In the past four years, there have been marked political shifts in most of the major mining jurisdictions in Latin America. In most countries, these changes have intensified the political risks faced by Canada-based companies with local operations. This primer briefly examines the topic of political risk before providing an overview of the political context in Latin America and then discussing some strategies that may be used by Canadian miners to mitigate risks.
Before analyzing the Latin American political context, we must understand political risk itself. Canadian miners face all kinds of risks in their businesses in Latin America: market risks, credit risks, economic risks, geological risks, metallurgical risks, other technical risks, legal risks, and safety risks, to name a few. Most risks are not political risks. Political risks include:
- The risk that politics may cause changes to laws and regulations, which adversely affect Canadian miners. This risk may be heightened if politics are unstable or polarized, creating big swings in policy. This risk may also register at a high level in a situation of seeming stability if one is dealing with a somewhat autocratic country, with the potential for a watershed event or sudden rupture. This risk is usually lower in a context of democratic stability. Note that, if laws and regulations do change, one must assess their likely permanence or durability. Especially in a business such as mining, with long time horizons, and with permitting phases that typically outlive political cycles, to say nothing of the duration of mine plans themselves. Canadian miners must assess the political situation of a host country over time, rather than at a point in time.
- The potential that, even if rules are relatively static, they are just not clear. In Latin America, the rules may often be ambiguous or untested. In direct relation to mining, this is often the case in countries or sub-national jurisdictions that have had less chance to mature as mining jurisdictions. For example, institutional expertise around the implementation of assessment and permitting regimes may be lacking.
- The risk that rules, though clear, may not be enforced due to weak government, or the existence of extralegal power structures. Often either weaknesses in state power or political considerations, such as the leverage of community or Indigenous groups, may make the strict by-the-book enforcement of the law difficult to predict or simply not of controlling relevance.
- Corruption. Corruption should be flagged as a risk unto itself. It can directly impact miners if, for example, bribes are solicited or a competitor or litigant pays bribes to get ahead. Indirect impacts can be inflicted through various other corrosive effects on the business and investment climate, as discussed further below, and can exacerbate any of the other political risks discussed here.
- The absence of the rule of law. In some countries in Latin America, the judiciary is poorly funded or not sufficiently professionalized. At times and in some countries, it is politically influenced or is otherwise simply corrupt. All of this impacts the rule of law, creating uncertainty around disputes, questions of mineral title, permitting and tax questions and other issues .
- Geopolitical risks. For miners, a geopolitical risk is a risk that something changes outside the country in question, or in the relationship between countries, which makes investing in a given country less certain or less attractive. The Inflation Reduction Act in the United States and its potential impact on battery metals projects in some countries that lack free trade agreements with the United States is an example. Another example is the Canadian government's recent use of the Investment Canada Act to order that Chinese companies divest from three lithium companies listed in Canada, for national security reasons.1
- Traditional political risks. Traditional political risks, including outright nationalization, capital controls, governments preventing the repatriation of capital or profits, and the like, continue to lurk. These are things that happened a lot in the 20th Century, but which have been comparatively rare over the past two decades in the region. As the 21st Century wears on, we may see a return to these risks, including as a result of the resource nationalism and geopolitical fracturing discussed further below.
LATIN AMERICAN POLITICAL CONTEXT AS OF EARLY 2023
The beginning of a rightwards swing?
With the return of Luiz Inácio Lula da Silva to Brazil's presidency in January, the broad march of the political Left across the continent, which has unfolded progressively since late 2018, is now complete. Ecuador is now the only significant regional economy with a right-wing government, and a fragile one at that.
However, most of the new governments of the Left are proving their ability to govern practically. With the possible exception, at times, of Gustavo Petro's new government in Colombia, few have sought to govern in a overly doctrinaire manner. In addition, while the Left has risen of late, a rightwards swing may be about to start. Arguably, it already has with the ousting of Pedro Castillo in Peru at the end of last year, in fact. Argentina is expected to elect a market-oriented government this year,2 and although Chile's next election is a way off, polls are showing popular dissatisfaction with Gabriel Boric,3 who also suffered a thumping defeat in Chile's constitutional referendum last year.4
Mexico is predicted to stay with the leftist Morena party in elections next year, but President Lopez Obrador, who will not be running again, has already seen his parliamentary majorities cut in the most recent mid-terms in 2021.
