Monday, 29 August 2011

MinMinas Outlines Sector Future

Colombia’s government is restructuring the administration of the mining sector that will include the creation of a National Minerals Agency (NMA), the end of Ingeominas. The NMA will be responsibile for supervising the sector and authorizing concessions and mining titles, replacing Ingeominas in this latter role. Colombia’s concession system – the Catastro Minero – administered by Ingeominas has proved to be untenable resulting in extensive delays in processing concession applications and uncertainty about exploration project development timescales.

Receipt of new applications was suspended for six months in March and recently extended a further six months until February 2012 to give the authorities time to clear an estimated backlog of 20,000 applications. Of 19,029 title applications pending as of February 2011, Ingeominas has resolved 3,194 and has 7,915 currently under evaluation.

The administrative changes also include the creation of a Vice Minister of Mines within the Mining and Energy Ministry that will also include an environment and communities directorate to better coordinate mining themes relating to these aspects. Ingeominas will be recast as the National Geological Service, with responsibilities reduced to being the state geological survey.

As part of the overhaul Mining and Energy Minister Carlos Rodado will advance a change of regulations to obtain more financial resources from the state and remove budgetary restrictions. The minister hopes to be able to obtain 2% of the monies received from mining royalties, currently some 200 billion pesos/year.

The minister hopes the changes will allow the growth of the mining sector. Mining has grown 3.2%/y over the last five years and the minister aims to achieve 9.5%/y growth. The minister believes that the changes will help generate royalties of US$12 billion in the next ten years. “The restructuring has taken a lot of time due to the great institutional weakness that exists,” said Rodado.

Since Law 1382 – the 2010 amendments of the 2001 Mining Code – was struck down by the Constitutional Court, the government has decided to write a new mining code, a process that will see it consult with communities, industry and the regions before taking to Congress, and take up to two years to bring into law.

Junior explorers are less than impressed by Colombia’s exploration administration, in particular the moratorium on the receipt of mining concession contract proposals that was recently extend until February 2012 to give state geological survey Ingeominas additional time to clear a backlog of requests. The moratorium was initially enacted for a six-month period on 1 February 2011 to clear a backlog of 19,629 concession requests. The extension means new contract proposals or concession contract transfers cannot be submitted until 2012. “Colombia has been put forth as the next big mining country but they need to follow through with quicker applications, legal title guarantees and improved infrastructure. Let’s hope this is what they do. The markets are hot for gold projects but not if you can't get government approvals to do work,” said the CFO of a Vancouver-based junior.

Minminas Carlos Rodado said the government has no plans to raise the royalty payable on gold production despite calls to do so amongst some senators, in order to preserve the competitiveness of the country. That was a good decision given that miners in Colombia face of the highest overall tax burdens in the continent at around 50% (34% tax on profits, 3.5% royalty, 16% IVA on purchases [reclaimable]).

Rodado said the government may seek to use other means to capture some of the additional value created by high commodity prices and so it would be advisable to take a look at what is happening in Peru where President Ollanta Humala appears to have successfully negotiated a royalty structure overhaul that allows the state can to share the benefits of higher commodity prices without killing the golden goose. Royalties will in future be based on operating profits instead of sales as is the case in Chile. Why is this good? Royalties on sales make it more difficult for new projects or expansions to be profitable but an operating profits system means both miners and the state can obtain more resources when commodity prices are high, but neither side gains when prices fall. Peru’s miners currently pay a 1-3% royalty charged on sales depending on the mineral.

Greystar pupates into Eco Oro

Greystar Resources (formerly TSX: GSL) has been busy attempting to leave its traumatic start to 2011 behind and put its best foot forward. The company has awarded technical contracts to complete a feasibility study for an underground operation at its Angostura Au-Ag project in Santander and it has also decided to change the company name to Eco Oro Minerals (TSX: EOM) to distance itself from the negative reaction ‘Greystar’ seems to provoke in the region. Various walls around department capital Bucaramanga were daubed with anti-Greystar graffiti at the end of 2010 as the company tried to obtain environmental permits for an open pit gold mine which protestors succeeded in blocking with a liberal dose of misinformation on the grounds that it would damage a paramo eco-system that the company was unable to overcome. One can understand where they are coming from but ‘Eco Oro’ sounds like a company trying too hard to be consumer friendly. It suggests that the company will use the best of the best processes that minimize environmental impact and will have remediation and rehabilitation projects that creates a major improvement to the environment. Let’s hope this is the case otherwise the protestors will soon see through this name change.

