Wednesday, June 7, 2017

Mining Risks in Latin America: A Changing Landscape (Part 1)

Latin-America has some of the world’s largest mines. Chile’s Mina Escondida is the largest copper producing mine in the world. Mexico is the world’s largest silver producer. Chile is also posed to become the largest lithium producer in the world, while investors are eyeing 35 different lithium projects in Argentina.

As investments in mining continue to flow to the region at an incredible rate, local governments are stepping up regulatory requirements and enforcement. Mine workers are demanding better pay and working conditions. Local authorities are becoming more vigilant of pollution risks. In recent months, there have been several instances where these issues have resulted in the suspension of operations, penalties, and fines at large mines in Latin America.

In Argentina, after the third spill of cyanide solution in 18 months, the world’s largest gold miner, Barrick Gold, faces a steep challenge in its operations at its Veladero mine. After the second incident, mine operations were suspended for weeks, executives were indicted, and Barrick was fined a record $9.8 million. Following that incident, local authorities demanded the implementation of certain safety measures that would reduce the risk of similar events occurring in the future.

According to the judge overseeing cases related to Veladero, Barrick missed deadlines imposed by three orders from local authorities, including an order requiring Barrick to replace the pipes that would subsequently fail and cause the latest cyanide solution spill. Barrick operations have been suspended since March 28th, and local authorities have ordered the reengineering of the Veladero mine. A federal judge has called for the closure of the mine under Argentina’s Glacier laws, which require the complete suspension of mining operations after three serious incidents.

In response, Barrick has presented a $500 million reengineering plan to be implemented over a 5-year period. The Argentine government has yet to approve it. Local authorities are also taking blood samples from residents in the area, to determine health risks to the local population. In the US, investors and shareholders have now filed a class action against Barrick for misrepresenting the situation of Veladero.

Earlier this year on the other side of the Andes, 2,500 workers went on strike for 43 days at BHP’s Mina Escondida in Chile, demanding better working conditions for current and new employees. As a result of the strike, BHP suspended the construction of a second desalination plant in the port of Coloso and the extension of an existing concentration plant. BHP’s decision was the result of permanent blockades that prevented subcontractors from going to work on the projects.

Further north, 1,200 workers went on strike at the Southern Cerro Verde mine, Peru’s largest copper mine. The strike lasted three weeks and halved production during its duration. In February, Anglo American PLC suspended operations at its El Soldado copper mine in Chile after failing to receive regulatory approval from local authorities for the redesign of the mine.

While the tone of this post may seem pessimistic, the intention is to bring attention to some of the particularities of mining risks in Latin-America. The development of stricter regulatory frameworks, demands for better working conditions and rights, and the assessment of penalties for environmental violations are all signs that the region is developing and the mining sector continues to thrive. With respect to (re)insurance coverage for these facilities, while most insurance policies for mining operations exclude the risk of strikes, other types of losses involving suspension of operations by a government authority may present interesting coverage issues. Insurers and Insureds alike should be cognizant of the particularities of the region to better assess risks and provide adequate insurance coverage. 

Published by Hernán Cipriotti