Venezuela Mining Report 2011

The administration of President Hugo Chávez continues to nationalise companies working across the mining sector. Consequently, the operating environment for privately-owned domestic or international companies continues to deteriorate, with government policies serving to drive out foreign miners and investment.

Even the gold sector, where some private-sector mining activity had been tolerated by the regime, is now coming under pressure. In February 2011, Canadian gold miner Crystallex International Corporation had its Las Cristinas mine contract terminated by Caracas, with the government citing lack of progress on developing the mine site. For its part, Crystallex has said that the site is ‘shovel ready’ and has blamed the state for not approving construction. Crystallex has now filed for international arbitration on the matter.

However, while Western mining companies remain out of favour, it is a different story for Russian miners. One company that remains in favour with the authorities in Caracas is Canada-based (but Russian managed and funded) Rusoro Mining. We examine the outlook for this company in our Company Monitor section at the end of this report, alongside the prospects for mining giant Anglo American, which maintains a presence in Venezuela via its 91%-owned Minera Lora de Niquel subsidiary.

Industry Forecast

BMI currently holds a very negative view on Venezuela’s mining sector. The country’s rampant inflation will do much to undermine growth in real terms, and we see annual metal production levels either plateauing or falling over our forecast period. Frequent strike action, ageing infrastructure and a lack of inward investment present three further challenges for the Venezuelan mining sector. At present, we are forecasting average annual real terms contraction of 8.23% over our newly-extended forecast period to 2015.

Were there to be a change of regime in Caracas (which seems unlikely at present), then we would look to revisit these negative forecasts. We believe that Venezuela boasts significant natural resource wealth, especially undeveloped gold deposits, which would be of interest to Western investors should a new government emerge.

Venezuela Bottom Of Latin America Business Environment Ratings Table Unsurprisingly, Venezuela remains rooted to the bottom of our newly-updated Business Environment Ratings table for the Americas region in 2011, with a score of just 24 out of 100. First and foremost, President Hugo Chavez’s hostility towards any Western involvement in the mining industry, coupled with substantial risks to property rights, represent the major impediments to any mining business seeking to enter Venezuela.

Beyond this, the ongoing threat of further socialist reforms, combined with a recent currency devaluation and price caps on certain goods, continues to weigh heavily on the Venezuelan investment climate. A frail institutional framework is also a key weakness of the country's business environment. President Chávez has signalled his intent to further his government's nationalisation drive, which will continue to undermine private sector business activity.