Latin America’s Mining Boom

Latin America's mineral wealth has long attracted investors but mining companies may flee to other regions if some regional governments follow through on efforts to squeeze more revenues out of natural resource exports.

Miners have flocked to Latin America for its rich deposits and relatively stable politics, reaping large profits as demand for metals ballooned in China and India.

Before the recession hit in 2008, miners earned fat profits in the region.

Some Latin American lawmakers began pushing for their countries to get a greater share to help improve towns around mine projects, which are often poor and isolated.

Legislators in Mexico and Brazil are considering various measures to raise levies on the industry. But analysts warn that companies could retreat to other parts of the world if the proposals go ahead.

Ecuador recently overhauled its mining rules to set a windfall tax on revenues when global metals prices where high. Miners, hit by the global financial crisis, now are hesitant to continue exploration there.

"Where there is competition for exploration and development spending, companies will go toward those areas where the regimes are more beneficial so they can provide a higher return to their shareholders," said Charles Kernot a mining analyst at Evolution in London.

Kernot said companies may choose to move to countries with more friendly mining policies even if they are politically less stable.

Attractive copper and iron ore reserves in Mongolia and West Africa could win out over Latin America, he said.

Brazil, one of the world's largest producers of iron ore, has a plan to raise mine royalties, prompting an outcry from some miners who say taxes in Brazil are already burdensome.

"There are other countries that have good mineral assets. Brazil is not the only game in town," said Richard Court, chairman of engineering firm GRD Ltd, a mine builder.

Iron ore extractors pay a 2 percent royalty in Brazil but policy makers are looking to the oil and gas industry -- where 5 to 10 percent royalties are charged -- as a potential model.

"The government's lack of an open forum on this subject of raising royalties on mining is worrying and is creating uncertainty ... that will hold up project development," head of Brazil's mining industry association Paulo Penna said.

WINDFALL PROFITS, WINDFALL TAXES

Ecuador's leftist President Rafael Correa pushed for a law passed in January that boosted governmental control over the nascent mining industry. The country, home to world-class precious metals reserves yet to be exploited, has said it wants "at least" 5 percent royalties on mining projects, which will be decided on a case by case basis.

"When metal prices reached their bubble level countries said, 'we ought to have a bit of those windfall profits and so we'll impose windfall taxes' and that killed investment stone dead," Kernot said.

In Mexico, a major copper and silver producer, lawmakers are considering a 4 percent tax on mining output as part of a fiscal reform package meant to boost government income during a steep recession.

Even before the proposed tax increase in Mexico, investment in new mining projects is expected to plummet by nearly 40 percent in 2010 compared to 2009 as credit withers.

Metals prices have recovered from their steep decline at the end of last year, but some Latin American governments are reacting to the market volatility by keeping policies steady.

South American mining powerhouses Chile and Peru have so far refrained from making major changes to mining rules.

In Peru, many miners have contracts with the government that lock in tax rates for two decades or more, effectively preventing major changes in tax codes. In Chile, the government offers companies tax incentives to spur investment.

The Latin American region urgently needs foreign investment and technology. Democracy is slowly taking root which will offer investors the necessary stability to successfully compete in today's world.