The fall in global GDP, estimated at 5.2% for the current year according to World Bank figures, will be a consequence of the high impact of the COVID-19 pandemic, with effects still uncertain for the period 2021-2025. Faced with an economic downturn that is on the rise, twice as powerful as the 2008 recession, capital-intensive industries such as mining will have to implement effective policies to sustain their development and deal with possible devaluations of commodities and falls in international trade. Although some metals such as gold have positioned themselves firmly, the immediate future once again brings to the sector a key concept in times of weakness: competitiveness.
By the time the pandemic ends, the world is projected to be somewhat poorer, although it is expected that this depression will not be accentuated under the dreaded “L” shape, drawing a fall like the one that characterized, for example, Japan’s “lost decade” in the 1990s; but rather it will be in the form of a “U”: that is, a period of economic stagnation followed by a return to pre-crisis growth levels with potential relief due to demands postponed by the trade hiatus of recent months. Thus, it can be seen that the efforts that the coronavirus has forced to make in all continents are and will be more than important, and although there are still 12 nations without positive cases reported, the truth is that the pandemic will set a historical precedent not only in economic matters but also in production and development that will govern the entire planet.
From now on, it will be necessary to go through a scenario of expansive indebtedness, market distortions and negative supply shocks without a great predictable rise in prices, which will add to a change of paradigm in which technology, sustainability and the strategic vision of the leaders within the renowned new normality will come into play. Even many of these transformations caused by the health condition, personnel restrictions and interruptions in the supply chain are here to stay and will be a fundamental part of the redesign of the post-COVID-19 mining sector.
The pressing need to contain this impact is driving the transition to a more efficient and resilient economy, which has not been driven solely by the pandemic, but has accelerated – and very rapidly – as a result of the pandemic and this first half of 2020 that put all global productive activity on edge at the same time. As the World Bank points out, “the rapid increase in cases of COVID-19, together with the wide range of measures taken to stop the speed of the virus’ spread, has abruptly slowed economic activity in many emerging markets and developing economies”, so growth projections have been “seriously” reduced and the world is now faced with a central premise of economic science: the scarcity principle, which suggests scarce resources for infinite needs.
Although this context will lead to certain critical minerals being consolidated as strategic assets, the truth is that the economy’s capacity to respond will be reduced and each sector will have to become efficient in order to recover from the red figures. This could indicate an expectant cycle as we emerge from the pandemic and the adoption of a more pragmatic vision by mining management and international capital; while as a counterpoint it could also translate into an opportunity for productive acceleration in those regions of great geological wealth and with feasible mining projects that have not yet seen the light of day.
In the search for this balance between a tight market, cautious investors and regions with struggling economies, improvements in competitiveness are positioned as a central aspect to be considered in order to optimize the capacities of economic agents. Specifically in the mining area, the industry will be able to focus on working to become more competitive both in terms of the development of operations and the participation of operating companies and at the level of countries and governance. Each region, in this sense, has particular challenges, and in Latin America these could interfere in some taxing topics such as social license, maintenance of rules and legal security, added to the optimization of human and technological resources and related to infrastructure and environment.
Although mining is a robust sector accustomed to risk and fluctuations, it will not be alien to the context and a twofold impact is observable: on the one hand, a sharp fall in demand until it is clear what this new world will be like and, in parallel, a decrease in supply whose consequences will begin to be more noticeable in the statistics of the second half of this unexpected 2020.
Meanwhile, the forecasts of the consulting firm Deloitte announce that the prolonged recession caused by the coronavirus could have implications in the sector related to probable mergers between companies, reduction of liquidity in the junior and exploration sector, as well as opportunities for the automation of critical roles and functions. Thus, some sectors of the industry will be more affected than others and the way out of this crisis will depend on how much longer the pandemic spreads and the rebound this has on each particular commodity. Therefore, working on competitiveness in a comprehensive manner may be very useful in this uncertain scenario.
