In recent years, Latin America has become a preferred destination for mining investment, especially for Canadian companies. Prospective regions, such as the Andean range, the Guyana greenstone belt and the Cuadrilatero Ferrifero in Brazil, coupled with several business-oriented jurisdictions, easy transportation links and western culture, make it a “no brainer” destination for international ventures.
Greenfield projects for mineral exploration usually begin with acquiring mining properties from local owners or by applying for mining properties. In these early stages, exploration companies generally do not pay much attention to holding structures and regulatory matters; they simply secure the properties (sometimes just barely) and start exploring. But soon enough, when exploration has yielded some encouraging results, and the company is prepared to raise significant capital in the market to advance, joint venture or sell the project, such lack of attention to properly structure the project at the beginning may come back to haunt them.
The value of projects, for purposes of financing, equity issues, joint venturing or sale, will be determined not only by their geological resources and potential, but also by additional factors, including tax base and transactional costs, registered value of the investment for capital repatriation and tax deductions in the host country, and the ability to assign or to effect changes of control of mineral properties, among others.
Usually, assignment of, or security over, mining rights in Latin America is subject to approval from, or registration before, mining authorities. These processes may take some time and can be discretionary. If mineral properties were not previously placed within a vehicle that could form part of an acquisition, financing, or property package, such approval procedures could derail the transaction and affect its value.
Also, if the exploration company has not properly structured and recorded its investments, some of these investments may not be deductible for income tax purposes, potentially impacting the value of the project as well as reducing the tax base for any dispositions. In some countries, the ability to repatriate dividends and capital is linked to registration of direct foreign investment (DFI), so it is imperative to do this properly and in a timely manner.
Regulatory matters are often an issue: it is never too early to tackle zoning, permitting and technical matters. In addition, some Latin American countries still exhibit some degree of political risk; therefore, it is important to structure the ownership chain of the project through a jurisdiction with which the host country has an investment protection treaty.
Last but not least, Canadian securities regulators have become increasingly inquisitive and require a broader amount of information when analyzing disclosure documents for reverse takeovers, initial public offerings or equity financings with an international asset component. They sometimes check the entire holding structure of any material assets and ask to see detailed information, such as acquisition documents, due diligence reports, local legal opinions and more.
In brief, in order to turn exploration successes into economic successes, prospectors should follow these recommendations as early as possible in their projects:
- Structure projects with an offshore component, allowing for tax-efficient divestments and quick and easy assignments of interests.
- Structure investments in a way that most of them can be registered as DFIs and are tax deductible.
- Tackle and resolve regulatory issues early on.
- Document due diligence procedures, opinions and acquisitions as much as possible under North American standards.
Then, take a look at Latin America, the most incredibly prospective and investor-friendly region on the planet for resource projects – and happy hunting!
Jorge Neher is a partner with Norton Rose Group, a leading international legal practice. He is based in Colombia and Venezuela, with a practice focused on mergers, acquisitions and finance of natural resources projects all over Latin America.