Going ‘South’ Is Good Business

The fourth quarter of 2008 and certainly the first half of 2009 brought with them an economic crisis and the tumbling of metal prices that will be long remembered as one of the more turbulent periods in mining history.

As a result, mining firms have been forced to adapt to these market variations and change their focus from production to cost reduction, which has led to a growing list of postponed projects and shrinking investment budgets. Cutting costs and improving efficiency has taken a front seat to optimized production.

The trend towards efficiency puts added importance on solutions that allow for increased automation and better control of costs, and this brings unique opportunities for Latin America -a region showing interesting growth where many Canadian companies are now based.

What is surprising, however, is that in spite of the sharp recession in the U. S. (the economic contraction in the U. S. is going to be between 1 and 2 per cent), and the decline in commodity prices (nearly 50% since mid-2008), the economies in Latin America are going to be able to grow.

Growth in Latin America will come from domestic sources, notably consumption and investment. The key here is that a major reversal in the direction of capital flows could change the economic landscape dramatically. Under large capital outflows, it will become almost impossible to keep consumption and investment at their current levels.

Focussing on Canada, there are some signs of life as well. Following a difficult period in 2008, new mining financings for the first quarter 2009 (ending March 31) on Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV) were up by 71% compared with the first quarter in 2008, raising C$4.8 billion in 356 financings.

“During the first quarter of 2009, we saw a continuation in the interest in gold and other precious metals with a large number of equity financings being completed on a “bought deal” basis. TSX and TSXV listed companies in various metals including base metals, iron ore, uranium, specialty metals and potash also started to raise financing for their projects. However, most of the capital was for advanced stage development companies and producers with less going to the junior exploration companies compared with previous years,” said Greg Ferron of the Toronto Stock Exchange (TSX).

According to Ferron, as the quarter progressed, TSX exchanges started to see new capital flow into the junior exploration sector primarily on a private-placement basis

In addition, the good news is that the prospect for Canadian mining companies does not appear particularly grim for their Latin American operations and, even more, according to the TSX, Canadian mining operations are strong in South America.

For instance, there are 23 TSX companies (with 81 exploration mining properties), and a further 34 TSX Venture Exchange companies (with 143 exploration mining properties) in Argentina.

Mexico is another Latin America country where mining companies choose for their projects, with 66 TSX companies (192 exploration mining properties). The same situation is found in Brazil, where a number of mining projects are based. There are 21 TSX companies (with 80 exploration mining properties) and another 27 TSX Venture Exchange companies (with 76 exploration mining properties).

But how do some Canadian mining companies really deal with their operations in South America? Canadian Mining Journal found three small-to medium-sized companies to share their points of view that show the promise that Latin America offers to their projects.

They are Aquiline Resources (with two projects in Argentina and Peru), MineFinders Corporation (one project and several explorations in Mexico) and Colossus Minerals (a project in Brazil).

Through experience, they have analysed the dynamics of the mining equipment market in Latin America and its evolution given the current context of austerity. They have also envisaged key points such as competition against large mining companies that are highly financed, and they have explained their anti-crisis plan, as well as the pros and cons of operating in South America.

Building Strategies

Personnel and properties are the two primary concerns for any mining company, but those issues are essential for competing and surviving in todays market, especially for a small-or medium-sized company operating abroad. In this context, a possible road is for them to focus on specific projects, as opposed to what a larger integrated company with competing assets in diverse geographies is able to do.

“Local management may find their projects sidelined when the parent company transfers its focus to another jurisdiction or another metal. In contrast, we have kept a narrow focus on our South American assets, and expect to retain this focus. We also believe we have offered a greater degree of autonomy to our Argentinean and Peruvian management than would have been expected from a larger entity. Despite our size, we have been fortunate in attracting a highly skilled technical team, who are motivated by the reward of working with a large, dynamic silver asset, particularly Navidad in Chubut province, Argentina, which has responded well to technical expertise, having grown by almost double since we assumed operating control in November 2006. Our drilling in 2008 accounted for 85% of the drilling in the province, and approximately 11% of the drilling in the country,” said Flora Wood, Vice-president, Investor Relations, of Aquiline Resources.

Generating new projects through grassroots exploration is another competitive advantage for small-to medium-sized companies operating in South America.

