MINING TO A LATIN BEAT …. but can capitalismo Latin style last?

Spanish conquistador Pedro de Valdivia, if folklore is correct, met an especially horrific end. Crossing the Atakama Desert in northern Chile on his way to adding yet another South American colony to 16th century Spain, Valdivia grievously blundered by messing with the savage Araucano Indians.

He lost the battle and was punished for his arrogance by having molten gold poured down his throat. Such brutality had its desired effect — Valdivia had his fill of gold once and for all, and the horrified Spaniards had their fill of the Araucanos. The tribe was never bothered again.

Four centuries later, it can be assumed the Araucano Indians have mellowed. The Atakama Desert and Chile as a whole are being invaded now by mining companies, many of them Canadian, bent on finding gold, the metal that motivated Valdivia and his compatriots, and copper.

In fact, Canadian investment in Chilean mine projects (which include a few zinc prospects) last year totalled $491.4 million, according to an item in Mines and Minerals Weekly Bulletin, a publication of the Ontario Ministry of Northern Development and Mines. Furthermore, a phenomenal $4 billion will have been spent on mining between 1990 and 1994. That figure is based on estimates presented to The Denver Gold Club earlier this year by Raymundo Chico of Amada Mineral Corp.

But more significantly, the Canadian onslaught has spread to include practically the whole of Latin America. Mexico, Panama, Costa Rica, Colombia, Ecuador, Bolivia, Guyana, Venezuela and Brazil have attracted Canadian exploration and mining firms. (For a sampling of the companies and their projects, see the accompanying tables.)

They are picking up property options and knocking on outcrops all the way from Chihuahua to Chile in such large numbers from several “push-pull” factors. A dearth of “easy” exploration targets, northwestern B.C. and the copper/gold porphyry targets in that same province notwithstanding, is one such push factor.

This problem was expressed recently by Owen Owens, chief geologist for Cominco Ltd. The most pressing problem for exploration is “finding the large new deposits in stable enough countries to sustain world mineral production in the 21st century.” The best opportunities, he feels, are in underdeveloped countries and “some countries in this group have sufficient social and political stability to warrant work.”

That view is shared by Clarence Logan, who is heading up Noranda’s Latin American exploration team. “You’re looking at a level of exploration similar to what we saw in Canada in the 1960s. Just from surface exploration, we’ll make discoveries.”

As well, the mounting environmental hurdles and native land claim problems in the Northern Hemisphere make exploration and development more expensive and time-consuming. It also adds an element of uncertainty, which to investors translates into additional risk. Exploration companies operating in Mexico, Central and South America “don’t have to go through fights with the Sierra Club or two years of assessments,” Cohen said one mining analyst.

“YOU’RE LOOKING AT A LEVEL OF EXPLORATION SIMILAR TO WHAT WE SAW IN CANADA IN THE 1960S. JUST FROM SURFACE EXPLORATION, WE’LL MAKE DISCOVERIES.”

The pull factors are numerous. From a promotional point-of-view, Latin America is heating up. It isn’t yet a promoter’s paradise — not in the “drunkard’s dream” fashion of flow-through funding as it affected Canadian exploration in the late 1980s. But a junior exploration outfit can at least catch the eye of a major company if the junior has a Latin American play.

Geologically, the targets in the southern hemisphere are abundant and at or near the surface. From the gold/ copper porphyries of northern Chile to the Cordillera Real in Bolivia, from the Sonora district of Mexico to the Guyana Shield of Venezuela, Latin America presents prime ground for geological sleuthing.

David Hutton, Rayrock Yellowknife’s v.p. of exploration and development, speaks from personal experience in Costa Rica and elsewhere.

“Primarily, you go there because it is geologically endowed,” he says. “I’ve seen showings that if they were in North America would have been peppered with drill holes.” But the most important attraction now is political. Latin America has embraced free enterprise and democracy. Whether or not it will be a lasting embrace leading to a permanent union remains to be seen, but for now mining companies and observers are content with the signs they see.

