The impact of shifting politics on the mining investment landscape in the Andean region
The impact of shifting politics on the mining investment landscape in the Andean region
By: Shawn Doyle and Adil Dostmohamed
The mining investment landscape in the Andean region of Latin America is in a period of transition due to rapidly shifting politics. While Canadian and other foreign mining companies should prepare for increased regulatory and tax burdens in Chile, political risk appears to be moderating slightly. In Peru, while the perception of risk remains elevated following the election of the new far-left president, Pedro Castillo, and the appointment of his cabinet, there may be openings for the intrepid. Meanwhile, Ecuador’s new government may introduce regulations that could enhance the appeal of that country for miners. Although opportunities clearly remain abundant throughout the mineral-rich region, mining companies must bring an increasingly sophisticated appreciation of shifting political currents to the structuring of their investments.
Chile: Prospects for Pragmatic Outcomes
Mass protests and violent unrest in Chile, which began in October 2019, shocked mining investors, who knew Chile as a solid democracy with a longstanding market orientation and a strong rule-of-law track record. Subsequently, when, in an attempt to stem riots, politicians offered a pathway for the drafting and public approval of a new constitution, many investors raised their level of alert. Then, in May 2021, when Chileans elected a constitutional assembly to draft such a new constitution and right-leaning parties failed to secure the one-third of seats that would have given them a veto over the draft, that level of alert was raised. Additional cause for acute concern came that same month when surveys of Chileans’ voting intentions for the November presidential elections showed that Daniel Jadue, the leader of the country’s communist party, had pulled ahead of all other candidates. On top of that, left-wing parties in Chile’s congress brought forward a bill to impose punitive new royalties on copper and lithium mining, which would, at the high end, be imposed at a rate of up to 75%, computed by reference to gross sales. All of these developments have driven both headlines and trepidation among Canadian and other miners.
However, the picture has grown rather more nuanced of late:
- First, on July 16, a somewhat more moderate left-wing party’s candidate, Gabriel Boric, bested the communist party leader, Jadue, in a primary to determine who would lead the left-block into the general election – and did so by a resounding margin, giving some credence to those who argued that Chileans’ relative pragmatism should prevail in the end.
- Second, after much in the way of theatrics in the weeks immediately following the opening of the constitutional convention, the delegates appear to be getting down to work and taking more seriously the grave task they are charged with. This may be partly a result of recent polls that showed a slight downwards trajectory in public approval of the constitution-drafting process. The delegates know that whatever document they draft must ultimately be approved by the electorate before it can come into effect, and the vote will be mandatory, meaning that less radical elements of the electorate, which may have sat out the election of assembly delegates (which only saw 40% of voters turn out) will have their voices heard. Therefore, while the new constitution, which will be presented to the public in mid-2022, seems likely to propose changes to areas of law that are relevant to mining, including mineral property rights, Indigenous Peoples’ rights, the environment, and workers rights, among others, it is not a foregone conclusion that these changes will be radical in nature, and they may be manageable for mining companies.
- Third, the royalty proposal, which originated in the lower house of congress, is of suspect constitutionality, given that the (current) Chilean constitution assigns taxing powers to the executive branch. Moreover, far from hurtling through the legislative branch, the bill is currently the subject of much careful and reasoned scrutiny in a senate committee. The committee has been taking advice on it from international metals and mining industry experts, who have left little doubt about the damaging effects that the bill would have on mining investment. Therefore, many analysts expect that, while taxes on mining are bound to increase, actual increases are likely to fall far short of the nearly expropriatory regime proposed in the lower house.
Companies wishing to proceed with investments will need to give greater attention to their exposure to social and environmental risks, and to their cost structures, and will need to draft financing, joint venture and other agreements in a manner that will enable them to respond flexibly to possible legal changes. Mining investors already present in the country must carefully examine the benefits of any existing tax stabilization agreements that they may have signed, while foreign investors generally can look to the protection available under international investment treaties. Canada’s Free Trade Agreement with Chile provides investors with some protection.