Since the start of the year, the company formerly known as Greystar has been pupating into – its shareholders hope – something that is much more attractive and palatable. A name change is cosmetic but can be meaningful when the message it sends to stakeholders is that something new and different is happening, which certainly seems to be the case here.

Following the open pit environmental permitting debacle, lead shareholder Amber Capital took control and put former EVP Frederick Felder out to pasture and installed new leadership, making the company more Colombian with power hitter Rafael Nieto Loaiza appointed president and Nieto Loaiza and Juan Esteban Orduz appointed to its board.

The project has been given a make-over as well and Eco Oro plans to issue an optimized preliminary economic assessment for Angostura with a revised mineral resource estimate for an underground operation and a prefeasibility study during the third quarter of 2012, which it says will protect the Paramo, have a greatly reduced environmental impact, minimal and controllable impact on the sub-surface aquifer and minimal water consumption, have no leach pad requirement, and will reduce the overall plant and infrastructure scale.

Eco Oro It will also produce an initial mineral resource estimate for the Mongora deposit by year end where it has completed 54 drill holes and 20,276m. Located 3 km south of Angostura it hosts higher-grade gold mineralization including 2.0m @ 116 g/t Au.

Chavez Gold Nationalization Adds to Colombia Shine

Across Colombia’s border Venezuela’s President Hugo Chávez is to nationalise the gold sector in an attempt to stamp out illegal mining and boost international reserves. Whilst illegal mining is also a problem in Colombia, President Chávez has failed to recognize that the Colombian government’s liberal market policy regarding mining (and other sectors) sees foreign direct investment flooding into the country and its international reserves increasing nicely.

Like Colombia, Venezuela sits on large untapped gold deposits but nationalistic intervention has seen a succession of foreign (Canadian) explorers turfed out including Bolivar Gold and Crystallex International, leaving just Russian mining company Rusoro as the sole foreign company. Meanwhile, lack of state presence has allowed illegal miners to overrun highly prospective areas, creating extensive environmental damage and paying no taxes. Venezuela officially produces 11 tpy of gold with illegal miners producing an estimated additional 10 to 11 tpy, according to Mr Chávez. The government is preparing a decree to stop illegal miners exploiting gold, which will be as effective as Colombian laws to do the same. Stopping illegal mining requires direct action and the creation of viable economic alternatives for the poor that generally are engaged in illegal mining as a subsistence activity.

Both Colombia and Venezuela are using the army to help combat illegal mining, which is often run by what Chávez calls ‘mafias’, or criminal bands in Colombia. “I’m counting on you because the area remains in anarchy, run by mafias … We can’t keep allowing them to take it away,” he said during an address to the army as he presented them with newly purchased Russian military equipment, reported the Financial Times. Chavez’s past effort to control illegal mining have produced international conflict in the past as Guyana, a small country in north-eastern Latin America, claims Venezuelan soldiers blew up two gold-mining dredges working on the Cuyuni River near the frontier.

President Chavez will also repatriate US$11 billion in gold held in foreign banks reports Bloomberg. The country has about 211 tons of its 365 tons of gold reserves held overseas at various banks. “We’ve held 99 tons of gold at the Bank of England since 1980. I agree with bringing that home,” Chavez said on state television. Opposition lawmaker Julio Montoya says the move is to reassure select Venezuelan creditors that it can repay loans. “We think that China, Russia and Brazil have asked Venezuela to transfer the reserves to guarantee the loans that the government has received in recent years,” said Montoya according to the Financial Times, with whom Venezuela has accumulated US$34bn of debt over the past 16 months.

