WGC promotes gold mining in Latin America

Acting as lobbyist for some of the world’s biggest gold miners, the World Gold Council has sponsored the publication of a study titled The New El Dorado: The Importance of Gold Mining to Latin America.

The study’s principal authors, Penelope Plowden and Georgina Wilde, surveyed the health of the gold-mining industry in every Latin American and Caribbean country.

They begin by citing gold production figures from Gold Fields Mineral Services’ annual gold survey and then marry those numbers with political commentary and macroeconomic statistics from such sources as the World Bank, the International Monetary Fund, the Inter American Development Bank, and the Economist Intelligence Unit.

At a recent luncheon in Toronto to help launch the study, Jill Leyland, WGC’s manager of economics and statistics, said the council wants to convey four key messages:

– there has been a strong rise in gold output over the past decade in Latin America;

– gold mining provides benefits to the region;

– the gold-mining industry is threatened by low gold prices; and

– 1999’s Washington Agreement, which capped official gold-reserve sales and lending, has helped stabilize gold prices.

Collectively, the countries of Latin America produce about 378 tonnes (12.1 million oz.) gold per year, or roughly 15% of the global total. Gold accounts for 1% of Latin America’s exports, or US$2.4 billion annually.

More to the point, Latin America’s gold output increased 6.2% annually during the 1990-99 period as foreign private capital flowed into new, large-scale mines. This investment was the direct result of governments’ opening up their minerals sector as part of larger reform programs.

Still, traditional small-scale and artisanal miners continue to account for a significant share of Latin America’s gold output — up to 20% in some countries.

The WGC notes that these smaller operations, which often damage workers’ health and the environment, are on the wane as alternative employment opportunities arise and technological advances at larger mines leave less gold behind in their tailings for artisanal miners to recover.

Latin America’s biggest success story is Peru, according to the WGC. The country has become the region’s largest gold producer — ranking eighth globally — thanks mainly to the development, over the past decade, of large-scale mines jointly owned by foreign companies and state agencies.

Boasting cash costs among the lowest in the world, Peru’s gold mines now spin off 16% of the country’s total export earnings. Production has soared 800% since 1990, with about 60% of today’s gold output coming from two new high-altitude mines: the massive Yanacocha complex of Compania de Minas Buenaventura (BVN-N) and Newmont Mining (NEM-N), and the Pierina heap-leach operation of Barrick Gold (ABX-T).

Latin America’s number-two producer, Brazil, has been on a reverse trend, with gold production dropping 37% during the 1990s — a decline attributed to waning garimpeiro activity caused by extraction difficulties and lower world gold prices. While it is estimated that garimpeiros produced 75% of Brazil’s gold in 1988, that figure fell to only 30% by 1998. However, the devaluation in the real in 1999 has caused some upsurge in garimpeiro activity.

Latin America’s other bright lights, Chile and Argentina, stand out not just for their surging gold production during the 1990s, but also for their substantial unexplored potential.

Bolivia, too, saw a significant rise in output in the 1990s, but there has been a sharp fall in gold mining and exploration since 1997, and there continues to be damaging competition with the illicit cocaine industry.

In terms of export earnings, gold plays a huge role in Guyana’s economy. Indeed, the yellow metal is that nation’s single largest export earner, ahead of rice, sugar, bauxite and tourism.

Gold production in Guyana soared 400% since 1990, owing to the opening of what was, for a time, Latin America’s largest gold mine: Omai, owned by Cambior (CBJ-T), Golden Star (GSC-T) and the Guyanese government. However, Guyana’s gold production has been flat or falling since 1997.

“The 1990s were generally a positive decade for Latin America, compared with the ‘lost decade’ of the 1980s,” said Leyland, citing three tangible improvements in the region: a reduction in heavy debt loads; the disappearance of hyper-inflation; and an improvement in the political climate.

Still, Ecuador and Venezuela are the only two Latin American countries with current account surpluses, and the region is still largely dependent on commodity exports, if northern Mexico’s maquilladora plants are excluded.

The New El Dorado shows the benefits that large-scale gold mining can bring to developing countries, including:

– enhanced inflows of foreign-exchange earnings from exports;

– inflows of foreign direct investment and associated high technology;

– a higher rate of capital formation for the whole economy;

– increased government revenues from royalties and taxes;

– direct and indirect employment; and

– improved infrastructure.

The WGC cautions that some Latin American countries have mining codes which are dangerously ambiguous, and stresses that governments in the region should ensure that their investment policies are consistent and reliable.

The WGC concludes that growth in Latin America’s gold output has been largely due to foreign direct investment and that there is potential for a sustained rise in gold output which could contribute further to economic development.

However, in order for the momentum of the 1990s to be maintained, more exploration is needed — an activity that is jeopardized by the continued low gold price.

The New El Dorado is available free of charge from the World Gold Council’s worldwide offices and can be downloaded from its web site: www.gold.org

The report is the second in a series launched by the WGC in 1999 to impress upon non-industry types of the importance of gold mining in emerging countries. The first report, titled A Glittering Future?, outlined the importance of gold production to sub-Saharan countries and other “heavily indebted poor countries.” The third will be a study of the importance of gold mining in Asia.

The WGC says the first study helped contribute to the Washington Agreement, reached in September 1999, which limited official sales over five years and covered 85% of the world’s official reserves.

That agreement reduced uncertainty and improved stability in the gold market — stability that can be seen not by looking at the gold price in U.S. dollars but by looking at the price using an index combining five major currencies, all weighted by gross domestic product: the U.S. dollar, the euro, the yen, the pound sterling and the Canadian dollar.

“The Washington Agreement seems to have stopped the downward plunge of gold prices,” said Leyland, who believes that the industry needs a double-digit decline in the U.S. dollar for more than six months in order to achieve a significant rise in gold prices.