The past decade has been something of a reawakening for the mining industry, as improved security and political support have resulted in increased investment and mineral production. A polymetallic country with robust resources of coal, gold, copper, nickel and emeralds, Colombia is also relatively unexplored. A 2012 Ministry of Mines and Energy (Ministerio de Minas y Energía, MME) study revealed that only 52% of the subsoil has been analysed, a figure which goes down to 30% in terms of geochemistry and to 5% for geophysics. It also has one of the strongest investor protection frameworks in the world – ranking sixth in the Investor Protection Index, according to the World Bank – and has consequently become a hotbed for mineral exploration. As a result of its growth potential, the current administration has identified mining as one of five key economic drivers, and restructured the state agencies responsible for its management.
CHALLENGES: Nevertheless, obstacles persist. Slow procedures have pushed the number of mining licences under review to more than 19,000 and forced a moratorium on new applications in 2011. The newly established National Mining Agency (Agencia Nacional de Minería, ANM) has been working to rectify the situation, and, in July 2013, the application process was reopened. Estimates of illegal mining activities – much of which is used to fund revolutionary groups such as the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia, FARC) – are also on the rise. Transportation infrastructure remains scarce, leading companies to integrate vertically and establish proprietary infrastructure, and security improvements over the past decade have not completely halted attacks by insurgent groups.
However, the outlook is optimistic as governmental support for the industry continues. The administration has high hopes of expanding production of its primary mining exports – coal and gold – while also formalising the vast number of informal operations and ensuring a stable and secure environment for private firms.
BACKGROUND: Colombia has a long history of mining, with evidence of activities dating back more than 2000 years. Spain’s colonial conquest of Colombia was itself partially a product of the country’s mineral wealth.
While modern mining operations were fairly limited during the 20th century, the discovery and commercialisation of significant coal deposits in the 1980s led to the sector’s revival. Recent security improvements have also reinvigorated interest, in particular from international junior mining companies.
QUANTIFYING GROWTH: In the 21st century mining has continued to represent a relatively small percentage of the wider economy, considering Colombia’s geological wealth. From 2000 to 2012 the sector’s contribution to GDP hovered between 2% and 2.5%, while in 2012 it was responsible for 2.3%, according to data from the National Statistics Agency ( Departmento Administrativo Nacional de Estadística, DANE).
The combined extractive industries (mining and hydrocarbons) expanded by 5.9% in 2012, with mining activities alone up by 6.3%, both outpacing GDP growth of 4%, largely thanks to the 19% expansion in the mining of metallic minerals. Meanwhile, coal extraction expanded by 3.9% and non-metallic minerals by 1.8%.
Growth is also visible from the sector’s employment statistics, which saw mining and energy direct employment increase by 12% in 2012, from 210,362 to 235,521 employees, during a time of slow growth in national employment, which rose by 0.9%. Its contribution to overall employment increased slightly and it is now responsible for 1.1% of the national workforce.
STRUCTURE: In 2011 a restructuring of the sector saw the creation of the ANM, which falls under the purview of the MME and takes over the role of managing mineral resources from the Colombian Institute of Geology and Mining. That body, which formerly oversaw all licensing and contract promotion, negotiation and execution, was renamed the Colombian Geological Service (Servicio Geológico Colombiano, SGC) and its mandate was simplified to providing geological data.
Reorganisation also occurred within the MME itself, with the creation of a deputy minister of mines. At the same time, the National Office of Mining and Energy Planning (Unidad de Planeación Minero Energética, UPME) was given responsibility for strategic planning for the mining and energy sectors.
ANM: The creation of the ANM was modelled after the National Hydrocarbons Agency. In addition to holding and managing all exploratory and development concessions within the national mining registry, the ANM is responsible for tracking, collecting and transferring royalties. Perhaps the biggest challenge awaiting the ANM when it was established was to evaluate the immense backlog of mining applications that had built up over the years. In February 2011, 19,629 mining applications were stuck in bureaucratic limbo, though by July 2013, 17,343 (88%) had been processed with just under 1400 mining titles granted. A further 2286 applications are still awaiting a decision.
