M&A and investment in Latin America’s natural resources sector




FW moderates a discussion on M&A and investment in Latin America’s natural resources sector between Alejandro D’Ambrosio, a partner at EY, Raúl Fernando Romero Fernández, a senior associate at Rodríguez Dávalos Asociados, and Werner Ahlers, a partner at Sullivan & Cromwell LLP.

FW: How would you characterise M&A and investment activity in the Latin American natural resources sector over the last 12-18 months? Which deals have caught your eye?

D’Ambrosio: During 2014, M&A transactions involving companies or assets which can be classified as natural resources decreased by approximately 21 percent compared to 2013. We identified approximately 110 M&A reported transactions involving natural resources in Latin America during 2014, and approximately 140 for 2013. We expect to have at least the same amount of unreported transactions every year, as small- and family-owned business are usually neither reported nor identified in the market. Though the natural resources sector suffered the impact of the strength of the US dollar, the slight deceleration of the China economy and the revolution of unconventional energy sources – namely shale oil & gas – M&A transactions in Latin America involving natural resources have remained fairly stable. Interest in these types of transactions is unlikely to decline from those levels seen in 2014. Last year in the region there were four M&A transactions with reported values higher than $1bn – two metal and mining transactions in Peru, one metal and mining deal in Chile and an oil & gas transaction in Brazil. During 2013 there were three transactions with reported values of $1bn and above; all three of those deals involved oil & gas assets in Peru, Colombia and Brazil.

Romero: The past year has seen an intense return of global M&A activity after four years of stagnant growth, and Latin America has been no exception. M&A activity in the natural resources sector of the region has been especially active in terms of volume. The past 12 months have seen interesting deals such as the one struck between an Argentinean firm and a foreign national oil company to develop the Vaca Muerta shale formation in Argentina. This deal is notable as it demonstrates a willingness to allow foreign participation in a strategic hydrocarbon area. Last year certain companies were very active in their M&A space, selling their participation in certain ventures while setting up new joint ventures to exploit new investment opportunities that will begin with the first public round of production sharing agreements in Mexico.

Ahlers: The variability in commodity prices, particularly oil prices, in the last year has clearly had an effect on dealmaking activity in the natural resources sector. Mining acquisitions have been more limited, with large international mining companies focusing more on optimising capital expenditure programs. Meanwhile, some small to midsize mining companies have stepped up deal-making by focusing on strategic acquisitions that capitalise on the low price environment. Examples of this are Lundin Mining’s acquisition of gold assets in Ecuador from Kinross and its acquisition of other mining assets in Chile from Freeport. In the oil & gas sector, there does also appear to be some pull back by companies on expansion and capital expenditure programs in response to the drop in oil prices. However, while M&A activity in this sector will remain somewhat unpredictable from country to country in the region in the short-term, Repsol’s recently announced acquisition of Talisman Energy proves that transformative deals are still possible. In addition, a number of key trends are likely to continue driving activity in the sector. The passage of Mexico’s landmark energy reform, the discovery of unconventional gas resources throughout Latin America and a pent up backlog of investments in infrastructure in markets like Peru and Colombia are all likely to drive M&A activity. The increased interest of private equity firms and other financial investors may also drive some novel deals, such as CPPIB’s acquisition of significant interests in Transportadora de Gas del Peru, Peru’s largest transporter of gas and natural gas liquids in Peru. Dealmakers will also be keeping an eye out for what collateral effects the Petrobras investigations may have on deal activity in Brazil’s pre-salt fields and the rest of its oil & gas industry.

The variability in commodity prices, particularly oil prices, in the last year has clearly had an effect on dealmaking activity in the natural resources sector.
— Werner Ahlers

FW: Are there any countries and sectors that appear to be particularly active at present? What factors are making them attractive to dealmakers?