“With regard to acquisitions, larger companies have more access to capital than we do, but their size also makes it difficult for them to form a consensus, move quickly on targets, and they require projects of a larger scale than we would to make a positive impact, so we can operate in a smaller niche of relatively higher risk, but higher potential reward,” said Mike Wills, Investor Relations Representative, of Minefinders Corporation.

He added: “In terms of competition for personnel, we offer salary and benefits which are comparable to our competitors, and we seek out professionals who appreciate the challenges and opportunities of a small-company environment. We have many fewer layers of bureaucracy, and the decisions made by our people have more important impact on the company than they would with a giant company.”

Current times also impose a new set of uncertainties, so mining companies operating in South America have their anti-crisis strategies.

As Flora Wood has pointed out: “We have enacted measures that were in response to negative development. For instance, we acquired our first project interest in Argentina in 2003, which was after the currency devaluation and debt default of 2001-2002. This gave us some insight into how the country adjusted to the currency change, and the mining companies operating in Argentina at the time appeared to recover well. We also have contingency plans affecting our labour force depending on the stage or our activity. We are not yet generating revenue, as our assets are development assets. However, we can make some predictions based on economic studies of our main asset, Navidad in Argentina, and our smaller gold asset, Pico Machay in Peru.”

In other cases, such as the Canadian mining company Colossus Minerals with its operation in Brazil, as companies move towards mine construction, they will implement an anti-crisis plan.

Modern Technology

In general, the level of technology in South America is appropriate for small mining industry. In Peru, for example, according to Wood, modern exploration and mining is well developed and has been since the early 1990s.

In the case of Minefinders Corporation and its operation in Mexico, they have not encountered
any significant issues in terms of finding capable workers within the country, and they operate workforce training programs to elevate the skills of their workers, as well as training new people. However, for specific complex software used by certain departments, they sponsor training programs for their employees.

In Colossus Minerals case, they are presently utilizing Brazilian drilling companies.

“Equipment is modern and operation is efficient. Some analytical work is performed in Brazil very well, but we also do additional analytical work in other countries,” said Ari Sussman, CEO, of Colossus Minerals.

However, operating in South America could have challenging issues. For instance, there are cultural differences and some significant differences in terms of legal framework, particularly with the amount of time cases can take within the courts, and some complex jurisdictional issues.

“In the US and Canada, contracts and contract specifics are generally considered immutable, while in Mexico, relationships and the ongoing dialogue are sometime more important in terms of getting things done,” said Wills.

Concerning technology, Mexico has a long history of mining, and a highly active construction industry, so people at Minefinders Corporation find large number of highly qualified heavy equipment operators, good mining engineers and geologists, and generally high quality employees in Mexico.

“However, certain kinds of technology, equipment and parts are more difficult or more expensive to find. Telecommunications costs are much higher than you would find in the US,” said Wills.

More from Colossus Minerals indicates that Brazil`s infrastructure could use improvements. “Sometimes it is difficult to manoeuver through foreign bureaucracy. Examples are longer lead times than Canada to import equipment into Brazil., and there is also a longer process to obtain various licenses and mineral titles,” said Sussman.

However, South America is a region where a number of mining business advantages exist. Issues such as cheaper labour, rich mining cultures, and excellent university programs in mining yield quality young personnel. Plus, there’s plenty of equipment available.

And finally, according to Flora Wood of Aquiline Resources, Latin America offers additional advantages, such as an ability to work almost year round.

“Unlike other jurisdictions which have a definite rainy season, severe winters or tropical conditions, we have a good climate, and no rainy season or other seasonal effects that would halt mining activity. In the winter, there is sometimes an issue of access to the site, such as snow and wind, that can make conditions difficult, but these conditions are generally very short-lived,” said Wood.

In addition, conditions such as a very low crime rate and high safety, plus an established mining code in Argentina, offers clear provisions for foreign-owned or domestic mining companies.

In Peru, there is a similar situation where the mining culture is very firmly entrenched, with clear timelines applied for permitting, with one federal government agency which issues permits and monitors mining.

Certainly, Latin America offers a new set of business opportunities for the Canadian mining sector as well as Canadian suppliers for mining projects.