Argentina is often recognized as a geologically unexplored country with a great potential of resources and a very diverse offer of minerals, especially in the mountainous area, but which nevertheless has not been consolidated as a mining country, but as “a country with mining”, as Dr. Ricardo Alonso, Secretary of Mining and Energy of Salta, points out.
From this perspective, a series of aspects related to deficiencies in productive diversification, prohibitions of activity in some provinces and cyclical effects on the economy have placed the country in this group of nations with an imbalance between geological resources and the number of active deposits, with great opportunities to work on competitiveness.
Although in recent times some State policies have been consolidated at the national and provincial level that have provided greater predictability to mining development, the truth is that the potential for attracting foreign exchange and socio-economic growth is great in comparative terms to what is currently being produced. To understand the dimension of this situation, it is enough to mention the case of copper, the most important segment of the Chilean economy and with great future prospects linked to electromobility, which in Argentina has not yet managed to take off despite having a portfolio of world-class projects. At the inauguration of the Mesa del Cobre by the San Juan Mining Chamber (CMSJ), the figures reported by Mario Hernández, president of this trade organization, indicate with forcefulness why it is necessary to advance in the mining positioning of the country and offer greater stimuli to the development of mining: only in the copper enterprises of the province of Cuyo sleep more than US$130. billion (2020 to 2060); some US$7 billion in taxation and US$30 billion in terms of wages and suppliers; that is, around US$1 billion per year for 40 years analysing the impact of only four of the six porphyry copper mines in the country (Josemaría, Pachón, Altar and Los Azules).
However, analysing the current situation of the national mining industry, it can be seen that in 2019, the lithium and metal mining sector was the fourth largest exporter with a figure of US$5,106 million, registering a year-on-year fall of 5.5%. This amount represented 7.8% of the country’s total exports, and gold and silver metals generated the highest external sales (55.6%; US$2,839 million), followed by the steel sector (20%), aluminum (16%), lithium (3.6%), lead (1.9%) and other non-metalliferous metals.
However, according to projections made by the Ministry of Mining at the end of 2019, between 2020 and 2030 the mining industry could experience a drop in exports of 47% (lithium, copper, gold, silver, zinc, molybdenum and lead) from US$3,623 million to US$1. The cause: “Even with the construction underway and an optimistic scenario for lithium operations, if we do not activate new projects, exports will inevitably be reduced due to the maturity of the deposits,” explained the national mining portfolio at the time.
In the light of these figures, if one adheres to the idea that a country or economic agent is competitive on the basis of its capacity to remain in a market, Argentina will have to improve its regional attractiveness and begin to lay the foundations for the strategies under way among the national and provincial states, companies and citizens to attract investment to the country while improving productive efficiency, reducing costs and guaranteeing mining development in the medium to long term in conjunction with a related social, economic and political matrix. The state of affairs in neighboring countries, especially Chile and Peru, could be a model to follow in order to increase the participation of mining as an engine of development, as the Secretary of Mining, Dr. Alberto Hensel, stated at the end of June: “Argentine mining has a competitiveness problem: if you compare the level of investment that the country received with Chile is 10 to 1: it is about US$30 billion of investments against US$3 billion that Argentina received.
Mining Investment Law
Law 24.196, enacted in 1993 and aimed at promoting mining investments, is a roadmap when talking about the competitiveness scheme of the extractive industries in Argentina with regard to prospecting, exploration, development, preparation and extraction of mineral substances.
The regulations provide guarantees of fiscal stability for 30 years from the presentation of the Feasibility Study, and allow mining companies investing in the country to enjoy a fixed tax burden without changes in the long term.
It also authorizes companies that have subscribed to this investment regime to deduct income tax from the total amount invested in “prospecting, exploration, special studies, mineralogical and metallurgical tests, pilot plant tests, applied research and other work aimed at determining the technical and economic feasibility of the same”; and provides an exemption from asset tax, provided that the companies maintain contributions to their respective assets for a period of not less than five continuous years from their entry.
