Ongoing Opportunities for Canadians in Mining in South America
For a short time, as the sub-prime mortgage crisis began to immerse the world in a financial debacle not seen in decades, it seemed as if the mining industry might be spared. At a gold conference in Lima, Perú, in May 2008, Roque Benavides of Compañía de Minas Buenaventura and Eduardo Hochschild of Hochschild Mining quipped about the price of gold topping $1,500 per ounce. The MineExpo trade conference in Las Vegas in September 2008 was the best attended ever. The massive convention center buzzed with activity. Within two short months, however, mining companies had begun to mothball projects and lay off staff, as their market capitalization plummeted and access to credit all but dried up.
Miners are no strangers to economic downturns. Most people in the mining industry remember well the last downturn in 1999/2000. Given the fact that the average cycle in mining is close to five years in length, many were expecting a downturn in the relatively near future. However, Guy Saucier, General Manager, Corporate Development, of Met-Chem Canada, sums up what seems to be the feeling many have by saying that "[the mining industry] has never seen the downturn happen so fast."
Investors watched in disbelief as stock markets plummeted 40% in the second half of 2008, and many of these losses were incurred in financial services or commodities stocks.
By nature, miners are both optimistic and speculative. They know that mining has always been a highly cyclical industry, and those with know-how and strong stomachs for the risks can benefit greatly from the rewards.
Canadian investors and exporters can benefit from several key opportunities through this bottom of the cycle by:
- Capitalizing on this buyer's market;
- Focusing on core capabilities;
- Identifying key markets and associated opportunities and risks.
The big questions on everyone's mind are "have we hit the bottom yet?" and "how long will this downturn last?" While it is impossible to be certain, it seems likely that we are at or very near the bottom. Export Development Canada – EDC believes that the macro economy will begin to recover during 2010, and that the current credit crisis will likely be worked out in the first half of 2009.
According to Aimee Rae, an Economist with EDC's Economic Analysis and Forecasting Group, in the long term, base metal prices are expected to rebound yet remain moderate. Over the next four years, copper will climb back up to around $5,000 per tonne. Copper price forecasts are based on an expectation that demand – much of which comes from China – will recover and the industrial boom taking place throughout many parts of Asia will resume.
"Rae believes that the increase in demand will result in price recovery, but supply will be constrained in the short term due to issues related to the credit crunch and feasibility of operations at current market prices," says Rae.
As prices recover, companies will see a return to the sales and profitability they recently enjoyed. However, even in the short term there are opportunities to be capitalized upon.
Industry periodicals these days are replete with dire predictions of bankruptcies and layoffs among Canadian mining juniors and suppliers alike. Only time will tell whether these predictions are unduly negative, but it is unquestionable that the recent plunge in commodities prices and global access to capital has rendered many projects all over the world uneconomical, forcing Canadian mining companies to slowdown or mothball development or to try to sell the property at fire sale prices.
According to International Minerals Corporation (IMZ), under the current market conditions, there are significant opportunities to acquire projects that are in or near production at low acquisition costs, some of which are at a 20-year low. Those companies that remain relatively financially healthy are certainly seeking to purchase Canadian juniors, so the trend towards consolidation in the industry that characterized the recent peak of the cycle can be expected to continue through the trough.
Furthermore, mining companies that have in the last several years suffered from skyrocketing input costs can benefit from a respite. As a result of the global recession, labour constraints will ease and labour disputes should be more easily resolved. Whether for staff, commodities or other inputs to their mine, it is a great time for mining companies to lock in long term contracts that will protect their profitability going forward. According to Rae, "There are a lot of bargains out there, and it is expected that companies with cash will be able to pick up some great deals."
Focus on Core Capabilities
As well as bargain-hunting, wise mining companies will use this slowdown to confirm their corporate strategy and focus on core strengths. When business is booming, companies concentrate on keeping up with demand from existing customers in known markets. When business is slower, companies can benefit from the opportunity to reaffirm whether they are growing in the right direction, to rationalize product lines or projects that may not fit with that corporate strategy and to plan for the future. Met-Chem Canada is one such company: "We are using this down-cycle to refocus – to look at our strategy and see if it should change," says Saucier.
A chance to catch one's breath is also a chance to develop and deepen relationships with key buyers and suppliers and to embed strong corporate presence in key markets. Once companies have reaffirmed their corporate strategy and position within their chosen market, they can focus on refreshing their client lists and determine how best to serve their clients. Many Canadian mining companies have established offices or relationships with agents in foreign countries. They have recognized the merits of localized management of their mining project and suppliers, due to the competitive advantage that comes from speaking the language of their customers and being able to offer them rapid delivery and after-market service.
One example is Norcast Castings. The company is a premium supplier of grinding mill liners, based in Canada. In 2007, Norcast opened offices in Santiago and Iquique, Chile and, in 2008, an office in Lima, Perú.
According to Pete Lahucik, Market Area Manager, International, "While agents opened doors into the market and helped with initial business development, as the market expands, Norcast has found that local representation and Spanish-speaking technical and sales personnel are critical." Those companies with diversified international customer bases are obviously best insulated from economic shocks, so those who feel that their business could be enhanced by a greater international presence may wish to spend the effort on setting up international offices during this downturn.
