That Colombia has the potential to become a significant mining player is indisputable. The country is already the largest producer of emeralds and one of the largest exporters of thermal coal and ferronickel in the world, with the involvement of well-known players such as BHP Billiton and Xstrata Coal, to name a few.
There are also ample indicators that it has the potential to produce substantial quantities of gold, iron ore and metallurgical coal.
However, while progress is being made by a growing number of domestic and foreign-owned mining companies, most of its mining potential remains untapped and the industry contributes less than 3% of GDP.
The government of Juan Manuel Santos has identified the mining sector as one of five ‘locomotoras’ (engines of development) that can drive economic growth in the coming decade and beyond. The government has witnessed the significant contribution that the oil and gas sector has delivered to the nation’s economy and it is committed to doing what is necessary to enable the mining sector to replicate that success.
Among the positive steps taken so far have been the creation of the National Mining Agency (ANM) and reform of the geological service, Ingeominas, as well as other structural changes that will enhance the independence and effectiveness of mining-related institutions; plus a commitment to overhaul the existing mining code of 2001.
Viewed in isolation, the government’s words and deeds so far can only be viewed as very encouraging to the mining sector. The objective is clear, the commitment is there and the geological potential abounds.
These positive signs are encouraging a growing number of mining companies, including a handful of Australian juniors, to rank Colombia as one of their preferred targets.
Unfortunately, these developments are accompanied by a series of issues that are not easily resolved and are generating uncertainty and therefore question marks about the development of Colombia’s mining sector.
At present, the attitude of many Colombians towards mining is based on the behaviour of artisanal and illegal miners (two different groups that each requires distinct treatment), who fail to adhere to the world’s best practice mining standards expected of today’s mining companies.
Of Colombia’s total gold production in 2010, it is estimated that only some 14% originated from ‘formal’ sources. The number of artisanal miners runs into the tens of thousands and a recent study by the Universidad Nacional found that a single ‘illegal’ miner will ‘dump 35kg of mercury, 330 gallons (some 1250 litres) of used oil and 2,500t of sediment into rivers in one year’.
As well as the army of artisanal miners, there is also the problem of criminal groups infiltrating the gold mining activity in order to launder drug money and generally profit from the unregulated mine sites. Their involvement only adds to the dangerous operating environment in certain locations and to the detrimental environmental impact of the ‘informal’ mining sector.
According to Daniel Linsker of Control Risks: “The main security challenge for mining companies will continue to come from the complexities of the local environment around mine sites, and the interplay between different actors – both formal and informal, legal and illegal. Possibly the two biggest challenges on that front will come from illegal and artisanal miners, and from communities and local companies being infiltrated or set up by organised crime . . . . which pose some serious security, legal, and reputational risks.”
The polluting and unsafe work practices of the ‘informal’ miners has also taken its toll on community attitudes towards mining and, when combined with a heightened awareness of the importance of protecting the environment, now sees many Colombians questioning whether mining can co-exist with agriculture and can be consistent with environmental protection.
There is also a very public debate about how the spoils of the mining sector should be apportioned between the central and provincial governments, between the national population and those communities where mining is carried on.
A consensus remains elusive and it is clear that the government has to do a better job of managing community expectations. Mining companies also have their part to play and will need to ensure that they implement the right policies in order to secure the all essential social license that is a growing feature of all mining projects.
Despite the enthusiasm and optimism evident in Colombia’s mining sector, investment and development has also been held back by infrastructure bottlenecks and government bureaucracy.
Colombia’s decentralised political system means that the messages coming from the central government are not always adhered to at the regional level. Nor do all members of Congress share the president’s commitment to boosting the mining sector, which makes the passing of necessary legislation less than straightforward.
In the 2013 Mining Leaders’ Investor Survey, exploration companies voted bureaucratic procedure ahead of security risks as the biggest factor limiting the development of their companies in Colombia. This is perhaps understandable given that since 2011 there has been a moratorium on new exploration licenses, as the government works towards the long-promised overhaul of the 2001 mining code.
There are thousands of pending exploration applications awaiting government response and clearing the backlog has been one of the priorities of the ANM since it commenced operations in May 2012. Progress is being made, but the scale of the task is daunting and the ongoing delays are extremely detrimental to junior miners who depend on constant news flows about deals and projects to retain investor interest and thus financial support.
