Legislative changes entice foreign investment

Venezuela became one of the world’s major gold producers when stamp milling was introduced late in the last century in the El Callao area, a small portion of an extensive greenstone belt located in Venezuelan Guayana. Production peaked in 1885, when 8,193 kg gold

was produced in Nacupay, Panama, Mocupia, Potosi, and El Callao mines, with grades often surpassing 1.5 oz. gold per tonne.

In 1924, cyanide and flotation processes were introduced in Venezuela, and output from the area (Chile vein and Union mine) peaked at 4,566 kg in 1940. In 1926, oil production became the primary source of income in Venezuela and so mining, as well as other sectors of the national economy, became progressively of less interest.

In 1945, a new Mining Law was decreed, establishing a 60% income tax rate to mining activities, which prevented any new significant investment in mining, including gold, until recently.

The steps towards developing the country’s gold potential are well under way. A new Income Tax Law (passed by the Venezuelan Congress in 1991), states that foreign and domestic entities (including branches, joint ventures and subsidiaries) are given the same tax treatment under Venezuelan law. The new Tax Law slashed taxes on mining activities to 30% from 60%, a rate considered internationally competitive. A new Mining Law has been in consideration in the Venezuelan Congress since 1983 but is not expected to be approved before the last quarter of 1994.

Gold production in Venezuela has soared at least ten fold in the last five years. According to the last Gold Fields evaluation, since 1988 Venezuela has been the 10th largest Western world producer and has one of the highest positive growth rates among South American countries. However, actual production bears no relation to its world class potential.

In Venezuela, any individual or company, foreign or national, may own a gold-mining concession. The mining sector has been declared a national priority for foreign investment promotion in Venezuela.

Venezuela’s mining sector has been in a transition period for the past several years — between irrational and rational exploitation, between the chaotic proliferation of small mining operations that cause enormous environmental damage and the orderly development of ecologically-sound mining programs.

Today, extensive improvements in infrastructure have improved access to the zone, and large areas have been made available to interested parties for exploration.

This transition has taken place in large part because of increased co-ordination between the Ministry of Energy and Mines (MEM) and the Corporacion Venezolana de Guayana (CVG), the regional development authority and industrial holding company. New taxation and investment and mining legislation have encouraged a recent influx of foreign investment in the mining sector, most of it from Canada.

Since 1989, any foreign investment may be freely repatriated, regardless of the amount. Foreign business entities are taxed on income arising in Venezuela. The dividend tax has been eliminated. Investment tax credits at 10% of the investments in new fixed assets are now available to the mining industry. Foreign currency accounts can be opened in Venezuela. Venezuelan law is based on the Latin system prevalent in the Spanish-speaking countries of Latin America. MEM acts on behalf of the state under a 1945 law, whereby all minerals in the country belong to the state. MEM issues concessions to parties and/or companies under rules and conditions (that can be site specific) that give mining rights for specific minerals. These rights can be for “soft rock” (alluvial, eluvial and saprolitic) mining rights only or for the hardrock mining rights as well. It is generally understood that the holder of the soft rock rights will be granted the hard rock rights if and when they are applied for.

In Bolivar state, MEM granted CVG the diamond and gold rights to both the soft and hardrock under “Decree 1409”. CVG is involved in many aspects of the economy, such as power generation and primary aluminum smelting. Since CVG has the concession from MEM, it now leases out the mining rights to interested parties under its terms and conditions which in turn must comply with the terms agreed to by CVG with MEM.

Some of the lease’s terms: requirement of performance bonds, regulations which specify the timeframes allotted for exploration, the fulfillment of environment guarantees and the submission of timely progress reports. Thus there are currently two routes in which exploration and exploitation rights to a mineral property can be held from the government: 1) concessions granted by MEM — these are the mineral properties issued prior to Decree 1409;

2) leases granted by CVG, under its concession from MEM.

There has been considerable confusion over mineral rights in the Canadian investment community because there are two ways to “hold the rights”. In some cases, rights to minerals are separated and rights to soft and hard rock are separated. It is unlikely that the holder of gold and diamond rights would not receive copper rights when applied for, or that the holder of soft rock rights would not receive hard rock rights.

