Colombia: Still a tough sell

Growing interest in Colombia’s geological potential from resource companies and investors has helped the country become one of the world’s most popular mining destinations. 

While its nearest neighbours have been awash in critical or negative attention – 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 year 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 high-grade La Bodega gold project; and Talisman Energy‘s (TLM-T, TLM-N) joint US$1.75-billion purchase with Ecopetrol (EC-N) of BP‘s (BP-L, BP-N) Colombian oil and gas operations.

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

Top of mind for most foreigners, explained Lopez, is security. Decades of guerrilla warfare and narcotics trafficking have led to the widely held view 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 mountains and jungles where few others will venture. Contrary to popular belief, Lopez argued, security is no longer a key issue thanks to ramped-up military efforts over the past 10 years to
defeat the insurgent group the Revolutionary Armed Forces of Colombia (FARC).

“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,” Lopez said.

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, maintained Colombia is “mostly secure,” or at the very least, that security is no longer a “decision-maker” for companies considering entering the country.

Mining secretary Lopez nevertheless drew chuckles from the crowd when responding to questions over how secure exploration can be in remote mountains 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 ways the Ministry of Mines and Energy is working to make the country a better place for miners. Because Colombia’s mining industry is at a relatively early stage of advancement, improvements need to be made.

First, officicals 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 is extremely difficult to pass new laws in Colombia and hopes lawmakers will decide soon.

Second, Colombians need to strengthen their regulatory institutions. The Ministry of Mines and Energy would like to increase the power of its six delegated district authorities in order to simplify the application process. Increasing collaboration between the Ministry of Mines and Energy and the Ministry of Environment is critical, as projects which are approved by the former can still be turned down by the latter under current regulations. 

Third, the government is trying to incentivize technology transfers with tax breaks on mining equipment. Historically, unsophisticated mining has harmed the environment. New technologies help alleviate this pressure.

Fourth, environmental protection laws need to be more clearly developed. Confidence was 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 in the Andes). This prompted shares of Vancouver-based Greystar Resources (GSL-T) to plummet, as much of Greystar’s flagship Angostura gold project is in one of these paramos. 

Lastly, he argued that the public and private sectors need to invest more in infrastructure, and the government needs to maintain the country’s economic growth rate. Trade-offs between future growth in the mining sector and the personal welfare of Colombian people across all parts of the country need more effective management, he said.

The seminar included a presentation by the chief operating officer of Sunward Resources (SWD-V), David Forest, where he claimed there is a 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 in early 2010 and has since embarked on a community relations campaign that Forest says is critical to success in the country. As the country is host to diverse races and 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 established. If a company wants to circumvent some of them it is possible to do so, though not recommended by Forest.

It was at this point that someone from the audience asked a question which brought a second collective chuckle from the 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,” Forest, replied 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 obtained approval from the two separate indigenous groups that live there – a necessary step before being granted drilling permits.

Sunward has used the drill bit, however, at its Titiribi project, a gold-copper porphyry system with an existing National Instrument 43-101-compliant inferred resource of 3.7 million oz. gold and 460,000 tonnes copper (230 million tonnes grading 0.5 gram gold per tonne and 0.2% copper, at a cut off grade of 0.3 gram gold). It 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 is mostly unchanged since 1974. 

He said the code compares favourably to other Latin American jurisdictions, with a corporate income tax rate for miners of 33%, and royalties paid on the value of production 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 o
n the amount produced; nickel, 12%; metallic minerals, 5% and radioactive minerals, 10%. Oil royalties vary between 8.5% and 25%
depending on daily production.

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

In the meantime, Colombia continues to improve in rankings of mineral jurisdictions. The Fraser Institute’s survey of global mining executives – based on exploration potential versus risk in 2010 – placed Colombia third-best of all Latin American countries, behind 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, it’s ranked 40th of 79 evaluated regions.