Brazil's New Gold Rush

With Mexico, Peru and Chile making life more difficult for mining, investors are increasingly looking at iron ore powerhouse Brazil to provide other metals, such as gold, copper and nickel...

Brazil is a mining powerhouse. Every year it churns out hundreds of millions of tonnes of iron ore to feed the world’s factories and infrastructure programmes. But with Mexico, Peru and Chile making life more difficult for mining, investors are increasingly looking at Brazil to provide other metals. After all, only 26% of its massive territory, which takes up almost half the landmass of South America, is mapped for exploration.

Some of the best opportunities could come in precious metals. Despite the lack of geological information Brazil already has the world’s seventh-largest gold reserves, suggesting much more can be found. Moreover, even with the ample deposits already discovered, Brazil is only the 13th-largest gold miner in the world, which shows there is immediate potential to raise production.

Peter Marrone, CEO of Yamana Gold, which operates the Jacobina gold mine in Bahia State, believes technology could help Brazil boost output of the yellow metal. “Brazil has a long history of mining but it is still underexplored for gold and copper. That centuries-old mining tradition has not translated itself into modern mining techniques and new approaches so there is an excellent opportunity for new discoveries.”

One London-listed company bringing modern mining techniques to Brazil’s traditional gold fields is Serabi Gold. “We are a legacy of a small, Australian junior company that went to Brazil in 2003/2004 to the Tapajós, in Pará state, Northern Brazil”, explains CEO Michael Hodgson. “It’s a very prolific, artisanal gold field where no-one had actually put a hard rock mine into production. There’s huge potential in the Tapajós gold field, a very immature gold field, 200 x 200 km in area, with roughly 1,500 artisanal mines being recorded there.”

Indeed, it’s estimated that artisanal miners, known locally as Garimpeiros have mined 30 million ounces of gold from Tapajós, so it is clearly a prolific field. The informal miners are not in direct conflict with larger players like Serabi, because the Garimpeiros can only mine the top soil. Their licenses and technology prevent them from mining the hard rock typically found around 15 metres below the surface. Nevertheless, if Brazil wants to make the most of its reserves and discover more then it will need to formalise the sector. I think there are parts of the Brazilian government that would like to, but the current President remains supportive of the garimpeiros or artisanal miners”, says Hodgson. “In the short term we see the government making efforts to improve the standards of the garimpo operations to address criticism of the effects of these operations.”

Pará potential

Tourist guides often describe Brazil as a land of contrasts but the same could be said about its mining industry. Pará state is the second-largest iron ore state in the country and is home to Carajás, the biggest open pit iron ore mine in the world. Carajás produces 150,000 tonnes of iron ore per year and is owned by Vale, one of the world’s largest mining companies. But away from Vale’s mega facility the state’s mining sector is less sophisticated. It lacks the high-quality mining institutions found in more mature states, like Goiás or Minas Gerais.

“It’s an established mining state and the second largest in Brazil, but immature compared to Goiás which has seen mining for a much longer time now ”, says Hodgson. “But the Para state government is very ambitious to be the number one miner in Brazil and one thing I have learnt from my time in Brazil is that state government authority really exceeds federal authority.  We work closely with the Pará government, and as part of this education process we joined forces with other TSX and ASX listed companies organising a fact-finding trip to Western Australia, where they saw several small, underground and surface mines, all producing 40,000/50,000 ounces. Often, we have encountered a view that such small-scale operations are no more than glorified garimpos, given the historic culture of large scale mining operations.  But on arrival, they couldn’t believe how organised and well run the operations were. On the way back, we told them, we were all sending our copper concentrate to smelters based outside of the country. We asked them, “Can you help us have a really good junior mining business in the state of Pará? Can we have a copper smelter in Belém? Can we have a gold refinery in Belém, so you keep the money in Pará?” They loved it. We took them to Palito, and they were blown away by how modern the operation is. In the state of Pará, the potential exists to have a similar scale industry as what you see in Western Australia.  For the state authorities their part of the bargain has to be, to be pragmatic and professional in the way that they manage the permitting, and the way they actually police these operations.

“In Australia we can get a permit in 12 months, and at the moment it takes longer in Brazil. The potential of the junior mining industry in Para, and particularly the Tapajos, is enormous and, with daily improvements in access and power supply, this potential is becoming more of a reality. We engage with the local communities and government agencies to help them understand this potential and help us to unlock it.”

It’s an established mining state and the second largest in Brazil, but the Para state government is very ambitious to be the number one miner in Brazil … "

Hodgson’s emphasis on the important of state government, is confirmed by other miners in Brazil. Lukas Lundin, is the major shareholder in Lundin Mining, which recently bought the Chapada copper and gold mine in Goiás for around $1billion. “One of the most important factors is the state that you are in”, says Lundin. “Chapada is in Goiás, which is a good mining state. So, we don’t worry too much about what is happening in the capital Brasilia because the most important political relationships for us are with the local governments directly around our mine. Those local politicians understand the industry, because it’s an established mining district, and also see the value of our operation. There is a great relationship with local communities and good ties with the regional government, so we are very happy to be there.”