Growing one's international business does not necessarily mean setting up foreign offices. For Met-Chem Canada, part of focusing its strategy to weather this storm has meant focusing on building contacts closer to home.
"We are looking for new opportunities to help our existing Canadian clients build value in this challenging economy," says Saucier. Canadian mining suppliers need go no further than Bay Street in Toronto or Howe Street in Vancouver to reach nearly twothirds of the world's mining companies, and can leverage their common language, technologies and business culture to establish relationships that can take them around the world. Setting up a foreign office or warehouse may not always be essential, depending upon the good or service. As an engineering firm, Met-Chem has no need of warehouses or distributors in international markets. "Rather than establish foreign offices, if a contract is substantial, we'll ally with local firms," says Saucier.
Understand Key Markets
A 2007 survey of mining suppliers undertaken by EDC jointly with CAMESE found that two of the primary constraints to the growth of their business that respondents faced were lack of time to research new business opportunities and lack of procurement contacts. As with business strategy, forward-looking companies will take some time in the coming months to identify and understand their key international markets and the associated opportunities and risks. Doing so means knowing how to leverage resources for information and business contacts.
Latin America has always presented many opportunities for Canadians in mining – both for mine developers and for suppliers. This is even truer in times of economic difficulty. Two key Latin American countries – Chile and Perú – present the greatest opportunity for Canadians. In Lahucik's view, "Chile's and Perú's mining markets are stable and permitting is much faster there than in Canada, which allows suppliers like Norcast to be involved from feasibility to mine start-up in a much shorter time period than in Canada."
Chile is a very well-developed and robust environment for mining, and has enjoyed strong and growing ties with Canada for more than a decade. Opportunities abound to leverage the strong reputation and expertise Canadians have in Chile.
Perú is a newer, emerging mining player, with a rich geology and favourable investment environment. Canadians can leverage the impending Free Trade Agreement between the two countries to get in earlier on in the development of what may well one day be a mining powerhouse. A closer look at each of these two countries will outline the types of opportunities Canadians can benefit from, regardless of whether they are suppliers or sponsors, and which apply in many other countries around the world.
Chile is one of the most important mining countries in Latin America and the world's largest copper producer. Chile also has rich, high-grade iron-ore deposits, a flourishing nitrate industry and also produces gold, silver, uranium, cobalt, molybdenum, zinc, lead, bauxite, sulphur, potash and rare earth metals. According to the Chilean Copper Commission, COCHILCO, more than US $21 billion will be invested in Chilean copper and gold projects between 2008 and 2012, with US $5.3 billion of it expected to be spent in 2009 alone. This new investment will generate demand for machinery, equipment and supplies for copper, gold and silver production.
Chileans, however, are far from the only significant investors in mineral exploration in that country.
"Canada today is the largest investor in the mining sector in Chile and the third largest overall investor in the country," says Christian Daroch, Regional Manager of Chile, from EDC's Santiago office.
"Canadians poured $13 billion into developing 11 mines in Chile in 2007, compared with $4 billion in 2001." For example, Barrick Gold has two projects underway – Pascua Lama and Cerro Casales (owned jointly with Kinross) – planned investment for which is expected to be around US $1.5 billion. Construction activities in these mines are planned to start in 2011. Teck is also set to bring online its Andacollo Sulfides project by 2010, for a planned investment of around US $386 million. All of these projects are expected to use Canadian expertise as well as to generate demand for Canadian machinery and equipment.
The Free Trade Agreement that has been in place between Canada and Chile since 1997 has resulted in a strong and growing base of bilateral trade. In 2007, Canada exported CAD $659 million worth of goods and services to Chile and imported CAD $1.6 billion back. The potential for growth, however, still stands, in that, according to the International Trade Center, trade compatibilities exist on approximately 56% of the top 50 bilaterally traded goods. Thus, trade synergies between Canada and Chile have only begun to be explored.
Not only are there rich opportunities for Canadian mining companies to invest in mining properties in Chile, but there is also strong and growing demand for the Canadian supply of goods and services in this sector. More than 100 Canadian mining supply companies have a base in Santiago, and another 70 companies have representations elsewhere throughout the country, closer to the mining centers. Although Chile currently has more open pit than underground operations, it is expected that underground mining will grow significantly over the next 10-15 years, opening up the following opportunities for Canadian exporters of mining equipment and services: specialized technology and services to improve water accessibility; software; processing technology and safety equipment.
Because Chile is important as a destination for Canadian investment
support for the mining industry in Chile goes back decades, it has been growing in recent years along with EDC's support for other sectors in that market. In 2005, for example, EDC supported CAD $300 million of Canadian trade with and investment in Chile, approximately half of which was in the mining sector. By 2008, total EDC business volume in Chile had soared to nearly CAD $1 billion, $550 million of which was in the extractive industries. One of the ways in which EDC is working to strengthen ties between the two countries in this sector is through investment in key Chilean mining projects on the basis of future procurement from Canadian suppliers by the Chilean sponsor. In late 2008, EDC hosted a delegation from the Esperanza mine in the Antofagasta region. Three senior procurement officials from the mine visited Toronto, Sudbury and North Bay, where they met with key representatives of government and trade associations, such as CAMESE and SAMSSA, held one-on-one meetings with over 100 Canadian mining suppliers and toured 5 plants.
