Overview of Mining Industry in Colombia
The mining industry is among the most important industries and an economic growth engine, which has become a dynamic and important sector for Colombia’s economy. At the moment, the mining industry represents 2.1% of the GDP and is forecasted to grow in the sectors such as coal, gold, nickel, and emerald. Foreign direct investment in the Colombian mining sector represents 31.9% and provides major investment opportunities for both local and foreign companies. In 2014 the world gold council ranked Colombia as the 6th largest gold producer in Latin America, having tripled in the last ten years. Below is a snapshot of the industry in the Colombia:
Source: Stockhouse, Investing in Colombia, 2017
Strong Support For Legal Mining Investment in Colombia
Although the mining industry in Colombia has experienced tremendous growth, the government has been trying to decrease the number of illegal mines in the country and has been making sure all companies go through a rigid legal process to set their company up properly. They want mining companies to be formed responsibly and consider all the risks involved in setting up a mining company.
The associated costs of illegal mining have been an issue faced by the Colombian government for decades. Peoples lives are put at risk when miners choose to exploit their materials illegally. For instance, in illegal gold mining, gold is refined with mercury, leading to thousands of cases of mercury poisoning against victims in the vicinity of these illegal mines. The Colombian military believes that each year about 200 tons of mercury end up in the country’s rivers.
Mines that are not legally formed are also at risk of collapsing and causing harm to workers in the fields. On top of that, there are sweeping environmental damages from illegal mining-related activities, including large-scale deforestation, dredging, digging and excavation, as well as heavy use of toxic chemicals.
This is why there has been a strong attitude from the Colombian government to remove illegal mines and ensure that all new mining procedures are formalized and that mining companies are legally formed with the right precautions.
How to Establish a Legal Mining Company in Colombia?
When planning to invest in the Colombian mining industry and to acquire a mining concession, it is recommended you explore the use of due diligence services before making your investment. Due diligence services help you get an adequate risk assessment and make the right investment decision. This part of the article describes the process of due diligence in the mining industry and gives more information on different steps that are part of the due diligence process.
Mining Due Diligence in Colombia
Due diligence in mining is a preliminary analysis before contracting a mining concession, in order to know the current state of the contract. In every due diligence service, two different analysis needs to be carried out – on the one hand, a legal analysis must be conducted, and on the other hand, a technical analysis has to be done.
The legal analysis consists of the following:
- Review of the existence and validity of mining titles
- Duration of the mining title
- Technical and Environmental Mining Commitments
- Status of compliance with obligations obtained by the mining title
- Inventory of the factual situation
During the legal analysis, an administrative analysis of the title must be carried out, in which the date of registration, current owner or holder, obligations, operational area, location and mining registry code have to be verified. In addition, an analysis of the mining titles and environmental restrictions has to be conducted, in order to obtain the respective information of the zone of interest. The zone has to be analyzed if there is a mining title in existence or if there are any environmental restrictions within the area, in order to prevent a rejection from the national mining agency. All environmental information can be obtained from the Colombian environmental information system (SIAC).
The technical analysis consists of an analysis of all environmental restrictions. Involving an analysis of the limitations of mining rights, by considering natural parks, forest reserves, river areas and the geographical location. The competent environmental authority defines which mineral extraction methods do not affect economic exploitation of the surface and basis and defines which extraction methods can be used in the relevant area.
When using mining due diligence services, it is also crucial to have several other elements in order to assess and measure the risk of investment.
Key Facets for a Legal Mining Due Diligence in Colombia
In order to have a fair, complete and reliable due diligence process, it is important that both parties sign a Memorandum of Understanding (MOU) or a letter of intent. This memorandum or intent has to contain binding clauses such as access to information and clauses of confidentiality, expenses and applicable law and jurisdiction, which have to be applied during the application of the due diligence process.
- Fulfillment of the obligations with the state
This includes the verification of terms and the amount of policies and guarantees, which are applicable according to the regime to each mining title. The next step is the compliance of contractual obligations and requirements made by the mining authority as well as to verify deadlines to remedy, by taking into account the legal regime applicable to each title. After this process, the follow-up of the compliance of the mining authority of due process and terms of law for the notification of administrative acts must be communicated to the holder, according to resolutions issued by the mining authority. Besides that, the administrative acts that are projected according to the delegation of functions and resolutions issued by the mining authority have to be signed. This part also includes the follow-up on the performance of pending procedures.
- Compliance with environmental obligations and existence of environmental liabilities
The existence of formal aspects, such as the existence of the respective environmental license has to be reviewed. Furthermore, there should be no pending administrative processes, investigations or pending sanctions. Apart from there must be a review that the mining owner has the environmental authorizations on aspects such as water concession, forest utilization, dumping of liquid waste and atmospheric emissions. Moreover, the compliance of applicable environmental regulations during the exploitation phase has to be verified. It has to be mentioned that the sanctioning system in environmental matters is very strict and imposes sanctions and fines.
- Health, safety and environment
During this step, the historical occurrence of occupational accidents and risks has to be identified. Furthermore, the legal provisions of hygiene and mining safety have to be taken into consideration. Evaluations in the area include the compliance with provisions regarding industrial safety and health, as well as the verification of the affiliation of workers to the social security system.
- Land management
The seller has to provide a study of land management, including the characteristic of the properties where the project is located, existence of easements, whether granted or in process of expropriation and compliance with compensation payments.
- Foreign corrupt practices act
In Colombia, any negotiation of acquisition of companies in which a foreign company intervenes has to include an anti-corruption due diligence. The law requires that those who do business must demonstrate that the necessary level of due diligence is acquired and have to be careful when exercising business transactions with companies that may be linked to acts of corruption.
- Fulfillment of obligations with the state
In order to fulfill the obligations of the state, a compliance with contractual obligations must be checked according to the chronological origin (date of grant and applicable law on that date) and according to the relevant stage of the mining title (exploration, construction, and assembly).
Mining assets that are located in settlement areas of national ethnic groups must be verified. This information can be obtained by the ministry of the interior. If such settlement exists, it should be verified that the concession holder has completed a process of prior consultation of the relevant communities prior to the development of the project.
- Technical Management
This due diligence has to be carried out independently by technical audit personnel, and their general rule is to not be in contact with the legal team doing the integral due diligence of the operation, which may make it difficult to find the adequate contingencies found in the field. The technical review includes the development of the technical stages, in accordance with the documents approved by the mining or oil authority, as well as adequate technical management of mining operations and rational use of mining resource.
The final stage is to verify if the examined operation meets the thresholds of the prior authorization of the superintendence of industry. Therefore, it is imperative that you first notify the SIC about your planned operation.
Wrapping It Up
The Colombian government is making sure they get rid of the illegal mines as well as are strengthening the legal process when setting up a mining company in the country. This is why it is extremely important to go through all due diligence processes when deciding to invest in Colombia’s mining sector. The execution of a proper mining due diligence helps any company make the right business decision for investment, and allows them to manage their investment risks more effectively. If you have any more questions regarding the mining due diligence process, get in contact with Biz Latin Hub- Colombia. The company is well-equipped to deal with all your mining legal due diligence question and inquiries. Reach out to Craig at Colombia@bizlatinhub.com and see how our mining lawyers can add value to your Colombia mining investment.
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