In addition to clearing the backlog of licence applications, the ANM was handed the task of auditing the mining titles already in existence on an annual basis. Following new regulations, the agency must make two annual visits to companies with mining titles in the exploration stage and may make up to four annual visits to firms already extracting. To fund this, as much as 2% of royalties can be diverted for this purpose. The audit involves monitoring more than 6000 production projects and 4000 exploration plans. Natalia Arias Echeverry, the general manager of the National Fund for Project Development, or FONADE, which actually carries out the audits, told OBG, “The first audit will involve at least one visit to each mining title, which will be accompanied by a technical and policy review, and is expected to conclude by August 2013.”
COMMODITY PRICES: The upturn in the sector’s fortunes is not simply down to the improved security situation, political support and mineral wealth. Rises in commodity prices have also played a key role in attracting investment in mineral extraction, not only in Colombia but also across the world. In the case of Colombia, demand for its high-quality thermal coal for use in power generation has been traditionally supported by various markets, including those in the US, Europe and Asia. However, it is the huge demand from the growing emerging markets, such as India and China, that will likely support future demand as the US and Europe pivot away from coal-fired power plants.
Power generation in India is roughly two-thirds supplied by coal, and the country is planning on adding 88,000 MW of capacity in the next five years, while China may add three times that amount, much of which will necessarily come from coal. Thus, while cleaner, and costlier, alternative fuels are becoming increasingly common in the developed world, growing emerging markets are likely to continue using cheap, reliable coal in the foreseeable future.
The price of Australian coal has more than quadrupled in just over a decade, rising from $26.30/tonne in 2000 to $121 in 2011, before slipping to $96.40 per tonne in 2012, according to the World Bank Prospects Development Group. The World Bank predicts that the price of Australian coal will roughly maintain its current level from 2013 to 2025, floating between $90 and $100 per tonne, though it is expected to once again reach triple digits at $100 in 2025.
However, according to local sources, coal exports from Colombia fell by 20% in the first quarter of 2013, accounting for a 40% drop in prices. A poll of members of the Large-Scale Mining Association (Asociación del Sector de la Minería a Gran Escala, SMGE) revealed that investment of more than $7.73bn was projected for the sector. With the amount projected in 2010 at $13.42bn, this represents a 42% drop.
The dramatic rise in the price of gold amid economic uncertainty has also been a magnet for investment in Colombia. According to the World Bank, the price of gold increased from $279/ troy ounce (t oz) in 2000 to $1670/t oz in 2012. Though it appears to have peaked, gold’s decline will be slow and steady according to World Bank forecasts, falling to $1300/t oz in 2025 – a trend which would represent sufficient revenue for continued development of new gold projects.
INVESTMENT: A relatively optimistic commodity market, combined with an improved security situation and political support, has helped the country attract 2% of the global mining exploration budget, according to the Metal Economics Group. Foreign direct investment (FDI) has grown rapidly in recent years as big coal multinationals expand production, while a host of junior gold exploration companies continue to hunt for the next major deposit (see analysis).
EXPORTS: Revenues from mining exports have risen dramatically over the past decade, from $1.59bn in 2002 to $12.47bn in 2012, according to the Ministry of Commerce, Industry and Tourism (Ministerio de Comercio, Industria y Turismo, MCIT). As a share of total exports the sector was responsible for 21% of the $60.3bn in 2012, up from its 13% share in 2002.
Coal is the second-largest export following oil, and accounts for the majority of exports from the sector. In 2002 its share of mining exports was 72.7% and although it had decreased by 2012, it was still responsible for some 62.6%, bringing in around $7.8bn of the sector’s $12.47bn haul. Other major exports from the sector in 2012 included the country’s third-largest export, gold ($3.4bn, 27.3%), as well as ferronickel ($881m, 7.1%) and emeralds ($122m, 1%), according to data from MCIT and DANE.