Latin American politics are relevant to Canadian miners because the political Left is typically less friendly than the Right to foreign mining companies. The potential for a rightward swing in regional politics is something for Canadian mining companies to watch for in 2023 and beyond.
There is also a populist, anti-incumbent tendency that has emerged in Latin America, as elsewhere. This trend, more than left-wing sentiment in general, may account for some recent victories by the Left and, paradoxically, also contribute to the current promise of the Right in some countries. This may augur more political instability in general. On the other hand, the Covid-19 pandemic's effects on Latin America and how it contributed to political instability can't be underestimated, and with the pandemic's effects quickly diminishing, there may be some political settling.
There has been a crescendo of resource nationalism in Latin America in the past three years, from Mexico to Peru and Chile, with many proposals to increase the state role in the mining industry or to outright nationalize some parts of it.5 Resource nationalism is thus an important part of the broader regional political context for Canadian miners but, as with political ideology, there are caveats.
First, the rhetoric has far exceeded the reality so far. The extremes have not been realized in Chile, for example, with the new constitution. The constitutional proposal that was voted on late last year did not contain the hard-Left policies on resources that the Communist Party and others pushed for (generating international headlines in the process), and the diluted draft was resoundingly rejected by voters.6 The new proposal that will be drafted later this year will likely be even more moderate, given guardrails that political parties have put in place. Meanwhile, in Peru, the Castillo government loudly contemplated changing the rules around mining to reduce perceived foreign exploitation of the country, but it never wound up taking any concrete steps that were prejudicial to foreign investment in mining. To the contrary, the Castillo government's most significant legacies include the permitting of a large new foreign-owned mine.
In Mexico, Lopez Obrador's proposed constitutional reforms – which would have fully nationalized the electricity industry and various strategic minerals – failed to achieve the required congressional supermajority in 2022. Lithium was nonetheless nationalized in Mexico in 2022, in a fairly clear violation of the Canada-US-Mexico trade agreement, and the risk of further minerals being nationalized on strategic grounds remains present.
Geopolitics: Latin America's Place in a World that is Fracturing into Competing Blocks
Despite their geographic proximity to the United States, many countries in Latin America hesitate to align with U.S. foreign policy stances. In 2022 many countries in the region, including its largest economies – Brazil and Mexico – staked out vaguely non-aligned positions in relation to Russia's invasion of Ukraine in direct defiance of the NATO approach. Tellingly, in the recent elections in Brazil, this was one of the few things that the two otherwise diametrically opposed candidates, Bolsonaro and Lula, seemingly agreed on.
What does this have to do with Canadian miners? As globalization begins to fracture and the world slips into multipolarity with competing blocks,7 it is important to keep track of where Latin American countries stand. In practical terms for miners, geopolitical trends may have significant implications under emerging industrial policies, such as the Inflation Reduction Act in the United States. As the US looks to nearshore critical minerals under the Act, some countries will end up inside the fence and others outside it. For example, to unlock the full consumer credit for electric vehicles, a percentage of critical minerals in the battery must have been processed in the US or a country that has a free-trade agreement with the United States. Notably, Argentina, which has received significant investment in lithium projects, does not have an agreement, while Chile does.