Fraser Report: Another indicator
One of the competitiveness thermometers of the mining industry is the annual report of the Fraser Institute, a survey of key players from different jurisdictions to evaluate mining development, policies and overall performance in each region. The survey is designed to elicit the views of managers and executives on investment barriers in jurisdictions with which their companies are familiar, and asks respondents to analyze 15 policy-related factors and how they influenced company decisions.
In 2019, the survey was distributed to 2,400 industry professionals and, with a total of 263 responses from 76 jurisdictions, the potential of mining provinces, states and countries was ranked according to the extent to which “public policy factors encourage or discourage mining investment”.
For this latest edition, the investment attractiveness index placed Argentina’s provinces in an intermediate position, from the middle of the table to the bottom, although San Juan, located only four positions after Chile and three before Peru, showed that the country has great potential if public policy is adjusted and long-term guarantees are provided. Followed by San Juan (22nd), Salta took 36th place, Catamarca 44th and Santa Cruz 53rd.
What do we mean when we talk about competitiveness?
Officials and referents of the Argentine mining industry explain what competitiveness is and why it is so important to consolidate a competitive Argentina in these times.
“In order to make the investment magnet more competitive, San Juan has built a legal-economic stability that provides greater security” (Eng. Carlos Astudillo, Minister of Mining of San Juan)
“There are many common factors that influence competitiveness and focus on: quality, costs, stability and social license. To these, which are common denominators of the activity, we must add those specific to each jurisdiction and district. The variables mentioned, with the exception of quality, which is pre-existing, I consider them endogenous since they are manageable from the sector itself, which although, just as social license can be looked at from the perspective of an external factor, inaction or erroneous action by the sector causes adverse reactions that even paralyse the activity. In the concept of quality I include what is meant by the result of the geological polynomics / infrastructure that determines the amount of its feasibility and the perspective of the business. In any case, in order to make the investment magnet more competitive, San Juan has built a legal-economic stability that provides greater security for the capitals that observe mining. These variables are the constant challenge with which the activity must coexist”.
“While the work is continuous and permanent to give greater competitiveness to the mining sector in its maximum expression; there is a firm decision of the Government of San Juan to put in value the mineral resources that the province possesses. That is to say, to grant the mining right embodied in our Code the protection of its compliance through the determination of mining extraction and production. To this, we must add the call of the Governor of San Juan, Dr. Sergio Uñac, to the so-called San Juan Agreement that will allow us to establish a manageable vision of the future, providing security and predictability”.
“In this sense, we have convened a round table on mining activity in which we are holding a dialogue to obtain the appropriate model to provide the activity with certain, permanent and important competitiveness. From within our ministry we have made the organic modifications aimed at giving greater agility, not only to the administrative and legal procedures, but also to the control and monitoring of the investment that must be thought of in production. With regard to taxes, San Juan is exempt from provincial taxes because we are convinced that the indirect contribution is greater and highly positive with the generation of suppliers and work”.
“In addition, we have faced a strong training plan for the generation of highly qualified human resources and on the other hand, we have advanced in a coordinated communication action towards our society, to affirm the social license that mining has in our province”.
“To advance competitiveness, it is observable that technology and infrastructure have yet to be developed.”
(Eng. Rodolfo Micone, Minister of Mining of Catamarca)
“From an economic point of view, competitiveness is the capacity we have to compete, the ability to go out into the market and stay in it being able to satisfy what is demanded, focusing on improving our offer and products. The comparative advantage of Argentine mining is in its resource, in our case lithium, for example”.
“To advance in competitiveness, it is observable that there is still a need to develop technology, and infrastructure, both road and energy and communications, especially in comparison with other countries that have developed their mining industry”.
“If we want to improve our competitiveness, as a sector we must have a positive and transcendent vision and strategy that is adapted to the current economic demand. We have experience and have travelled a long road of learning, where the fundamental thing is the interaction of the actors of the activity: State, community and companies”.
