Change creates opportunity in Colombia mining

The drop in commodity prices, particularly gold, has created challenges for both the government and private players in Colombia’s mining industry. In 2015 Goldman Sachs ended its brief foray into the natural resources sector, selling its coal-mining division to Murray Energy. The US investment bank had paid around $200m for Coalcorp’s La Francia coal mine in 2010. Two years later, the firm paid another $407m for a surrounding mine and a stake in the Fenoco railroad. However, in 2013 a series of community protests led to the mine shutting down for nine months. While global economic difficulties and local protests have posed challenges, the small-scale segment and some companies have been able to turn things to their advantage.

Hunker Down

Murray Energy has bucked the trend in the US coal industry, spending over $4bn in 2013 and 2014 to acquire competitors in Appalachia and Illinois in the US. The firm’s focus on low-cost production has been key to its success. It is likely to bring the same model to Colombia, where existing players have also been pursuing growth investments. Between 2013 and 2015 Cerrejón, the country’s biggest coal mine and transport complex, invested over $1.2bn in expanding its production infrastructure, adding an extra ship loader to its port and boosting export capacity to 41m tonnes per annum (tpa). However, Roberto Jungito, the company’s CEO and president, told Bogotá- based daily Portafolio in April 2015 that at current prices the firm had no plans to raise production significantly from its current level of 34m-35m tpa. Instead, the company has undertaken a root-and-branch cost-cutting initiative, renegotiating with suppliers and improving energy efficiency.

The good news for Colombia is that it could be one of the first countries to benefit from an expected rebound in the price of coal. The strong depreciation of the peso has given the country a cost advantage over many of its competitors, and the idle capacity at Cerrejón and other mines means that production could be ramped up relatively quickly given the right conditions. According to an October 2015 report by Australia-based Reuters columnist Clyde Russell, Colombian exports to Asia could make sense at the $60-65-per-tonne range, effectively putting a cap on the future upside of the coal price in Asian markets.

Golden Opportunity

Bogotá’s Gold Museum is testament to the rich mineralogy of Colombia’s Andean mountains. The museum has 6000 pre-Hispanic gold ornaments on display, with a collection of over 55,000 pieces. The country was a prolific gold producer during the colonial period and after independence, right up until the late 1940s when the start of a civil war made exploration and production of gold in rural areas too dangerous. By the end of 2015 there was only one local company formally producing gold, Mineros, which produces mainly from large-scale alluvial mining using dredges. Formal mining accounts for only 10-15% of the gold produced in Colombia.

With the spike in gold prices following the global economic crisis, an increasing number of artisanal miners have begun panning rivers and extracting from disused mines (see analysis). According to figures from the National Mining Agency ( Agencia Nacional de Minería, ANM), gold production increased rapidly from 546,111 oz in 2007 to a peak of 2.3m oz in 2012, before dropping slightly to just above 2m oz in 2014 following a dip in the price of gold. ANM also reported that production rose by 7.7% to 519,472 oz in the third quarter of 2015.

Antioquia department, where the city of Medellín is located, regularly accounts for around half of national gold production, while Chocó and, to a lesser extent, Nariño, are also important centres of production for the country’s gold output.

Bubble Trouble

While production remains high, gold export revenues have dropped. Having peaked at over $1900 per oz in the second half of 2011, the price of gold has fallen steadily, settling below $1100 at the end of 2015. After 2008 high gold prices led to an inflow of junior exploration companies, many of them listed on the Toronto Stock Exchange (TSX). From 2000 to 2015 over 100m oz of gold were discovered in Colombia, accounting for around 10% of all discoveries worldwide, according to Paul Harris, editor and publisher of the Colombia Gold Letter, a monthly newsletter focused on the local gold sector. However, the three-year bear market has led to numerous companies going into “care and maintenance” mode, cutting back on exploration activities and expenses. Many others, unable to raise cash on the capital markets, have closed shop.

“At the peak of the boom in 2012, there were at least 80 juniors and half a dozen major gold companies active in the country,” Harris told OBG. “At the end of 2015 there were perhaps five juniors and two majors actually developing projects. Fundraising for exploration companies has been essentially nil.” The pace of exploration has also slowed to a crawl. “In 2012 diamond drilling companies conducted over 650,000 metres of drilling in Colombia. In 2015 that figure will be well under 100,000 metres,” said Harris.