This occurs in a context of very high Chinese influence in Latin America (excluding Mexico, which sometimes appears to be where the US draws the line on this influence, regionally). Chinese state and state-backed organizations have become important players in South and Central America, which, among other things, means Western mining companies have more competition for mineral assets than in the past.8 Chinese competitors often bring infrastructure lending and enhanced government-to-government relationships to the table, which can give them a leg up.9
Finally, President Lula has begun to make a new push for regional integration in South America, including a mooted currency union. If he and other likeminded leaders make much headway, this trend could make companies from outside the region, like Canadian mining companies, less competitive in Latin America as compared to regional rivals. It must be noted, however, that little has come of past efforts to form an effective regional block.10
Corruption and the State of Democracy
No overview of the Latin American political context would be complete without surveying the problem of corruption. It remains pervasive in the region and in many countries it is perceived to be getting worse.11
Countries ranging from Chile and Peru, to Brazil, to Mexico have seen their scores worsen on Transparency International's corruption index over the past 10 years.12 Among mining jurisdictions, Mexico in particular is towards the extreme end in terms of being corrupt.13
Canadian companies know the dangers of becoming enmeshed in corruption. Where corruption is endemic, it can force executives to choose between projects being stalled or risking liability under the Canadian Corruption of Foreign Public Officials Act14 or the long-arm of the US Foreign Corrupt Practices Act.15 But beyond the risk of companies themselves becoming involved in corruption, are there other consequences of operating in a corrupt place? Does corruption have a broader negative effect on the business environment?
The answer is an emphatic yes. Studies have shown that where corruption is prevalent, there are slower timelines for projects, greater levels of friction and inefficiency, higher costs, market distortions, less competition, and weaker investment returns.16 Businesses must also contend with greater regulatory uncertainty and policy unpredictability where there is corruption.
What's more, increasing corruption has often advanced apace with more general erosions in countries' democracies. According to the Economist Intelligence Unit (EIU), several mining countries in the region have become less democratic over the past several years, including Mexico, Brazil, Bolivia and Peru.17 Others, like Chile and Argentina have seen improving democracy scores, but, with the exception of Chile, none of the significant mining jurisdictions is ranked as a "full democracy."18 Most are ranked as flawed democracies, while several others, including Mexico, Peru and Bolivia are not ranked by the EIU as being democracies at all.19 They are ranked as having hybrid regimes, somewhere between democracies and dictatorships. For example, although Mexico has elections, it has a long history of one-party rule which spanned most of the 20th Century under the PRI (from whom Morena may steal the mantle). This tendency is attributable to weak rule of law, including unreliable judicial independence, and flaws in the underlying institutions that would otherwise allow Mexican elections to be truly free and fair. These flaws are seen to have grown worse in recent years, and President Lopez Obrador has recently proposed a set of reforms to Mexico's electoral commission which would weaken and politicize it, further eroding Mexico's status as a democracy.20
The consequences of operating in non-democracies are myriad. The problems of corruption and patronage are ever-present, adding drag to economic efficiency and heightening the risk of non-compliance with Canadian and US anti-corruption laws. Weakened or non-existent rule of law, including unfair or arbitrary local courts, may create risks to property and mineral tenure rights, as well as permits.
Another regional political trend is the upward pressure on taxes caused by the pandemic and the increased spending it required. This includes proposals to specifically increase taxes on mining.21 So far, most changes have been modest, but all eyes are on Chile this year to see if it moves forward in introducing a quite onerous new mining royalty, which has been put forward several times in different iterations by left-wing actors over recent years. The proposal is currently being debated by the Chilean congress and, although it may yet be altered, if passed later this year it is estimated to increase the total tax burden on some major copper mines by twenty percentage points or more in some realistic copper price scenarios. Even if passed, however, its full impact will not be felt until the expiry of historical tax stabilization agreements currently enjoyed by many miners.
If Chile's new royalty passes, Canadian miners must turn their attention to whether other countries will follow suit. In an increasingly connected region, political ideas that take root in one place tend to quickly transfer to neighbours. For many years in the past, in relation to mining, Chile set the benchmark as a destination for foreign mining investment and, with its market orientation, often served as an unflattering comparator for other countries in the region. Now, as the Chilean government moves to capture more mining profits for the public purse, it may also serve as a benchmark for this model. It is also worth keeping an eye on tussles unfolding between government and miners in Panama, Mexico and elsewhere over government revenues to see if any have precedential effects.
