(Reuters) – Colombia expects to sell exploration rights to its large untapped mineral resources next year as part of its effort to attract foreign investment to develop its gold, coal and silver mining sector.
The government’s new national mining agency will coordinate the sale of rights to develop the country’s unexplored mineral wealth as it aims to boost its income from mining, which only accounts for around 2 percent of the country’s economy.
Some of the biggest names in commodities, including Chilean state-owned copper producer Codelco CODEL.UL, have already expressed an interest in taking part in what the government hopes will turn into an exploration boom, Deputy Mining Minister Henry Medina Gonzalez told Reuters on Monday on the sidelines of the 5th International Exploration Forum held by Cesco in Santiago.
Speaking at the conference on Monday, Gonzalez said his ministry aims to lure foreign investment by clamping down on illegal mining, tightening up regulations and establishing a formal mining code.
The new mining agency, which starts work on May 3, will establish which properties will be sold as part of an auction next year, Gonzalez told Reuters on the sidelines of the conference.
The government estimates some 3 million hectares of “strategic zones” will be up for grabs, he told delegates at the conference.
The government will not participate directly in any of the projects, he told Reuters, keen to stress the government’s hands-off role.
“We don’t want to scare off investors. We want to be as predictable as possible,” Gonzalez told Reuters when asked if he would consider overhauling the royalty payment system.
This is particularly important given the turmoil seen in other Latin American countries in recent years: from Peru, where the government last year made dramatic changes to mining taxes, to Argentina, where the government on Monday unveiled plans to seize control of leading energy company YPF. [ID:nL2E8FG98O]
The aim is to increase total mining investment to above the $2.6 billion invested last year, Gonzalez told Reuters, but he declined to give a target figure.
Goldman Sachs (GS.N), Votorantim VOTOR.UL, BHP Billiton (BLT.L), AngloGold Ashanti (ANGJ.J), Anglo American and Glencore GLEN.UL are already investors in the country. The U.S. investment bank is said to be bidding for a Vale SA (VALE5.SA) coal project in the country, although Gonzalez said he did not know how far along that sales process was.
Codelco is also interested in setting up exploration in the country as the Chilean state-owned copper producer looks abroad for new resources in a bid to offset falling ore grades and output at its domestic operations.
More copper producers need to explore in riskier locations to stave off a massive shortage of ore output and keep up with demand, Michael Chender, chief executive of Metal Economics Corp, told delegates on Monday.
ROYALTIES MAY BE REVISED LATER
While the development of its mining sector is in its infancy, the government wants to keep royalties stable, but may consider revising the system at a later date, Gonzalez said.
The current royalty system is based on a percentage of the price of the commodity which is then calculated according to production volume, according to Claudia Jimenez, who is head of the government association created a year ago to promote private investment in large-scale mining projects.
Some politicians have called for a switch to a system more in line with Chile, which bases its royalties on a company’s income, rather than production, Gonzalez said. There is no imminent change planned yet.
“It’s not a country with a mining boom, (but) it has the potential. We need to understand the potential” before making changes to the royalty system, he told Reuters.
With development of its natural resources, the government also plans to overhaul its infrastructure, including its ports, waterways, and 2,000 km (1,242 miles) of railroad tracks. A major new highway through the center of the country is also planned, Gonzalez said.
The government led by President Juan Manuel Santos has made a two-year push to create investor-friendly conditions to try to woo foreign investment.
Mining only accounts for 2-3 percent of the South American country’s gross domestic product; oil makes up 83 percent of total royalties, according to Jimenez.
“Colombia is not yet a mining country,” she said.
But that will change if investment takes off. The country aims to increase coal output by 35 percent to 115,000 tons per year by 2014 from last year’s level of 85,000 tons and gold output by 30 percent to 73 tons from 56 tons last year, she said.
Strategic minerals, including silver, have been identified and exploration is greatly needed: less than 50 percent of the country has been explored, Gonzalez said.
RISKIER LOCALES LURE COPPER PRODUCERS
The move to countries seen as higher risk is needed as deposits in mature copper producing countries are depleted, analysts say. There is evidence that foreign companies are spending more in Colombia in recent years.
Colombia only accounted for 2 percent of total global nonferrous exploration spending in 2011, but its proportion of Latin American spending has grown to 10 percent from less than 3 percent in the last four years, Chender said in his presentation.
Companies are becoming more open to risk after a dramatic retrenchment during the global economic crisis in 2008 and 2009, but tolerance for risk has not returned to 2007 levels.
The rate of converting a copper discovery to development will fall because of challenges from rising costs and difficult operating conditions, but demand is rising.
“There’s our problem,” said Chender, noting Colombia is “an outstanding example” of how a country can transform itself to become more investor friendly.