Wednesday, 3 August 2011

Colombia extends concession moratorium

Colombia's Mining and Energy Ministry has extended a moratorium on the receipt of mining concession contract proposals and legalization of traditional miners until february 2012 to give state geological survey Ingeominas additional time to clear a backlog of requests.

The moratorium was initially enacted for a six-month period on 1 February 2011 to clear a backlog of 19,629 concession requests.

The extension means new contract proposals or concession contract transfers cannot be submitted until 2012.

August 2011 Large-scale miners to self-regulate

The mining debate in Colombia will increasingly need to distinguish between traditional, artisanal (often illegal) mining and large-scale mining. Whilst worlds apart in almost every way conceivable they share the same noun – mining – which is why the general public confuses the one with the other and associates the maladies of the former to the potential of the latter. Traditional mining destroys the environment and pays no tax, but everyone from farmers to senators hear the word mining and think that the modern large-scale miners and explorers destroy the environment and pay no tax. Through the recently formed Large-Scale Mining Association, 13 of Colombia’s biggest mining companies have started to address this issue and better educate people.

“One of the biggest challenges from the point of view of the environment is the battle against [illegal] exploitation that is putting at risk the ecological richness of the country. Illegal mining does not comply with any rule; they do not have mining titles or environmental licenses, they use little technology, deteriorate water sources, risk the health of their workers and give poor quality jobs. Nor do they pay taxes or royalties,” says executive director Claudia Jimenez.

The mining association is creating a self-regulating code for its members to promote responsible mining in terms of the environment, community Relations, industrial safety, human rights and economic transparency that will be a higher standard than Colombian law demands.

By operating to this code and annually reporting its results, the association hopes to give better understanding to politicians and the public alike about the actual performance of large miners and the contribution they make to the country and the communities in which they operate, and thus help distinguish themselves from the artisanal miners that cause negative impacts.

At the end of July Colombia enacted a law to combat illegal mining. Law 1450 of 2011 prohibits the use of dredges and other mechanical equipment for mining activities without a mining title that is registered in the National Mining Register. The law requires the government to implement a strategy that distinguishes between informal or traditional mining, and illegal mining.

The law also calls for the mining authority to publish a list of mining titleholders that are in the exploitation stage that have all necessary licenses, and of those agents that are authorized to commercialise minerals. From the start of 2012, commercial agents will only be allowed to purchase minerals from miners that are on the mining authority list.

July 2011 The ‘chicharron’ that is Ingeominas

‘Chicharron’ (pork crackling) is a Colombian term that is used to describe a complete mess or balls up, and the term can easily be applied to national geological survey Ingeominas, which is at the centre of a political storm due for a host of reasons that has impeded the efficient management of the sector.

The central problem has been the failed implementation of an electronic Colombian Mining Cadastre that is the repository of information of mining and exploration concessions. This is what explores consult when they want to see what land is available and what the government uses to monitor and regulate the sector. To put it bluntly, if this does not work everything grinds to a halt, and that is precisely what has happened to the extent that even mining and energy minister Carlos Rodado is making jokes: “It is not a cadastre but a catastrophe”.

The electronic system that was intended to modernise concession title administration, improving efficiency and information provision and collection but its failure to do so, despite a couple of attempts at patching it up caused Ingeominas to continue to operate its old system in parallel, extending the time needed to process concession title applications while giving the government little precision on what the status of the sector actually is.

Whilst an estimated 9,000 mining titles have been awarded some 20,000 remain pending causing the government to impose a moratorium on new title applications earlier this year to work through the backlog. As a result of the systemic faults in Ingeominas a government study found that on average concession requests took 600 days to be awarded, according to news weekly Semana, a bureaucratic nightmare for explorers.

Such delays and uncertainty also became a fertile breeding ground for corruption as Ingeominas officials sold privileged information, allowed concessions to be granted in protected areas and offered speedy expedition of titles for fee. The same government study found that some concession titles only took a month to be awarded.

