Growing pains in Colombia vex Canadian mining companies

Canadian miners are feeling the growing pains of a mining industry in transition in Colombia, which is struggling to harness a frenzy of exploration activity as prospectors race to stake claims. Facing a backlog of thousands of unprocessed mineral concession requests, the government has put aside 21 million hectares of mineral-rich lands to auction to the mining industry in blocks, instead of the usual first-come, first-served system of awarding concessions that is accepted globally, and used in other parts of the country.

Sunward operation in Colombia

Far from rubbing their hands over the plan, which copies a model that helped drive an investment boom in the country’s oil industry in the past decade, exploration companies worry the oil and gas exploration model is not appropriate for mineral exploration, which is done on a much smaller scale and focuses on narrow mineral veins.

“Really for juniors, they can’t take on these kind of vast areas because simply the cost of holding the land is so high,” said Colin Andrew, chief executive officer and director of Sunward Resources, a Vancouver-based gold exploration and development company with assets in Colombia.

Exploration companies have to pay a canon, or tax, of about US$9 per year on each hectare of land in a concession. Mining executives like Andrew say the auction model will be too expensive for cash-strapped junior explorers, especially in an environment where credit and financing windows are virtually closed to them.

Market players have expressed some concern about government meddling in the private sector, and hope the auction process will not become a permanent model in Colombia. “I think it’s going to become tough to see a lot of these areas really becoming of strategic interest or … rapidly accelerated,” Andrew said.

Few countries can boast as storied a gold tradition as Colombia, an Andean country that has been attracting gold bugs since Spanish conquistadors came in search of the mythical El Dorado<linkto: http://www.bwob.ca/industries/natural-resources/another-chance-at-el-dorado> 500 years ago. But the true exploration boom began only 10 years ago, when then-President Alvaro Uribe embarked on a U.S.-backed offensive on Marxist guerrillas, right-wing paramilitaries and a thriving cocaine trade. After that, the number of gold exploration companies ballooned from barely a handful to more than 70 over the decade, according to the Colombia Gold Report.

The boom has not been without its challenges as Colombia balances the need to attract investors with protecting its complicated terrain of plains, rain forest and Andes highlands. “They were not ready for it,” said Frederick Felder, a Canadian mining consultant who has been advising private and public players in the Colombian mining sector for 12 years. “The whole framework of the government agency that was looking at that was set up for a time when Colombia was simply not very attractive to anybody.”

Steve Letwin, chief executive officer of Toronto-based gold miner Iamgold Corp., said his company would not participate in the auction process as it stands, saying more clarity is needed. “I think the government is doing great things moving the industry ahead,” Letwin said. “But I am not sure they are to the point where there is a full understanding to be able to run an auction process.”

The prospective metals in the area—much of it in eastern Colombia along the border with Brazil and Venezuela—include gold, coal, silver, copper, platinum, potassium phosphate and uranium. The auctions are to begin next year and Colombia hopes to repeat the successes of similar auctions that helped double its oil output over the past decade, making the sector the main driver behind foreign direct investment.

Thanks to bold moves like the oil auction, Colombia had record foreign direct investment in 2011 of more than US$13 billion, making it the No. 4 destination for foreign capital in Latin America. From January to June of this year, Colombia saw $9.3 billion in foreign direct investment, compared to the $7.7 billion in the same period last year, and more than 80% was chasing mining and energy.

“We have to make all the efforts necessary to make sure that that exploration continues and that it turns into production. That is what we are hoping, that is what we want, that is what we are trying to do,” Colombian Mines and Energy Minister Mauricio Cardenas said in a recent telephone interview.

“There’s a huge exploration boom in gold, and it’s being led by foreigners, and it’s being led by Canadian companies,” said Cardenas, who is spearheading the effort to auction the mining blocks in a competitive bidding model that would help Colombia screen for speculators.

Most of the area covered under the block auction is rich in biodiversity, located partly in the Amazon river basin where a proliferation of mining operations would pose a major threat to the environment, Cardenas said. Cardenas said the government is drafting geological maps of the area before putting the first blocks up for auction in 2013. He said the first areas to hit the market will be the best, and most likely to attract investor interest.

“I understand the public policy issues that they are addressing with this,” said Peter Harder, a former deputy foreign minister for Canada and senior policy adviser at the law firm of Fraser Milner Casgrain. The firm’s clients are bullish on Colombia but have expressed some concerns about government intervention in the sector.

“I think the proof will be in the eating of the pudding.”