Peru: Reckoning with the Unknown
Over the past two decades, Peru has steadily gained ground as a major mining jurisdiction, while also making steady progress in the general advancement of its economy and the entrenchment of its democracy. However, new questions have now been raised about the country in the wake of the narrow election of Pedro Castillo, the candidate of Perú Libre, a political party with a Marxist orientation, as the country’s new president. The party’s election platform called for the full nationalization of the mining industry, as well as tax increases and, as in Chile, modifications to the country’s constitution. These rapid political developments in Peru have caught many Canadian and other foreign mining companies, not to mention many Peruvians, off guard.
During the period between Castillo’s election in early June and the appointment of his cabinet on July 30, many commentators predicted that Castillo’s politics would be tempered as he assumed power. As evidence for this, they cited his appointment of some moderate technocrats, including a former World Bank economist, Pedro Francke, as his economic advisor, as well as the release of a plan for Castillo’s first 100 days in office, which eschewed any talk of nationalizations and otherwise seemed more modest and incrementalist than the party platform. However, the cabinet appointments on July 30 rattled investors, as more radical figures assumed key roles, including Guido Bellido, a far-left hardliner, who will become the prime minister. In an apparent effort to calm the markets, the moderate, Francke, was confirmed as Economy Minister, in the evening, after most the rest of the cabinet had been named.
The published plan for the first 100 days includes increases to taxes and mining royalties. But Franke has held consultations with miners and has reported an expectation of proceeding through “dialogue.” Like his peers in Chile, he doubtless appreciates the need to keep the mining industry alive and healthy in Peru. Indeed, Peru is arguably even more reliant on mining than Chile (which is famously reliant on the copper business), given Peru’s generally lower level of development and the fact that mines account for 60% of its exports.
Still, the expectation is that taxes will rise, and the government may try to extend increases to companies that enjoy tax stabilization agreements. There is a relatively recent precedent for Peru setting aside its obligations under such agreements, in that another left-leaning president of Peru convinced miners to “voluntarily” renegotiate agreements less than a decade ago. Still, not all miners may be able or willing to consider changes, and any unilateral actions by Peru could well lead to international arbitration proceedings.
Climate of Uncertainty Could Generate Opportunities
In this climate of uncertainty, some are looking into insurance protection provided by the Multilateral Investment Guarantee Agency, or to remedies under bilateral investment treaties, but there are others who are making new investments. Indeed, there may even be a buying opportunity for foreign firms, as smaller local firms, which are perhaps most exposed to political risks (given their lack of home-country backing), look to sell assets.
Canadian investors are afforded some level of protection by the bilateral investment treaty between Peru and Canada. The treaty prescribes, among other things, requirements for equal treatment, minimum standards of treatment, protection from unreasonable expropriation, rights to expatriate funds, and a prohibition on imposing performance requirements. Peru recently ratified the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a free trade agreement between Canada and 10 other countries. This agreement provides Canadian investors with further protection and enhanced access to Peru.
There may also be opportunities for local owners of mines and mineral properties to look to the TSX for reverse take-over opportunities, which could give Canadian status and treaty protections to their businesses.
Ecuador: Ripe For Foreign Investments in Mining?
Ecuador has lagged behind its southern neighbours in the development of its mining industry. However, it has lately become an interesting investment destination for Canadian and other mining companies, and its mining exports have been trending upwards.
Companies operating in Ecuador have sometimes struggled to meet Environmental, Social and Governance (ESG) challenges and contended with unclear regulatory regimes, but the country has a new business-oriented president, Guillermo Lasso, who has pledged to establish a clear new framework for responsible mining, while also countering illegal mining and protecting the environment. Mr. Lasso lacks a majority in Ecuador’s legislature (his party holds only 12 of 137 seats) so he must work with other parties to implement his agenda, which could prove difficult. But, after more than a decade of left-wing governments that didn’t place much emphasis on attracting foreign investment, Ecuador may now be ripe for new investments in mining.
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Our team at McCarthy Tétrault continues to monitor the mining investment landscape in the Andean region of Latin America, as well as global mining trends and developments and how they will impact Canadian investors. For further information, please contact your McCarthy Tétrault trusted advisor or one of the authors.
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