The Ingeominas chicharron also made government attempts to control land speculation ineffective by awarding concession titles to individuals that presented the bare minimum of information with the sole intent to sell them on to other companies. Many titles were never registered on the National Mining Register to avoid paying the surface canon, defrauding the state of considerable financial resources and causing the concessions to enter into a kind of administrative limbo that foreign explorers have to unravel and put right when acquiring concessions.

There is light at the end of the tunnel however. The government is creating a National Minerals Agency to regulate the sector similar to the way the National Hydrocarbons Agency regulates the oil sector. The good news for mineral explorers is that the World Bank has made resources available to set the cadastre ship straight and the government will work with international expert advisors in mining concession systems to implement a workable technology platform that is due to be operational in 2012.

June 2011 Mining Code update

The lead off for this issue is news that Colombia’s Constitutional Court struck down Law 1382 of 2010, which amended Law 685 of 2001, Colombia’s Mining Code. Juan Carlos Henao, president of the Court, determined that this was unconstitutional as there was no prior consultation with indigenous or ethnic black communities, which there has to be for laws that will affect said communities. Exploration and mining occurs in said communities ergo cogito sum a bit of an embarrassment for the government.

Law 1382 was generally unpopular with miners and explorers as it was a political rather than a technical law, which left various technical questions unanswered, as Greystar Resources found out to its cost. For example, Law 1382 prohibited mining activity in Paramo regions but faield to define what a paramo is for the intents and purposes of the law.

AngloGold Ashanti has also seen project development mired in similar uncertainties with its La Colosa project in Tolima department. “The project has suffered obstacles in the exploration phase that clearly has delayed the schedule.“Some critical decisions as to where we can do activities, what kind of permits do you need and how will they be obtained need to be clarified,” said Rafael Herz, AGA head in Colombia.

So where does leave the exploration and mining sector now? Well, the Court decided that the effects of its ruling would not be applied for two years, in effect maintaining the status quo while giving the government two years to consult with the various community groups to be able to present the bill to Congress again.

May 2011 TSXV vs AIM vs BVL vs BVC

The traditional home of junior exploration companies is the TSXV in Canada and this has certainly been the case for juniors picking up projects in Colombia. While several transactions (IPOs and RTOs) remain in the pipeline, there are the initial signs that the TSXV is getting saturated with the Colombia story and juniors are starting to look elsewhere to list. With over 35 junior explorers listed on the TSXV on the back of Colombian projects, London’s AIM is starting to get some attention (see Touchstone Holdings below).

Canada saturation could also mean that regional stockmarkets will see more action. Both Peru and Colombia have institutional investors that want to invest in mining and exploration but have limited opportunities to do so. Colombia is gold country yet local investors only have one name to invest in: Mineros SA, a company that produces around 100,000 oz/y Au from alluvial deposits and a small-scale mine. As the only game in town, the laws of supply and demand mean its stock is overvalued compared to similar size companies on the Toronto bourse, a fact that has contributed to this company not undertaking a secondary listing in Toronto, New York or London.

Colombia, where pension funds manage US$8 billion, represents an untapped investor base that explorers and miners can use to diversify their investor base, increase support for their stock and provide local financial institutions with a chance to share in project success. The secondary listing of Canadian-listed energy companies Pacific Rubiales (TSX: PRE) and Canacol (TSXV: CNE) were very popular with Colombian investors, particularly Pacific Rubiales.

Peru’s Bolsa de Valores de Lima (BVL), the Lima stock exchange, showed the potential of secondary listings of Canadian juniors in 2006-2007, with the likes of Candente Resources, Vena Resources (TSX: VEM) and Peru Copper, an influx that propelled Lima to become South America's most successful exchange in 2006, with a 161-per-cent rise in the general index. Like Peru, Colombia’s investment laws mean that pension and mutual have to invest a major proportion of capital in locally-listed securities.