Peter Marrone, CEO and Founder of Yamana Gold, which sold Chapada to Lundin Mining, notes that Bahia, where his company’s Jacobina gold mine is based, managed the pandemic more efficiently than the federal government. “Our mine is mainly regulated by the state and we worked closely with it to keep our mine operating. The state has done a very good job of balancing what is needed for the economy with public health concerns, and the proof is that the mine has kept producing.”

Promising geology

The most important thing is what is below ground, stresses Lundin. “It’s all about the geology. Chapada is an incredible asset and that is what first caught our attention.” But given the low levels of exploration there should be plenty more gold and copper to be found. And this is where Para looks particularly promising, with just 11% of the state being mapped for exploration, making it a real mining frontier within Brazil.

Serabi Gold is now carrying out expansive exploration. Hodgson isn’t expecting a mega find, but smaller, narrow vein deposits. “We only really started exploration in 2019. We’d flown an airborne survey, over the 60,000 odd hectares that we hold around Palito, and have been rewarded with multiple Palito lookalikes in the tenements. São Chico looks really promising in terms of expanding.  We’ve got this new area called São Domingos, where I think we’re going to find resource there and hopefully another mine. So there’s organic growth from our exploration efforts. We’ve got 4 drill rigs there right now, we are drilling a lot.”

A recent equity issue means Serabi raised enough funds to develop its Coringa asset and also keep exploring, says Hodgson. “We can fund for the next two years a really aggressive 30,000 metre a year drill program, where we really hope we will find another deposit. You might not have 100,000 ounces in one deposit, but if you can actually find three deposits each producing 50,000 ounces, with synergies, that’s a good story.”

To put that in context, Serabi currently produces around 40,000 ounces of gold per year but Hodgson believes that success with the drill bit could help the firm grow to 160,000 ounces of production per year between its Palito and Coringa assets. If that story can be repeated by other firms in Brazil, then the country will be able to boost both gold reserves and production. And that’s where the above ground conditions for companies looking to build and operate mines, really becomes important.

Above ground

Marrone is “delighted” with the country. “We have been there since 2003, when I founded the company and took it public, so it is the jurisdiction in which we have been the longest. It has improved in the Fraser Survey, so we are not the only ones who are happy with it. Based on our own experiences, not what a survey says, I can say that it has always been a good place to mine and incrementally, over time, it is improving.”

That positive assessment is shared by Lundin. “Our experience in Brazil has been excellent. We have a very good management team and hardworking employees... You hear negative stuff about Brazil and it being tough to do business there, but we have had the opposite experience. It’s a great country for mining. We haven’t had any problems with the famous ‘Custo Brasil’ despite the fact that our operation is a complex industrial process with plenty of local inputs.”

One problem that particularly impacts underground miners are labour laws, say both Marrone and Hodgson. “The labour laws in Brazil for surface mining are pretty relaxed”, says Hodgson, “you can actually do 10-hour shifts. But for underground mining just 6-hour shifts. That’s because of previous problems with ventilation many years ago, but whilst modern operational health and safety standards are now very good, the law hasn’t changed to reflect all the improvements in performance. As a junior we are competing for finance and investor attention with an underground gold mine in Australia, which will be operating 12-hour shifts, it’s that simple.”

Yet Brazil has some above ground advantages against Australia. The most important is its renewable energy. Brazil has the greenest electricity grid of any major economy in the planet, with 80% of its electricity produced by renewable resources. Traditionally this has been supplied by hydropower from huge dams built in the second half of the 20th century. Falling rainfall is restricting hydroelectric power output yet Brazil has been quick to find clean alternatives.

“Brazil has a natural capacity for generating electricity from renewable sources”, explains Bento Albuquerque, Minister for Mines and Energy. The country has had such success in using renewable resources that it has one of the lowest levels of greenhouse gas emissions on the planet. For many years now, hydroelectric power plants have supplied most of the country’s electricity. Over time, and with the decrease in the amount of available and affordable hydro power, this has gradually given way to other sources. Thus, biomass, wind power and later photovoltaic solar sources were on the increase, so that Brazil’s electricity grid remained with high levels of renewable energy.

“It is important to note how Brazil’s energy profile has changed over the past decades, with a huge growth in renewables and a reduction in hydroelectric power. The estimates are that between 2005 to 2030 the share of hydroelectric plants in centrally generated installed capacity will decrease from 75% to 54%. Other renewables will grow from 5% to 33% and thermal will go from 19% to 13%."

That is a big contrast to Australia, where just one quarter of electricity comes from renewable energy. With increasing ESG pressure on miners, it is big advantage to be able to run a mining operation on green power. The old saw, says Brazil is the country of the future… and always will be. Perhaps. But right now Brazil has the most attractive future of any of Latin America’s mining powerhouses.