By Allan Brown
Latin America is a literal treasure trove of minerals.
The region is home to around half of the world’s lithium, silver and copper – hence the major focus on commodity exports, which tightened during the boom years.
In Latin America, MDBs are involved in the mining industry – though eﬀorts are largely channeled into helping governments and companies minimize the impact of extractive activities on local communities.
“We are working with those sectors [extractive industries] as well. The idea is to ‘green’ them as much as possible,” says Christiaan Gischler, senior project manager at IDB.
Indeed, multilateral development banks have tended to steer away from direct mine project ﬁnancing in recent years for various reasons, with sustainability and poverty reduction-focused mandates – which prioritize the likes of infrastructure, renewable energy, SME and sanitation projects – among them.
Back in the mid-1990s, Latin American countries started to become more attractive in the eyes of foreign investors on account of their regulatory frameworks and legal certainty and exploration incentives. The World Bank’s Multilateral Investment Guarantee Agency issued a ﬂurry of guarantee products in Argentina, Chile and Peru during that decade. It has since shifted away, according to publicly available data.
The World Bank’s private sector ﬁnancing arm IFC, meanwhile, has supported mining and quarrying projects via debt and equity ﬁnancing. Examples are the multilateral’s 5% stake in Peru’s Yanacocha gold project, which it held from 1992- 2007, and its 2.5% participating interest in Chile’s Escondida copper mine, which it oﬄoaded to Japan’s Mitsubishi in 2010.
Another reason is the industry's reduced need for development banks. In the region’s large-scale mining sector, players with steady cash-ﬂows can usually obtain ﬁnancing to get their projects built.
As Latin American development bank CAF says: “Mining is not a sector on which CAF places heavy emphasis, because our additionality is reduced.”
The ﬁnancing story is diﬀerent for smaller players, especially those in the exploration phase. Juniors, who tend to raise funds via the equity markets, are also usually unwilling to take on debt when they don’t know whether their exploration acreage will eventually turn a proﬁt.
In terms of development bank involvement, CAF is helping the southern region of Peru develop a mining cluster. The project comprises three major components: the ﬁrst one focused on the development of the institutional structure and governance of the mining cluster model; the second is designed to generate concrete and short-term innovative activities that allow mining companies and goods and service providers to work jointly and strategically to solve the immediate needs of the sector; and a third component that seeks to develop a knowledge base of the mining ecosystem in the southern region of the country and the identiﬁcation of opportunities for improvement in regulatory matters.
In neighboring Chile, IDB is executing a similar strategy. The bank issued a US$100mn loan to help the country improve the project permitting process across various industries as part of eﬀorts to support sustainable growth. The multilateral also conducts research into the mining industry, focusing on areas such as innovation and mineral resource management best practice.
Chile is the world’s biggest producer of copper but there is a dearth of new, large-scale copper projects in the pipeline, partly on account of increased capital discipline among investors following the commodity price plunge. Preliminary ﬁgures indicate the global reﬁned copper market in the ﬁrst seven months of 2019 was in deﬁcit to the tune of about 325,000t, the International Copper Study Group said.
Canadian junior Marimaca Copper – which wants to develop its Marimaca copper oxides project, located near the coast of Atacama region – said banks could play an important role in ﬁlling a ﬁnancing gap in Chile today.
Marimaca Copperthinks Marimaca has the potential to double its published 76Mt resource at an average grade of 0.5% of copper to over 150Mt following an exploration program it recently completed. Looking to the future, the project could involve total capex in the hundreds of millions, after already spending about US$50mn on exploration and claims acquisitions.
Marimaca CopperCEO Luis Tondo says projects like Marimaca, on account of its favorable location and Chile’s established mining framework, are low risk.
Tondo, who expects copper prices to rise on account of electriﬁcation eﬀorts globally and China’s determination to keep its economy growing apace, said: “Here in Chile I think there is an opportunity for local banks as well as development banks.
“If these same banks that lend money for technological innovation initiatives today could open up a credit line for mid-size miners so that they can develop their projects, then this would have a very positive impact on the Chilean economy.
“Any good project will always attract money. It doesn’t matter how good or bad the international market is.”
Opportunities in Mining for MDBs
To get an analyst’s view on mining and multilaterals, BNamericas spoke to Chris Berry, president of New York-based consulting ﬁrm House Mountain Partners. Berry has been an independent analyst since 2009, with a focus on energy metals supply chains including lithium, cobalt, graphite, vanadium and rare earths.
BNamericas: Multilateral lending institutions, such as development banks, don’t tend to get involved in mining projects in Latin America. Why do you think that is? For example, do you think it is to do with risk, the fact that multilaterals are geared toward reducing poverty and promoting sustainability initiatives – or a mix of various factors?
Berry: It's arguably a mix of various factors though with respect to critical metals and minerals such as lithium and cobalt, these markets are small (lithium is 269,000t in size while copper is 23Mt) and resemble oligopolies in terms of market structure.
Lithium is an extremely political issue in a country such as Chile as evidenced by the recent negotiations between [miner] SQM and [economic development agency] Corfo. The irony is that in order to decarbonize economies and promote ecological sustainability, raw materials such as lithium and cobalt are going to be needed more than ever. Providing a funding mechanism is a viable way for multilaterals to participate in mining supply chain development.
BNamericas: Indeed, do you think there is space for greater involvement of multilaterals in Latin America’s mining sector, especially if demand grows for lithium and given the fact that the commodity is linked to sustainable development eﬀorts, etc?
Berry: Yes. I would assume that the multilaterals would be more likely to lend to emerging producers given their smaller balance sheets and need for lower cost capital than what the broader ﬁnancial markets may be willing to provide. What form this lending from multilaterals would take is up for discussion but could be low interest loans or a percentage of project ownership. Emerging raw material producers will face dilution as they raise multiple rounds of capital and so minimizing this through creative ﬁnancing structures is crucial to the survivability of the company and the long-term wealth creation for all stakeholders.
BNamericas: Could a major upswing in prices of energy metals potentially increase appetite of multilaterals to get involved in the mining sector?
Berry: Absolutely, though this may depend on the mandate the multilateral has for investment. Everyone focuses on price rather than long-term value. This is just a ﬂaw in terms of how humans view investments. Development-stage companies need capital to survive and push their projects forward regardless of where raw materials prices are. Filling this gap is a perfect opportunity for multilateral lending institutions.