The Power of Indigenous and Community Groups
For Canadian miners operating in Latin America, community relations have become much more important over the past decade. Everywhere, local communities and especially Indigenous groups have gained political leverage. This is partly due to the influence of foreign NGOs importing foreign concepts, sometimes lifted directly from the Canadian context. It is also a result of new international law, mainly the United Nations Declaration on the Rights of Indigenous Peoples.22 Given the political implications when communities stand up in opposition to a project, many governments have become less willing to intervene or more tepid in enforcing the law on behalf of foreign miners. Reputational risk for Canadian miners is always engaged in these scenarios as well. Increasingly, national or state-level government support for a mine cannot fully substitute for local-level support. A well connected ally from the local elite is no substitute for investing in doing right by the local populace.
In some Latin American countries, national leaders have recently given unusual support to anti-mining sentiment. In Mexico, President Lopez Obrador has been reliably hostile to mining, and has frequently singled out Canada for complaints. Lopez Obrador will be term-barred from running in 2024, and much of the party's popularity and its policies are directly attributable to him. It is yet to be seen whether Mexico will continue on the current path beyond this year. For now, however, Lopez Obrador's position on mining is manifested through Mexico's current policy of refusing to grant any new mining concessions, delays and antagonism encountered in mine permitting and other administrative obstacles.
Meanwhile, in Colombia, President Gustavo Petro has appointed critics of mining to the lead the mining ministry and has given much publicity to his government's opposition to a wide variety of projects. This has effectively frozen some projects until, perhaps, the end of his government.
POLITICAL RISK MANAGEMENT STRATEGIES
Before attempting to mitigate political risks, Canadian companies operating in Latin America must first assess political risk in Latin American countries objectively. Companies must avoid undue reliance on a country's "brand." Chile, for example, developed, over 30 years, a brand as a very stable, market-oriented, mining-friendly country. In recent years, as Chile has moved in a different political direction, its brand has continued to adhere and some investors have not looked deeper. Chile remains an attractive country for investment, but miners must make clear-eyed assessments of the investment climate to gain a fulsome understanding of the risks involved.
Investors must also be wary of hype. Many countries go through cycles where, one year, half the government cabinet is making the international circuit declaring that the country is open for business and welcoming mining investment, and, the next year, the country has moved in a drastically different direction.
With a clear sense of the risks they face, Canadian mining companies can employ various strategies to mitigate their political risk exposure in Latin America.
Political Risk Insurance
The first and most direct approach is to procure political risk insurance, which typically covers loss owing to more extreme political risks such as expropriation and direct violence. This is often contracted, whether through the Multilateral Investment Guarantee Agency or other insurers, in connection with project financings. However, the risks that Canadian miners face in the region mostly spring from less extreme factors and trends, such as those concerning taxation, stakeholder relationships, and the like, which are usually not insurable. While there are concerns related to the rule of law in many countries, the non-discriminatory domestic policy decisions made by authorities in the region would usually fall outside the scope of insurance coverage. Nonetheless, political risk insurance is sometimes advised, and our firm is well equipped to help Canadian miners with political risk insurance policies.
Next, there are country-to-country investment treaties, whether bilateral or multilateral, which can, like insurance, provide strong protection against discriminatory practices by host governments and other more extreme types of political risk. Canada is party to investment agreements (or free trade agreements with investment protection chapters) with most of the largest mining jurisdictions in the region. Brazil is the most notable exception.
These treaties typically require host governments (with some exceptions) to accord treatment to foreign investors no less favorable than that they accord to their own companies. But they generally do not prevent countries from adopting non-discriminatory measures that they consider to be in the public interest.
Moreover, governments do not always adhere strictly to their treaty obligations. Mexico is already testing the new Canada-US-Mexico Agreement with its lithium nationalization and other measures on energy and power. Legal challenges are pending within Mexico, and Canada and the United States are discussing the matters with Mexico at a diplomatic level.
