Mining in Colombia: a closer look

Vancouver – An ever-growing interest in the geological potential of Colombia from both resource companies and investors has helped the South American country become one of the world’s most popular mining destinations in recent years.

While its nearest neighbours have been awash in critical or negative attention lately – most notably Venezuela, Ecuador and more recently Peru – Colombia has been making headlines for its vast mineral resources, fast-growing economy, relatively stable politics and a steady stream of big-name acquisitions in the resource sector.

Major investments in the country over the past 12 months include Gran Colombia‘s (gcm-t) US$200-million purchase of the Frontino gold mines out of receivership; Brazilian billionaire Eike Batista and his EBX Group‘s $1.5-billion acquisition of Vancouver-based Ventana Gold for its promisingly high-grade La Bodega gold project; and Talisman Energy‘s (tlm-t, tlm-n) joint US$1.75-billion purchase of BP‘s (bp-l, bp-n) Colombian oil and gas operations with Ecopetrol (ec-n).

In early June, almost 100 mining executives and professionals from Vancouver packed a room at the waterfront Pacific Rim hotel to hear about Colombia’s burgeoning mining industry in a seminar sponsored by PricewaterhouseCoopers, the Canada-Colombia Chamber of Commerce and the Canadian Council for the Americas. Most notable among the speakers was Nicolás Lopez, Colombia’s Secretary of Mines for the Department of Antioquia, who described some of the challenges and benefits relating to mineral exploration in his country.

Top of mind for most foreigners, explains Lopez, is security. Decades of media coverage concerning problems with guerrilla warfare and narcotics trafficking in the country has led to the widely held belief that Colombia, or at least rural Colombia, is not a safe place for anyone to go traipsing around – let alone geologists who tend to explore the mountains and jungles that few others venture into. Contrary to popular belief, says Lopez, security is now no longer a key issue, thanks to ramped up military efforts over the past 10 years to defeat the insurgent group FARC (the Revolutionary Armed Forces of Colombia).

“Ten years ago, Colombia had a lot of problems with security. I am here to tell you the situation has dramatically changed for good. I have no doubts that Colombia is the place to be.”

There are now 40 Canadian mining companies with operations in Colombia, and 25 in oil and gas. According to Fernando Vargas, the Trade Commissioner for the Canadian Embassy in Colombia, Canadian companies accounted for the largest amount of gold production and investment in Colombia during 2010. He too describes Colombia as being “mostly secure,” or at the very least, security is no longer a “decision-maker” for companies thinking about entering the country.

Mining secretary Lopez nevertheless drew some chuckles from the crowd later on when responding to questions over how secure exploration can be in remote mountainous areas historically controlled by the FARC. “Look, Colombia has the most sophisticated army in the world – we have been fighting them [the rebels] for 45 years!”

He said the March 2011 kidnapping by FARC guerrillas of 23 contractors working for Talisman in eastern Colombia was a rare exception, and that the Colombian military led an operation that resulted in the workers being freed within hours. As recently as June 9, however, Colombian officials said the FARC had abducted three Chinese oil workers and another foreigner in southern Colombia.

Aside from security, Lopez pointed out six separate ways the Ministry of Mining is working toward making the country a better place for miners. As Colombia’s mining industry is still at a relatively early stage of advancement, several improvements still need to be made.

First, they are trying to make Colombia’s legal framework more stable. Changes to the country’s mining act in 2010 (Ley 1382) were recently ruled unconstitutional in court, however the government has two more years to pass new laws before it reverts back to the old code. Lopez says it its extremely difficult to pass new laws in Colombia and hopes lawmakers will come to a conclusion sooner rather than later.

Second, Colombia needs to strengthen its regulatory institutions. The Mining Ministry would like to increase the power of its six delegated district authorities in order to simply the application process. Increasing collaboration between the Mining Ministry and the Ministry of the Environment is key, as projects which are approved by the Mining Ministry can still be turned down by the Ministry of the Environment under current regulations.

Third, the government is trying to incentivize transfers of technology with tax breaks on mining equipment. Historically, unsophisticated mining processes have harmed the environment, and new technologies will help to alleviate this pressure.

Fourth, environmental protection laws need to be clearly developed. Confidence in this area was greatly shaken in 2010 when changes to the mining code appeared to ban mining in the country’s Paramo ecosystems (high-elevation valleys of wet grasslands located in the Andes), prompting shares of Vancouver-based Greystar Resources (gsl-t) to plummet. Much of Greystar’s flagship Angostura gold project is in one of these Paramos.

Lastly, the public and private sectors need to invest more in infrastructure, and the government needs to maintain the country’s economic growth rate. Tradeoffs between future growth in the mining sector and the personal welfare of Colombian people across all parts of the country need to be more effectively managed.

To provide a clearer picture of what Colombia’s mining environment is really like, the seminar also included a presentation by the chief operating officer of Sunward Resources (swd-v), David Forest, titled, “Views and experience from a mining company in Colombia.” Forest explained there is a huge gap between foreigners’ perceptions of operating in the country and the reality on the ground.

Sunward acquired its two main gold projects, Titiribi and Murindo, in a reverse-takeover transaction in early 2010. The company has since embarked on a major community relations campaign, including community forums, supporting medical treatment centres, environmental and water monitoring, reforestation projects and several other efforts – all critical to success in the country, says Forest. As the country is host to a diverse group of races cultures with different education levels about mining, the “onus is really on the operator to carry out best practices.”

Forest noted some laws are not fully set out yet, and if a company wants to circumvent some of them it is quite possible to do so, though not recommended. Communication and two-way dialogue are key, according to Forest.

It was at this point that someone from the audience asked a question which brought a second collective chuckle from the mining executive crowd. This all sounds great David, said the questioner, but after all this work you still haven’t been able to drill a single hole at your Murindo project because of problems with the locals, have you?

“That’s correct,” replied Forest with a touch of chagrin. He went on to explain the Murindo licences are on the border of two separate mining departments, Antioquia and Choco, and that the company has not been able to get the approval of the two separate indigenous groups that live there, a necessary step before being granted drilling permits.

On a more positive note, Sunward has been able to use the drill bit at its Titiribi project, a gold-copper porphyry system with an existing National Instrument 43-101-compliant inferred resource of 3.7 million gold oz. and 460,000 tonnes of copper (230 million tonnes grading 0.5 gram gold per tonne and 0.2% copper at a cut-of
f grade of 0.3 gram gold). It currently has four drill rigs operating at the site.

The last speaker of the seminar was Carlos Chaparro, a tax partner with PwC for Colombia. He explained the finer points of the country’s tax code, which he said has been basically unchanged since 1974. It mostly compares favourably to other Latin American jurisdictions, with a basic corporate income tax rate for miners of 33% and royalties paid on the value of production at the mouth or border of the mine at rates that vary between 3% and 12%, depending on the product. All royalties are paid at the federal level only.

Gold and silver royalties are 4%, iron and copper 5%, platinum 5%, coal 5% to 10% depending on the amount produced, nickel 12%, metallic minerals 5% and radioactive minerals 10%. Oil royalties vary between 8.5% and 25% depending on the level of daily production.

Canada and Colombia are also working toward signing into law a free trade agreement, expected to come into effect around 2013.

In the meantime, Colombia continues to improve in surveys and rankings of top mineral jurisdictions. The Fraser Institute’s widely regarded survey of global mining executives based on exploration potential versus risk in 2010 placed Colombia third-best of all Latin American countries, behind only Chile and Mexico. This is up from seventh-best in the 2006/2007 survey, though a wider look shows Colombia still has a ways to go; when the rest of the world is included, the country ranked just 40^th of 79 evaluated regions.