A New Hope

To add onto the drops in production, a common complaint among mining firms is that media perception and public opinion fails to distinguish between formal and informal mining. The latter’s poor environmental record and exploitation of gold projects by illegal groups is often conflated with legal, large-scale mining outfits. Without a single hard-rock legal gold mine in operation, the industry cannot demonstrate the benefits these investments offer in terms of well-paying jobs, infrastructure, and a tax base for rural communities. However, that should soon change.

In March 2015 Canadian firm Red Eagle Mining’s San Ramon project in Antioquia became the first Colombian hard-rock mining project to receive its environmental permit in recent years. The company subsequently raised $65m in financing to build the project and awarded Canadian engineering firm Lycopodium Minerals the engineering, procurement and construction management contract. San Ramon is a relatively small mine, with an anticipated production of around 60,000 oz per year over an eight-year mine life.

Nevertheless, with all-in sustaining costs of $763 per oz, it will be profitable even in low gold price scenarios and has a payback period of less than two years. The successful development process of San Ramon has allowed Red Eagle to position itself as one of the leading independent gold miners in the country. Following the deal, in October 2015 the firm acquired a controlling stake in CB Gold, the Canadian owner of the high-grade Vetas project in the Santander department.

More Opportunities

A second gold project received its environmental licence in December 2015. The Gramalote project, also in Antioquia department, is owned in joint venture by UK-South African major AngloGold Ashanti and Vancouver-based B2Gold. Located 110 km north-east of Medellín, the mine is far bigger than San Ramon, with indicated and inferred resources of nearly 3m oz. However, with grades of under 1 gram of gold per tonne, the project is set to be an open-pit mine. Having completed a consultation process with local communities in September 2015, the company will spend 2016 and 2017 undertaking the relocation of houses and sugarcane plantations on and around the mine site. Construction of the mine is slated to begin in 2019, with production beginning in 2021 at a rate of around 450,000 oz per year for the first five years of mine life. “When Gramalote enters production it will be the first large-scale mining project in Colombia in 30 years,” Felipe Márquez Robledo, vice-president of corporate affairs, sustainability and general counsel at AngloGold Ashanti Colombia, told OBG.

Different Stokes

The progress seen by the San Ramon and Gramalote projects stands in stark contrast to the many dozens of gold projects currently paralysed by licensing and community issues, as well as dwindling funds. However, Red Eagle and the AngloGold Ashanti-B2Gold joint venture took very different paths. One of the keys to San Ramon’s success is its small size and low cost structure. “Many of the exploration companies that arrived in the last 10 years came looking for gold-copper porphyry deposits, or geological structures that contain large quantities of gold, but at low grades,” said Harris. “They hoped that they would be bought up by one of the majors looking to boost their reserves, but that has not happened following the fall in gold prices. Today companies want small, cheap-to-run projects that can generate cash-flow quickly.”

Crucially, Red Eagle also maintained strong relations with surrounding communities and artisanal miners, as well as the local environmental authority, the Regional Autonomous Corporation of Central Antioquia (Corporación Autónoma Regional del Centre de Antioquio, Corantioquia), which approved its permit. Other firms have not been so lucky. TSX-listed Continental Gold, owners of the Buriticá project in Antioquia, had been one of the Colombian mining industry’s flagship companies during the 2008-12 boom years and it was widely anticipated that the firm would receive its environmental permit in early 2015. Tomás González, the minister for the Ministry of Mines and Energy ( Ministerio de Minas y Energía, MME), even announced it was imminent at the Prospectors and Developers Association of Canada annual conference in Toronto in March 2015. However, the licence stalled in Corantioquia, and in September 2015 Continental Gold requested that its environmental impact assessment be revised by the National Authority of Environmental Licences (Autoridad Nacional de Licencias Ambientales, ANLA).