But these treaties are nonetheless valuable. For example, their "full protection and security" clauses often mandate host countries to provide police security when there are disturbances at a mine. Canadian companies should therefore take into account treaty protections in setting their corporate holding structures. Too often, companies give prominent importance to tax considerations in determining how to hold assets abroad and give short shrift, if any, to investment treaties. Our firm is available to advise companies how to take advantage of Canada's investment treaties.
Double-Taxation Treaties and Tax Stabilization
Additionally, it is important to consider the presence or absence of double-taxation treaties between Canada and host countries in the region. Luckily, Canada has such treaties with all major countries in the region,23 which can help to blunt the effect of some adverse host-country tax changes.
Some countries in the region also offer tax stabilization arrangements to foreign investors, including miners. Peru and Argentina, for example, have regimes to exempt investors from domestic tax increases.24 In the past, Chile operated a very successful such regime, under its Decreto Ley 600.25 However, this regime has lapsed. With the prospect of a significant increase in Chilean taxes on mining on the horizon, many investors surely wish that this regime were still in place.
Our internationally connected tax team has broad experience across the mining industry and is well equipped to assist with all tax challenges faced by Canadian mining companies operating abroad.
Local Stakeholder Engagement
Often, the best way to manage some types of political risk is through local stakeholder engagement and relationship-building. This means employing strategies like:
- Building and expanding stakeholder groups that depend on a mining company's success and have aligned incentives. The more local suppliers a company has, the likelier it is to weather political storms.
- Leveraging relations among third-party stakeholders so that they will keep each other in check. One stakeholder, such a community from which many mine employees are drawn, can often act as a bulwark against another that is antagonistic to the mine.
- Closely monitoring and prioritizing the quality and stability of community relationships. If the company is present in the local community, is attuned to its needs, and is aware of the sentiments and rumours of local inhabitants and responsive to them, it will face reduced political risk. Note that none of this is the same as "having friends in high places", although that can help too.
- Obtaining local government support when the central government is resistant. In some countries, while central governments display hostility to mining, state or local governments can be enlisted as allies. For example, in Mexico, although mining is almost entirely federally-regulated, it is much easier to get things done in some states, like Sonora and Chihuahua, because the support of local and state politicians for what they see as responsible, value-creating projects can make it politically costly for the federal government to stick to its anti-mining rhetoric.
- Allocating risks via contract. There is much that can done via contracts, with suppliers, customers, financiers, trade unions and others, to reallocate political risk in a manner that both shields a mining company from bearing all of its risks alone, and gives additional parties a stake in the successful development and continued operation of a mine. Our firm can assist miners with contracts that help to lessen the overall burden of political risk.
- Coordination within the industry. Each of the mining countries within the region has one or more mining trade associations, which help companies with advocacy, but also with intelligence on emerging risks and how to navigate around them. Companies can also often learn from the experience of others, sharing best practices for community engagement and the like.
- Finding local partners. In some countries in the region, political risk can be reduced by involving local partners, including equity partners.
The Use of Information to Manage Risks
Monitoring politics and legislation. Canadian mining companies can stay ahead of emerging risks and trends by putting in place systems to systematically monitor local politics, and legislative proposals. This information can then be fed into finer risk analysis and the formulation of strategy.
Risk analysis. It is important for mining companies to employ formal, objective systems for risk analysis. And also to go beyond that and develop flexible, dynamic plans that respond to risk.
Developing sources of information. While acting within the law, companies are wise to develop varied sources of information, within community groups, opposition groups, employee groups and other stakeholder groups.
Being proactive in diffusing the company's message. Use explicit and less explicit methods to diffuse the company's message.
Avoidance and diversification. Canadian mining companies should choose their jurisdictions carefully and make sure that political risk is taken into account as a consideration that may legitimately lead to a decision to not pursue a project, and not as a factor that is assumed to be able to be overcome. They should avoid investments in high-risk jurisdictions. Not all jurisdictions in Latin America with attractive geology are currently advisable for new investments. Companies should also seek to diversify their investments if they do decide to go into high-risk countries, and avoid concentrations in jurisdictions with higher political risks.
