Growing Headwinds To Investment
BMI View: We believe Latin America will remain one of the most promising and active mining areas in the world, given its abundance of mineral deposits, good infrastructure and a generally sound and attractive business environment. However, as the global economic landscape remains weak, we expect a number of key themes to continue dominating the mining industry, particularly on concerns over rising costs and falling prices, increasing political risks and a deteriorating business climate.
We believe Latin America will remain one of the most promising and active mining areas in the world, given its abundance of mineral deposits, good infrastructure and a generally sound and attractive business environment. The region is home to an abundance of minerals, especially silver and copper, and we expect demand for these minerals to remain strong given aggressive electrification and power programmes by major economies in Asia.
|Abundance Of Mineral Deposits|
|Latin America - Share of Global Mine Production %, 2011|
We expect Latin America to remain at the forefront of the global mining industry and retain a decisive influence on global production levels. Chile is the world's largest producer of copper, producing more than 32% of global mine output while Brazil is the second's largest producer of iron ore, at approximately 20% of global mine output. The recent tax increases and export ban on raw commodities in countries like Australia and Indonesia should also prompt more investors to shift their investment focus towards Latin America. Overall, we expect Chile's mining industry value to more than double from US$25.1bn in 2009 to an estimated US$58.5bn by 2016, growing at an annual rate of 10.2% over the forecast period.
|Chile - Strong Growth Ahead|
|Mining Industry Value (US$bn, LHS) and Growth (%, RHS)|
Apart from Chile, we believe growth in Brazil will continue to be driven by large investment into iron ore mining. This is especially given China's heavy reliance on iron ore imports for its rapidly industrialising economy, despite our expectation that Brazil will be one of the countries hardest hit by a slowdown in China. In addition, we expect the mining sector in Mexico to experience steady growth over the coming years owning to its favorable regulatory environment and rich reserves of precious metals. We believe precious metal prices will outperform the wider commodity complex given our expectations for further quantitative easing.
Rising Risks To Outlook
That said, a number of headwinds have dominated the mining sector of late and we expect these to remain in place. Rising cash costs and falling metal prices have led to the delay and cancellation of several mining projects in recent months as investors have grown increasingly worried about the global macroeconomic outlook, choosing instead to spend more time reviewing and reassessing market conditions before carrying out any form of investment. Increasing prevalence of public protests against mining projects could also derail planned projects scheduled to come online in the coming quarters. Just lately, Newmont Mining Corporation, the largest gold producer in US, reported a 28% fall in net income to US$279mn as a result of higher cash costs and a larger than projected decline in production. The corporation also halted construction of a US$4.8bn Minas Conga project in Peru last year due to strong opposition from the locals over the environmental impact of mining.
We believe Argentina will remain one of the riskiest mining region in Latin America due to the country's economic imbalances. Private sector businesses might become key targets for government's intervention, best exemplified by the recent government takeover of oil company YPF, as the latter impose further capital controls and stricter foreign trade restrictions on the mining sector.