ROYALTIES: The mining sector contributed an estimated $1.71bn in royalties in 2012, well over double the $620m the sector posted in 2005 and a 6.2% increase on the $1.61bn it recorded in 2011, according to data from the ANM. In June 2011 the administration made a bold move when it pushed through legislation that will see royalties from the mining and energy industries redistributed more broadly. “Working in mining in Colombia is particularly sensitive, as the large number of indigenous communities and the country’s biodiversity require us to show commitment to local communities. We need to learn how to speak honestly about responsible mining and to be consistent with that speech so that we do not leave a bad impression,”
Ken Kluksdahl, the president of AngloGold Ashanti Colombia, told OBG. Though part of a broader agenda to reduce inequality, most communities in miningand energy-heavy regions are perturbed by the move.
How they react to reduced coffers could impact future investment (see Energy chapter).
Colombia’s status as a home to guerrillas and drug lords effectively cordoned off much of the country from exploration for decades. Now that a prolonged military offensive has begun to substantially weaken the grip of narcotics traffickers and insurgents, exploration into the country’s geological makeup has picked up again as public and private entities invest in discovering what lies in the geologically unknown forests and mountains (see analysis). Prospects of a peace agreement with FARC are also adding to confidence.
COAL: Blessed with an abundance of high-quality anthracite and bituminous deposits, Colombia is the fifth-largest global exporter of coal and the largest in South America. As demand for thermal coal continues, mainly from growing emerging market giants India and China, the government has set bold production targets to cash in on its proven deposits of 6.75bn tonnes, while coal is also an important resource for power generation. However, meeting targeted levels is proving difficult as an assortment of setbacks, including strikes, environmental spills, guerrilla attacks on infrastructure and volatility in commodity prices, have slowed expansion at various stages of the supply chain.
The main sources of thermal coal reserves are in northern departments near the Caribbean coast, which are primarily exploited by large multinationals, including Drummond, GlencoreXstrata and Cerrejón, the country’s largest coal operation, which is jointly owned by Anglo-American, BHP Billiton and Xstrata. However, Colombia also possesses significant metallurgical coal deposits, which are primarily used in the manufacturing of steel in the interior of the country, where numerous smaller mining companies are found.
PRODUCTION HIKE: From 1991 to 2011 the extraction of coal expanded at an average annual rate of 7.2%, as production more than quadrupled from 20.2m tonnes to 85.8m tonnes. In 2011 production expanded by 15.4%, the largest increase in the past 20 years. In 2012 output rose by 4% year-on-year, reaching 89.2m tonnes, according to the ANM, significantly below its original target of 97m tonnes. It was also less than the revised target, lowered due to labour disputes midway through the year, of 93m tonnes. In 2013 the government’s hopes to achieve production of 94m tonnes could also be dashed as disruptions persisted throughout the sector in the first quarter. Claudia Jiménez, president of the SMGE, told OBG, “The drop in coal prices has led to a failure to achieve 2012’s goals. The outlook will not change unless a new mine starts running operations, for which institutional speed and promotion of public-private partnerships are needed.” According to long-term production projections from the coal producers’ association, Fenalcarbon, output could reach 200m tonnes by 2030.
THE BIG THREE: Coal production is concentrated among three primary producers, the largest of which is Cerrejón, responsible for mining 34.3m tonnes of coal in 2012. It was followed by US-based Drummond, which extracted 26m tonnes, and Anglo-Swiss firm GlencoreXstrata with 14.7m tonnes. Together the big three coal miners produced 84.1% of the national total, with extraction among them reaching 75m tonnes.
Cerrejón, already one of the largest open-pit coal mines in the world, is undergoing a $1.3bn expansion that will see its annual production rise to 40m tonnes when completed in 2015. A vertically integrated venture, the Cerrejón partners 100% own and operate Puerto Bolivar, which will see the addition of a second berth and dual quadrant shiploader as part of the project, while it also operates its own rail line.
Drummond’s operations, which are 20% co-owned by Japan’s Itochu Corporation, also consist of transportation infrastructure as it operates a proprietary port, Puerto Drummond, in Santa Marta. Drummond is in the process of expanding its port capacities with a $450m upgrade scheduled for completion in 2013. Moreover, Drummond’s production is expected to rise to 31m tonnes in 2013, according to local press statements from Drummond executives.