After much discussion and debate, a new Mining Law has now been drafted and it is expected to be approved by January, 1995. This new law will simplify and tighten some of the rules regarding title and rights. The new law will fix royalties at 2%, streamline the concessions granting process, formalize foreign participation and set special rules for gold mining. Comparatively little systematic exploration work has been done in the mineral-rich Guayana region, and officials note that Venezuela cannot lay claim to an official figure of proven gold reserves. But knowledgeable analysts estimate that a potential of 10,000 tonnes of exploitable reserves lie in the Guayana region and that an annual production of 75 tonnes is feasible.

In neighboring Guyana, whose geological structure is identical to Venezuela’s, a 300,000-oz.-per-year startup (the Omai gold mine) has demonstrated the economic potential of the gold-bearing laterite-saprolite overlying quartz vein-stockwork geological model.

Guyana’s documented historical production indicates that it has the same huge potential as the greenstone belts of Eastern Canada and Western Australia. The Venezuelan greenstone belt is bounded by granitoids and gneisses of the Supamo Complex which is overlaid on the south side by flat continental sediments of Roraima Group.

In 1985, CVG founded Tecmin, a company devoted to mineral exploration. Based on geological data, CVG has obtained five years’ exploration permits for several gold regions of prime exploration potential. Apart from Tecmin, there are other exploration companies, mostly Canadian, working in the region. Since that most recent gold rush started in 1991, large areas have been uncovered, mostly by illegal miners known as “garimpeiros”, but in some cases by better capitalized local mining concerns.

The garimpeiros primarily use pumps and monitors to convey the ore material to recovery plants. When the garimpeiros experience more consolidated ore such as quartz veining and/or saprolitic conditions, they use hammer mills prior to sluicing and amalgamation. Only in the last four years has there been any concerned effort either by the owners or the government to fully monitor these mining operations.

Since world-wide attention has been focused on the Kilometre 88 and El Callao gold districts in the Guayana region, the government has adopted new environmental regulations in order to protect Venezuela’s ecological system. Legal mining activities are under way in some of the 367 concessions (including CVG and MEM) so far granted throughout the Venezuelan Guayana territory. In the past, mining methods in many of those concessions were primitive and their recovery rates usually low.

Foreign companies are currently acquiring rights by either staking out new claims or joint venturing with the owners of existing claims. About 20 big foreign companies and joint ventures are active now.

Although a number of Canadian companies have been active in Venezuela, it was the presence of Placer Dome (TSE) that drew the first real interest to the Guayana gold region and the Kilometre 88 district in particular. Local owners of concessions currently include an

assortment of farmers, entrepreneurs, politicians, military types and even a consortium or co-operative of all of the aforementioned. Gradual and often expensive negotiations have allowed Canadian firms to acquire the rights to various Kilometre 88 and El Callao concessions. In the last two years, more than 75 exploration contracts have been signed with mining companies. Two mines are in production in the gold-rich El Callao zones. One is the Minerven facility, wholly owned by CVG, which is an underground mine that produces 2.9 tonnes per year. The other is Revemin, a joint venture between Monarch Resources (TSE) and CVG, which is recovering gold from the tailings of the Laguna mine. Revemin, in production from 1897 until the 1940s, is producing 1.3 tonnes per year.

In El Dorado district, Monarch opened its high-grade underground La Camorra gold mine this past June.

In 1991, CVG created a joint venture with Placer Dome to explore and mine Las Cristinas gold concessions, including rich gold tailings. At present, extensive exploration work is being done.

The recent increases in official production figures are due, among other reasons, to the international prices now being paid by the Central Bank of Venezuela, the only authorized purchaser. It sets its daily price on the Zurich and London gold fixes.

The gold industry is experiencing a steep growth curve; indeed, gold exploration has made mining the fastest growing sector of the gross domestic product (+18% in 1992).

The expanding mining and peripheral industries provide more jobs for miners, technicians and other professionals, as well as attracting foreign investors. During the next three years, this activity is expected to generate 10,000-20,000 new jobs and annual foreign exchange earnings of $US1.8 billion. Canadian companies related to the gold industry are well perceived in Venezuela, and have been successful in the sale of mining equipment, consulting engineering and, recently, in the formation of joint ventures in both drilling and mining companies.

— From a recent report on Venezuela’s gold-mining industry prepared by Luis Romero, senior commercial officer, Canadian Embassy, Caracas.