Maria Constanza GarcÃa, president of the ANM, said: “We are putting the house in order. Everything is going to be clear. We’re going to check the legal, technical and financial situation of every title that we have.”
This new approach to enforcing the existing mining code saw the ANM revoke 32 mining concessions in the first two months of this year. In 85% of the cases, the concessions were revoked due to the failure to pay the annual mining canon, insurance policies and fines. The revocations mean that license holders must suspend all activity in the area, begin to dismantle any installations and start environmental closure proceedings.
Conscious of the growing discontent and seeking a better way to unlock the country’s mining potential, the Ministry of Mines and Energy in 2012 announced a plan to auction off to the highest bidder the exploration rights to plots of land within an area of land that the government has classified as strategic reserves (the strategic mining area, SMA), being an initial 2.9million hectares to which a further 17.6 million hectares was later added.
The SMA has been divided into 202 blocks (roughly 15.4% of Colombia), primarily in the eastern departments of GuainÃa and Vichada (on border with Venezuela) and in Amazonas, which feature potential blocks of gold, uranium, coltan and iron.
The reasoning behind this initiative is that it will control the rampant speculation that was common from 2001 to 2010, a period during which security improved significantly in Colombia under then President Alvaro Uribe.
During these years there was an avalanche of licence applications from individuals whose objective was merely to secure exploration rights which they would subsequently on sell to genuine mining companies. Their actions were made worse by the fact that the government was unable to cope with the volume of applications and often did not monitor and enforce compliance with the terms of the licenses issued.
It was this out of control situation and a lack of resources on the part of the then regulator, Ingeomias (this role now corresponds to the ANM), that ultimately led to the introduction of the moratorium on new exploration licenses.
The SMA plan has been copied from Colombia’s oil and gas sector, where the auction system proved itself as a successful mechanism for attracting foreign investment from players with the credentials required to develop Colombia’s hydrocarbons industry. However, it is difficult to find many mining commentators who support this initiative.
Most are of the opinion that the auction system is not appropriate to the mining sector and fear that it will disadvantage the junior mining companies that are such an integral part in the success of the mining sector of all countries. Their thinking is that only larger mining companies will have the financial resources to participate in the auction system and that the exclusion of the juniors will rob Colombia of much needed impetus.
Whilst we wait to see how these issues are handled and how the sector evolves, one undeniable conclusion from my visit is that what is happening in Colombia represents an outstanding opportunity for Australia and, in particular, our mining equipment, technology and services (METS) companies.
Despite the issues that have been highlighted, Colombia is already host to a growing number of major mining companies that have world-class mines in production or development, which are committed to operating in accordance with world’s best practice.
These companies are seeking access to world-class technology and service providers that can help them to improve their competitiveness and to build the successful mining supply chains that are common in many mining jurisdictions.
A paper on the Australian mining sector that I presented at a conference and another given by Peter Beattie at the Large-Scale Mining Association conference last month, highlighted the significant interest that Colombian authorities have in understanding how Australia has developed its mining sector.
The focus is on learning from Australia’s experience in areas of environmental protection, engagement with indigenous communities, creating mining clusters and generally developing a sustainable mining model.
This interest will manifest itself when a large Colombian delegation, including representatives from the central and provincial governments come to Australia in late May to attend the second Latin America Down Under conference in Sydney and to visit mining areas such as the Hunter Valley to witness at firsthand how mining can be conducted side by side with agribusiness.
There are undoubtedly many obstacles that need to be overcome if Colombia is to fully capitalise on the potential of its mining sector, but there are encouraging signs.
Australian juniors who are prepared to undertake the comprehensive due diligence that is essential before entering the market, who are willing to operate in a way that acknowledges the various issues that exist in the market and to have patience, will find ample rewards in Colombia.
If the Colombian authorities are prepared to make hard decisions, there are many mining companies positioning themselves to participate in the potential ‘gold rush’. Should that eventuate, there will be significant opportunities for Australian juniors and METS players alike to benefit from the expected growth.
*Jose Blanco is senior partner of Blanco Partners and chairman of the Australia-Latin America Business Council. He was invited to Colombia by the Asociacion Nacional de Empresarios de Colombia to speak at its ‘Colombia Genera’ conference last month.