The smallest of the big three producers is GlencoreXstrata’s local subsidiary, Prodeco, which was responsible for 16.5% of total production in 2012. Though Prodeco operates a 17m-tonne capacity port in Puerto Prodeco in Santa Marta, GlencoreXstrata is in the midst of constructing a new $600m port along the Caribbean as a result of new government regulations requiring the implementation of direct loading systems utilising conveyor belts by 2014 at all maritime ports. The project, dubbed Puerto Nuevo, is located in Ciénaga, Magdalena, and will allow ships carrying up to 8000 tonnes of coal to export and maintain an annual capacity of 21m tonnes. Prodeco, which won a public concession to construct and operate the port in 2010, expects it to come on-line in the first half of 2013. GlencoreXstrata is simultaneously expecting to expand production in 2013 to 20m tonnes per year.
SETBACKS: Several recent incidents have prevented coal production from meeting government targets. Strikes have had the largest impact as labour disputes have erupted at the primary coal railway line ( FENOCO), as well as at several mines including GlencoreXstrata’s La Jagua mine and the jointly owned Cerrejón.
Workers at the privately held FENOCO rail line, which is partially owned by GlencoreXstrata, Drummond and Goldman Sachs, went on strike in mid-July 2012, shutting down the primary route of transport for thermal coal for Drummond and Glencore in their mines in the northern Cesar region for around a month ( operations resumed in August). Although trucks were brought in to replace rail transport, they were able to make up only part of FENOCO’s lost capacity. The FENOCO strike started just after that of GlencoreXstrata’s local Prodeco unit, which runs the La Jagua mine, and was likely even prompted in part by the La Jagua strike. However, the strike at Glencore’s mine lasted three full months before activities resumed in late October 2012.
More recently, in February 2013 labourers at the Cerrejón mine went on strike, resulting in the mine’s closure for 32 days before an accord was struck between workers and company officials, which resulted in improved wage, health and housing benefits. According to statements by Cerrejón officials to local press, lost production from the strike is estimated to be 3m tonnes, or 3.36% of 2012 national production.
Another incident in early 2013 resulted in the National Authority of Environmental Licensing (Autoridad Nacional de Licencias Ambientales, ANLA) suspending the second-largest coal producer, Drummond, from exporting coal for three weeks following an environmental disaster. On January 13 a Drummond ship that exports its coal out of the Caribbean port of Santa Marta, encountered severe weather and was forced to dump its load or sink in rough seas. An estimated 870 tonnes were lost in the incident. When it seemed things could not get worse for the coal industry in the first quarter of 2013, a night time ban on FENOCO’s rail line was enforced. The ban, which ran from 10.30pm to 4.30am to allow local residents an undisturbed sleep, lasted nearly three weeks in February. A few weeks after FENOCO’s ban was lifted, Cerrejón’s rail line was attacked by FARC on March 14, derailing 17 train cars and shutting the train down for four days. The company’s stockpiles of coal at the port were sufficient so as not to halt export operations. However, after being attacked eight times by FARC and other insurgent groups in 2012, it is clear that the security situation had not improved sufficiently to justify celebrations.
Given the stoppages within the industry during 2012 it is no surprise that targets set by the national government were not met. With the recent strike at Cerrejón it could prove difficult to meet 2013 targets as well, though production increases could make up for lost time if further labour disputes are avoided. Even then, other issues have also hindered production in recent years, such as significant shortfalls in 2011 due to the effect of heavy rains on large open-pit mines.
GOLD RUSH: Similar geological characteristics to its Andean neighbour Peru have miners digging for gold in hopes of uncovering major deposits of the precious metal. Increased gold production and favourable price fluctuations in recent years have seen gold exports overtake coffee as the third-largest export behind oil and coal. Figures from SIMCO show that the volume of gold production expanded 18.4% in 2012, while its export value jumped 18.8% from $2.77bn to $3.3bn. Moreover, since 2008 gold revenues have increased nearly four times over, expanding from a base of $891m.