Guill Rishchynski, deputy director of the Latin American and Carribean Trade division of External Affairs and International Trade Canada, tells The Northern Miner Magazine that the “governing economic paradigm” of Latin America through 1960s and ’70s was a combination of import substitution and protection of domestic markets. According to Andreas Raczynski, writing in Episodes, Vol. 12, No. 4, this was mainly in reaction to the “breakup of colonial and pseudo-colonial bonds, reinforced by the perception that minerals are an exhaustible, national asset of strategic importance for future development.”

Tariff and non-tariff barriers, such as import licencing restrictions and onerous foreign ownership rules, and nationalization were the order of the day. The mining industries were viewed in most Latin countries as strategic sectors and, therefore, placed under the thumb of government almost exclusively. This was especially true in countries where mining contributed a high percentage of the Gross National Product and a dominant part of exports were controlled by a few foreign groups. Such economic policies worked to a degree for it created basic industrial infrastructure, Raczynski said. But then came the debt crisis of the 1980s.

Since then, Raczynski notes, the following changes have occurred in many less developed countries:

* With solid experience in commodity marketing and in negotiating a fair distribution of benefits, Third World countries are more confident about controlling the excesses — real and perceived — of private investment.

* Mining houses, both large and small, are exploring and developing — not just the traditional mining companies of the U.S.

* Local investors on domestic and foreign stock exchanges are playing key roles.

THE MOST IMPORTANT ATTRACTION NOW IS POLITICAL. LTAIN AMERICA HAS EMBRACED FREE ENTERPRISE AND DEMOCRACY, BUT WILL IT BE A LASTING EMBRACE?

* Revisions to corporate law, administrative procedures, taxation and mining codes are setting acceptable conditions for investment.

Rishchynski points to Mexico as a model of the new Latin approach. It joined gatt (General Agreement on Tariffs and Trade) in 1986 and restructured tariff rates, reduced requirements for import permits (a non-tariff trade barrier) and loosened the rules on foreign investment. It wrestled inflation down to 20% per annum from 160%, restructured its foreign debt and de-regulated and privatized industries. The private sector could then take front and centre. Government intervention in the economy was reduced. It stuck to its knitting in education, health, and basic social structure, and quit running airlines and mining companies.

To lure foreign mining companies, the Mexican government late last year re-wrote the mining code to stimulate investment, exploration and diversification of the country’s mineral production. Today, foreign companies can own up to 100% of a mining project for a period of 12 years. Concession renewal would be guaranteed if joint ventures are struck with Mexican firms prior to the 12-month termination.

In Bolivia, much the same has occurred. The economy, once racked by a 26,000%-per-annum inflation rate, has stabilized, thanks to an austerity program involving the abolition of wage and price controls, the removal of monopolies, and free convertibility of currency. A new investment law guarantees property rights, a free exchange of capital and no restrictions on dividends, royalties or the level of imports. For the mineral industry directly, a new mining code clearly spells out the new, relaxed rules of the game.
Even 100% foreign ownership is acceptable.

In many other Latin American countries, details might vary, but the underlying message is a carbon copy of Mexico’s — bring on the mining companies, we’re open for business. Or in Rishchynski’s words: “The private sector is seen as the wealth creator, which represents a 180deg shift in mindset.”

Such a sweeping change in policy from the protectionist, nationalistic practices of the past has convinced Rishschynski that more Canadian firms should begin establishing links in Latin America. “The time to get into Latin America is now.”

He advocates taking the long-term view, striking partnerships for lasting relationships. His agency aids in establishing initial contacts through trade missions, technical seminars and attendance at conferences such as Expomineria 1990, recently held in Santiago, Chile. The search for partners in the host country and the assessment of liabilities can be done by the industrial co-operation division of the Canadian International Development Agency (cida).

But the concept of country risk, however, is a sticky one. No one knows whether this political/economic change of heart is permanent. Hedging your bets must be a reflex action. Says Noranda’s Logan: “(Former Chilean dictator Augusto) Pinochet is still the general in charge of the army. I suppose that’s a concern to people. . . . And there’s no saying the next group in power won’t turn and go in the opposite direction again.”