1. Ismail Shakil and Siyi Liu, "Canada orders three Chinese firms to exit lithium mining", Reuters (3 November 2022).
2. Mariano Spezzapria, "Larreta, Massa y Milei, bien posicionados en una encuesta nacional que da en primer lugar a JxC" La Nación (4 March 2023).
3. Cadem Research & Estrategia, "Aprobación del Presidente Boric sube a 32% (+2pts) y desaprobación cae a 61% (-3pts), su mejor semana desde noviembre 2022" Cadem Research & Estrategia (26 February 2023).
4. Catherine Osborn, "How Chile's constitution revolution missed the mark", Foreign Policy (9 September 2022).
5. Cecilia Jamasmie, "Resource nationalism sweeps Latin America's top mining countries" Mining.com (19 August 2021).
6. The Economist, "Common sense prevails as Chileans reject a new constitution" The Economist (5 September 5 2022).
7. Michael A Peters, "The emerging multipolar world order: a preliminary analysis", Educational Philosophy and Theory (15 November 2022).
8. US Congress House Foreign Affairs Committee, "China regional snapshot: South America" (last modified 25 October 2022).
9. Diana Roy, "China's growing influence in Latin America", Council on Foreign Relations (12 April 2022).
10. See eg. Council on Foreign Relations, "Mercosur: South America's fractious trade bloc", Council on Foreign Relations (17 December 2021).
11. See Transparency International, Corruptions Perceptions Index, (1995-2022).
12. See Transparency International, Corruptions Perceptions Index, (1995-2022).
13. See Transparency International, Corruptions Perceptions Index, (1995-2022).
14. SC 1998, c. 34.
15 15 U.S.C. §§78dd-1, et seq (1977).
16 See eg. Eleftherios Spyromitros and Minas Panagiotidis, " The impact of corruption on economic growth in developing countries and a comparative analysis of corruption measurement indicators", Cogent Economics & Finance (5 October 2022).
17. See Economist Intelligence Unit, Democracy Index 2022: Frontline Democracy and the Battle for Ukraine, (The Economist Intelligence Unit: 2023), at 40-5.
18. See Economist Intelligence Unit, Democracy Index 2022: Frontline Democracy and the Battle for Ukraine, (The Economist Intelligence Unit: 2023), at 40-5.
19. See Economist Intelligence Unit, Democracy Index 2022: Frontline Democracy and the Battle for Ukraine, (The Economist Intelligence Unit: 2023), at 40-5.
20. The Economist, "Mexico's government has attacked the country's electoral watchdog", The Economist (2 March 2023).
21. See eg. Caitlin Purdy and Rodrigo Castillo, The Future of Mining in Latin America: Critical Minerals and the Global Energy Transition (The Brookings Institution: July 2022), at 8-9.
22. Felipe Gómez Isa, "The UNDRIP: an increasingly robust legal parameter" (4 February 2019), The International Journal of Human Rights.
23. See eg. Convention Between the Government of Canada and the Government of the United Mexican States for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (12 September 2006); Convention Between the Government of Canada and the Government of the Federative Republic of Brazil for the Avoidance of Double Taxation with Respect to Taxes on Income (4 June 1984); Convention Between the Government of Canada and the Government of the Republic of Chile for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (21 January 1998).
24. See, for Argentina: Secretaria de Mineria, Informativo No 1 Ley de Inversiones Mineras (Argentina Ministerio de Desarrollo Productivo); see, for Peru: Otorgan un régimen de estabilidad jurídica a las inversiones extranjeras mediante el reconocimiento de ciertas garantías, Decreto Legislativo No. 662 (2 September 1991).
25. See Biblioteca del Congreso Nacional de Chile, Historia de la Ley No. 20,848 (30 January – 16 June, 2015).
To view the original article click here
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.