Peru implemented listing standards modelled on the Toronto Stock Exchange, which Colombia appears to be doing too, such as accepting the NI 43-101 resource statement requirements to mitigate project risk. In essence, if companies comply with Canadian market regulations and requirements, Colombia will generally accept these, meaning a company simply has to comply with local financial rules to be able to list on the BVC. Contrast this approach with that of Chile, a mining giant that is also desperate to get mines to list on its stock exchange. However, Chile was arrogant enough to try and reinvent the wheel and create its own regulatory and resource reporting framework. No company wants to increase the amount of regulation it has to work through and so consequently, Chile’s stock market is still waiting for secondary listings.

A local secondary listing helps mitigate the long-term risk potential of resource nationalism-driven politics as local ownership gives foreign-run companies access to sophisticated local investors that can assist with navigation through the often complex world of local politics. Maybe Greystar should have listed in Colombia long ago? It certainly started talking about it early enough! One can conjecture whether there would have been resistance to its project if mandarins in Bogota and Bucaramanga had held a chunk of its stock…

In Colombia, the financial houses are aggressively promoting the secondary listing option, keen to reap the fees this will generate. The drive to list miners and explorers on the BVC is being led by Citi Bank, but local investment banks such as Interbolsa and keen to get in on the action too. This action will be an obvious target for Celfin Capital once it receives its banking license in the coming months, as the company is very active in secondary listings in Peru. Its Peruvian sibling - Celfin Capital Peru – is in the process of listing Canada’s Luna Gold (TSXV: LGC) on the BVL, a company that has gold production and exploration projects in Brazil.

So who will be first in Colombia? In 2009, the frontrunners were B2Gold (TSX: BTO) and Greystar Resources, but B2Gold is making a discreet exit and Greystar first has to configure a project that works with regulators. Our nod goes to the entities formerly known as Medoro Resources/Gran Colombia Gold. Medoro was quite advanced in its listing application process so when the merger is concluded it makes sense for the new entity to list in Colombia. In addition, the Segovia/Remedios assets of Gran Colombia are perhaps the most famous and known in Colombia and it is a producer, something the local market will love.

May 2011 Pacific Gold?

Gran Colombia Gold (TSXV: GCM) and Medoro Resources (TSXV: MRS), two companies in which mining heavyweight Serafino Iacono has an interest, have agreed a friendly merger. With Iacono as the pivotal link it would be no surprise to if the company was renamed Pacific Gold to add to his other natural resources companies Pacific Rubiales and Pacific Coal!

The merger pairs GCM, a 100,000 oz/y Au producer with an exploration company that has one of the largest gold resources found to date – current cash flow and long-term production growth. Thus company hopes to grow production from 109,000 oz Au in 2011 to over 630,000 oz Au in 2016! Punchy!

It is understood that the market likes the idea of the merger, but the fall in the stock price of GCM and MRS indicates that it perhaps does not like its terms. While general economic conditions have seen most resource stocks slide, in the week following the merger announcement GCM has fallen from C$1.60 to C$1.34 while its bedfellow has slid from C$2.12 to C$1.86. Those terms include each MRS shareholder receiving 1.20 common shares of GCM, plus 0.50 of a GCM common share purchase warrant for each MRS share meaning that upon completion existing GCM and MRS shareholders would each own approximately 50% of the combined company on a fully diluted basis.

The merger will tease out a few administrative synergies to reduce costs, which will presumably include pruning the merged board. The merger presentation says it will initially have a whopping twenty directors! This includes more than its fair share of political heavyweights as between them the companies have almost recreated President Uribe’s cabinet with mining and energy minister Hernan Martinez, former Minister of Foreign Affairs and Minister of Culture Maria Consuelo Araujo, and former Vice Minister of the Interior and Justice, Ricardo Lozano. How many politicians does a board need?

Other synergies could be seen in the community and sustainable development department programmes to face the joint challenges of their respective projects. However, the main benefit will be the much stronger technical team under Don East, Jose Oro and Vicente Mendoza that will result.

May 2011 Greystar gets political

Greystar Resources (TSX: GSL) is cleaning house following its failure to advance its Angostura project. In a move that many think long overdue, the company’s major shareholders have brought in local political heavyweights to help move its project ahead in what is now a political game for the company. In doing so it has shed the lingering vestiges of it being a junior exploration company, a naïve condition that proved insufficient to grapple with the politics of mine development in Colombia. As a result of this, executive vice president Frederick Felder – who was instrumental in driving ahead the exploration programme that discovered a 11.5 Moz Au project - has retired and Steve Kesler has been replaced as CEO.

