Industry Trend Analysis - Local Opposition To Deter Growth - JAN 2016

BMI View : Guatemala's gold and silver mining sectors production growth will slow due to a weak project pipeline and continued community opposition over the coming years.

Guatemala's mining sector will face persistent challenges from local opposition which will deter foreign investment and elevate operational risk. Despite government efforts to reduce costs and provide tactical support to mining firms facing opposition, Guatemala's unstable business environment will dampen production growth in the precious metals sector. We expect Guatemala's silver output to increase marginally, from 27.3 million ounces (moz) in 2016 to 28.4moz by 2019, averaging 1.3% annual growth. Similarly, we forecast the country's gold production to rise slightly, from 191 thousand ounces (koz) in 2016 to 200koz by 2019, averaging 1.3% annual growth during 2016-2019. The country's overall mining industry value, totalling just over 1.0% of total GDP or approximately USD900mn in 2016, will remain at this level over our forecast period to 2019.

Silver Production To Plateau
Guatemala - Silver Mine Production & Growth
e/f = BMI estimate/forecast. Source: BMI, USGS

Public Unrest To Remain Key Challenge

Miners operating in Guatemala will continue to face operational challenges, resulting in project delays and elevated costs. Local communities cite environmental damage, land rights, and violent responses to peaceful demonstrations as key accusations against firms including Goldcorp and Tahoe Resources. For instance, the Marlin gold mine has faced opposition from indigenous groups before Goldcorp began operations in 2006. Further, a group of Guatemalan citizens filed a lawsuit against Tahoe Resources, after violence erupted at protests against the firm's Escobal silver mine in 2013. In November 2015, a Canadian judge ruled that the suit will be settled in Guatemalan courts. While Tahoe retains the support of the federal government, local jurisdictions surrounding the Escobal mine have voted to ban mining, increasing political pressure to hold a referendum in the mine's municipality. In July 2015, US firm Kappes Cassiday and Associates (KCA) allegedly ignored a court order to stop construction at the El Tambor gold mine due to widespread protests against the project. The firm reported limited production due to protesters blocking the entrance.

Poor Operating Environment Overshadows Mining Potential
Select Countries - Operational Risk Index
Source: BMI

Government Support Not Enough To Spur Development

Despite Guatemala's government support of miners, operational challenges, exacerbated by low commodity prices, will deter firms from undertaking major new projects in the country. Efforts of the government to improve the business environment include providing police assistance to mines facing protests and the attempted reversal of the December 2014 mining royalty hike. In September 2015, Guatemala's Constitutional Court ruled against the legality of the 10% mining royalty and reinstated the original 1% rate. However, projects such as Cunico Resources' Mayaniquel (acquired from Anfield in 2014) remain undeveloped. Further, over the first nine months of 2015, Goldcorp reported lower gold production at Marlin, with output totalling 128koz compared to 134koz over Q1-Q314. The firm cited higher depletion rates at the mine due to a reduction of proven and probable reserves as the key reason. Beyond operational risks, weak gold prices further detract from potential mining investment in Guatemala. We forecast gold prices to average USD1,150/oz in 2016, declining further to average USD1,075/oz by 2018.

Downward Prices Exacerbate Operational Risks
Global Gold Prices (USD/oz) & Growth (% y-o-y)
f = BMI forecast. Source: BMI, Bloomberg