Make money from the metals mining boom in Latin America

Covid-19 has hit Latin America harder than any other. But the continent's highly competitive mining sector looks poised to profit handsomely over the next few years. James McKeigue explains

Latin America has suffered more from Covid-19 than any other region. The Financial Times points out that Peru and Ecuador have the world’s highest number of excess deaths per capita, while Brazil has the second-largest total of coronavirus deaths. The botched public-health response has also exacerbated the economic impact. According to the International Monetary Fund, a combination of a 9.4% drop in 2020 GDP followed by an estimated weak recovery of 3.7% in 2021 means Latin America will have incurred greater economic damage than any other region in the world. 

But there is one bright spot among the carnage: Latin American metals mining looks set to benefit from the pandemic. The economic crisis has pushed investors towards gold, helping the yellow metal reach a new record high. Meanwhile, copper prices have eclipsed pre-pandemic levels, supported by stimulus packages in the EU and China. 

I suggested MoneyWeek readers invest in Latin American mining in June 2019, and in October 2019 I looked at Ecuador's mining sector – nearly all the shares I tipped then have risen strongly, with some doubling. The long-term fundamentals I highlighted back then still apply, but the pandemic looks set to give the sector a further fillip, so this is a good time to revisit it.

Profitability is on the rise

The immediate impact of coronavirus was disastrous for Latin American mines. Despite being categorised as a strategic industry by governments conscious of the need to maintain export earnings as other sources of revenue dried up, many mines, particularly in Peru, were forced to close. When they did reopen, it was with elaborate coronavirus measures – such as keeping workers in a seven-day quarantine before they were allowed to start work – that added to costs. 

Analysis of 15 gold majors by S&P Global Market Intelligence found that costs increased by 2.5% in the second quarter of 2020. However, the shutdowns cut supply, which eventually led to higher metals prices that outweighed the extra costs. Other elements of the coronavirus fallout, such as lower oil prices and declining local currencies, have provided a further boost. As a result, profit margins have increased for gold and copper miners across Latin America. 

Metals were also given a boost by the unprecedented stimulus unleashed by governments in response to coronavirus. In the first few months following the World Health Organisation’s declaration of a pandemic in March, more than $13trn of stimulus measures were announced around the world. For the first time, emerging markets such as Chile and Colombia engaged in quantitative easing (money printing), while developed countries tried everything from wage compensation to boosting infrastructure programmes. 

The first direct impact of this splurge of money printing and borrowing was that gold’s value against paper currencies began to rise. In addition to gold’s typical function as a safe haven during crisis, this was also a case of simple arithmetic. The yellow metal is priced in dollars, so if there is a finite amount of gold and a sudden increase in the amount of dollars then it makes sense for the paper money value of gold to increase. Indeed, analysis from the World Gold Council reveals a massive increase in demand for gold from financial products, such as gold-backed exchange-traded funds (ETFs)

That helped gold climb by 34% from the start of the year to August and reach a record nominal price of $2,061. It has since cooled off to around $1,921. Buying an asset when it’s near a record high is never normally a good idea, yet if you take inflation into account then gold is still well below levels it reached in 1980 and 2011. And with stimulus packages set to be extended in the UK, EU and the US, gold should receive more support in the years to come, especially as all this printed money raises the spectre of a nasty jump in inflation. That’s good news for Latin America, which produces 12% of the world’s gold.

Accelerating the shift towards electric cars

The region is even stronger in copper, where it produces 44% of global output. Indeed, just two countries, Peru and Chile, account for 40% of global copper production, a similar level of market domination that 13-member cartel Opec boasts with oil. Here prices will be supported by the green nature of Covid-19 stimulus packages in the EU and China. Improving infrastructure, including telecoms upgrades through 5G networks, will underpin demand for copper – as will incentives to encourage the spread of electric vehicles (EVs).

Covid-19 is therefore accelerating the shift towards EVs that was going to happen anyway. That’s why US electric carmaker Tesla has been the standout stock this year, overtaking Toyota to become the world’s most valuable car firm despite making a fraction of the cars. Analysts debate whether Tesla’s early lead in EVs will be overhauled when the established car producers switch to electric. 

But either scenario will be good for the raw materials that go into EVs. A battery-powered EV uses about 83kg of copper, compared with 23kg in an internal combustion-engine car, with hybrids such as the Prius somewhere in the middle. But it’s not just copper that should benefit. Cobalt, nickel and lithium are also heavily used in different parts of the electric car and battery. 

To give us some idea of the impact EVs will have on demand for metal let’s run through the numbers for nickel. Today there are between four to five million EVs on the road. By 2030 that figure is expected to have risen to between 40 and 50 million. At present the world consumes 2.34 million tonnes of nickel per year, with just 5% being used in EVs. By 2030 the growth in EVs will have added one million extra tonnes of annual demand. 

Latin American mining’s competitive edge

The coronavirus factors I mentioned above apply to miners around the world – so why am I so bullish on those in Latin America? The first is that Latin America, which accounts for roughly 10% of the world’s GDP and a similar share of the planet’s population, produces a disproportionately large quantity of metals. In addition to its strong position in gold and copper, it currently accounts for 20% of zinc output, 51% of silver and 20% of iron ore. As for lithium, set to be another beneficiary of green stimulus, the lithium triangle of Chile, Argentina and Bolivia holds more than 50% of global reserves. The mismatch between the region’s output and domestic demand makes it a natural exporter.

It is also a low-cost producer. A renewable-energy revolution in Chile means miners in the country can now access cheap, green solar power. Peruvian, Ecuadorian and Brazilian operations can access low-cost hydroelectric power. Being powered by renewable energy is especially important for miners producing metals such as copper, zinc or lithium for EVs. As EVs become more common, their environmental benefits will come under more scrutiny and manufacturers will pay a premium for metals with a low carbon footprint. The same applies with social responsibility. Mining investors sometimes complain that Latin America’s myriad rules and regulations hold up new projects. 

But at least that ensures that legal mining complies with global best practices. For example, much of the cobalt that Tesla or Apple currently use in their products is mined in the Democratic Republic of Congo, where child labour is rife. That doesn’t happen in legal Latin American mines, giving cobalt from the region an advantage in the market place. 

Latin American taxes are also surprisingly competitive. For example, Chile has a lower fiscal burden for mining companies than Australia, while Peru and Ecuador have cut taxes in recent years. Indeed, Latin American countries have climbed up the rankings of the influential Fraser Institute’s Annual Survey of Mining Companies. Chile and Peru are the top-ranked in Latin America, while Brazil and Ecuador have made the most dramatic improvements in recent years. The region has steadily increased its “investment attractiveness” score in consecutive surveys, which is impressive when you consider that it has basket cases such as Venezuela and Guatemala weighing it down. 

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