With vast coal, gold and other mineral reserves, Colombia is one of Latin America’s leading mining countries. It is the world’s fourth-biggest exporter of coal, an important gold producer and the world leader in emerald mining, a small but profitable sector. Mining has expanded significantly in the past decade as the last two governments have emphasised its importance to the national economy and courted foreign investment. However, challenges have emerged in recent years. Falling commodity prices have stalled many development projects, while strikes, guerrilla attacks and government sanctions have interrupted production.
Coal is the dominant component of Colombian mining. In 2013, exports of 85.5m tonnes, worth $6.7bn, represented a 4% drop in tonnage and a 14.3% drop in value compared to the previous year. Gold is the second-biggest mining segment, with exports of $2.3bn in 2013, down by a third from 2012. Ferronickel, with $680m of exports in 2013, follows gold as the next most important mining product. Other locally mined minerals include copper, emeralds, platinum and phosphate.
Industry Opening
Since 2002, when President Álvaro Uribe took office, mining has expanded rapidly. Right-of-centre and pro-business, Uribe strove to open the industry to foreign investment and unlock the country’s mineral wealth. His government passed laws ensuring that foreign investors would be afforded the same treatment as domestic ones and that tax regimes would remain stable. Uribe’s government and that of his successor, President Juan Manuel Santos, have also held mining royalties at levels that are competitive with regional peers. These measures helped turn Colombia into an attractive destination for foreign investment.
In the World Economic Forum’s “Global Competitiveness Report 2013-14”, Colombia ranked sixth in the world for investor protection. Both Uribe’s and Santos’s governments have also been successful in improving the country’s security. As a result, foreign investment has steadily risen. In 2001, foreign direct investment (FDI) in Colombian mining stood at $524m. Since 2004, FDI into the sector has surpassed $1bn every year and reached a peak of more than $3bn in 2009, before retreating somewhat to approximately $2.9bn in 2013.
Reserves
Although significant mineral reserves have been discovered throughout the country, large swathes of territory remain unexplored. According to a 2012 Ministry of Mines and Energy (Ministerio de Minas y Energía, MME) study, only half of Colombia’s subsoil had been analysed, despite the fact that Colombia is widely believed to have much greater reserves than those already mapped. The holdup in subsoil analysis has largely been caused by activity among guerrilla groups, namely the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia, FARC) and the National Liberation Army (Ejército de Liberación Nacional, ELN). For decades, these groups controlled large areas of the country (up to 50% of its territory by some estimates), especially in jungle and mountain regions that are geologically similar to those in which many of Colombia’s mines have been found. Guerrilla control of these regions has prevented government agencies from probing them for mineral resources and private companies from exploiting them.
The situation has improved in the past 10 years. Colombian government forces have waged a sustained campaign against the guerrillas, which has succeeded in reclaiming much of the territory over which they had lost control. It is believed that guerrilla dominance has fallen to around a quarter of the national territory, which has opened up new areas to geological analysis. As these areas are analysed, a clearer picture of Colombia’s total potential mineral wealth will emerge.
According to BP’s “Statistical Review of World Energy 2014”, at the end of 2013, Colombia had proven coal reserves of 6.75bn tonnes, made up entirely of anthracite and bituminous coal. Thermal coal reserves and production are concentrated in the north, with exports leaving through Caribbean ports. Metallurgical coal reserves, a small portion of the total, are currently being explored and exploited in the country’s Cundinamarca region.
Emeralds & Gold
Colombia produces the world’s highest quality emeralds and also the greatest quantity of the gems. About 55% of the world’s emeralds come from Colombia, with exports totalling $126m in 2013. The industry has historically been profitable, but also dangerous. The “green wars” over control of emerald mining claimed thousands of lives before industry actors agreed to maintain peace. However, since the death in 2013 of Víctor Carranza, who controlled an estimated 40% of the industry, the prospect of renewed violence has emerged. Competition, peaceful or otherwise, will surely be fierce as emerald prices rose an estimated 30% in 2013 and are expected to climb another 25% in 2014. The price hikes have come amid concerns over Colombia’s production, which has fallen as some of the country’s primary emerald mines, such as Muzo and Chivor, have approached exhaustion. Production declined from 5.2m carats in 2010 to 1.2m in 2012, before rebounding in 2013 to 2.6m.
