Industry Trend Analysis - Approved Royalty Legislation Increases Downside Risks - JAN 2015

BMI View: If signed into law by President Otto Perez, the recent Congressionally-approved legislation increasing mining royalties in Guatemala will increase the downside risks to our already downbeat outlook for the country's mining sector.

Guatemala's Congress approved late last week a bill that would raise mining royalties to a total of 10% (9% going to the federal government and 1% to local jurisdictions), further cementing the country's second-to-last ranking in our Americas Risk/Reward index despite its known precious metal reserves. Indeed, should the legislation be signed into law by President Otto Perez and go into effect in January 2015, the country's overall score may deteriorate further. Guatemala ranks 15 out of 16 in our latest index, owing to its particularly poor rewards score, which takes into account a country's tax regime ( see 'Industry Risk/Reward Index - Americas,' October 9). The law has prompted the country's Chamber of Industry to announce it may mount a legal challenge of the legislation, arguing the legislation will curtail investment into the country. Canadian silver miner Tahoe Resources, which operates the Escobal mine, stated its effective royalty rate would double from 5%, putting the firm in a challenging financial position given silver prices remain at multi-year lows. Fellow Canadian miner Goldcorp, which operates the Marlin mine, will also take a financial hit if the law goes into effect.

Downside Risks For Already Low Score
Americas - Mining Risk (Vertical Axis) & Reward (Horizontal Axis) Ratings

In addition to headwinds caused by higher royalties, we expect Guatemala will remain a flashpoint for anti-mining sentiment after seeing significant violence erupt against mining projects in prior quarters ( see ' Central American Protests To Be Particularly Fraught ,' October 8). We therefore believe a combination of weak precious metal prices and a poor operating environment will lead the sector to contract in 2015 and 2016, before experiencing growth again in 2017. While we forecast the country's mining industry value will remain the largest within Central America through 2018, poor governance, significant corruption, and uneven rule of law will cause further conflicts among government, mining, and community stakeholders over proposed mining, preventing growth.

Royalty Increase To Pose Further Downside Risks
Guatemala - Mining Industry Value & Growth