LATIN AMERICA SPECIAL — Central America sees return of

In 1979, Nicaragua’s triumphant Sandinista revolutionary government nationalized all foreign mining operations in the country. Once again, foreign mining interests had been swept away by the turbulence and unpredictability of Latin American politics.

Fourteen years later, a Sandinista state mining manager is quoted in the Miami Herald. “We realize that development can only come with private capital,” he says.

Realization may be a start, but can Nicaragua and other Central American countries generate enough trust to win back the foreign mining investment they now so desperately want? Many Canadian mining investors believe they can. Peter Bojtos, chief executive officer of Greenstone Resources (TSE), which has more than 3 million oz. of gold resources on its properties in Panama, Nicaragua and Colombia, believes the days of the military dictatorship are over.

“The funding of wars has stopped,” Bojtos says. “The influence of the Soviet Union isn’t there any more, so political parties are not being fed arms by both sides.”

Gold is the commodity of choice for Latin American mining investors. Greenstone has forsaken the potential of South America for the previously less popular deposits of Central America.

“There are hundreds of companies interested in South America, but only `tens’ interested in Central America,” Bojtos acknowledges. “Competition is hot along the Chile-Argentina border, for example, and the price of property is getting quite high. Central America is looking like a bargain — ripe for changing from warm to hot.”

According to Tom Ogryzlo, chief executive officer of Kilborn Engineering, a mining consulting engineering and construction management company, some $2 billion worth of Canadian mining projects are being planned for Latin America. “There are about 60 Canadian companies active in Chile, and 20 in Peru,” Ogryzlo estimates.

Bojtos says Canadians spent about $500 million on exploration in Latin America last year. “It’s not official,” he admits, “but it’s the kind of figure being tossed around in the industry.”

One of the fastest “temperature” swings may be happening in Panama. With its Noriega days behind it, Panama City is experiencing a building boom to rival Toronto in the 1980s.

Alberto Diamond, a partner in KPMG’s Panama City office, says that economic growth in the post-Noriega years has averaged 5-6%. Inflation in Panama’s U.S. dollar-based economy is only 1.8%.

“The elections of 1994 showed the world that Panamanians believe in democracy and want to live in a democratic country,” Diamond says. “Now our region definitely needs foreign investment to combat unemployment and poverty. “Mining is one industry the country wants and needs to promote, and there is some tremendous potential for mining activity in Panama.”

Ogryzlo is also bullish on Panama. He notes that Panama hosts Petaquilla, one of the world’s largest undeveloped copper deposits. One of the first mines soon to enter production in Panama is Greenstone’s Santa Rosa, which will be the largest in the region, with output of 60,000 oz. gold per year. Elsewhere in Central America, Greenstone is investing in its La Libertad property in Nicaragua. That country is also reviving some of its old mines such as Bonanza, Siuna and La Rosita that contributed 80% of the country’s total exports in the 1940s.

Placer Dome (TSE) has made a new find in the north of Costa Rica, and other Canadian and international mining companies are showing increasing interest in that country.

“In the last few months, we have been contacted by a number of foreign mining investors, including one from China,” says Rafael Sayagues, who specializes in legal and tax matters in KPMG’s San Jose, Costa Rica, office. “They’re feeling out the environment to get involved in mining here.” Honduras, El Salvador and Guatemala are still plagued by civil unrest, although Greenstone is exploring for gold in Honduras.

At least part of the interest in Latin America stems from disenchantment with current mining conditions in Canada and the U.S. Aside from the fact that North American properties are expensive and already well explored, environmental regulation and taxation are raising the price per ounce of mine development many times higher than in Central America.

Ogryzlo says a mining permit that may take up to five years to obtain in North America can be approved in as little as one month in Latin America, although the rules are about as stringent. Both Ogryzlo and Bojtos point out that companies are responsible about the environment in Latin America, often going beyond local requirements. “We do it the same way we’d have to do it in our own countries,” Bojtos says.

Marty Godin, a mining tax partner with KPMG in Toronto, says the demise of flow-through shares and capital gains exemptions in Canada have made raising capital for exploration in Canada more difficult. That provides just another reason for companies to choose to invest in Latin America.

But he warns that taxes there are not insignificant. Some Latin American countries have basic tax rates comparable with North America, and most assess 2-4% royalties against the value of minerals exported.

Wages are lower, but rising quickly in proportion to productivity. “In Peru, wages have risen 30% in the past three years,” Ogryzlo says. “They still tend to be low, but employers have to pay 80% of wages to the government for social security. It tends to balance out.”

All things considered, is Central America a wise move? Not if your orebody is too far from your market, or the product needs a lot of marketing, Bojtos advises, citing his reasons for sticking with gold.

“North America has been picked over and this area hasn’t,” Ogryzlo adds. “But a lot of those deposits in the Andes are at high altitudes that are not too hospitable for humans. The logistics become quite interesting.” Notes Godin: “With the leaps in exploration technology over the past decade, many areas now being targeted might previously have remained unexplored.” While advances in mining exploration and development technology have made significant contributions to mining prospects for Latin America, the growing degree of confidence in Central America may be the most inspiring development of all.

— The author is a partner with KPMG in Toronto and national director of the firm’s mining industry practice.