Gold reserves are more difficult to quantify because a great deal of the production is carried out by informal or criminal operations. However, the reserves of many of the large private operators are known. Among the larger projects are Gran Colombia Gold’s Marmato, with measured and indicated reserves of 11.8m oz of ore. AngloGold Ashanti’s La Colosa development project has resources of 12.3m oz, while Sunward Resources’ Titiribi project, Batero Gold’s Quinchia deposit, AngloGold Ashanti and B2Gold’s Gramalote, and Seafield Resources’ Miraflores mine together accounted for measured and indicated gold reserves of approximately 12.6m oz.
Gold Production
On an annual basis, Gran Colombia Gold, a Canadian company, and Mineros, a domestic firm, are responsible for between 10% and 15% of the country’s gold production. Besides these two companies’ operations, there are several large projects in development, including AngloGold Ashanti’s La Colosa. However, further development there has been delayed due to falling gold prices. The value of gold fell 28% in 2013, with contracts for February 2014 delivery priced at $1202.30 per ounce in late December. La Colosa had undergone a pre-feasibility study, but AngloGold returned it to a conceptual stage as the company reassessed the project’s prospects in a lower price environment. It is now in pre-feasibility for the second time.
“I think what almost every gold major is facing is that you can continue to run mines and make profits at lower prices, but you tend to put your development decisions on hold,” Ken Kluksdahl, president of AngloGold Ashanti, told OBG. “That’s the reality that’s facing Colombia. You really need to see some improvement in pricing to see these projects go forward.”
Gran Colombia Gold has faced the challenge of remaining profitable in a lower price environment after suffering losses in 2013 and early 2014. In response, the company made some workers redundant and began modernising its operations. “It was a company with high costs of production and we had to attack the problem,” CEO Lombardo Paredes told Bloomberg. The company says that newly installed machinery and corporate restructuring have enabled it to reduce total costs by about $205 per ounce, and it expects to return to profitability in the third quarter of 2014.
Commodity Prices
Gold’s decline in 2013 marked the end of a 12-year bull run. The steep drop in 2013 was caused by expectations that the US Federal Reserve would start decreasing the levels of its monthly bond purchases, a process referred to as “tapering”. Quantitative easing, the Fed’s bond purchase programme, supported gold prices as it threatened to weaken the US dollar. Investors poured money into gold as a hedge. As the Fed indicated that tapering was on the horizon, investors sold gold in large quantities. According to a report in The Wall Street Journal, the quantity of gold held by exchange-traded funds fell from 84.6m oz at the beginning of 2013 to 57.7m oz by year-end.
Gold futures partially recovered in early 2014, reaching a seven-month high of $1379, before ending the first quarter at $1279.60. However, the outlook for gold has not improved for 2014. Jeffrey Currie, the head of commodities research at Goldman Sachs, said in January 2014 that he expected gold prices to drop to $1050 by the end of the year. Michael Haigh, head of commodities research at Société Générale, who, along with Currie, accurately predicted the 2013 bear market, also has a negative outlook on gold. As many of Colombia’s gold projects were conceived with a baseline gold price of $1500, plans may need to be modified now to accommodate the new pricing environment.
The price of coal has also retreated in recent years. The benchmark Australian thermal coal price declined from a high of $141.94 per tonne in January 2011 to a four-year low of $78.02 in April 2014. Prices do not appear poised for a quick recovery (see analysis).
Colombian mines have continued operating through the general decline in commodity prices in the past three years, save of course the many new investments, such as AngloGold’s La Colosa, that have been postponed. According to Colombia’s Large Scale Mining Association, an industry organisation, mining projects worth $7.3bn of investment were stalled as of early 2014.
Regulation
To cope with the increased flow of FDI into Colombian mining, the Santos government restructured the industry’s regulatory framework in 2011. The National Mining Agency (Agencia Nacional de Minería, ANM) was created to take over the functions of the Colombian Institute of Geology and Mining (Instituto Colombiano de Geología y Minería, INGEOMINAS) and assume future responsibility for granting mining licences. The ANM also manages mining royalties and oversees mining operations to ensure regulatory compliance.
