A Toronto Stock Exchange listed company, Mayor Drilling, recently reported what many in the Colombian gold community have been suspecting for some time: that so called “geopolitical concerns” are blighting the “success story” of a country which discovered 96 million ounces of gold in recent years, according to figures released by the industry’s ‘Colombia Gold Letter.’
Few question the extraordinary geological potential of Colombia, but a thriving exploration and mining sector requires facilitative legislation to allow development. The nation’s Attorney General, Alejandro Ordoñez, also recently highlighted the importance of the nation’s mining sector by stating that the government could not afford to “cast aside” an activity that generates 300,000 jobs and produced royalties in excess of 8 billion pesos between 2008 and 2012.
Although gold exploration represents 2.4% of the GDP, President Juan Manuel Santos seems to be making all the right overtures calling the mining sector the “motor of development.” So if there’s a crisis, the answers can hardly be superficial.
There seems to be a lack of understanding of the sector, from its processes and value chain, amongst those that make and implement policy as well as, by those who oppose the development of a modern mining sector. A simple example illustrates this. A concession contract gives an exploration company the right to explore the subsurface. It has no rights to the surface. When a deposit is discovered that is economically viable to produce, the surface a mining company will seek to buy is only a tiny fraction of the subsurface area it explores.
In Colombia, the news media tends to report concession areas as though they were surface rights, whose use is being denied to farmers and their communities. “At one point, as much as 40 percent of territorial Colombia was being petitioned for by foreign companies…” stated a recent article on the website, Colombia Reports. This kind of reporting makes communities feel threatened and encroached upon.
The sector has suffered from poor enforcement rather than poor laws. The Mining Code, Law 685 of 2001 is a good, workable piece of legislation which functioned ineffectively because the regulations needed to make it work were never fully developed, resulting in uncertainty and imprecision.
The cause célèbre of the high Andes wetlands – páramos – is a case in point. Mining in páramos has been outlawed, but páramos are still are not legally de- fined as environmental reserves. In the Attorney General’s report, Ordoñez points out that while mining activity is restricted or excluded from almost 60 percent of the Colombian territory, “the environmental authorities have not delivered the zoning and arrangement works for these protected areas.”
A lack of human and financial resources to administer, in addition to the failure to develop and issue norms, have resulted in a backlog of 19,000 concession applications. Despite the dramatic growth in the sector, rather than seeking to correct these failings, the government of former president Álvaro Uribe Vélez passed a new law (Law 1382 of 2010) which became politicized and distorted in the eyes of public opinion.
Since Uribe’s legislative attempt was struck down by the Constitutional Court in 2011, the Santos administration was forced to do what should have done from the outset, provide resources for its Ministry of Mines (MinMinas), and which has led to the creation of the mining agency, Agencia Nacional de Mineria. Clearly, Colombia has the effective tools to oversee a bouyant sector.
Exploration still faces an onerous administrative burden to advance in projects. “There needs to be a simpli- fied process for all permits with a cen- tral environmental authority. In Peru, if the authority does not review permit applications and respond within a defined amount of time, they are automatically granted. The principle of administrative silence puts the onus on the authority to process more efficiently,” states Albert Crutchner, CEO of KTTM Geophysics.
Political myopia and economic power interests continue to blight the sector. The mining value chain is quite simple: explorers look for deposits, which they then hope to sell to larger companies to develop. Politicians, however, confuse the public with pejorative terms, such as “speculation,” leading the national government in 2011 to declare 10 minerals (gold, silver, copper, iron, tantalum, phosphate, manganese, metallurgical coal, thermal coal and uranium) as “strategic” and delimit 20.5 million hectares as reserves for the state to dispose of through open and transparent auctions. If Colombia considers dealing in mining titles “speculation,” it effec- tively nationalizes speculation in much of the country.
The auction of exploration blocks is common in the oil and gas sector, and something Colombia through its agency, Agencia Nacional de Hidrocarburos, has executed successfully. Yet mineral exploration is a very different “beast” to oil and gas, and therefore, requires a different approach.
MinMinas claims it wants to ensure that those exploring have the technical and financial capacity to do so, but the financial market is very efficient in ensuring that this occurs through the al- location of capital. “In the end it’s the markets and investors who decide which are feasible projects and reward those with good enough results,” claims Vice President of Equity Sales at Bancolombia, Rupert Stebbings. “Those that disappoint investors will rightfully fall by the wayside.”
In Colombia mineral explorers pay US$9 per hectare for an exploration concession. Although this may seem like a small sum, if a concession is granted for 20,000 hectares a company must pay US$180,000 per year. Exploration companies hence have an incentive to work effectively to either find minerals or walk away. All the state needs to ensure is administrative efficiency so as to not asphyxiate the mining value chain.
Exploration is relatively non-invasive. Regulatory focus should concentrate on development and execution once deposits have been found. Although President Santos delivers a promining rhetoric, it seems no one in his government listens. The recent widespread farmer’s strike shows a country leaning towards nationalist policies, questioning the coverage and impact of Free Trade Agreements.
The agricultural strikes are grounded in a philosophy of government “hand-outs” including subsidies, price floors and rolling back the advancements of the FTAs. If striking is the way to instigate reforms in Colombia, we may see potential explorers setting up their own road blocks and grinding the mining “motor” to a complete stop.
About the author: Paul Harris is a mining consultant and industry expert based in Medellín.