Lima, Peru — As he opened the Cerro Lindo zinc-copper operation of Compania Minero Milpo at the end of July, Peru’s President Alan Garcia threw down the gauntlet, challenging the South American country’s mining industry to make Peru the most important mining country in the world.
Garcia said there was no reason why Peru should not be as big a copper producer as its southern neighbour Chile, and that development of the mining industry is essential for the development of the Andean country.
“Twenty per cent of the world’s mineral resources are in Peru, but only ten per cent of the country has been explored. Chile has fewer mineral resources than Peru and no polymetallic resources, yet it produces five million tonnes per year of copper,” Garcia said. “We can develop many more mines. We could open 200 or 300 more mines in Peru due to world growth projections. We could replace Chile — what are we afraid of?”
Peru produced 1.05 million fine tonnes of copper in 2006, a 3.9% increase over the 1.01 million fine tonnes produced in 2005. While reeling off a list of projects including Xstrata’s (xsraf-o, xta-l) Las Bambas and Anglo American’s (AAUKD-Q, AAL-L) Michiquillay copper-gold-silver project in Cajamarca department, energy and mining minister Juan Valdivia perhaps gave a more realistic forecast when he said, “within five years, it is very possible that we can double copper production.”
The Garcia government says it is a firm supporter of the mining sector because it sees it as the key to sustained economic growth and a tool with which to reduce the poverty rate from 50% to 30% during Garcia’s term in office. “Sooner or later Peru will develop through mining, but only when it does not represent a conflict with other sectors of the country,” Garcia said.
Over the last 20 years, Peru’s export earnings from mining have jumped ten-fold to US$14.6 billion in 2006 and a forecast US$18 billion this year from US$1.3 billion, according to mining association SNMPE.
“There is a price effect here, but there is also a three or four times increase in volume as well,” said deputy mining director Angel Murillo.
The government intends to maintain political and economic conditions to attract foreign investment while addressing the social problems that have hindered the development of some mining projects in recent years.
“We will maintain legal stability in the country so that there are guarantees for investors, and we will continue to work towards social responsibility to re-establish a better relationship between companies, the state and the communities. Social issues are the main challenge the mining sector faces. We have overcome the financial and technical problems; now we have to work to establish good relations,” Valdivia said.
Mining investment is flooding into Peru, but while the country is a polymetallic delight, the money is largely drawn to copper projects.
“There is ten billion dollars in investment forecast over the next five years and eighty per cent of this is for copper with the remainder for gold and zinc,” says Julio Loc, senior analyst at credit ratings agency Apoyo y Asociados.
Given the diversity of Peru’s minerals — from antimony to uranium — mining potential presents a much broader gamut than a handful of high-profile copper projects. A geologic map available from the mining ministry shows that the country is peppered with exploration and development projects. The exploration profile of Peruvian gold producer Compania Minas Buenaventura (bvn-n) represents this in microcosm as it will spend US$18 million in 13 different departments (states) this year. While the primary focus of the company is gold and silver, president and CEO Roque Benavides says it will take advantage of any opportunity that presents itself.
Buenaventura currently has a project development pipeline that could see it pour US$1 billion into six projects and joint ventures totalling US$2.3 billion in total investment. Projects waiting for authorization include the US$1.2-billion Minas Conga and US$500-million Cerro Quillish projects in northern Cajamarca department led by gold miner Yanacocha, Buenaventura’s joint venture with Newmont Mining (NMC-T, NEM-N). Other projects include the San Gregorio zinc project in Pasco department, Pilancones in Piura, and La Zanja and Tantahuatay in Cajamarca.
“We are in mining to make money,” Benavides says. “We love to continue investing, we generate a lot of cash and we are looking for opportunities, although we think the best way to grow as a company is organic, through exploration.”
Buenaventura’s open attitude is shared by some foreign exploration companies such as Canada’s Vena Resources (VEM-T, VNARF-O), which will spend US$20 million this year on exploration of its more than 29 properties, including its Pucara copper-gold project and uranium targets.
To finance this, Vena restarted production from the Azulcocha zinc mine in July and plans to install a mill capable of processing 500 tonnes per day to generate cash flow for ongoing operations.
“The cash this will generate will offset our burn rate,” says Vena chairman and CEO Juan Vegarra. “We have a highly diversified portfolio with plenty of organic growth possible from our own operations focused on different metals.”
An impressive geological resource is not all that Peru offers exploration companies.
“There are people all over the place so there is electricity and there are access roads so you can go almost anywhere,” says Jean Martineau, chairman of Canada’s Malaga (MLG-T, MLGAF-O) — formerly Dynacor Resources — whose primary interest is the Pasto Bueno tungsten mine in Ancash department.