So out with the old and in with the politicos to the board in the shape of Juan Esteban Orduz and Rafael Nieto Loaiza. Former Legal Vice-President of the Cemex Group in Colombia, Orduz was Minister Plenipotentiary-Deputy Chief of Mission of the Colombian Embassy in Washington who was instrumental in the creation of Plan Colombia, which saw the US government donate billions in military aid to Colombia to underpin the Democratic Security Policy (DSP) of former President Alvaro Uribe. The DSP reasserted state control over the country and so paved the way for foreign exploration and mining companies to be able return to Colombia. Former Colombian Vice Minister of Justice Rafael Nieto Loaiza will become President. In addition, incumbent directors will not stand for re-election and will be replaced by nominees of major shareholder Amber Capital.

April 2011 PDAC Colombia day

It was standing room only at the Colombia Day event organized by the Colombian Government and Colombian Canadian Chamber of Commerce on Tuesday 8 March. In part, this was due to the increasing amount of people interested in investing in exploration projects in Colombia, and investors in Greystar Resources keen to get a bead on whether the government will allow the company to proceed to develop an open pit mine at its Angostura gold project in Santander department.

Mining and Energy Minister Carlos Rodado was unconvincing and mediocre. By contrast, deputy mining minister Tomas Gonzalez came appeared as a bright, sharp and eloquent intelligence, and that understands the mining sector and its needs. Gonzalez is someone that the mining sector will be able to work well with. Unfortunately Minister Rodado has the power.

After beginning by saying how important foreign investment is and how the government has created the conditions for it to thrive: “we have put in place an institutional framework with clear rules of the game,” and “we have to guarantee a speedy licensing process”, Minister Rodado spent an awful lot of time talking about the biodiversity of Colombia and plant and animal species that need to be protected. Maybe he is eyeing the environment minister job! Then a shudder went around the room as his penultimate slide talked about the need to obtain a ‘society license’ (licencia societal) describing it as “not something that is regulated but that is necessary” and that “one can assume that if you respect the environmental codes and use of best practice processes, that it will be obtained”. Clearly this is misleading as there is no guarantee about anything left to the will of public opinion, prompting the CEO of a Colombia gold exploration junior to comment, “there is no list of boxes that you can tick to show you’re safe”.

Deputy minister Gonzalez gave a strong presentation that began by saying that “the interests of government and investors are aligned” and that one big problem for all is that “obtaining licenses and permits is taking too long,” which the government is addressing by hiring more people and providing more funding to improve the process so that by year end the backlog of license applications will have been dealt with. Looking to the future, the government is creating the National Mineral Agency (Agencia Nacional de Minerales) to centrally administer the minerals sector and ensure that the same rules are applied in the same way across the country, acknowledging that “institutions are weak and not at the level we want to support the mining boom”. The design of the new agency should be presented to Congress in September and could be implemented for 2012.

Then things got really interesting. The audience picked up on the minister’s comments about Colombia wanting to attract foreign investors and then asked him for clarity about how holding public hearings to decide the future of a project gives that, when public hearings are not specified in the law. People wanted to know “why the government has sat back and done nothing to counter the lies written in the press about the Angostura project.” Deputy minister Gonzales said “It is frustrating to have the pressure of debate we are having in Colombia now as we are fighting a war with public opinion to demonstrate that we can have sustainable mining”.

Finally, the minister lost his cool and said “don’t confuse changing rules and government back-tracking with a company that has not presented a project well,” and as the furor increased he said “if this is how you are going to act I am not sure we want you in Colombia anyway”.

Earlier, Rodado said that a reduction of income tax is being considered for mining companies to compensate for increases in other taxes. Fine, but if the government continues its watery management of the sector, it will be irrelevant as there will be few companies that progress to the mining stage.