LatAm miners face social, tax challenges amid political unrest

Mining companies will need to do more to win community support for operations across Latin America amid an onslaught of political unrest, Fitch Ratings analyst Joe Bormann told BNamericas.

But governments looking to squeeze more revenue from mining must also take care not to push too far, or risk undermining future investment in the sector, according to the analyst.

“There is definitely a negative political trend, and a lot of unrest throughout the region, whether it's Chile, Peru or Colombia,” said Bormann, Fitch’s deputy regional group head for LatAm corporates.

“And when you say those three, you can look around and say Argentina and Mexico have got their own unique challenges, but political unrest has been highest in those three.”

ECONOMIC SLUMP

This political turmoil in part relates to governments looking to increase mining taxes and royalties to prop up public coffers, which have been hit hard by the pandemic-related economic slump.

But administrations are also facing growing demands from voters to improve public services and tackle ingrained inequality.

While the pandemic has hit mining, including through suspensions and reduced operations, nearly all mines are running, with companies reaping the benefits of the recent surge in industrial and precious metals prices.

ROYALTY RISK

In Chile, the world’s top copper producer, mining companies are facing possible sharp rises in royalties, sparking warnings of increasing investor risk, while the incoming administration in Peru, likely to be led by Pedro Castillo, is planning higher taxes on the sector.

Public unrest has also hit the mining sector in Colombia, where a national strike and blockades have caused a drop in coal output and threaten to undermine a government drive to deliver mining growth by auctioning concession blocks.

Governments are also considering mining tax hikes or greater state control over mineral resources in Brazil, Argentina and Mexico.

Efforts to promote mining growth by governments in Panama and the Dominican Republic are being hampered by public opposition, relating to potential negative environmental impacts and concerns that communities have not received a fair share of mining revenue.

While Fitch expects that most corporates, including mining companies, will face higher taxes or royalties in the coming months, governments will need to reign in their demands to avoid an investor exodus.

“In Peru and Chile particularly the mining sector is very vulnerable,” Bormann said.

“It’s [mining] also very important for the countries, so there’s a real balancing act for the left-leaning politicians that want to take more money from the companies through taxes and royalties, and at the same time a need to make sure that mining companies don’t abandon the countries, because you need to continue to have mining investment for the long-term health of the country.”

INEQUALITY ISSUES

As well as the pandemic-related public funding crisis, governments must also address growing pressure to tackle inequality in the region.

“Miners are making a lot of profits, its a peak moment in the market, there is a lot of income inequality, governments need to address it, and to some degree, corporates need to be part of the solution,” Bormann added.

Miners’ interests and those of governments are aligned on this front.

“There are a lot of reserves to be mined over the next decade so they [mining companies] need to have the support of the communities to be able to do that,” he said.

“There need to be concessions made by them that are viewed favorably.”