Romero: Due to the boom of shale oil & gas in North America, and the opportunity it presents, all countries that have recognised the shale plays, such as Mexico, have the potential to attract the investment of firms and companies that have the experience and the technology required to exploit them. However, the global volatility of oil prices might affect investment decisions in the sector in the future and will help funnel them towards the natural gas industry. Due to the risks associated with venturing into new geographical locations, especially in an industry that is so extensively regulated as this one, collaboration with local strategic partners on investment schemes is vital, and so M&A activity will prove to be extremely important in the near future.

Ahlers: With the recent introduction of landmark energy reforms, there is obviously a great deal of interest in potential investment opportunities in Mexico’s oil & gas sector. Although companies are still trying to understand the implementation of the new laws and regulations and accommodate to potentially shifting long-term oil price expectations, interest in the country’s oil & gas – and, particularly in the short term, its related services sector – is expected to remain active as expectations for the positive long-term effects of the reforms remain high. Latin America’s unconventional gas reserves and emerging role in the global liquefied natural gas (LNG) trade may also present new opportunities throughout the region. Demand for more diversified and cleaner-burning energy resources within the region is expected to fuel the development of renewables and additional regasification facilities throughout Latin America. This may, in turn, create opportunities for joint ventures and other investments in new and existing liquefaction terminals and LNG transportation infrastructure near or in Latin America, including Mexico, Peru and Colombia, and other existing and new LNG exporting countries.

D’Ambrosio: In terms of investor preferences, there were a number of attractive nations in Latin America, led by Mexico, Peru, Chile, Colombia and Brazil. The least attractive nations in the region at the moment are Venezuela and Argentina, however investor expectations may shift in the future given the presidential elections in Argentina during Q4 2015. Furthermore, the potential change in the business environment which may be brought on by the elections may well lead many foreign investors to evaluate the possibility of completing acquisitions in Argentina’s natural resources sector. Investors may try to take advantage of the current low price of assets compared to other Latin American countries, before the election occurs. In terms of sectors, there are a number of differences, depending on the country in question. In Mexico, the oil & gas sector has been driven by recent changes in regulations, which have served to open the market to private investors. In the case of Peru, though there is interest in most natural resource areas, mining and the oil & gas sectors appear to be the stars. Mining for Chile and oil & gas in Colombia are the preferred sectors. With regard to Brazil, though it is still the most attractive location in the region for investors, the future evolution on transactions in the natural resources space is uncertain due to different variables. A country’s economic and financial performance during 2015, the oil price and the impact of shale resources in the global market, among others, can all play a significant role. The growing interest in natural resources in Argentina has been based on undeveloped, unconventional resources in shale oil & gas in the Vaca Muerta reserves, low assets prices and small tickets compared to neighbouring countries, relatively undeveloped mining areas, and high productivity for agribusiness compared to other areas in the world.

FW: To what extent are political and economic incentives, as well as legal and regulatory reforms, enticing investors and businesses to Latin America’s natural resources sector

Ahlers: Countries focused on private and foreign investment reform in Latin America, particularly those that have facilitated investment by pension fund managers, generally have been able to attract increased private equity investment. Nonetheless, the natural resources sector continues to be a sector that faces particular scrutiny from regulators and lawmakers that can pose certain obstacles or pitfalls investors should understand thoroughly. For example, in some countries we have seen unexpected changes in tax and royalty regimes, in addition to unpredictable permitting and environmental requirements, all of which have made it difficult for certain markets to strengthen – or turn around trends in underdevelopment in – the natural resource sector. On the other hand, jurisdictions that are able to address environmental and permitting regulations in a balanced, predictable way, and that are able to provide assurances of long term regulatory stability, will continue to see positive benefits from foreign investment.

D’Ambrosio: Though political and economic incentives and the regulatory environment are usually the first areas of analysis for foreign investors, in most situations those factors are balanced and analysed together with long terms expectations in these areas, the impact on expected rates of return and price for the assets, exposure to local or foreign markets, and countries’ necessity to develop those sectors, which usually require incentives to invest, among other factors. Depending on aversions to risk from every type of investors, each of the these factors may have a positive impact on an investor’s decision to invest, however there are limited occasions where it is difficult to find a buyer for a natural resource asset, no matter the Latin America country involved, at adequate, balanced conditions.