But he adds that in the U.S. and Canada, development is becoming more expensive and time-consuming, largely because of environmental concerns. “We recognize all the risks (in Latin America), but at least they seem receptive to having us there.”

George Tikkanen, president of Cominco Resources International, said that to limit risk “we’ve been conservative as to what countries we’ll go into.” Mexico, Chile, Bolivia and Honduras are some of the less riskier countries. “Doing business in Chile is very much like doing business in the U.S. and Canada.”

Peter Allen, chief executive officer of lac Minerals, echoed Tikkanen’s views on Chile during a gathering of financial analysts earlier this year. “It is stable, has long traditions, honors contracts, has a well-balanced economy and a well-educated workforce.”

On country risk generally, Allen explained that lac has developed a sophisticated model: “Our hurdle rate for these investments is a multiple of our required rate of return for North American projects.” Such quantitive variables as a country’s gnp per capita, inflation, unemployment and literacy, balance of payments and tax rates, are plugged into lac’s country risk model.

But to hedge even further, because “these models are not great predictors of the future,” lac limits foreign country investments as follows: any one new investment to 10% of the company’s capital; any ongoing investment to 15%.

David Watkins, who directs Minnova’s exploration, puts a slightly different twist on things. “Canada is like those other countries. There has always been that element of political risk here. Saskatchewan has nationalized industries. B.C. had its problems in the 1970s.” What he sees is “enormous opportunities,” not merely narrowly for mining companies, but also for geophysical outfits and manufacturers. Latin American countries want to develop their mining industries, but they don’t have the proper tools.”

However, both investors and the miners should consider the comments of Andreas Raczynski, the veteran South American mining executive who is a deputy director with the International Finance Corp. He notes that the current change of heart was caused by circumstances not by conviction. But barring a long recession or another debt crisis, Raczynski believes the “groundwork is being laid for a more stable situation.”

The following tables are representative of Canadian activity in Latin America. They are not intended as a complete listing of all such companies.

BARANCA NEGRA

Owner: Adonos Res.

Country location: Chile

Nearest major city: Ferrenca

Current reserve: 53 million tons (48 million tonnes) at 1.2% titanium dioxide

Project status: Exploration

Commercial startup date: N/A

Current drill program: 1,200 metres, $115,000

Laws/regulations: Foreign interests can own 100%

Profit repatriation rules: Withholding tax on profits after recovery of invested capital.

Regional geology: Not included in company’s response to questionnaire

SAN BARTOLOME MINE

Owners: Armenonic Del Ecuador S.A.

(joint venture between Armeno Res. 50% and Nissho Iwai Corp. 50%)

Country location: Ecuador

Nearest major city: Cuenca

(third-largest in country)

Current reserve: Geological reserve

potential: 2.2 million tons at 15 oz. silver, 0.65% lead, 1.9% zinc and 0.01 oz. gold per ton (two million tonnes at 466 grams silver and 0.31 grams gold per tonne)

Project status: Pre-production

development and exploration

Commercial startup date: June, 1991

Current drill program: No drilling.

Continuous u.g. development and exploration. To date, horizontal development is 24,168 metres and vertical development is 107 metres.

Laws/regulations: Armenonic Del Ecuador S.A. has a 100% interest in the mining rights. Mine under a 15-year contract with INEMIN (Ecuadorian government). Armeno is committed to pay to INEMIN a 1% net smelter return for first four years of operation 3% thereafter.

Profit repatriation rules: No restrictions of which the company is aware

Regional geology: Situated in the Cordillera Real, 30 km southeast of Cuenca

REFUGIO

Owner: Bema Gold Corp. 50%

Country location: Chile

Nearest major city: Copiapo

Current reserve: Proven and probable 112 million tons at 0.030 oz. gold per ton (102 million tonnes at 0.93 grams per tonne)

Project status: Final feasibility study

completed April 15, 1991

Commercial startup date: Early 1993

Current drill program: 200,000 ft. (61,000 metres)

Regional geology: Situated in the Maricunga Mining District in northern Chile. Gold and minor copper mineralization occur in stockworks exposed at surface.

