The Palliser Report is a compilation of the discussions and views expressed at this Diggers Resource Conference and the observations of the Palliser Group.
a. South American Diggers Conference: This Resource Conference was one of the first in Australia to focus on the resource issues in South America- its potential, its economies and the business opportunities.
It had important representation for the Ambassadors from Colombia, Brazil, Peru, Mexico and Chile who gave passionate presentations about their respective countries dealing with legacy issues and perceptions. They "show cased" the potential, economic and political performance and confronted the perceptions of problems in governance, economics and structural reform.
Company testimonials provided very positive examples of resource potential, commerciality & success and how to operate with "in-country" management and expertise to maximise the success of the venture.
Currently there is no "appetite" for funding resource developments in Latin America from Australian markets. However there are some companies which have the potential to provide exploitation results that will start to change investor attitudes.
As noted in the discussion on capital markets, it is only within the last 3 years that investor attitude to funding via ASX listings in West African resource developments has changed to the point where the ASX and AIM(UK) now provide about 50% each of the equity capital for African mineral developments by Australian companies. This change occurred based on successful exploitation campaigns of Australian companies that have resonated well with these capital markets to generate some investor confidence.
b. Conference Focus: The Conference highlighted the advances in the area (South America) in terms of leadership role in resource exploitation during the last decade underpinned by advances in national economic performance, improved government regulation and an acknowledgement of the substantial resource potential in copper, iron ore, zinc/silver, coal, gold and precious metals.
Latin America is highly prospective, underpinned by attracting about 26% of global resource exploitation budgets in 2010 (Australia 13%).
Latin America from Mexico to Chile is considered a resource rich province with some of the regions vastly underexplored. Estimates suggest that only 30% of the landmass of Brazil, 1.4% of Peru and 51% of Colombia has been actively explored for resource wealth. There are continuing opportunities for successful exploitation strategies.
Mining strategies for Peru, Chile and Brazil aim to attract the multinational to develop their resources while Mexico and Colombia are encouraging mid-size companies to participate in their resource development with the objective of maximising development through diversity of companies and ideas.
c. Changing attitudes: An important part of the Conference theme related to the focus on all stakeholder considerations when doing business there. It is the expected norm for business behaviour to exploit permits and discoveries employing an active community consultation process, maintaining respect for cultural issues, adopting sustainable exploitation practices, adhering to the environmental codes practices and understanding the law and regulations on these aspects.
Access to and judicial use of water resources was a key consideration in developing an exploitation strategy that was consistent with local needs.
Governments are developing innovative investment policies to encourage new exploration activity, such as Chile with its Fenix Fund, to give SME explorers access to funds for 50 projects over the next 10 years. These are the companies with the new ideas to challenge the existing paradigms!
d. Latin America's Core: Perception is not reality in these important countries led by Brazil, Colombia, Peru, Chile and Mexico where current GDP growth for the region was about 5.1% in 2010 (OECD about 2.3%). The estimate for 2011 is 3.5% (OECD about 1.7%) but these countries are not immune from the effects of an EU contagion and /or a slowdown in China demand as is evident in the 4th quarter 2011.
Composition-The region has two languages (Spanish in 16 countries and Portuguese in Brazil) with about 540 million people (aging and needing skills upgrades). However there is expected to be improving literacy and living standards over the coming decade and the collective economies will have a GDP that is about 80% of mainland China's GDP. This is an impressive regional market with 80% of its trade done outside the region on a north-south axis. On the other hand it has a growing dependency on exports to China and Asia away from traditional North American and EU markets.
A key issue for the region is infrastructure development in all countries to underpin energy supply, health, transportation and urban growth and improvements to the environment. Improved transparency will increase productivity and sustainability. Wealth distribution is critical.
The region has 6 countries that are considered "investment grade" Brazil, Colombia, Chile, Peru, Mexico and Panama.
There is political stability in these major resource countries that underpins investor risk taking. It is apparent from the Ambassadors' presentations that this is a core theme to new investors in the region, i.e., political stability, market related fiscal regimes, investor rights are critical to their national investment and growth strategies. In essence, the global market place and its demands for administrative transparency, the ability to earn returns commensurate with risk and adhere to growing demands of CSO, is ensuring that each country has a competitive regime to attract FDI.