Romero: The stability of the global economy has certainly contributed to the growth of M&A activity not only in Latin America, but the whole world. Mexico’s structural reforms, especially the energy reform, which allows private investment in a variety of activities that had been previously reserved for the state for decades, have definitely been a major factor behind current interest in the sector. As the regulatory climate becomes clearer with the issuing of regulations by newly appointed government bodies, it should serve to attract even more investment to the country.

In carrying out due diligence, the proper hiring of local advisers and collaboration with those advisers certainly provides for a better and more rigorous result.
— Raúl Fernando Romero Fernández

FW: In your experience, how should foreign investors approach negotiations when identifying targets and closing deals in Latin America?

D’Ambrosio: Considering the changing and volatile economic, political and regulatory environment in Latin America, together with the volatility of commodities markets, it is critical for foreign investors to have an adequate understanding of current and expected conditions and the local culture before performing a complete risk assessment and a projection of an investment or acquisition. Obtaining different views from local advisers can be critical even for companies with a presence in Latin America, particularly if the firm’s M&A or development team is based abroad. The involvement of local advisers is also critical in the second step of the investment analysis: due diligence, negotiation and closing.

Romero: Foreign investors should pay close attention to the identification of targets that can add value to their investments. It is important to identify the benefits and goals of an acquisition and to carry out the acquisition process with these factors in mind. Additionally, negotiation processes in Mexico require parties to have an open approach to the decision makers of target firms and parties should be willing to understand what their key interests are, as these can differ greatly from their own. Additionally, investors should take into account, while negotiating deals in Mexico, local practices as well as the wider legal and regulatory scheme, which may differ considerably from the applicable regimes in their countries.

Ahlers: Firms should work with sophisticated advisers that are not just deeply familiar with the target’s market and jurisdiction, but with the sometimes unpredictable political and regulatory risk issues presented by investment in Latin America and the various ways of mitigating such risks that investors have successfully employed across the region. This can best be accomplished by working closely with both local and international advisers experienced in the jurisdiction, and across the region, to understand, in detail, the political and regulatory risks presented by the investment and transaction – regulatory uncertainty, foreign investment regimes, foreign exchange restrictions, and so on – and exploring thoroughly the foreign investment protections and other mechanisms to mitigate these risks. In addition, firms must conduct deep due diligence in key sensitive areas, including tax, labour, anti-corruption compliance and permitting in order to identify and allocate any lingering risks. Finally, companies should stick to their core principles in executing deals and avoid succumbing to arguments that things operate differently in the target’s jurisdiction. Failure to do so may lead to the unintended assumption of risks, particularly with respect to compliance with general anti-corruption laws.

FW: Do you believe the due diligence performed by foreign acquirers is typically robust enough to properly manage and understand the key risks involved in these types of deals?

Romero: In carrying out due diligence, the proper hiring of local advisers and collaboration with those advisers certainly provides for a better and more rigorous result. In general, due diligence activities are thorough enough to deal with most risks, but it is always important to accept that the more robust the process is, the longer the acquisition will take. The timing of acquisitions can be an issue in taking advantage of key investment opportunities, such as bidding rounds, and investors must evaluate this trade-off when carrying out their M&A activities in Mexico. Moreover, investors should consider adjusting their due diligence processes in order for these to provide enough certainty in accordance to the practice and the way of doing business in Mexico, as well as to include any legal or regulatory risk that may arise from the activities performed by the companies in Mexico, whether these are affected by municipal, state or federal provisions.

Ahlers: While political risk has moderated in many countries in the region, investors should continue to monitor legal developments and ensure that they take full advantage of legal regimes for the protection of foreign investments. Understanding these risks, which can touch on core regulatory issues that could threaten a successful closing, is always the beginning of a thorough due diligence exercise. Clearly, for those investors interested in natural resources, concession regimes, permitting and environmental compliance should continue to be focal points of any diligence process. In addition, issues of labour, tax and anti-corruption compliance are always sensitive areas that should be a key focus of any transaction in the region.

