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Latin America will be a major player as global demand for lithium soars
As decarbonization initiatives gain momentum around the world, lithium has become a new mining frontier, even referred to as “white gold” by industry media. The mineral is an important element in the path of many countries to get out of dependence on fossil fuels. It is the main component in batteries of electric vehicles and is also used in many other electronic devices, including cell phones. Several international media outlets have reported on the rising risks of lithium shortages globally in recent months as demand soars. This will represent significant opportunities for producing countries in the next decade.
According to data from the US Geological Survey, Australia is the largest producer. However, Latin America holds a significant portion of the world's lithium reserves. This makes the region a potential mining center for years to come.
lithium triangle
The Lithium Triangle, formed by Chile, Argentina and Bolívia, concentrates the largest mineral reserves in the world. This region has attracted increasing foreign interest in recent years, although its production potential remains underexploited. In Bolivia, for example, extraction remains highly limited to small projects. This is due to technical difficulties associated with extracting lithium in the country, excessively restrictive government policies and lack of technology at the national level. President Luis Arce tried last year to improve the country's production prospects – mainly by promoting international tenders. However, the results will likely remain modest, as Bolivia does not have an approach in line with international standards and specific regulations on lithium exploration.
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O Chile is regionally ahead in exploration capacity, with operational projects at an advanced stage. The country led global production until 2017, when it was surpassed by Australia, due to Chile's slow pace to allow new players to enter its market. Still, Chile remains a promising investment destination on this front, and the government maintains investor-friendly rhetoric. However, the ongoing constitutional process, coupled with a stronger pro-environment approach from the new government of President Gabriel Boric, means that regulatory risks will be heightened for at least the next 12 months. Legislative proposals related to the preservation of water resources, in particular, are likely to increase operating costs for companies. This will also be compounded by the growing activism of indigenous groups.
Argentina, which holds the second largest amount of lithium identified globally, wants to promote new (and massive) investments in the mining sector. Despite the country's long-standing macroeconomic imbalances and the heightened regulatory burden faced by multinationals, the government of President Alberto Fernández has worked actively over the past year to attract mining investors. These efforts included mining-specific measures to simplify the investment environment. However, multinationals operating in the country remain highly exposed to regulatory risks associated with price and capital controls and, ultimately, will continue to sustain high levels of financial volatility.
Mexico and Peru
Mexico is a complex case for investors in the sector. On April 20, 2022, Congress passed a presidential reform to the mining law to nationalize the country's lithium reserves. This was done primarily to give President Andrés Manuel López Obrador (AMLO) a political victory following a coup to his main power reform, which lawmakers failed to pass as the government did not need the change to stop granting mining concessions from lithium. However, it has put existing licenses under the spotlight, as AMLO has already said that all lithium mining concessions granted before the reform will be scrutinized. If the Mexican government finds that the concessionaires are not ready for the exploration phase, that they have not carried out indigenous consultations (when appropriate) or that there have been irregularities in the bureaucratic process, it will seek to cancel them. There is ample room for the federal government to decide whether to comply with these requirements at its discretion. In this context, some business entities – such as the National Association of Employers (Coparmex) – expressed concern that the cancellation of concessions would harm private investment. Ultimately, the Mexican government does not have the necessary technology to mine lithium, which could pave the way for some form of public-private partnerships for lithium mining in the future. Otherwise, alienating private investment would result in failure to tap Mexico's lithium reserves.
In Peru, production also remains incipient. Recent projects have raised growing concerns among government officials about the potential radiation associated with extracting lithium as it would be mixed with uranium. The legislative proposals to boost the sector, however, advanced. On May 14, 2021, the country's Congress approved a bill to declare lithium production an activity "of public interest" and the mineral "a strategic resource". Furthermore, Peruvian President Pedro Castillo has said he intends to boost the industrialization of lithium, which would further pave the way for improvements in the country's production prospects next year. However, Castillo's significant political problems add uncertainty to this scenario: he will face new impeachment threats from Congress (having survived a second impeachment attempt on March 28) and his popularity continues to decline. Furthermore, persistent calls from the ruling Peru Livre party for Castillo to renegotiate ongoing contracts continue to undermine investor confidence.
Complex (but promising) prospects
Overall, Latin America will continue to present great opportunities for mining investors with moderate to high risk appetites. Foreign investors are unlikely to face discrimination – most governments recognize the importance of attracting foreign capital amid the region's broad economic challenges and the need for environmentally friendly technology to extract it. Risks related to resource nationalism will therefore be limited. However, heightened fiscal concerns will underpin considerable fiscal uncertainty (eg in Chile and Argentina). However, this is unlikely to significantly affect the profitability of new projects; particularly as evidence suggests that there will be high levels of global demand for years to come.
As environmental, social and governance (ESG) trends gain traction at the global and regional levels, related risks become increasingly relevant to business. The socio-environmental impacts associated with lithium production have not yet been fully understood by academics, but have already generated growing concerns among environmentalists and social movements in Latin America. Issues such as air, soil and water contamination – in addition to the impacts of mining on surrounding communities – are likely to continue to pose reputational, regulatory and operational risks for companies that do not have strong compliance protocols in place. The specific risk scenario for mining in Latin America will require a proactive and mainly on-site approach by private players. From a risk management perspective, successful investors in the region are likely to be those who implement comprehensive pre-investment risk assessments (including ESG) and ongoing monitoring strategies based on solid local knowledge.
Source: LatAm Intersect PR | Via: Gabriel Brasil is a Senior Analyst on Control Risks' market-leading political, operational and security risk analysis and forecasting team.