There have been significant changes over the last decade with the commencement of structural reforms in resource fiscal terms, protection of investment rights and intellectual property rights as well as banking (including repatriation of dividends and taxation), but the challenge is to build on this start.
The challenges for the region are to promote wealth distribution, improve educational and skill opportunities and resist the temptation for protectionist policies when trade agreements "kick-in" as the importance of China to their economies grows. Finally, the balance between community needs and stakeholder returns needs to be attuned to cultural issues.
e. Dominant Economy: Brazil is the largest economy (Australia fits in the physical dimensions of Brazil) with 192 million people and a GDP of circa US$ 2200 billion which is underpinned by a large manufacturing sector (40% of GDP) and a large internal market equal to 60% of GDP. The latter is founded on the exploitation of its massive hydrocarbon reserves in the offshore Santos Basin which bring it into the top 10 of global hydrocarbon producers.
f. Investment Allocation: Austrade estimate that some AUD$ 240 billion will be spent on development projects (not including exploration expenditure) in the next 5 to 10 years (to 2020) with 32% going to Chile, 24% to Peru, 12% to Brazil and 9% to Colombia. Colombia has the fastest growth in exploration resources spending, attributable to increased competition for exploration permits (successful allocation of new energy exploitation permits The Open Round 2010 ("TOR") June 2010) and enhanced transparency in resource administration.
g. Australian Investors: The Australian investor understanding of South American countries is limited by distance, unfamiliarity with the different markets, cultures, governments and perceptions about operating in these far-off regions. Currently there are about 250-300 Canadian resources companies (within the same time zones as Colombia) that operate in both energy and resources exploitation covering 1000 + resource projects. I In 2009 they raised $AUD 3.0 billion capital on the Toronto Securities Exchanges. They also have active support from the Canadian Federal Government Department of Foreign Affairs (an active sponsor in association with the Alberta Provincial Government of the Colombia International Petroleum Conference & Exhibition November 2011) in competing in this Latin American market. This support provides Australia's competitors a great advantage over our resource and energy industries to compete in this lucrative resource market.
h. Company presentations were on the whole excellent, providing information on the technical and commercial challenges. A reoccurring theme was "in-country" management which signalled the use of a blend of local experienced expertise with expatriate support. It makes for easier dealings with all stakeholders and acknowledgement of contemporary thinking in resource exploitation. In addition there was strong focus on CSO and indigenous issues, environmental practices and judicial use of water resources.
Testimonials indicated the benefits of a thorough due diligence process to create an understanding of the legal process for the business, developing partnerships with reputable local partners, having transparent JVs and dealing at all time with community and stakeholder issues.
i. Sundry Comments.
i. Funding Sources: The conference was advised that in seeking China funds for resource development there was a need to understand the Chinese drivers for approval;never make an announcement until the money is in the bank! Their needs are driven by their own cultural experiences. In China for resource development, there can be as many as 41 government approvals from all levels required to advance to the production phase and that process has coloured their own "due diligence" process. Similarly in dealing with indigenous and minority rights, they have limited knowledge on how these matters are managed. This compares to Australian "due diligence process" that puts physical assets like transportation as a key matter for resolution. Understanding the DD focus of the capital source is critical as much as having alternative option sources to create some competitive tension.
ii. Security - It is the "elephant" in the room when discussing investment in Latin America. Through perception and not reality, investors are drawn to believe it is still a major issue and there is no adjustment for success achieved. This is similar to inferences drawn from the "Hollywood film constructs" about life in certain countries, such as the films with Chuck Norris about MIAs in Vietnam with a majority of Americans still believing that they exist today - 35 + years from the end of the Vietnam war!
Latin America, from Colombia to Chile in the countries discussed, have made great strides in improving community and investment safety by reducing the threats of terrorism supported by active social redistribution strategies. There is always room for improvement, but perceptions are changing and this conference was an important step in that process.
Geoffrey R Widmer
28th November 2011
The preceding commentary is a compilation of views and data expressed at the 17th to 18th November 2011 -South American Diggers 2011 Conference expressed by the various participants. The Palliser Group has not verified these facts as presented to the conference and has not made independent enquiries as to the validity of the statements made or of the data presented. The Palliser Group recognises the authors of the various views as detailed in the South American Diggers 2011 Conference.