We are confident that Latin America will not only bring into production many new deposits in the following years, but that many new discoveries will be made as well. We follow the money as Latin America is apparently the place to be.
Latin America continues to be the most popular destination for exploration investments in the world. According to the latest “World Exploration Trends” by the Metals Economics Group, 25% of total exploration investments worldwide were headed to Latin America in 2011 (in contrast to 10% in 2003), whereas 15% of all spending worldwide went to 3 countries: 1. Mexico (6%), 2. Chile (5%) and 3. Peru (4%).
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
More than $425 billion in investments have already been budgeted by international resource companies for the development of deposits in Latin America for the next 5-10 years, whereas the lion`s share flows to Chile, Peru and Colombia. (1)
Most near-surface deposits in other regions of the world with traditional sound mining jurisdictions have already been discovered and are increasingly being depleted thanks to technological advances in exploration and mining since the 1970s. Many of the largest deposits worldwide are being brought into production in Latin America these days, yet Latin America is still considered as being relatively underexplored, because its laws were not favorable for foreign companies in the past. During the last decade, a drastic change in politics and attitude towards foreign mining companies has occurred in Latin America with the result that most exploration funds are now flowing there continuously. Peru, Chile and Mexico rank among the 3 mining-friendliest countries in Latin America (according to the Fraser Institute) and the Top-10 in the world. While the frameworks and jurisdictions for exploration and mining are worsening in many other regions (e.g. Australia or China), Latin America is increasingly improving its regulations. Peru is ranked third in the world in terms of gold, silver, copper and zinc reserves, yet from a mining standpoint, only 15% of the country has been explored leaving immense potential for future discoveries.
Already, Peru has experienced 10 years of consecutive economic growth and ranks as one of the fastest growing economies in the world (in 2006-2009, GDP grew on average 9% per year) in hand with one of the lowest inflation rates in Latin America. This is mainly due to Peru being the largest silver producer in the world, the third largest in copper and zinc, the fourth largest in lead and the sixth largest gold miner. The government looks favourably on foreign mining investments as a method of helping to finance the country’s development. The credit rating agencies Standard & Poor’s, DBRS, Moody’s and Fitch have all given the country “Investment Grade” status. In 2009, mineral exports made up 61% of export revenue. Peru has signed Free Trade Agreements with China, Canada, USA and other countries and has executed more than 30 international investor agreements which effectively protect investors.
In no other Latin American country does mining represent the main engine of the economy as is the case with Peru. Exports from the mining sector total some $30 billion, out of which around $10 billion is earned from gold and $7 billion from silver exports. With an output of 170 tons in 2010, Peru ranks as the world`s sixth largest gold producer. Illegal mining accounts for around 25% of that output, with a strong tendency that it will shift to foreign companies as mining regulations are increasingly tightened by the Peruvian government (for the benefit of sound/regulated mining). The third largest gold producer, USA, mined 210 tons in 2010, whereas #2 Australia had an output of 255 tons and China 345 tons – which translates into Peru having a realistic chance of ranking among the 3 largest gold producers in the near future as a production increase of around 25% is solely required to achieve this.
The map from Infomine.com shows major mines in Peru with Yanacocha in the northern Andes being one of the largest and most profitable gold mines in the world (with varying amounts of silver). The Yanacocha district is a 10 x 4 km area of altered rocks within an extensive belt of Tertiary volcanics that extends the whole length of Peru and which also hosts the epithermal gold deposits Lagunas Norte and Pierna.
