EDITORIAL PAGEA — One step forward, two back

Several years ago, Venezuela took steps to revitalize its near-dormant mining sector by adopting a more favorable tax structure and promising to reform its mining laws.

Optimism was high that the country would become another Chile, with gold, rather than copper, being the fuel for an economic boom.

Attracted by the geologic potential, mining companies flocked to the country’s historic mining districts and began acquiring and exploring concessions. The competition became fierce, and prices to acquire the more prospective concessions moved into the stratosphere. An unfortunate consequence is that some juniors today are spending far more on payments to concession owners than on exploration.

But the initial optimism about Venezuela’s emergence as a top gold producer is fading for reasons that have nothing to do with hefty property payments or the fact that new discoveries are slow in coming.

At a recent gold conference in the capital city, Caracas, foreign investors were disappointed that there was no announcement to change the regulation that all gold produced in the country must be sold to the Central Bank. While government officials expressed optimism that the country’s gold output would triple by the end of this decade, foreign investors were clearly not as bullish. The overwhelming view was that while the country has great potential, serious money will not be invested in gold projects until the exportation of gold is allowed.

By most accounts, the government’s decision to impose exchange controls has caused distortions in the gold market. Depending on the exchange rate of bolivars to the dollar, a gold producer can be paid less for gold sold to the official market than if it were sold on the unofficial market. (Producers are paid the spot price in bolivars; the problems arise in trying to exchange them into dollars.)

Most producers understand that these policies are interim measures linked to the country’s well publicized economic problems, which involve the failure of a series of banks. And most are “cautiously optimistic” that positive changes will be made shortly. In the meantime, current policies make it difficult for producers to conduct normal business, such as arranging forward gold sales and importing mining supplies and parts.

And in some quarters, concern is growing that a number of smaller producers may be pressured into smuggling their product out of the country in order to sell it on the international market rather than to the Central Bank. Delegates also expressed concerns about the uncertainty and complexity still associated with obtaining permits to explore for, and ultimately mine, minerals on concessions. The slow process of obtaining permits has led to delays, and delays are never welcome in the mining business. Delegates also urged that measures be taken to rectify the ambiguity of some tax laws, particularly those that can be applied at the discretion of tax collectors.

Venezuela may indeed have the geologic potential to become a large gold producer in the next century, but this is not likely to happen unless the fundamental obstacles to major investments are eliminated. Let us hope that positive changes will not be long in coming.