OMAI

Owners: Omai, Cambior Inc. (60%), Golden Star (35%), Gov’t of Guyana (5%)

Country location: Guyana

Nearest major city: Linden

Current reserve: Proven and probable:

44.8 million tons at 0.047 oz. gold per ton (40.7 million tonnes at 1.46 grams per tonne)

Project status: Advanced exploration

Startup date: First quarter, 1993

Current drill program: $1.6 million, 27,300 ft. (8,326 metres) since May, 1990, for a total of 124,000 ft. (37,820 metres)

Laws/regulations: The agreement provides that the operating company must grant to the government a 5% interest in its share capital.

Profit repatriation rules: The agreement specifically provides that the operating company shall be entitled to export and sell outside Guyana any gold obtained during the mining phase of project operations free of any imports, duties and taxes.

Regional geology: Property lies in White Sand geomorphological region. Reserves are 75% fresh rock and 25% laterite and friable rock (laterite, paprolite, alluvials).

QUEBRADA BLANCA

Owners: Cominco Resources International (42.5%)

Country location: Chile

Nearest major city: Iquique

Reserve: 77 million tonnesat 1.4% copper

Project status: Technical feasibility complete, leaching tests under way, no production decision yet.

Commercial startup date: N/A

Current drill program: N/A

Laws/regulations: See other Chilean projects

Profit repatriation rules: See other Chilean projects

Regional geology: Quebrada Blanca is a secondarily enriched porphyry copper deposit. Primary mineralization occurred 38 million years ago and accompanied quartz monzonite intrusives. Early disseminated primary mineralization was followed by hydrothermal mineralization, mineralized breccias and post-mineral faulting. After supergene enrichment, the deposit was buried under Tertiary gravels and then partially re-exposed in Quaternary time. (J.P. Hunt, J.A. Bratt and J.C. Marquardt in Mining Engineering, June, 1983.
)

ANDACOLLO

Owner: Dayton Developments, 100%

Country location: Chile

Nearest major city: Andacollo

Current reserve: Mineable reserve:

22.8 million tons at 0.036 oz. gold per ton (20.7 million tonnes at 1.12 grams per tonne)

Project status: Development

Commercial startup date: early 1992

Current drill program: N/A

Laws/regulations: See other Chilean projects

Profit repatriation rules: See other Chilean projects

Regional geology: The Andacollo district is underlain by northerly striking and easterly dipping flows, pyroclastics, and epiclastic units characterized by lateral facies changes and ranging in composition from andesite to rhyolite. This sequence is intruded by coeval diorite stock and a younger latite porphyry, which host the Andacollo deposit.

LA PEPA

Owners: Bridger Chile

(Bridger Res.), Diaguitas S.A., Prosinor S.A.

Country location: Chile

Nearest major city: Copiapo

Current reserve: Geological reserve:

400,000 tonnes at 10 grams gold per tonne

Status: Production at 12 tonnes per day

Commercial startup date: N/A

Current drill program: N/A

Laws/regulations: Good right-to-mine laws. Mining title can be complex and needs constant legal vigilance because of overstating and nuisance lawsuits.

Profit repatriation rules: Most mining investments are now via Decree Law 600 (D.L. 600), i.e. profit repatriation is immediate and capital recovery after three years.

Regional geology: Tertiary age dacitic volcanics host epithermal vein structures and a stockwork within a resurgent caldera complex.

COLLAHUASI

Owner: Falconbridge Chile S.A.

Country location: Chile

Nearest major city: Iquique

Current reserve: “geological reserve”

240 million tonnes, grading 1.49% copper, 0.04% molybdenum

Project status: Advanced exploration

Commercial startup date: N/A

Current drill program: US$12.4 million going toward 40,000 metres of drilling, 20,000 metres of percussion drilling

Laws/regulations: Mining Code of Chile — Law No. 18, 248 (1983). Anyone may acquire mining rights pursuant to chapters one and two of the Mining Code, which right may be maintained by payment of annual tax.

