The Ghost of Christmas Yet-to-Come
The Colombian gold rush offers a stark reminder of the pitfalls that the new green gold industry needs to avoid. In our last edition of the year, we analyze the potential risks for 2019.
By: Mat Youkee
In Charles Dickens’ A Christmas Carol the Ghost of Christmas Yet-to-Come is the most terrifying of the three apparitions to confront Ebenezer Scrooge. Hooded in a black cloak, the figure doesn’t speak, it simply presents a vision of the grumpy skinflint’s future should he not change his ways. This vision was very much present at one of two conferences CCI attended in Medellín this November, and gave your correspondent reason to pause and reflect.
Back in 2011 there was a similar buzz surrounding the country’s under-explored gold mining sector
The second of the two events was the ExpoMedeWeed conference, held in the spectacular surroundings of the city’s botanical gardens. A vast wooden hexagonal canopy in the garden’s center provides shade for the stands and attendees, whilst all around lush vegetation and blue skies are a reminder that not only is Medellín the ‘city of the eternal spring,’ it’s also a pretty good place to grow marijuana. There was a sense of excitement and optimism in the air and – with English, Spanish and French being spoken all around – a feeling that important deals were being cut.
In many ways, it was a nostalgic experience for your correspondent. Back in 2011 there was a similar vim and buzz surrounding the country’s underexplored gold mining sector. However, at the excellent Colombia Gold Symposium held the previous week, the mood could not have been more different. In contrast to the sunny disposition of the cannabis events, Colombian mining conferences are populated by frustrated engineers, gaunt financers and over-worked lawyers.
Some of the Canadian investors who joined the gold rush of 2010 to 2013 have now successfully reinvented themselves in the cannabis space. In contrast to the some of the fresh-faced newbies, they often have a conservatism bred on experience. CCI decided to look at the issues that buried the Colombian mining industry and their possibilities of happening in the marijuana space:
In April 2011, Colombia announced a moratorium on mining licenses. Ingeominas, the Colombian geological service responsible for awarding titles, had been a hitherto sleepy entity. But as gold prices rushed past USD$1,500 per ounce, exploration firms began staking out properties at a far higher rate than they could be processed. As waiting times rose, smart firms hired Ingeominas officials to their staff, further reducing the institutional capacity of the organization. Originally set for six months, there were still thousands of unmet requests by October and the moratorium was extended for a further two years. The government looked poorly at the flipping of titles for a quick buck and the sector was soon subject to a major overhaul. In 2012, Ingeominas was abolished and a National Mining Agency established.
With 2019 around the corner, cannabis firms should consider whether the government has the resources – and will – to push approvals through at the current pace. Over 100 projects have been awarded in the last year and hundreds more are reportedly in the review process. Meanwhile senior figures in key ministries and ICA – an agricultural body – have moved on either to work for private firms or as consultants. As projects flip hands for many multiples of their initial spend, accusations of speculation could be set to follow. President Iván Duque could well decide that it’s time to take stock. What’s the probability of a moratorium on licenses?
In 2011 when mining lawyers talked about seguridad juridica (legal certainty) they were concerned about a government move to add a couple of percentage points to the royalty rates paid on mineral production.
Those were the days. Today the industry is in an existential battle with the country’s three high courts. The Constitutional Court has supported efforts to establish national parks and mining-exclusion zones over existing projects and supported the rights of local communities to vote down extractive projects via referendums. In October this year, the State Council announced a surprise moratorium on fracking. In all cases the mining and oil firms involved stand to lose hundreds of millions of dollars in sunk investments and numerous multi-billion dollar investor- state disputes are currently working their way through international courts.
The good news for investors in Colombian cannabis is that projects are unlikely to be halted on similar grounds. In February, a group of locals protested against the Cannavida project near Barichara, in Santander department. They argued that the project would affect an aquifer and therefore should be put to the vote. However, since then the situation appears to have been defused and – judging by Cannavida’s social media – the firm has prioritized community relations.
Cannabis projects have more freedom of location than extractive projects and should avoid environmentally and socially vulnerable zones. But the higher courts have little power over surface rights, and it’s not extractive, so growers should not fear judges for now.
Although there were no formal operational gold mines in Colombia, there were dozens of mining regions where artisanal and illegal miners chiseled away at old colonial era mines or panned for gold in the rivers of Antioquia. Conflicts between informal miners and licensed companies and between illegal miners and government forces led to serious (and sometimes fatal) violence, environmental damage and a negative view of the sector in general.
Fortunately for cannabis producers, relations with small-holder farmers have been more friendly to date. Resolution 579 of 2017 establishes that producers operating on a surface area of less than half a hectare are entitled to technical assistance and establishes that marijuana transformation plants must process 10% from small and medium scale producers. This system has yet to be tested in practice but it’s a positive sign that small scale growers – increasingly mobilized around the COCCAM association – are being considered in the early stages. While illegal marijuana production will continue in Colombia, unlike gold, growers are not competing for a finite resource, meaning violent conflict between legal and illegal producers is less likely.
Lack of Clarity
Colombia’s miners also had to deal with a lack of clarity regarding secondary issues such as environmental permits, local content requirements and royalty takes between local and national governments. The cannabis industry also faces clarity issues. As the December 31 deadline for seed registration comes to a close, it remains unclear how those projects which have yet to begin the registration of genetics with ICA will access seeds in the coming years. There is no clear guidance as to the availability of local seeds or their pricing or whether the seed import process – currently complex and long – will be speeded up to help growers.
While illegal marijuana production will continue, unlike gold, growers are not competing for a finite resource, making violent conflict less likely
Another point of confusion is the export process. In 2016 a 16% levy on cannabis was approved and while a weed-tax is absent from Colombia’s up-coming fiscal legislation, it could rear its head again in the future. Meanwhile DIAN has yet to issue an export code for cannabis derivatives and – judging by October’s “seizure” of hemp seeds at El Dorado airport – the Ministry of Trade has work to do educating police and customs officials on the legality of the industry. Even if Colombian regulators can get their act together, the Canadian market remains protective of its own industry and the Europeans require tough EU- GMP seals for pharmaceutical products and ingredients.
With Colombia basically off limits to mining firms during the 1980s and 1990s due to the presence of guerrillas, paramilitaries and narcos, rural populations had no experience of modern mining – and its benefits – comparable to Chile and Peru. Mining investors would bemoan that the country needed “one good mine” to show how the industry could positively affect the economic development of the regions. There were great hopes for Canada’s Red Eagle Mining, one of the first products to reach production, but a botched engineering plan meant the project collapsed, destroying shareholder value and frustrating the expectations of the community.
It’s too early to say what effect the December short-selling report targeting Aphria will have on the wider cannabis industry. However, the inclusion of a Colombian project in those deemed to be overpriced assets does little to boost the reputation of the nascent sector in a country where the government appears to want to downplay its support of cannabis and where a vocal left- wing minority accuse Canadian firms of siphoning off profits and leaving little for locals.
CCI does believe in good will to all men, however, and believes that with the right strategy, intelligence and approach, the Colombian cannabis sector represents a huge opportunity both for companies and the country. The risks are real, but so are the rewards. That’s enough humbug for one article.