ROOTING AROUND

Colombia 2015 | ENERGY & MINING | REVIEW: MINING

Minerals in Colombia have been mined for centuries; however, today the country is beginning to establish a strong commercial atmosphere in the sector.

When it comes to mining, Colombia is one of the world leaders. Its long history, predating European explorers by centuries, has helped to establish the sector and the country as a key performer. Colombia is the ninth largest nickel producer globally and currently hosts the 10th largest coal mine in the world. While the sector has faced a number of problems over the past few decades, a number of government initiatives look set to create a more stable and investor friendly environment.

GOLD

Since well before the Incan times, people in Colombia have been mining gold. The tools and methods may have changed, but people's desire to mine the precious stone still remains strong. However, due to quite strict environmental legislation, it has not always been easy for mining companies to acquire to necessary permits. On March 9, 2015, the South American company Red Eagle Mining became the first in the country to receive a permit to mine gold under modern environmental legislation. The company was granted a full permit with no conditions to mine San Ramon gold mine for its entire life span. Once complete, San Ramon will be the largest gold mine in the country. This was welcome news for the sector and Red Eagle Mining, which after a feasibility study estimated that the mine will produce an average 50,000 ounces of gold per year over an 8-year production period. Total reserves are estimated to be 2.42 million tons grading 5.2g/t of gold for 405,000 ounces. The long-term price of gold is predicted to stand around $1,300, meaning the project is worth around $526 million currently. As work begins, the mine is likely to yield more gold as exploration work continues throughout. The study estimated that the cash cost of producing one ounce of gold from the mine would come in at $596 with a post-tax rate of return of 53% according to a Red Eagle company report in March 2015. Red Eagle hopes to begin construction in mid-2015 with commercial production beginning in sometime in 2016; however, the next major problem is going to be raising the $74 million required to build infrastructure for the mine. In September 2014, Red Eagle had $2.5 million leaving it somewhat short of the target. Still, the company looks set to raise between $80 million and $85 million through a combination of debt and equity for construction and drilling related activities. In fact, just after receiving the permit, Red Eagle was able to raise $65 million in financing from Orion Mine Finance. Red Eagle agreed a production plan payment of $30 per ounce on the first 405,000 ounces of gold produced. In addition, it will issue 5 million warrants to buy Red Eagle stock, which will be exercisable over a 5-year term at a predetermined price. The news will be welcome across the entire sector, as Red Eagle has proven to everyone that it is possible to acquire a permit for a gold mine in Colombia as well as financing.

COAL

The coal sector in Colombia has long been the backbone of the mining industry. Colombia was the fourth largest exporter of coal in 2014 globally and produced 88.6 million tons of the black stuff according to the National Mining Agency, which represented a 3.6% increase on 2013 of 85.5 million. Early forecasts for 2015's production looks set to top the 100 million tons mark, representing a significant milestone in the country's coal mining production. And with the expansion of the Panama Canal nearing completion, the price of transporting exports will fall providing an opportunity for the coal companies to increase exports.

The largest miner in the country is the joint venture Cerrejon, which produced 34.4 million tons of coal in 2014. The Cerrejon mine is located in the Guajira peninsula and is not only the largest mine in the country, but also the 10th largest coal mine in the world. The mine has an estimated 754 million tons of recoverable coal, with 661 million tons of that proven and 93.2 million tons probable. The mine is a joint venture between Anglo American, BHP Billiton, and Glenco Xstrata, with each holding a 33.3% share. An expansion of the mine began in 2011 and was set to be complete in 2014 taking the mines production capacity from 32 million to 40 million tons per year.

The next largest mining company in the country is Drummond at 26.8 million tons at its La Loma and El Descanso mines, and then Glencore Xstrata at 12.6 million tons at its Calenturitas mine. There is also the smaller Colombia Natural Resources (CNR), which is an affiliate of Goldman Sachs. CNR produced 869,724 tons in 2013 at its La Francia mine; however, this mine was forced to close down at the end of 2013 due to environmental regulation amendments that came into force regarding companies switching to a less-polluting method of loading coal onto ships. CNR has now reached a deal with the Carbosan terminal of a local port to continue exporting its coal. This regulation change also forced Drummond to halt exports between January and March 2014 while it also switched its methods to comply with the new legislation.

NICKEL

On the world stage, Colombia is a well-known nickel producer and the ninth largest miner on the world. In 2014, the country produced 75,000 tons of nickel, which was the same as the year before. One of the largest miners in the country is BHP Biliton's Cerro Matoso mine, which has both a lateritic nickel ore deposit and a low-cost ferronickel smelter. BHP has been in Colombia for a number of years when it commenced mining in 1980 with the production of nickel beginning in 1982. In 1989, BHP increased its ownership in the mine from 53% to 98.8%, and a decade later increased it even further to 99.94% with the remaining 0.06% belonging to the employees of the mine. The mine is sat on the largest reserve in Colombia with an estimated 108 million tons of ore at 0.57% nickel, or 615,000 tons of nickel metal. Between 2Q2012 and 2Q2013, Cerro Matoso produced 50,800 tons of nickel, which represented a 3.9% increase in YoY terms. While BHP has been working well in the country, in August 2014 it announced there would be a demerger, which would involve Cerro Matoso. Coming as something of a surprise to many, BHP created a new entity that would involve Cerro Matoso that would be called NewCo. Matoso would be the centerpiece for NewCo, but would not include BHP's other nickel mine in Colombia Nickel West. The CEO of BHP, Andrew Mackenzie announced to the press that Nickel West was neither a good fit for BHP or NewCo and would be sold at the earliest opportunity. The reason for the split is that BHP was looking to reduce the size of its portfolio and move toward a simpler one based on iron ore, copper, coal, and petroleum. NewCo is poised to do well after gaining a strong portfolio of mines from around the world, and is expected to start of with positive cash flows from the get go. The company will take over the employment of 24,000 employees and contractors from BHP globally.

The mining sector in Colombia is a dynamic enterprise, and likely to remain a driving force behind the economy, even if it is not always as prominent as oil and gas.