Profit repatriation: Profits can be repa-triated subject to foreign investment rules.

Regional geology: Collahuasi porphyry deposit is 10 km east of the Quebrada Blanca deposit at 4,500-metre elevation. It lies within a 30-km-wide upthrown block of Paleozoic and Mesozoic volcanics and associated sediments, which are intruded by granitic porphyries. It is just east of the West Fissure, a major N/S fault. This geological setting is the host to most of the major copper deposits in Chile, such as Chuquicamata and La Escondida.

PULOCAYO

Owner: Sikaman Gold Res., 70%

Country location: Bolivia

Nearest major city: Oruro

Current reserve: “Probable geological resource:” 700,000 tons at 14 oz. silver per ton (636,363 tonnes at 435 grams silver per tonne) and 7.7% lead and 7.8% zinc.

Project status: Advanced: Next phase to substantiate size and continuity of high-grade mineralization. Old access ways to be rehabilitated and new adits driven.

Commercial startup date: N/A

Current drill program: N/A

Regulations: Free convertibility of foreign currency, lowest tax rates in Latin America, and no restrictions on foreign ownership.

Profit repatriation rules: No restrictions, except for 10% withholding tax.

Regional geology: Area dominated by Tertiary volcanics underlain by a variety of clastic sediments believed to be Paleozoic. The volcanics also underlain in part by early Tertiary gypsum-bearing redbeds.

IVAN COPPER

Owner: Minera Rayrock Inc.

Country location: Chile

Nearest major city: Antofagasta

Current reserve: Proven, probable and mineable: 4.75 million tonnes at 2.5% copper (but one million tonnes having preliminary status, subject to revision)

Project status: Advanced: Feasibility study to be completed by August

Commercial startup date: N/A

Drill program: Plan condemnation and exploration drilling after feasibility study completed, estimated at $250,000 for 20,000 ft. (6,100 metres) of rotary and core drilling.

Laws/regulations: 100% foreign ownership of mining claims allowed: stages of mining property from concessions to staked claims to patented claims. Annual rentals required but no “assessment” work requirements.

Profit repatriation rules: Two systems for foreign investors. Fixed rate of 49.5% income tax and additional tax, which gives an effective 45% tax; or “current” rates, which are now 15% and 35% respectively for an effective 35% rate.

Regional geology: Coastal belt of Mesozoic continental andesitic flows and breccias with related intervolcanic sediments intruded by coeval diorite-gabbro monzonite intrusives. Hypothermal primary copper sulphide deposits occur as steeply-dipping pipes and vein zones to tabular mantos. Secondary atacamite/chrysocolla deposits occur in the surficial oxidation zone.

BELLAVISTA GOLD

Project name and owner: Rayrock Inc.

Country location: Costa Rica

Nearest major city: San Jose

Current reserve: Proven and probable (diluted and mineable) open pit: 13.2 million tonnes at 1.57 grams gold per tonne

Project status: Advanced, negotiating development/financial aspects with Central Bank. Further drilling and final feasibility study planned.

Commercial startup date: N/A

Current drill program: Infill and extension drilling program of 30,000 ft., rotary ($500,000) planned to upgrade six million tonnes of possible reserve to category of proven and probable

Mining laws/ownership regulations: 100% foreign ownership of exploration and exploitation permits allowed. Exploration permits: maximum 20 km, two for three years plus 2-year extension. Exploitation permits: maximum 10 km, two for 20 years plus extension.

Profit repatriation rules: Dividend/ profit remittances permitted subject to a 15% withholding tax (after 35% corporate profit tax) and availability of foreign exchange from the Central Bank, unless covered by contractual export-related agreement.

Regional geology: Central gold belt consists of Miocene-Pliocene andesites, basalts, and lahars related to thoeiitic island arc vulcanism in an active plate subduction tectonic setting. Epithermal gold quartz calcite veining and stockworks mineralization of “bonanza-type” associated with uplift extension tectonics and vulcanism.