The recent violent protests by anti-mining groups lead to the Peruvian government stepping in rigorously – which shows how pro-mining politics are increasingly turning these days and even radically enforceing the development of new mines as they know how beneficial foreign investments really are (mining already accounts for 61% of its economy, whereas fresh foreign investments of some $50 billion stand ready today for the development of only a few large deposits during the next years):
“Peru’s government declared a 30-day state of emergency on Monday night after two people were killed and dozens of police officers injured in violent anti-mining protests against Swiss based-Xstrata near Cuzco, in south eastern Peru. The protesters, reports local paper El Comercio, accuse the Tintaya copper mine, owned by world’s fourth-largest copper producer Xstrata, of polluting local water supplies and killing farm animals. Peru’s president of the cabinet, Oscar Valdés, said in an official statement the government was urgently seeking to restore dialogue. “These protesters are very radical and opposed to dialogue and so to ensure safety we are declaring a state of emergency,” he said. Until negotiations are restored, Peru’s army and security forces will have special powers to quell protests and clear roadblocks that have cut off the mine.” (2) Reuters reported shortly thereafter: “Thousands of Peruvians marched in support of the country’s biggest-ever mining project yesterday, a day after the government implemented emergency powers to control an anti-mining protest in the south that turned deadly. The rally in the northern region of Cajamarca in favour of Newmont Mining’s $4.8 billion Conga project praised the economic benefits of mining, a contrast to demonstrations in Cusco against Xstrata’s Tintaya mine in which two people were killed.” (3) “Conga has gold deposits worth about $15 billion at current prices and would be the biggest investment ever in Peru mining. It is a crucial test for newly installed Humala who has on many occasions publicly backed the project. Royalties and taxes to the government from Conga, which would also produce copper, could total $800 million per year and operation was scheduled to start in 2014.” (4)
Foreign resource companies not only make possible the export of a country`s resources to global markets, but also the import of money, technologies and know-how creating new industries, infrastructure, incomes, jobs, qualified work-forces and taxes. If the people of a country feel they are not participating in that knowledge and wealth creation, then they must pressure the government and not foreign mining companies as the latter are just doing what they are allowed to do as per the framework set by the respective government.
Other senior mining companies with operations in Peru include Barrick, BHP Billiton, Rio Tinto, Xstrata PLC (LON:XTA), Pan American Silver, First Quantum, Rio Alto, Hudbay, Candente Copper and Chinese state-owned Chinalco. While it is typically the large mining projects that traditionally face heavy protests by anti-mining groups, smaller projects normally go through the stages from exploration to production smoothly and without much public notice. Since Peru is so rich in minerals, there are many thousand of small illegal mines producing for example >40 tons of gold per year. This is possible mainly due to the geological characteristics of hydrothermal gold and silver deposits which are typically a few meters wide with high-grade veins running for some hundred meters near the surface making possible low-cost underground mining using adits a few meters wide to follow the veins. If the veins are sufficiently enriched with gold and/or silver, a mining operation can start rather quickly as immediate cash-flow is generated by the very first meters in following the veins which enables company to re-invest that cash-flow into further low-cost exploration and infrastructure on site. Silvercorp Metals Inc. (TSX: SVM) started (financing) its mining operations exactly like that and is today one of the world`s most profitable silver mines. As it is rather unlikely to find another such large silver deposit in the world today as Silvercorp did some 10 years ago, there exist hundreds of smaller, less complex and less costly deposits especially in Latin America that would enable a (private or public) company to start production relatively fast within a few months after discovery and initial resource calculation. In such cases, no year-long and multi-million dollar drill campaigns and feasibility studies must be undertaken as the mining operation is to be classified as a small mining operation generating cash-flow of some 10s million dollar per year for a couple of years with only small and low-cost infrastructure required on site.
One of the exploration companies we follow closely is Sunset Cove Mining Corp. (TSX: SSM) which was founded in 2008 by Lorne Woods and Marc Blais. We know Woods from the elephant-sized success story of Osisko Mining Corp. (TSX: OSK) which discovered >10 million gold ounces in Canada and is now worth >$3 billion. We also follow Woods, because he regularly writes good readable articles in his blog about global economies, stock markets, resource stocks and countries like Peru, where he, as the CEO & President of SSM, manages the development of some high-grade near-surface silver veins into a small mine within a relatively short time. Together with Blais, both have 35 years of experience in managing mining operations and in financing public companies. As we know them from Osisko times, we also know them as having access to a handpicked international network of private and institutional investors, banks and brokers. During the last few years, they have installed an uniquely experienced Peruvian team consisting of a Mining Engineer, a Mining Geologist and a well-established General Manager all of whom have extensive experience in working with international and Peruvian mining companies. Together, they have access to a crucial network rich in local knowledge and experience in bringing deposits into production without much hassle.