As of June 2012 the largest measured and indicated (M&I) gold reserves belonged to Gran Colombia Gold’s Marmato project in the Mid Cauca belt, with M&I resources of 11.8m oz of fairly low grade (0.3g/tonne) ore. Other major M&I deposits include Sunward Resources’ Titiribi project (4.6m oz, 0.3g/tonne), Batero Gold’s Quinchia deposit (3.5m oz, 0.44g/tonne), AngloGold Ashanti and B2Gold’s joint venture Gramalote (2.54m oz, 0.25g/tonne), and Seafield Resources Miraflores mine (1.93m oz, 0.8g/tonne). However, the biggest gold discovery to date belongs to AngloGold Ashanti, whose exploration project La Colosa has 24m oz of inferred deposits. The deposit, which was discovered in 2007 but had exploration halted from 2008 to 2010 amid local concerns, is undergoing feasibility, environmental, social and financial studies. Other inferred deposits in the country include Sunward’s 6.44m oz in Titiribi, Continental Gold’s 3.76m oz in Buritica, Gran Colombia Gold’s 2.6m oz in Marmato and Batero Gold’s 2.6m oz in Quinchia.
Despite the fact that all of the mentioned deposits are in or around the Mid Cauca belt, several lucrative, high-grade deposits have also been found in the northeastern California belt, while exploration is ongoing at several other unexplored regions such as San Lucas and Antioquia. However, high gold prices have not only attracted big name mining firms, as much of the gold production still comes from informal and illegal ventures. In 2011 the MME estimated that some 40% of gold production came from informal or illegal sources.
OTHER MINERALS: After coal and gold it is the mining of emeralds and ferronickel that are next in line in terms of export revenues. Colombia is the largest producer of emeralds in the world, accounting for approximately 55% of the global total, and it also boasts some of the highest-quality emerald gemstones. “A perfect emerald is called a gota de aceite (‘drop of oil’) because it does not require the oils or other treatments that lower-quality emeralds do. Some argue that the truest emeralds come exclusively from Colombia. Other parts of the world that mine emeralds lack one or more characteristics of a true emerald,” Edwin Bayardo Molina, the general manager of Coexminas, a leader in the emerald extraction industry, told OBG. Despite being the largest global producer of emeralds, their export makes up a negligible portion of the sector’s overall export basket. According to data from the MCIT, export revenues from emeralds amounted to $122.2m in 2012, squarely in the middle between its 10-year low when emerald exports recorded $72m in 2005 and its decade high of $154m in 2008. Meanwhile, the production of ferronickel relies on just one mine, Cerro Matoso, which is the world’s second-largest ferronickel mine with an annual capacity to produce around 50m tonnes. The complex also features a smelter and is undergoing studies to expand production. Ferronickel exports expanded by 6.6% in 2012, rising from total revenues in 2011 of $826.6m to $881.2m, equal to around 7.1% of mining exports.
Indeed, the 19% expansion of metallic minerals in 2012 was in no small part due to increased revenues from the mining of nickel and iron, which expanded 34.3% and 30% respectively, according to DANE.
SECURITY: Colombia’s armed guerrilla groups and organised crime organisations have kept international investors and mining firms at bay for decades. Now that inroads have been made, an improving security situation has given companies the opportunity to explore tracts of land previously under the control of these groups. However, attacks continue in some rural areas as groups such as FARC and the National Liberation Army (Ejército de Liberación Nacional, ELN) wage war against the state through assaults on mining and energy operations (see Energy chapter).
FORMALISATION: Security issues go beyond attacks on infrastructure, as insurgent and criminal organisations have identified mining as a readymade replacement for the more dangerous narcotics trade. In many areas, illegal mining and extortion of gold operations has overtaken the cocaine trade as FARC’s principal source of revenue. Activities include illegal extraction, though a more common strategy is extortion – according to intercepted documents FARC and the ELN demand 5% of mining revenues and about $3800 for each backhoe – and even kidnapping, as one Canadian mining executive kidnapped by the ELN can attest.