PINES

Continental Gold can apply Buriticá to ANLA because it is one of 10 mines in Colombia classified under Strategic Projects of National Interest (Proyectos Estratégicos de Interés Nacional, PINES). Gramalote, along with AngloGold Ashanti’s other two development projects, Nuevo Chaquiro and the huge La Colosa deposit, are also included in PINES. This status also provides support from the highest echelons of government. María Lorena Gutiérrez, the president’s chief of staff, is tasked with overseeing mining PINES, ensuring that ministries and regulatory authorities work together and help avoid bottlenecks in the process. Ken Kluksdahl, senior vice-president of Colombia operations for AngloGold Ashanti, told OBG, “Support from public institutions in the development of La Colosa also benefits future gold mining projects in the country. At the same time, this support confirms that the sector is a key economic driver.”

Bureaucracy

This is a major bonus for firms with PINES projects. One of the central criticisms of the Colombian mining sector in recent years has been the lack of cooperation between the MME, the Ministry of Environment and Sustainable Development and the Ministry of the Interior. Another is that a revolving door of appointments for senior government personnel has prevented the development of a coherent policy. “A number of very capable individuals have been appointed to key positions, but if they only stay for eight to 10 months, it is impossible to develop a policy. It is a serious problem,” Eduardo Chaparro, executive director of water and mining resources at the National Association of Colombian Companies, told OBG. “Recent governments have tended to create new entities and agencies to resolve these problems, but it has not lead to an improvement in the situation. It has lead to more bureaucracy but has not provided continuity in public policy”.

However, the situation appears to be improving for PINES projects. “When President [Juan Manuel] Santos announced in 2010 that mining would be one of the key engines of growth for the Colombian economy, it encouraged increased investment, but also brought more attention from the media and non-governmental organisations,” said Márquez. “The licensing institutions did not have the capacity to deal with the increased demand for titles and licences, and there were no adequate processes to resolve the conflicts between ministries and regulators. However, in recent years I think the authorities have made a great effort to build a mining framework better suited to modern mining and to companies that have responsible practices.”

Other Minerals

Aside from the coal projects on the coast, Colombia’s only other major operating mine is Cerro Matoso, a nickel mine in Córdoba department owned by Anglo-Australian firm BHP Billiton. The mine is in decline and, having produced 50,000 tonnes in 2013, total production for 2015 is expected to fall to around 37,000 tonnes. Nickel prices have weakened along with other commodities and the grade at the project has fallen from 3% in the 1980s to half that in 2015. Cerro Matoso’s concession runs out in 2029, and in September 2015 Luis Marulanda, vice-president of corporate affairs for the mine, told Bogotá-based daily El Espectador that the current market situation makes extension of the concession unlikely.

A few hardy foreign companies have also begun to mine for Colombia’s most famous mineral. The emerald sector is opening up to investment following the death of the industry czar Victor Carranza in 2013. Shortly before his death Carranza sold his participation in the Muzo mine to Houston-based firm Minería Texas Colombia. The firm has since begun a process of upgrading the mine, formalising employment contracts and improving security. In September 2015 London-based Gemfields, a precious stones miner, acquired a 70% stake in two emerald projects in the Boyacá department for $15m. The inflow of foreign capital and modern mining techniques could see a turnaround for a sector that has been in steep decline over the last decade. In 2014 the country produced 2m carats of emeralds, down from 10m carats in 2004.

A clue to the future of the Colombian mining industry can be found to the south. Chile and Peru are among the world’s top three copper producers. At present Colombia only has one mine producing copper concentrate, Canadian firm Atico Mining’s El Roble project in Antioquia.

The underground mine has produced over 1.5m tonnes of copper and gold ore since 1990 and exploration efforts to extend its resource are ongoing. “Exploration work by Atico Mining and Cordoba Minerals suggests the existence of copper-rich volcanogenic massive sulphide systems in Colombia,” Harris told OBG. “At present, the area from south of Cali to the Ecuadorean border is no-man’s-land. If the country was to finalise a peace deal with FARC [the Revolutionary Armed Forces of Colombia], I expect to see significant copper deposits discovered in that zone.”

Outlook

In the years ahead the need for new revenue streams may push the government to make the tough decisions required to issue permits for new mines. But the private sector also has an important responsibility and new large-scale mines in the interior need to lead by example. That involves building inclusive community strategies, maintaining an exemplary environmental record, and providing jobs and tax revenue. If the public can be convinced of the necessity and benefits of large-scale mining, the vast resources are more than sufficient to develop a major mining industry.

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The Report: Colombia 2016

Mining chapter from The Report: Colombia 2016

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