Currently, its flagship is the Carolay polymetallic silver property, where advanced exploration drilling is taking place during 2012. The mineralization found on Carolay and the adjacent Marañon sector fits into the model of hydrothermal polymetallic and feeder vein systems with “mantos” (metasomatic replacement zones rich in base metals like zinc, lead, gold, silver and copper) and is similar to that found in the highly prolific Coeur D’Alene silver district in Idaho, which historically has produced more silver than any other silver district in the USA. The company’s NI43-101 Technical Report for Carolay, which now totals 5,784 ha, demonstrates a mineable grade of 269 g/t silver. A new vein, Carolay 4, has recently been discovered and surface samples taken from its 13 meter length show 352 g/t silver, whereas one sample returned 4,674 g/t silver. There are also indications of a disseminated copper ore body on the property, potentially porphyry style. Porphyry deposits are the single largest source of copper in the world and can also be major sources of silver and gold.
During 2012, SSM intends to focus on its flagship Carolay property by continuing its core drilling campaign of around >6,000 meters until the end of the year and completing an updated NI43-101 Technical Report to accomplish two objectives: 1. To prepare the first Carolay resource calculation. 2. To begin exploring the recently acquired Humberto and Marañon sectors, which were acquired in late 2011 and have more than doubled the property to 5,784 ha. Surface sampling has been positive and both are ready to be explored by drilling to reveal their potential. Additionally, the highly prospective Carolay 4 vein will be more thoroughly developed.
All of SSM’s properties are located near existing significant mining or exploration projects. The company is not only publicly traded on the Toronto Exchange (TSX.V: SSM), but also on the Bolsa de Valores de Lima in Peru (BVL: SSM). SSM is headquartered in Toronto, Ontario, with an office in Montreal. The company’s wholly owned Peruvian subsidiary is based in Lima (Minera Sunset Del Peru SAC).
Carolay is located near the village of Ushnobal in La Libertad. Low-volume artisanal silver mining had taken place at Carolay during the 1870s. The previous titleholder had insufficient capital to fund further exploration. After a thorough evaluation process and negotiations, SSM took possession of the property.
Located 550 km NNW of Lima, the regional geography at Carolay is made up by Precambrian aged metamorphic rocks of the Maranon Metamorphic Complex famous both for its rich mineralization and its potential for discoveries. It is co-magmatic with the Pataz Batholith located within the gold and silver Pataz mining district. Both geological formations – Maranon and Pataz – stem from the same magma flow. Carolay is located on the fringes of the Pataz Batholith. The productive Pataz Mining Belt is internationally known for its rich gold and silver deposits. According to the Geological, Mining & Metallurgical Institute of Peru, 6 million gold ounces have been produced in the Pataz, Parcoy and Buldibuyo mining districts from 16 mines over the last 100 years.
Nearby and around the Carolay property there are blocks of claims held by Minera Aurifera Retamas and Consorcio Minero Horizonte. These Peruvian mining companies operate well-known precious metals deposits in the general area of the Mara?on Fault, a well known metallotect. Several claim holders are present immediately south and contiguous to Carolay. Within a 50 km radius, the important gold and silver producers Poderosa, Mara?on, Retamas and Horizonte operate producing mines. The same geological features found in these precious metal production zones can be found at Carolay, whereas the topographic, tectonic and petrographic setting is similar.
Economic grades of silver have been found in the samples taken for the NI43-101 report on Carolay, such as 269 g/t silver, 0.9% zinc, 0.8% lead, and 0.3% copper. The mineralization found on the Carolay property and the adjacent Marañon sector fits into the model of polymetallic and feeder veins and is similar to that found in the Coeur D’Alene silver district. On May 30, SSM released the assays from the first drill hole intersecting a high-grade vein with 151 g/t silver for almost half a meter. Further assays from the ongoing drill program will be released any time now plus providing the stock with a regular news-flow potentially confirming the extension of such veins and discovering new zones of high-grade mineralization.
SSM’s ability to find and acquire properties like Carolay stems from the network it has established in Peru through decades of working in-country and through the relationships that its Peruvian staff have made after a combined 48 years working for major Peruvian and multinational companies. This ability provides the company with an advantage that few others can meet.
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The above editorial is not to be construed as an investment advice, consultation, or even recommendation to buy, sell or even hold any kind of securities or financial instruments of the above mentioned companies, any other company, market or physical commodity. The author was not paid or remunerated by the above mentioned companies. The author does not hold any securities of the above mentioned companies, but may initiate purchases of SSM after 72 h of the above publication.