Beyond illegal mining lies another major challenge, the formalisation of thousands of informal miners who have operated for years. In fact, one of the principal development challenges that Colombia, and much of South America, faces is the presence of a large informal economy. It is an issue that extends far beyond the sector, though its effects are relatively familiar: a loss of productivity, taxes and control (see analysis).
CLUSTER EFFECT: The establishment of a mining service and supply sector has also become a top priority as the government seeks to modernise, streamline and add value to the industry. Concentrating private sector entities in one place, often referred to as clustering, has become a common way of establishing or incubating relatively new industries across the world. The “cluster effect” has been used particularly effectively in technological innovation, though several examples of successful mining clusters do exist.
Chile provides the closest example to Colombia, where it is primarily private sector driven. Chile’s cluster focuses on mining services, firms that can provide mechanical, engineering and technical resources to mining operations, some of which have become large international players. However, grouping together downstream operations, such as value-added manufacturing, could also be a route for a mining cluster.
Indira Singh, the former executive director of the Ontario Mineral Industry Cluster Council, believes Colombia stands to benefit from such a strategy, as clusters maximise competitive assets and can reduce competitive barriers. Singh also believes clusters must have strong leadership from the private sector with a bias towards action, as Singh told industry executives at a conference in 2012. While establishing a strong service cluster will add tremendous value to the industry, addressing another long-term issue could have an even greater impact in the short to medium term.
INFRASTRUCTURE: The lack of a developed infrastructure network is a primary factor limiting growth. In a country that is covered largely by jungle and mountains, the construction of road and rail infrastructure often requires abnormally high investments. Complicating the matter is the fact that existing infrastructure, especially that used by mining and energy firms, has become a prime target for insurgent groups.
Augusto Jiménez, the president of Drummond Colombia, told OBG, “Due to the lack of investment coming from the public sector in infrastructure, private companies are forced to develop their own, as is visible in the coal sector. The trend continues as all the major coal players are updating infrastructure to meet rising demand from Asian markets.”
According to the SMGE’s Jiménez, poor infrastructure and the generally negative social perception of mining are the two major challenges that the sector will need to address in the medium term. “The next six years will continue to be challenging years of exploration and investment in infrastructure development. The sector is also coping with a lack of public knowledge regarding large-scale mining and the impact of the conflict over the use of resources,” she told OBG.
BUREAUCRATIC CHALLENGES: “Colombia’s geological potential is strong, but the development of the mining industry is being hampered by obstacles such as environmental licensing and infrastructure limitations,” Mario Escobar, the president and CEO of Ashmont Resources, told OBG. While private companies can work around infrastructure bottlenecks, though it typically means substantially increased operating costs, bureaucratic obstacles tend to be entirely out of private sector control, as is their design.
It appears that the ANM’s work to unblock the bottleneck in licence applications should soon be over. However, another bureaucratic issue has also hampered progress. The environmental licensing process has slowed in recent years as the newly created ANLA struggles to keep pace with rising applications.
Eduardo Alfonso Chaparro, the director of the Mining Chamber in the National Business Association, told OBG that there are currently two key aspects slowing ANLA’s processing of environmental licences: a lack of technical expertise among officials and hesitation due to fear of making a mistake in the issuance of a licence. In May 2012 the government increased ANLA resources to help it cope with the bottleneck, allowing the institution to triple its staff. The injection of funding contributed to the implementation of a geo-database and regionalisation systems that have dramatically reduced evaluation times. As a result, 80% of lagging applications have been resolved, and those made in 2012 are being resolved on average within 19.2 weeks.
OUTLOOK: With broad political support behind the industry, bureaucratic efficiency should improve with time as ANLA and ANM institute new processes for the issuance of environmental and mining licences. Geologically, the large coal and gold deposits will likely be the primary focus of the sector, but the production of nickel, copper, iron, emeralds and other metallic and non-metallic minerals could also provide attractive investment targets. Government efforts to curb illegal operations and formalise informal ones will also increase productivity in the sector. The future of one of the five drivers of economic growth is looking up.
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