside of the region in safer jurisdictions. As a result, Latin American governments rely on foreign debt, which they service by relying disproportionately on taxes imposed on natural resource exports. Depending upon commodity prices, which are inherently volatile, to manage fiscal accounts and foreign debt obligations heightens the risk of Latin American government debt. Today there are six Latin American countries where the federal debt is considered investment grade. For the remaining 15 countries, the risk of an economic or political shock driving them into a current account crisis varies from possibly to very likely. Even rational political leaders may be forced to take painful economic measures when facing capital flight. A case in point is the decision of the Mauricio Macri administration to reintroduce taxes on agricultural exports in 2018 after the Argentine peso lost more than 40% of its value. Miners need to study the middle- to long-term economic viability of their host country where political leadership will change many times before the life of a mine expires.

Currency collapseMost currency regimes in Latin America operate with free floats or “dirty floats.” However, a few countries are either dollarized or try to manage their currencies. Both approaches can lead to current account crises on the back of overvalued

currencies, hurting operating profits and sometimes provoking protectionist measures to slow imports. Price drops in the commodities that drive Suriname’s exports forced the country to abandon

its currency peg in late 2015. This triggered a 55% devaluation, 64% inflation and a pivot to Chinese financial support when Suriname’s president refused to embrace IMF support. So far, miners have not been hit with tax increases but

In countries where mining represents a small percentage of GDP, political leaders are more willing to gamble their country’s reputation for short-term tax gains.


the ability of Suriname’s government to provide infrastructure and public security has been compromised by its fiscal challenges.

Ecuador is a dollarized economy, a policy decision first implemented in 2000. The dramatic decision has helped curb Ecuador’s inflation and may have even limited the cost of fiscal deficits fueled by corruption. But when the U.S. dollar strengthens vis-à-vis Ecuador’s competitors, the country’s oil, banana, shrimp and gas exporters lose contracts or profits. In 2008 to 2009, in the throes of the U.S.-led financial crisis, the

American dollar strengthened against emerging markets when global capital retreated to safe havens such as U.S. T-bills and other U.S. assets. Ecuadorian exports took a hit, and the country quickly began depleting its reserves as its trade deficit ballooned. To help balance trade, Ecuador’s customs officials began slowing imports using every imaginable non-tariff barrier to do so. For miners, importing capital equipment became complicated and slowed their project development.


Remi PietNatural Resource & Infrastructure Practice Leader

Dr. Remi Piet is a Senior Director at AMI and leads the company’s Natural Resources and Infrastructure Practice.

Remi leads political and other risk analysis activities for the mining, energy and infrastructure sectors in Latin America, be it a snapshot country and counterparty risk analysis ahead of an asset purchase or the on-going monitoring of on-the-ground risks for miners and energy players.

Remi has worked on projects in more than 60 countries worldwide and taught at the University of Miami, Centrum Lima, HEC (Paris) and Qatar University. For more than a decade, Remi also led the Latin American operations of European and American multinational firms. He has traveled to and worked in 24 Latin American and Caribbean markets.

Recent engagements for clients included analyses of security, political and reputational risk exposure for mining majors in the Guyana shield, Andes, Central America and Brazil. Remi studies innovative approaches to community relations management as well as local political and security risk mitigation strategies.

Remi received a PhD in Political Economy from the University of Miami, an MBA from Laval University (Canada) and a Masters in Economics for Developing and Transitioning countries from Universite Paris La Sorbonne.

About the Authors


John PriceManaging Director

John is a veteran of Latin America market consulting and one of the leading public speakers and thought leaders in the region. Since 1993, John has advised more than 50 of the global 1000 firms on their business strategies and market intelligence needs in Latin America. John’s consulting career began in Mexico where he founded InfoAmericas, which by 2003 became the largest independent market intelligence firm in Latin America. The firm was sold in 2007 to Kroll, the world’s largest corporate investigations firm and John launched Kroll’s first market intelligence practice. In 2011, John left Kroll and co-founded Americas Market Intelligence.

John has published over 100 articles and whitepapers on the Latin American business climate and maintains a column in the region’s largest circulated English language magazine, Latin Trade. In 2007, John Price co-wrote and co-edited Can Latin America Compete?, which was published by Palgrave. John teaches as an adjunct professor at Florida International University.

John is an active board member of Nuestros Pequeños Hermanos, a LatAm orphanage network and the Canadian Council of the Americas. He is a BComm graduate (1988) from Queen’s University.

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Helping investors understand and mitigate mining risk in Latin America.

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managing mining risk€¦ · private sector. the greatest risk of political interference is felt...

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