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Mining: Collaboration vs. taxation. Taking the long view

Mining: Collaboration vs. taxation. Taking the long view

Posted by Bruce McDougall on April 13, 2014

Latin American countries now attract about one-quarter of all the mining investments in the world. Over the next decade, mining companies plan to invest more than US$425 billion in the region, and much of that money will come from investors and companies in Canada.

As a direct result of this investment, 70 million people in Latin America have raised their standard of living above the poverty level. To keep their financial heads above water, though, the economies of countries like Peru, Argentina, Mexico and Colombia will have to grow by as much as 6% a year, according to Luis Miguel Castilla Rubio, Minister of Economy and Finance of Peru.

To sustain their economic growth, Latin American governments have responded in different ways. Some have supported the development of a domestic supply chain to provide mining companies with locally sourced goods and services. Other governments have regarded mining investments as a taxable bonanza and have squeezed even harder for a bigger share of mining-generated revenues. Mexico, for example, has imposed a 7.5% levy on the gross earnings of base metal producers and a 0.5% royalty on producers of precious metals.

In other countries, social resistance to mining projects has overshadowed their potential benefits.  In Peru, Chile and Argentina, at least 28 major projects, representing investments of more than US$40 billion, have been suspended.

Ironically, Mexico has experienced first-hand the benefits of collaboration rather than taxation in its natural resources industry. A Canadian company, Clearstone Engineering Ltd., of Calgary, has been involved along with 20 other Canadian firms in a collaborative demonstration project with Mexico’s state-run oil company, PEMEX, to use cutting-edge technologies developed in Canada to reduce carbon dioxide emissions by more than 1.3 million tonnes a year. In the process, PEMEX will gain more than US$250 million a year in efficiencies. In addition to training PEMEX workers to use the technologies, the collaborative project allows PEMEX “to sustain production goals, avoid emissions and increase the recovery of valuable liquids that generate revenue potential,” according to a statement from Natural Resources Canada.

In addition to the financial impact, collaboration also has a positive impact on relationships between Canadian companies and the local communities where they operate. With this in mind, mining companies are trying hard to find Latin American suppliers for requirements such as uniforms, catering, housekeeping, construction, security services and mining equipment repairs.

According to a study of Canada’s 50 largest mining companies by Engineers Without Borders, at least 12 of these companies have developed a local procurement strategy, up from four in 2011. Data about the finances, production capacity, human resources and depth of training related to local companies not only help the industry’s local procurement efforts, they also help governments to focus their support for their domestic industries.

“We view local hiring and procurement as a win-win economic benefit to the regions in which we operate,” says IamGold in its performance overview, “and we try to hire and purchase locally wherever possible.”

Developing a locally based supply chain takes commitment and perseverance on the part of purchasers, suppliers and governments. As Wilson Prichard, assistant professor of political science at the University of Toronto, says in an interview with the Financial Post, “It’s one thing for a mining company to show up in a country and buy a whole lot of equipment from one supplier, who becomes very wealthy. It’s a very different thing for a mining company to come into a community and work to help people within the local community to build business models that can be sustained beyond the life of the mines.”

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