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Left-wing politics, higher taxes in Peru and Chile could lead miners elsewhere

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Left-wing politics, higher taxes in Peru and Chile could lead miners elsewhere

Left-wing nationalist politics and the prospect of higher taxes in Peru and Chile could divert the flow of mineral exploration and mine development spending to other countries, according to industry experts.

"It is going to slow down spending in the near term, for sure, in places like Peru and Chile," Haywood Securities analyst Kerry Smith said in an interview. "Some will move to places deemed more friendly, like Canada, the U.S., Ecuador and West Africa, etc."

In 2021, South American politics have come to the fore as a looming risk for explorers and miners, as politics in the key copper-producing regions of Peru and Chile are poised to shift left and both governments are pushing for more tax revenues from the mining sector amid historically high prices for major industrial metals, such as copper, and precious metals, including gold.

The lower house of Congress in Chile has passed a bill that would put a progressive royalty on copper and lithium sales, while in Peru, socialist candidate Pedro Castillo has claimed an election win in a contested presidential race. In the run-up to the election, Castillo took a hard line on the mining sector, proposing greater state and local control, and higher taxes.

SNL Image

Chile is home to many large copper operations, such as the Collahuasi mine in the northern Tarapaca region.
Source: Glencore PLC

"It is a predictable cycle," Sabina Gold & Silver Corp. President and CEO Bruce McLeod said in an email. Sabina Gold & Silver focuses on gold exploration and mine development in Canada. "Commodity prices increase. Governments see companies making windfall gains. Taxes increase and/or nationalism [and then] investment cools."

McLeod noted that the gap has narrowed between productivity-based pay in riskier locations, where there may be a higher chance of tax increases and expropriations, and North American wages during the latest mining cycle. Environmental regulations have also become more rigorous outside Canada and the U.S., the CEO said.

"So the benefits of operating in some of those countries have been eroded," McLeod said. "Taxes and expropriation risk will hurt investment in some of these jurisdictions."

Riverside Resources Inc. President and CEO John-Mark Staude said the exploration company has shifted some of its focus to Canada and away from more difficult destinations such as Mexico, where it prefers to form partnerships and joint ventures with other miners such as Hochschild Mining PLC and BHP Group in order to share risk.

Riverside and BHP Group agreed in May 2019 to explore for copper together in Mexico. In June 2020, Riverside granted Hochschild a 75% option on its early-stage Los Cuarentas project, with Hochschild terminating the option in May 2021.

Beyond Mexico, Riverside has decided to spend more of its own capital to advance a series of gold projects in Canada. "In a way, we have moved Riverside's interests ... out of Mexico during the current six-year presidency of [Manuel López Obrador]," Staude said in an interview, referring to the leftist president who was elected in 2018.

Among policies that have affected Mexico's mining sector, Obrador suspended the issuance of new concessions and has made it more difficult to get mining permits, according to industry leaders.

Staude said that, overall, the leftward shift of politics in some Latin American countries has pushed capital away to regions considered safer for exploration. "Longer term, the traditional Latin American mining powerhouses have lost their luster to the U.S., Canada, Australia, Finland and Sweden as favored destinations."

Still, other veterans in the exploration and mine development sectors remained skeptical that the latest shift in South American politics, or governments pushing for a bigger slice of mining profits, would have a major impact on spending and country choice among mineral explorers.

David Harquail, chair of Franco-Nevada Corp., which invests in metal royalties and streams, expects exploration capital to take a long-term view and companies to continue work on assets in more difficult jurisdictions in the hopes that project economics would hold up despite potentially higher taxes. Harquail also expects higher taxes to delay capital investments in mine builds in the near term, as miners readjust their expectations on planned projects or expansions.

"Unfortunately, good geology is captive to changing governments," Harquail said in an email.

Kevin Murphy, an analyst with Market Intelligence, took a similar stance on the potential impact of recent political shifts in South America on exploration spending.

"We really aren't expecting any significant cooling in Latin America," Murphy said in an email. "Countries like Chile and Peru are well regarded for their mineral potential, in particular copper and gold. So current prices will definitely incentivize increased exploration, despite potential policy changes."

The analyst echoed a view held by other industry observers: Resource nationalism comes and goes through mining cycles. As long as hardline policies outlined during campaigns do not become reality, there is, generally, little impact on the flow of exploration investments.

"Ultimately, every region has its operating quirks, and explorers are increasingly used to navigating them," Murphy said.