Paul Harris sees a lot of untapped value in Colombia, a land that hasn't seen the arrival of modern mining due to a government sluggish to implement speedy approval processes. But Harris, editor of the Colombia Gold Letter, believes there are still some opportunities out there, pummeled by the market but poised to be buoyed by a more accommodating political climate and rising gold prices. He talks about the leading Colombia plays in this interview with The Gold Report.
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. There are companies that have very good management in Colombia. One example is B2Gold Corp. (BTG). The company has been very successful raising funds, finding projects, drilling and developing resources.
TGR: B2Gold wouldn't be there if it didn't believe that it could bring, in conjunction with a larger company, an asset to production. How do you reconcile that with what's happening elsewhere?
PH: B2Gold recognizes the gold production potential of Colombia. B2Gold was originally was the senior joint venture partner, but AngloGold (AU) wanted to take control of the two projects.
AngloGold's main project in Colombia is La Colosa, a 24 Moz project that has had a lot of political and community difficulties advancing. La Colosa is looking to be a very big mining operation. I think AngloGold wanted to take control of Gramalote because financing its development is more within its grasp and also because its development would show Colombia how it can successfully manage the development of a modern gold mining project, taking care of the community issues and protecting the environment. Successful development of Gramalote would go a long way to helping convince the people of Colombia and the government that it can successfully develop La Colosa as well.
There are also a couple of exciting companies coming through in copper, interestingly enough.
There's the merger underway between Cordoba Minerals Corp. [CD-TSX.V] and Sabre Metals Inc., which is in a very interesting copper district in Cordoba. The lawyers are doing the paperwork on that and it should be finished in Q1/14. That's one to watch, assuming the merger is successful.
TGR: What is 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.
The most notable company that bought existing operations in the gold sector is Gran Colombia Gold Corp. (OTC:TPRFD). It bought the Frontino Gold Mine assets, which is now known as its Segovia operations, but it's struggling to deliver. It is a high-cost operation and as fast as the company cuts costs, the gold price has fallen faster. It's going to be a while yet before that company is in a cash-positive situation. It is now looking to raise about US$15 million [US$15M]. The company has rolled back its stock twice in the last three years and has a market cap of about US$16M, so it will be interesting to see how that goes.
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.
This interview was conducted by Brian Sylvester of The Gold Report.
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.
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
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