D’Ambrosio: Utilising local resources for due diligence and risk assessments when carrying out a new investment or acquisition is critical. In Latin America, the changing environment, be it political, economic or regulatory, last minute updates as well as a clear understanding of the local situation is critical to having an accurate view of risks and mitigating factors which can save money and hedge future risks.

FW: How important is local knowledge when it comes to dealing with the regional challenges, policies and processes of investing in Latin America’s natural resources sector? What are some of the common risks and pitfalls, and how can they be avoided?

Ahlers: For all foreign investors new to a country, or those returning to a country with a dynamic environment, the effective use of experienced international advisers familiar with techniques for addressing multijurisdictional issues and risks, and local counsel with an in depth understanding of specific jurisdictional challenges, is key to achieving deal objectives. Care should be taken to carefully select counsel for every deal to ensure the availability of the most up to date advice and deal technology. Money spent on experienced counsel can save hefty fees that may be incurred down the line to address issues that should otherwise have been identified at the outset of a deal.

D’Ambrosio: While local knowledge is critical in dealing with local and regional challenges, it is no less important to assemble a cooperative team to analyse an investment or acquisition involving resources from an investor who can clearly transmit investor strategy and culture. Teaming, ownership of the project, leadership and PMO, as well as local and technical skills, are key factors for a successful acquisition or investment in the region. Equally important is post-merger integration planning and execution and coordination between investment teams and assets management teams, which usually are different teams and sometimes have no or limited connections. Lack of understanding of local issues and culture, such as unsophisticated financial reporting systems and procedures, low quality of information, and related plans to solve or mitigate such risks, are common obstacles. Local transaction experience is key not only to identify specific risks factors but also to develop adequate solutions to eliminate or mitigate such risks, moving from identification to resolution.

Romero: Hiring adequate legal counsel and other local advisers is essential in tackling regional challenges, policies and processes. Local knowledge is necessary to carry out proper due diligence in the acquisition process, as these advisers have the experience and background to identify and evaluate the key risks involved. Projects in the natural resources sector can fail or be hindered by a lack of necessary governmental authorisations, or by failing to properly handle relations with other stakeholders involved in a project, as is the case with obtaining the necessary access rights. Local experience is also necessary to efficiently and successfully carry out investment projects in Mexico.

The key is to find appropriate opportunities and properly identify and measure risks and related solutions with local and foreign support.
— Alejandro D’Ambrosio

FW: What types of deals do you expect to see in the region’s natural resources sector over the coming months? Is dealmaking set to increase, or are there barriers to progress?

D’Ambrosio: In Peru, we expect to see continued active interest from foreign investors in mining and metals and oil & gas. The current and expected short term environment should keep the country as one of the main regions for investment in natural resources, as well as infrastructure projects. Although Mexico is one of the region’s best performers – not only because of the recent deregulation of its energy sector, its proximity to the US, its size compared to other Latin American countries, and its current economic and financial performance – the development of its oil & gas sector will be highly dependent on oil & gas prices in the coming years. Most of the international oil & gas players have investment plans for Mexico but break even points have been challenged by the drop in market prices. In any case, Mexico will remain one of the most attractive countries to invest in Latin America. Chile will likely continue to be attractive for investments. The challenge for investors is that assets prices are high compared to other countries. Based on Colombia’s current and expected financial and economic stability, and its need for foreign investment and infrastructure development, we should expect to see continued interest there too. The challenge will be assets prices in the future, which have increased in recent months and may push down expected investor returns. Brazil will probably see a slight decrease in the number of deals in the coming months. Also, deal sizes are likely to decrease based on a number of factors, including the country’s economic and financial performance in 2015. Yet the majority of transactions in Latin America will take place in Brazil. Argentina should continue to see a volatile financial, political and regulatory environment, at least until the primary presidential elections in August. After the elections, a clearer picture of the future business environment should emerge. Low assets prices will likely persist, at least through 2015, so opportunities for acquisitions and investments should remain throughout the year. We expect to see active acquisition activity based on opportunity prices to be led by investors with a risk aversion, who will probably make good returns if the political scenario changes after the October presidential elections.