"We were very surprised to learn of the number and quality of mining suppliers in Canada and we have met many companies we hope to buy from," said Juan Carlos Cuadra, Procurement Manager of Minera Esperanza.
EDC will participate as part of the lending group for the US $1 billion financing package, in the expectation that Esperanza will spend a significant portion of its approximately US $300 million of uncommitted capital expenditures for this mine in Canada.
With its fast growing economy and rich geology, Perú also represents a significant opportunity for increased trade with Canadians in mining. GDP growth in the past few years has been in the range of 8-9% per annum, and mining alone accounts for 6% of Perú's GDP. Perú is the first producer of silver, the second producer of copper and zinc, and the third producer of tin, bismuth and tellurium in the world. The Ministry of Mines estimates that over $10 billion will be spent by 2014 on CAPEX and exploration for approximately 20 new mines in development.
"Peruvian legislation makes it quite favourable for mining," says Verónica Lares, an EDC Economist specializing in Perú.
"A November 2008 bill on mining royalties directly ties royalties to the wealth generated by the mine rather than the amount of earth within it, but is not expected to have a significant impact on the operating costs of foreign investors," Lares adds.
Canada today is one of the largest investors in the sector and the 4th largest in Perú. There are 83 mining companies with operations in this South American country. The vast majority of the approximately $2 billion per annum of Canadian direct investment in Perú was in the mining sector, and for the development of 12 mines. One such example is that of Chariot Resources, which is currently developing the Justa copper mine in southern Perú. EDC is part of the lending group for this project financing.
Canada is very well established in the mining sector as an investor as well as a supplier of equipment and services, which is a key opportunity given that 80% of Perú's mining equipment needs are imported. The Canadian Embassy estimates that there are 120 Canadian companies supplying goods and services to the industry in Perú. In 2007, Canadian companies exported CAD $291 million worth of goods and services to Perú, and imported CAD $2.1 billion. The impending FTA between Canada and Perú, established in 2007 and soon to be ratified, will further drive growth in bilateral trade.
Here again, EDC is helping Canadian mining suppliers to grow their business in this key market by providing a loan to Hochschild plc, a Peruvian mining company with 4 operating mines in Perú. In return, Hochschild has agreed to try to procure from Canadian companies wherever it makes technical and economic sense. This relationship has already resulted in the introduction of numerous Canadian suppliers to this important Peruvian buyer.
"EDC support for Canadian companies selling and investing in Perú has been strong in recent years, particularly in mining." says Stephen Benoit, the newlyappointed Chief Representative of EDC's soon-to-be-opened Lima representation.
"In 2008, EDC's volume in Perú was CAD $291 million, a third of which was in mining. EDC supports sales to almost 200 Peruvian companies."
While both Perú and Chile represent tremendous opportunity, doing business abroad is never without its risks. In Perú, in particular, the government is keen to attract mining investment but is also under strong pressure from local populations to hold mining companies to account. Many mining sponsors now face local community opposition to projects, often with support from international NGOs. There is a rising threat of political violence – protests involving occupations of foreign investment installations and roadblocks (occasionally violent) – and legal uncertainty regarding certain mining projects.
Issues of Corporate Social Responsibility are so important that EDC hosted a multi-stakeholder consultation on Perú on May 22, 2008, involving not only mine sponsors and international financiers, but also representatives of NGOs and government. Key take-aways of that session can be applied to any mining project:
- Engage as early as possible;
- Be as transparent as possible;
- Confront issues directly and constructively;
- Establish, document and follow policies for CSR;
- Adhere to the Equator Principles or another such internationally-accepted standard.
Another risk that is not specific to one country is that of currency fluctuations. The appreciation of one currency versus another can eat away at a company's profit margins on an international project, if they are not careful.
As Lahucik notes, "An important lesson learned is [that] a supplier must monitor South American currency as it compares to [that of] the US and Canada on a close and very regular basis."
While EDC can help mitigate against the financial impact of some of these risks, nevertheless Canadian mining companies venturing abroad must do their homework and leverage such information resources as the Canadian Trade Commissioner Service to ensure that they derive maximum benefit from forays into international markets.
Experts agree that there will be a recovery in the mining sector because strong fundamentals are there. The question is, "When?" In the meantime, Jim Borland, President and Director of Strait Gold is undeterred.
"We're flying in a holding pattern," says Borland, "using this time to reconnect with stakeholders and ensure we're on the radar screens of investors for when the recovery comes."
Until it does, mining exporters can do well to follow his example: hunker down, research, reprioritize and refocus, so that your company can be among the first out of the gate when the skies clear.
Kimberley Lok works for Export Development Canada. The views expressed here are those of the author, and not necessarily of Export Development Canada.
Links and References
• Canada-Perú Free Trade Agreement
• Cerro Casales
• State of Mining is Bad, but it Could Get Worse
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