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Latin America at risk of missing out on next commodities rebound

Latin American countries need to get their priorities straight in attracting mining investment, or they risk missing out a significant share in the next commodities up cycle, industry watchers warned.

This is certainly the case in Chile, where mining companies are expected to invest about US$65 billion over the next 10 years, mainly in copper.

Throughout the current commodities down cycle, investors have been attracted to the country’s rule of law, which has allowed companies to focus on reining in costs. However, Chile continues to be plagued by the power wielded by unions, the so-called judicialization of projects, and bureaucracy.

This year is expected to see 16 contract renegotiations with unions and contractor firms, with other cost-cutting strategies such as staff reduction and investment deferrals having already been exhausted.

The negotiations will prove pivotal given the new labor regulation that became active in April strengthening union positions, Alberto Ortúzar, partner and head of Latin America mining practice at law firm Baker McKenzie told S&P Global Market Intelligence.

"In a sector where expensive strikes are already part of the cost of doing business, large miners should look to get ahead of the possible escalation of disputes into strikes by anticipating negotiations with unions," Ortúzar said.

Separately, the judicialization of mining projects is raising concerns over the effectiveness and usefulness of regulatory bodies in granting licenses that are later contested in courts or put on hold until the government’s Committee of Ministers gives the final word.

The country’s highest administrative authority must rule on nine investment projects before March 2018, when President Michelle Bachelet leaves office. One case is the reassessment of the environmental license already granted to Barrick Gold Corp.'s Cerro Casale copper-gold mine.

"Most of these cases tend to end up in court when questions are raised about the administrative process that preliminarily approves mining projects. The issues raised are often nontechnical in nature and are often raised after the window to accept claims has closed", Ortúzar said.

Peru is taking note of the struggles its neighbor and rival jurisdiction is facing and is implementing incentives to lure investment.

The country is seeking to attract US$14 billion in new mining investment in the next four years to increase copper production by 20%, Peruvian Deputy Mining Minister Ricardo Labó recently said at a mining conference in Australia.

Efforts include a revision to sulphur dioxide emission limits in project upgrades and a 79-day reduction in the environmental impact evaluation period by regulatory body Senace, now totaling 141 working days.

Peru’s efforts have caught the attention of Antofagasta Plc, which plans to open an office for mineral exploration this year, Chairman Jean Paul Luksic said recently.

This comes as the construction of new projects such as Anglo American Plc's Quellaveco, Minsur SA's Justa and Bear Creek Mining Corp.'s Corani mines is expected to encourage investment.

However, Peru lacks access to transportation infrastructure to facilitate exports, said Valentín Paniagua, partner and a member of the Peru mining practice at Baker McKenzie.

"The main issues in Peru are not social as much as executing projects and establishing priorities. Peru has stability, but the government is not prioritizing infrastructure in remote areas where most of the deposits are," Paniagua told S&P.

To lithium or not to lithium?

Bureaucracy in lithium development may also cause Chile to miss out on the next commodities up cycle. The government is only just now planning a legal framework to allow private companies to participate in public tender offers for lithium extraction.

Currently, only Sociedad Quimica y Minera de Chile SA and Albemarle Corp. are permitted to mine lithium in the Atacama Desert through a lease contract with Chilean development agency Corfo.

In contrast to Chile’s slow pace of reform in developing its lithium sector, Argentina is expected to account for about half of global lithium production by 2020. It now represents 15% of total world output.

The second-largest economy in South America is expected to receive US$1.5 million in investments to develop five projects that would triple domestic lithium production by 2021.

The expansions of FMC Corp.'s Salar del Hombre Muerto project in Catamarca province and the Olaroz lithium facility, a joint venture between Orocobre Ltd., Toyota Tsusho Corp., and Jujuy Energia y Mineria Sociedad del Estado, in Jujuy province are expected to lead the way.

"With lithium still considered a strategic mineral in Chile and Bolivia not being a top priority for foreign investors, Argentina has an opportunity to attract foreign investment in this area and create success stories that may help attract interest to other kinds of mining. Catamarca, Salta and Jujuy provinces are receiving most of the interest; all of them have brine projects in various stages of development,” Ortúzar said.