The ANM found that enforcement of mining regulations had been lax before the 2011 reforms. In 2013 alone, the agency made more than 15,000 field visits to mines and found that few (only 8%) were in compliance with all regulations. It also began working through the backlog of 19,000 licence applications it inherited from INGEOMINAS. To give the ANM time to do this, the government placed a moratorium on new applications, which was in effect until July 2013. In March 2014, Carolina Rojas Hayes, vice-president of promotion and development at the ANM, told OBG that the agency had received over 3000 new applications since the application process was reopened. These new applications will be dealt with in the order in which they were received. Rojas told OBG that the ANM now has enough manpower to keep up with the pace of new applications. Also, the government appears committed to providing the ANM with the resources it needs. Up to 2% of mining royalties may be diverted every year to fund the agency. However, industry representatives have told OBG and other outlets that the ANM is falling behind in granting licences, which has further delayed the start of new mining projects.
Stricter Government
The reforms of the regulatory framework have been accompanied by a new focus on the industry’s impact on the environment and local communities. The results of stricter enforcement of regulations have played out notably in relations between the government and Drummond, an American firm that is the second-biggest coal producer in the country. The government suspended Drummond’s export licence twice between 2013 and 2014, resulting in a significant loss of revenue for both the company and the government in terms of royalties (see analysis). The licence suspensions have surprised some industry observers, given Colombia’s accommodating treatment of mining majors during the past decade.
The new focus on protecting Colombia’s environment and local communities from mining has impacted the process of obtaining mining licences. Today, mining companies must obtain environmental licences and engage with local communities in consultas 2011 estimate by the MME, around 40% of gold production came from the informal sector.
The government faces two main challenges in its campaign, spearheaded by the ANM, to formalise the industry: convincing or compelling informal miners to submit to taxation and regulations, and eliminating criminal operations run by the FARC and other gangs.
Many artisanal miners already pay royalties but do not have official concessions nor comply with environmental regulations. The ANM has visited many of these operations with the goal of bringing them into the fold of regulation. Similarly, the government has worked with mining majors to help formalise some small-scale mechanised operations. For example, in March 2014, Continental Gold signed a memorandum of understanding with the MME and the ANM that laid out the conditions under which Continental would subcontract with informal small-scale miners working within the boundaries of the company’s Buriticá project in Antioquia. As subcontractors for Continental, the small-scale miners will become legal.
As the government formalises small operations, it is also working to tackle the more daunting, and urgent, task of reining in criminal mining. Headway has been made against illegal drug trafficking, but many criminal organisations have since turned to mining, which in value terms has surpassed drugs as a source of revenue for some groups. In Colombia, the FARC has earned income from projects including a large tungsten mine known as Cerro Tigre. The FARC’s tungsten mine is believed to have a weekly production capacity of 16 tonnes of wolframite, a mineral from which tungsten is derived. It is also believed to be Colombia’s only tungsten mine. As Bloomberg Markets reported in September 2013, numerous multinationals, including Apple, Samsung and BMW, have bought tungsten from Colombian exporters, which suggests that the FARC’s product has reached international supply lines. Despite widespread knowledge of the mine, the Colombian government has not been able to shut it down because it lies in a FARC-controlled region of the south-east.
In addition to illegal mining, the FARC and other criminal organisations profit from mining through extortion. The FARC and the ELN demand 5% of mining revenues from some operators and levy “taxes” on mining equipment. Additionally, they have disrupted large-scale mining operations by attacking mining infrastructure, such as coal-shipping trains (see analysis). These are among the issues that the government is seeking to resolve with the FARC through ongoing peace talks.
Outlook
Miners in Colombia continue to face challenges related to security and licensing. However, the country remains an attractive investment target because of its strong institutions, protection of investors, extensive reserves and competitive royalty rates. Furthermore, despite a new emphasis on enforcement of regulations, the government remains supportive of the industry – a position unlikely to change in the medium term.
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