The Gold Report: Paul, you’re our resident mining expert on the ground in Colombia. Some noteworthy developments have occurred in the junior mining space since we last chatted in May. How is that playing out in Colombia?
Paul Harris: Activity in gold exploration is off. The main reason is the drought of financing for junior companies. A lot of companies have run out of money. Those that have money are in cash-conservation mode. Many have mothballed their plans until they can finance again. There are only a handful of companies that are doing any meaningful gold exploration work at the moment.
I recently did an analysis of the drilling sector in Colombia. Drilling reached its peak in 2012 with more than 650,000 meters (650km) drilled. It’s fallen off this year to about 100km and it’s going to be much less in 2014. There’s about 100km of drilling that’s been planned, but on hold until companies can finance.
TGR: So three or four companies are doing the lion’s share of that drilling?
PH: Yes. The other thing I discovered was that the size of the typical drill program has shrunk. In the past it was 5–20km. Now companies are putting out 2km and smaller programs.
TGR: What’s responsible for cooling off the sector over the last couple of years?
PH: Many explorers in Colombia came into the Middle Cauca Belt looking for gold, copper-gold and gold-copper porphyries, which if successful would more than likely be billion-dollar mine development projects. The paradigm shift in the mining industry has meant that the majors are no longer looking for those projects. They’re looking for small high-grade projects and projects with low capital expenditures (capex). The change in fashion, if you like, has left many junior explorers in Colombia hanging.
There’s also a government factor. There’s a growing concern within the investment community over whether, having found a deposit, a company would be able to develop a mine in Colombia and about how long getting the approvals to do so would take. It’s one thing to find a resource that may be economic to exploit—but getting it permitted? Modern mining is a new concept in Colombia and there are no modern gold mines. There’s a question mark over how the government would do that.
TGR: Earlier this year MinMinas, Colombia’s Ministry of Mining and Energy, reopened the concession application process. Tell us about that and what’s happened since.
PH: The government reopened for concession applications July 2 after a two-year hiatus. It was quite successful with hundreds of applications on the first day.
Five months down the road, a lot of those companies that applied still don’t know whether they’re going to get their concessions or not. The government is dragging its heels on concession application approvals and that is hurting the sector, as companies have to pay their fixed costs while waiting.
TGR: Is there a discernible difference between the success of companies with a Colombian political insider, either in the management team or on the board, versus ones that don’t have that luxury?
PH: No. There isn’t one company that’s raced ahead of the others because it had a former minister or diplomat on its board of directors, and you shouldn’t expect this to be the case in a country where the rule of law is present. There are political issues to deal with in Colombia—I am not pretending that it is the simplest place to work—and while there may be bureaucracy and even corruption in some instances, I cannot see an instance where a political appointment has borne fruit. For the most part, they have been a waste of money and have filled a board seat perhaps better filled by someone that can add to the technical or financial aspects of a project.
TGR: How do investors make money in Colombian mining equities or companies with projects in Colombia?
PH: Well, Brian, I think you, as a journalist writing about exploration stocks, are in the unusual position of making more money than those that invest in exploration stocks at the moment. Seriously though, management, as always, is a key thing.
TGR: Is that the path to making money in Colombia? Buy an existing mine that already has gone through the permitting process and build up confidence with the government to develop another project afterward?
PH: There isn’t a great deal of existing or active mines to buy. Colombia’s very much an exploration play. The challenge is showing and educating governments, communities and politicians about modern mining, its benefits, the processes and the technologies. Everything is very new in Colombia. For example, heap leaching for gold doesn’t exist. Large-scale mining for gold doesn’t exist. There are conceptual hurdles to overcome.
TGR: If only a few companies are moving forward, what stage are the rest of the companies at?
PH: There are some that got in a few rounds of drilling, but not enough to get a resource out or to get to a conceptual stage, like a preliminary economic assessment (PEA). There are companies that have done a lot of drilling, but have gone into hibernation to conserve cash. There are easily 10, 15 or maybe even 20 companies like that.
TGR: Would a higher gold price be enough to save Colombia as a mining exploration play?
PH: A higher gold price is always helpful and makes uneconomic projects economic. Colombia is being very cautious about how it addresses modern mining and there is an information gap. Rightly or wrongly the financial markets view that caution as risk. Colombia is not like Chile or Peru where there have been so many mine developments. Until that first project is permitted and developed in Colombia, there’s going to be that question mark hanging over the country about whether mine development is possible or not.
TGR: What advice would you give to MinMinas, if you could?
PH: One, reduce the administrative burden of exploration. Does it really need to scrutinize concession applications for five months? The bulk of administrative scrutiny should come at the project development stage. The same thing for water use permits for drilling. These things shouldn’t take six months to obtain.
Two, work hard to develop a good working relationship with the environment ministry so that the environmental permitting aspects can be better. Nobody wants environmental permits to be anything but rigorous because the environment should be protected, but there should be a process that flows.
TGR: Some parting thoughts for investors?
PH: Take a deep breath and put your head down. Go for what your instincts tell you.
TGR: Thanks, Paul.
Paul Harris is a mining information expert with more than 12 years of experience as an analyst, journalist and researcher about the mining industry, of which he has spent nine years in Latin America including four years in Colombia and five years in Chile. Harris has written for leading industry publications and business newspapers around the world and produced reports for leading consultancy firms prior to starting Colombia Gold Letter.
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