“We still have not managed to have a long-term, predictable and reliable mining policy”
(Dr. Miguel Soler, Secretary of Mining and Hydrocarbons of Jujuy)
“By competitiveness we mean the ability to capture and sustain participation in world markets, inserting dynamic growth products into dynamic markets. Being a competitive country in mining issues implies the capacity to ‘produce’ its geological potential, and it is in this sense that its capacity to attract capital for prospecting, exploration, development and production of new mining ventures is of interest”.
“The integral development of each of these stages of the mining industry is the key to new discoveries, to increasing mining resources, to making feasible and increasing mining reserves, and to putting new mining ventures into production, requiring for each of these stages the participation in general of different types of companies, some dedicated exclusively to the search and others dedicated to the search, development and putting into production of new deposits”.
“As mining is an activity governed by international prices and ‘mining business opportunities in each country’, attracting capital for investment will depend on investors’ expectations about business opportunities and operating margins. In this way, and depending on the stages of mining development to which a company is dedicated, different factors such as legal security, mining and economic policy, the degree of development of basic infrastructure, the social license, and the administrative bureaucracy in the management of the necessary permits to carry out the activity will affect the competitiveness of each country.
“In recent years, the different national and provincial mining policies have been contributing to the development of the Argentine mining industry, achieving concrete situations in which Argentine competitiveness gained over other investment destinations; For example, with the growth of investments in lithium exploration, investments in expansion and new mining production projects in Jujuy, San Juan, Salta, Santa Cruz and Córdoba, but we still do not have a long-term, predictable and reliable mining policy that would allow us to increase our comparative advantages against other world mining destinations, and that would translate into an increase and diversification of investments in exploration, and in the development and production of new mining projects and others that have been waiting for some time”.
“The major pillars in building competitiveness are legal certainty and clear rules of the game”
(Dr. Ricardo Alonso, Secretary of Mining and Energy of Salta)
“The Argentine Republic is not a mining country. It is a country with mining. To be a mining country an important part of its GDP should come from mining activity and that does not happen. In any case, the country was on its way to achieving good competitiveness in the sector with the few provinces that can still mine. Likewise, in the framework of a pandemic of these characteristics we still do not know what the future scenario will be for companies, commodities and markets”.
“The major pillars in the construction of competitiveness are legal security and clear rules of the game, in addition to the accompaniment of nation and province to the mining enterprises so that they can develop and generate genuine work and genuine wealth. Mining is a complex clockwork mechanism where if one gear fails, the whole system fails. The metals of the Andes, hydrocarbons and agro-industry are three of the great economic pillars on which the national economy can be sustained.
“Having a competitive mining industry generates benefits for the country”
(Dr. Alberto Carlocchia, President of the Argentinean Chamber of Mining Entrepreneurs)
“There is a whole series of factors that allow us to measure the competitiveness of our industry, and that make a country more or less competitive in mining matters, regardless of its geological resources. Among them we can mention infrastructure issues, fiscal policies, regulatory aspects and labor and social issues”.
“Mining in Argentina is a relatively young industry since its consolidation took place only a couple of decades ago. Our country has great potential thanks to its natural resources, since it is among the regions with the largest reserves of lithium, gold, silver and copper. The first step to mobilize that potential was undoubtedly the Mining Investment Act, but we still have ahead of us a path of improvements needed to achieve a position closer to that of leading countries in the region. It must be understood that having a competitive mining industry generates benefits for the country, which translate not only into improved export earnings, but also into the generation of skilled employment, the consolidation of regional economies and, above all, the development of people.
“To achieve this, from the industry we work on several axes, including quality in production processes, sustainability, transparency, training and innovation. When we work together with the communities, promoting the growth of the value chain, training activities and the hiring of local labor, we are also encouraging competitiveness. But the competitiveness of a sector is made by all the actors in the sector. That is why it must be inclusive and the concrete, effective and efficient participation of suppliers and unions is an indispensable condition”.
Source: Panorama Minero.