Colombia is one of the leading gold producers in South America but due to political unrest, the country has lagged behind others such as Brazil and Peru. Colombia has high grade gold (GLD) and is in dire need of extensive exploration work. Junior exploration firms to some of the biggest gold producers are eying the vast potentials of this small country. Problems related to law and order and lack of infrastructure still remain but the government has been working on solving these issues.
One of the emerging gold junior plays that is betting on Colombia is Continental Gold (OTC:CGOOF). Besides this, the mid-tier company B2Gold Corp (BGLPF.PK), which is also eying growth in the emerging markets, particularly in Nicaragua and Philippines, is also operating in Colombia by partnering with major producer AngloGold Ashanti (AU).
In the World Bank's ease of doing business index (2012), Colombia was ranked 45th, which puts it near Peru (43rd). On the other hand, Colombia offers considerably lower regulatory risk than neighbors such as Brazil (130th), Venezuela (180th) and Ecuador (139th).
Within the last two decades, about 90 million ounces of gold have been found in the country and more is yet to be discovered. New policies introduced by the former President Alvaro Uribe have contributed to increased entry of foreigners into the country's gold exploration and production sector over the past decade. Colombia's controversial Law-1382 is now obsolete and the more mining friendly Law-685 is now effective.
One of the biggest problems facing Colombia is the lack of infrastructure for the mining industry. However, the government seems to have realized that just having gold reserves is not enough and that lowering all-in costs are necessary to attract further development of them. But the National Mining Agency has been created which is currently working on clearing the backlog of 19,000 concession applications, now reduced to 7,000. Essentially, companies entering Colombia now will find a more business friendly environment than their peers did a few years ago.
B2Gold's Colombian joint venture with AngloGold Ashanti (AngloGold 51% - B2Gold 49%) is for the Gramalote property which is expected to become a major open pit gold mine producing between 300,000 and 400,000 ounces of gold by 2016. B2Gold has also purchased a 100% interest from AngloGold for the Mocoa copper-molybdenum porphyry deposits. While development on Mocoa is still early, work on Gramalote has been going on smoothly.
However, the issue of unlicensed mining is still very much alive in the country. Last year, the country produced 65 tons of gold, around 40% of it came from illegal mines. Then we have criminal mining activities. There is a big difference between illegal and criminal mines. While unlicensed (or illegal) mines are illegal on technical grounds, criminal mines are the ones that come under the umbrella of organized crime. The latter not only escape from government taxes, but also exploit the local population who are forced to work in dangerous conditions on extremely low wages, literally, at gun point. More importantly, however, they drive away FDI. Foreign players such as Continental, B2Gold or AngloGold Ashanti as well as legal domestic operators won't go anywhere near these activities.
That being said, Continental's Buriticá operations is located in a stable region and could become the company's cash cow for the next several years. According to some estimates, through Buriticá, Continental could produce 200,000 ounces of gold each year easily for two decades. As for B2Gold's Gramalote property, some analysts believe that the asset achieves different objectives for B2Gold and AngloGold Ashanti and because of that changes in ownership might occur in the future. The issues are scale. For B2Gold Gramalote is the mother lode while for the much bigger Ashanti it is more of a testing ground for operating in Colombia. Therefore, we would not be surprised if in the long run, B2 is bought out of Gramalote and a general consolidation of Colombian mining assets takes place.
With the recent weakness in gold prices, B2Gold has had the speculative froth pulled out of its price. Trading at a trailing multiple of 19.4 and putting in a double bottom near $2.20 per share we see some value in taking a position on now after a weekly close above $2.40 per share on the thesis of higher gold prices from here as the Yen (FXY) depreciation that has kept gold and silver prices under pressure looks to be just about over. Near term resistance is at $2.61 and $2.69 per share and may prove to be the top of an emerging consolidation range but this week's action has stabilized the price on strong volume.