Romero: The new legal framework definitely aims to promote growth in dealmaking in Mexico’s oil & gas sector. Growth may come from many joint venture projects between foreign investors and local companies with experience in the sector, as well as substantial acquisitions by certain companies that are looking to diversify their activities globally. It is also possible that firms based in Mexico may carry out additional acquisitions or strategic alliances in other regions, as certain Mexican companies in the mining sector have been doing recently.

Ahlers: We expect the natural resource sector to be active in the coming months as companies begin to understand the short, medium and long-term effects of lower commodity prices. Opportunistic and strategic transactions are likely to play a key role in the sector with stronger and more resilient companies looking to consolidate their position in their corresponding markets.

FW: What final advice can you offer to foreign acquirers looking to pursue M&A and investment opportunities in this sector?

Ahlers: A company should be clear about its objectives and risk tolerance when doing a deal and resist the temptation to abandon approaches and deal technology that have proven to be successful outside of the region. Different jurisdictions often present unique challenges in the context of a deal but the most satisfied clients are those that stick to the core principles that have guided them in other transactions while focusing on creative but clean execution with experienced counsel and using proven deal practices that are informed by, and adjusted to, local conditions.

D’Ambrosio: There is a wide range of opportunities to invest in natural resources in Latin America, with a wide range of options in terms of sectors, such as mining, oil & gas, agribusiness, renewable energy, paper & forest, among others. Risks and expected returns within this developing region have the potential to increase production and trading of natural resources. The region has no conflict hypothesis, either between countries or in terms of internal disruptions. The key is to find appropriate opportunities and properly identify and measure risks and related solutions with local and foreign support.

Romero: Although the potential for high value M&A investments in Mexico’s natural resources market, especially in the oil & gas sector, is undeniable, investors should take the volatility of international oil prices into account. Furthermore, they should bear in mind the inherent currency exchange risks and the reality that acquisition processes can entail transaction costs that exceed estimates. Moreover, a full understanding of the applicable tax regime and regulatory framework is required, particularly in the oil & gas industry. A thorough due diligence process is therefore essential to foresee and mitigate as many challenges as possible.


Alejandro D’Ambrosio is a partner at Ernst & Young, based in Buenos Aires, Argentina. He provides professional advice in transactions including M&A lead advice on the buy and sell side, business valuations, financial, accounting, tax and social security due diligence, and tax structuring involving assets in all Latin America countries. Mr D’Ambrosio has extensive experience in natural resources transactions, in particular related to oil & gas, mining, agriculture and different types of power generation, among other industries. He can be contacted on +54 11 4318 1549 or by email: alejandro.dambrosio@ar.ey.com.

Raúl Fernando Romero Fernández is a senior associate at Rodríguez Dávalos Asociados. He has participated in the negotiation of contracts and handling of regulated activities in several projects related to oil & gas E&P, power generation projects, distribution, storage and transportation of liquefied petroleum and natural gas, including one of the most important natural gas transportation pipeline projects in Mexico and the first private ethane transportation pipeline in Mexico. He has negotiated and executed several NAESB agreements and negotiated Mexico’s first Natural Gas Operative SWAP. He can be contacted on +52 (55) 5202 04 05 or by email: rromero@rdabogados.com.mx.

Werner Ahlers is a partner in the M&A, Project Development and Finance and Corporate and Finance Groups at Sullivan & Cromwell. His experience includes a wide range of cross-border mergers and acquisitions, corporate, project and asset-backed financings and capital market transactions. Mr Ahlers is chair of the Inter-American Affairs Committee of the New York City Bar Association and a term member of the Council on Foreign Relations. He can be contacted on +1 (212) 558 4000 or by email: ahlersw@sullcrom.com.

© Financier Worldwide



Alejandro D’Ambrosio



Raúl Fernando Romero Fernández

Rodríguez Dávalos Asociados


Werner Ahlers

Sullivan & Cromwell LLP

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