LATIN AMERICAN SPECIAL — Peru privatizing its mineral

The largest mining company in Peru, Centromin, is up for sale. The sale of Centromin is a large step in the aggressive privatization program started by President Alberto Fujimori in 1992. It will mean a major change for the Peruvian mining industry, which has been dominated by state-owned companies for the past 25 years.

Formed in the 1970s, when the military government of Juan Velasco Alvarado took over the Peruvian assets of New York based Cerro de Pasco Corp., Centromin ranks among the world’s largest silver, zinc, and bismuth producers. Operating seven mines, and the venerable smelting and refining complex of La Oroya, in the heart of the Andes, Centromin produces annually 295,000 tonnes zinc, 104,000 tonnes lead, 12 million oz. silver, 39,500 tonnes copper and lesser, but still impressive, amounts of minor metals and byproducts.

Meanwhile, Centromin’s smelters and refineries produce annually 60,000 tonnes refined copper, 2 tonnes refined gold, 531 tonnes refined silver, 67 tonnes refined zinc and 87,000 tonnes refined lead. With an annual turnover of about US$400 million, depending on metal prices, Centromin’s sales abroad are equivalent to more than one-tenth of Peru’s total exports.

In spite of the poor condition of the base metal market, Centromin has been performing well. The managing team headed by Hernan Barreto has turned the company around. After years of heavy losses, Barreto and his team managed to put the company back in the black and, most importantly, has reduced the workforce of the company from nearly 19,000 workers to only 12,000 in less than two years and without a major reaction from the labor unions. In 1992, Centromin reported a US$19 million profit, a big change from US$174 million loss in 1991. Profits for 1993, however, are expected to be a disappointing US$1.4 million because of low zinc and lead prices. It appears that Mineroperu will have less difficulty selling its assets. The company has already sold Minera Condestable, a small-sized copper mine located 100 km south of Lima; Quellaveco, a promising copper deposit purchased by the Anglo American-Minorco group; and Cerro Verde, one of Peru’s more appealing copper deposits.

And in a recent company auction, it sold exploration rights and a purchasing option on two deposits in northern Peru to Placer Dome (TSE). Placer offered US$7.1 million, plus an investment commitment of US$2.45 million in exploration, for the Jahuamarca gold deposit and the Canariaco copper deposit. Next on the list is the Ilo copper refinery, a plant designed to produce 75,000 tonnes refined copper per year, which is located at the port of Ilo, 1,300 km south of Lima. The plant was built in the 1970s to process under a tolling agreement the copper blister produced by Asarco’s Southern Peru Copper at the Ilo smelter.

The last bid tender of Mineroperu will be the Cajamarquilla zinc refinery located just 25 km outside Lima. The plant, designed to produce annually 101,000 tonnes of special high-grade refined zinc, 176,000 tonnes sulphuric acid, 1,600 tonnes copper cements and 355 tonnes cadmium, came into operation in 1981.

A technical study to double Cajamarquilla’s treatment capacity is part of the privatization package. At present, two-thirds of Peru’s zinc output of 600,000 tonnes per year is exported as concentrates and only one-third is refined locally. Cajamarquilla treats zinc concentrates produced by Centromin and local medium-sized miners. The main restriction for the expansion project is the availability of electricity. Because of

this, Mineroperu is also tendering a coal-fired power plant, Callacuyan, which is linked to Cajamarquilla.

Apart from these plants, Mineroperu is also selling dozens of deposits, some of which were explored in the 1970s. These deposits are being sold as assets, while the operating units are being sold as independent companies owned by Mineroperu.

These unexploited deposits have attracted the interest of more conservative mining companies such as Placer Dome. The company is not interested in operating mines but is instead interested in new deposits that it can explore and develop. Placer opened an office in Lima in late 1993.

Projects up for grabs include La Granja, a disseminated copper deposit in northern Peru for which Cambior (TSE) has bid successfully, and San Antonio de Poto.

San Antonio de Poto is a gold deposit located in the Highland of Puno, at 4,800 metres above sea level, near the Bolivian border, where Mineroperu has maintained a pilot operation since the early 1980s. A feasibility study suggested a US$29 million investment to bring the deposit into industrial production using two dredges simultaneously, producing 47,000 oz. gold per year. Reserves in the Pampa Blanca area, the largest of the deposits, are 95 million tonnes grading 0.29 grams gold per cubic metre.

Two large deposits have been transferred by Mineroperu to other state-owned companies in order to facilitate their sale. This is the case of Antamina, a 160-million-tonne deposit with 1.3% copper and 0.1% zinc, which is located in the central Andes. Antamina was transferred to Centromin in order to provide this company with a fresh source of copper concentrates for its 60,000 tonnes per year La Oroya copper smelting and refining complex. Centromin’s only source of copper is the Cobriza mine, which produces only 25,000 tonnes copper per year at a high cost. At present, Centromin is importing copper concentrates from Chile and the Philippines in order to feed its smelter. The second property transferred by Mineroperu was Coroccohuayco, a copper deposit located in Cuzco, about 10 km from the Tintaya copper mine. Coroccohuayco is now part of Empresa Minera Especial Tintaya, a state-owned copper producer to be sold during the second quarter of this year. Coroccohuayco is a key element for the future of Tintaya, Peru’s third largest copper mine.

Tintaya, with a treatment capacity of 8,000 tonnes per day of ore, started operations in 1985 but its reserves are running out. The company’s geologists have been working on finding fresh reserves at nearby deposits in order to ensure the operating life of the mining complex in the long term. These deposits are Chabucas, proposed to be a combined underground and open-pit operation, with 41 million tonnes grading around 2% copper, and Coroccohuayco, which holds 20 million tonnes grading 2.56% copper and set to be developed as an underground mine.

These mines, which will ensure Tintaya about 20 years of production at current operating levels, may have to begin operations by 1997 in order to replace the ore which is now being produced at Tintaya’s open pit. At present, the company is producing 54,000 tonnes copper per year contained in concentrates.

Apart from these deposits, Tintaya has accumulated about 10 million tonnes of oxide ore from the stripping of the mine. A study carried out by Kilborn Engineers in 1988 recommended a US$59 million project to build an acid heap leaching and SX-EW complex for the treatment of this ore.

The Peruvian government has privatized three major mining assets thus far. The first was Hierroperu, the country’s sole iron ore producer, which was bought by Shougang Corp. in December 1992 at a record price of US$120 million. Anglo American is completing a diamond drilling program at Quellaveco, the deposit that it purchased from Mineroperu which is located between Cuajone and Toquepala. The South African company plans to build a pilot operation in 1995 and to begin a feasibility study in 1996. According to current estimates, Quellaveco holds 270 million tonnes of leachable ore grading 0.9% copper. The company plans a 40,000 tonne-per-day operation to produce about 100,000 tonnes per year copper cathodes by bacterial heap-leaching and SX-EW plant. Production is scheduled to begin in 1999.

The last big mining privatization was Cerro Verde, carried out in the last quarter of 1993. The winner, and sole bidder, was Cyprus Amax Minerals (NYSE). Cyprus’ plan is aimed at shutting the current medium-sized, inefficient concentrator and expanding the heap-leaching operations from its current level of 7,000 tonnes per year of copper cathodes to about 48,000 tonnes per year.

The U.S. company also has under study the construction of a 28,000 tonne-per-day concentrator plant that will treat the primary sulphide ore of Cerro Verde, which is not suitable for leaching recovery. The concentrator is set to come into production by 1999.

— From a recent issue of “Platt’s Metals Week Focus” of New York.