LatAm mining sector facing growing cash demands

Mining companies in Latin America are generating huge cash flows following a surge in prices of the region’s main metals, including copper, gold, silver and iron ore.

But the sector is grappling with growing demands for a bigger slice of the pie from governments, communities and shareholders, according to BMO Capital Markets commodities analyst Colin Hamilton.

Miners are also facing pressure from investors to up their ESG (environmental, social, and governance) game and play their part in reducing carbon emissions, according to the analyst.

While the region remains in the grip of COVID-19, mining companies have learned lessons from the pandemic and are well placed to continue operating through current and future waves of cases, Hamilton says.

BNamericas: How do you view the mood in the mining industry in Latin America?

Hamilton: Obviously with prices where they are the mining industry is feeling pretty good about the world overall.

Always at this time in the cycle, when prices are good, governments want more, workers want more, shareholders want more, communities want more.

That’s obviously a challenging capital allocation balance for the mining industry to deal with.

But you’d rather that than have no money to distribute.

There’s confidence but not arrogance.

In the past you maybe had a bit more arrogance in the mining industry, and the attitude that everything’s going to be great forever.

I think there’s a little bit more sincerity. They know that we’re in a cyclical market, and they are going to make the best of the good times while they last.

BNamericas: With high numbers of COVID-19 cases globally, including across Latin America, how big an impact will the pandemic have on miners in 2021?

Hamilton: In the mining industry on the whole, most people are saying we have actually improved our standing in the communities where we operate because of the steps we took last year.

It was a challenge but we actually looked after the communities as well as we should.

I would say there’s not an expectation, even from the second and third waves coming through, that we would see the same impact as the first.

We had a second lockdown in Peru, but it affected mining much less than that in March-April last year.

There’s a feeling that the industry has had some positive learning about the way operations can be run when under stress, and companies are thinking about the potential benefits going forward.

There’s always some legacy, but relative to last year, I expect a muted impact on production.

BNamericas: How important are ESG issues right now?

Hamilton: ESG is on all mining compasses these days. I think there’s a bit of one-upmanship on setting targets for getting to zero [net carbon emissions] among industry leaders.

That’s something to watch over the next little while.

Then you have got the smaller companies that are just starting to get their heads around it, but they know they have to.

BNamericas: Why have ESG issues come to prominence now?

Hamilton: First, there’s the focus on it from the investor side. They [mining companies] know they are not going to get a meeting where they are not going to have to talk about ESG.

Investors are happy for companies to spend money in that area. That’s viewed as a good target for capex spending rather than perhaps even building a new mine.

Many of the targets are long distance. It’s not like they are being judged on them now.

It’s just part of a wider thematic. The asset management industry knows it has a role to play in moving toward a lower carbon world and moving toward the Paris Accord.

The mandates they are getting from their investors, particularly the younger generation, who are much more sensitive to these things, and who are of course the next source of funds for the asset management industry, that’s what’s driving it.

BNamericas: What approach is the industry taking on M&A?

Hamilton: At the moment I would say it’s more opportunistic than anything else.

You have certain miners with lazy balance sheets, and that [M&A] is obviously a potential solution to that, but compared to a couple of years ago when there was the whole Newmont, Barrick Gold thing going on, we’re not seeing anything like that.

You never know, but it doesn’t seem like an urgency going forward.

BNamericas: Overall how do you view the outlook for mining in 2021?

Hamilton: The view is that while it’s a tricky time for the world it’s not a bad time for the mining industry as a whole.

Margins across many commodities are good.

That’s why you are having this big debate on capital allocation, but there are maybe a few question marks coming through, around when mining is now in many cases an ex-growth sector, do people start putting money toward growth again?

But one of the overarching themes this year is the fact that it’s a very different world now and the mining industry knows it needs to play a part in the energy transition and that push toward a zero carbon world.