The bullish feeling is clear to see on the Lima Stock Exchange (BVL) where mining stock capitalization jumped 135% in 2006 to US$15.76 billion from US$6.84 billion in 2005 as investors flooded to mining stocks due to high commodity prices.
“There is a lot of liquidity in pension funds, mutual funds and banks and a low offer of financial instruments which makes it very attractive to list here,” Loc says.
This helped make Lima South America’s most successful exchange in 2006, with growth in the general index of 161%. BVL CEO Federico Oviedo says the mining index grew 256%.
Such growth and local investors hungering for stocks to invest in has seen Canadian junior Candente Resource (DNT-T, CDOUF-O) list in Lima, following the lead of Vena Resources and Peru Copper (PCR-T, CUP-X).
Local miners such as El Brocal and Milpo, most of which are already listed on the BVL, are equally bullish as they look at new project development. Peruvian zinc producer Milpo will look to boost its zinc production to 350,000 tonnes per year of contained zinc in concentrates in the next three or four years by developing its Hilaron project, near the Antamina copper-zinc mine in Ancash department, following the startup of its Cerro Lindo mine, says general manager Abraham Chahuan.
Milpo may spend US$250-US$300 million to develop the Hilaron mine and plant with a throughput of 7,000-10,000 tonnes of ore per day, having identified a resource of 12.2 million tonnes grading 5.25% zinc, 1.44% lead and 2.11 oz. per ton gold. If the project is approved, the company will fast-track project development in the same way it fast-tracked the Cerro Lindo development, boosting production to about 200,000 tonnes of contained zinc in concentrates annually. The company may also spend up to US$200 million to develop its Pukaqaqa copper-gold deposit in Huancavelica department, which could produce 50,000-100,000 tonnes of contained copper in concentrates each year.
As in other key mining countries, the success the mining sector is enjoying in this high metal price environment is exposing the social discontent that lies beneath the surface. Having been in a defensive posture throughout the nadir of the price cycle, many companies and the government have been slow to react to the challenge of managing the good t
imes. Peru has enjoyed 50-60 months of sustained economic growth, giving the government the challenge of translating that into benefits for the whole country.
“Peru is a country of constant conflict, but this government has been very good at reaching a balance so far,” says Jorge Ganoza, president of Fortuna Silver Mines (FVI-V, FVITF-O).
Peru’s economic growth has seen Chilean department store companies Falabella and Ripley launch stores in Peru, and their locations provide a rule-of-thumb wealth index. The stores are essentially in the capital, Lima, and the northern coastal cities, which means large parts of the population are not seeing the benefits of economic growth.
“You do not see department stores in mountain department capitals,” says Andrew Bristow, executive director of Monterrico Metals (MMTLF-O).
Having seen its Rio Blanco exploration camp trashed by anti-mining protesters in 2005, corporate social responsibility has become a priority for Monterrico as it seeks to develop a 191,000-tonne-per-year copper and 2,100-tonne-per-year molybdenum mine in one of the poorest areas in Peru. The area around Rio Blanco has a population of 140,000 with 25,000 unemployed and an average monthly income of 100 soles (US$32).
“The state is absent and social unrest manifests itself against the major presence of wealth,” Bristow says. “We have learned a lot of lessons over the last five years and a mining project must consider itself to be a development project to operate in a trouble-free environment with a strong and constructive relationship with local communities.”
Although many companies have developed sophisticated social responsibility practices, more examples of best practice are needed to overcome the suspicion that mining often faces to show that it can coexist with communities.
“There has to be more mines like Antamina, Tintaya and Barrick so that people in Peru get confidence that mining can interact well and do good for society,” says Ian Kilgor, president and CEO of Antamina, which is a joint venture led by BHP Billiton (bhp-n, blt-l).
Communities are not the only stakeholders looking for a better deal, according to the national mining and metalworkers union, FNTMMSP. The union plans to hold a second national strike in October in protest against the lack of progress by the government on an agreed program of issues, says general secretary Luis Castillo. He says the government had agreed to address key areas of concern such as sub-contract labour, profit sharing, work terms and pensions during a general strike earlier this year.
“We signed an act with the government in May about themes it committed to address but they have not completed any of the eight points,” Castillo says.
Unionization in Peru is slowly regaining ground following the repression in the 1990s of organized labour. Under the government of Alberto Fujimori, the movement saw the disappearance of many of its leaders.
“There are a lot of martyrs in the union movement in Peru, but we are reconstructing it and in the last twelve months, some 9,500 people have joined mining unions,” says Castillo, who now puts the country’s total number of union members at 29,000.
Castillo believes Garcia’s failure to comply with his campaign promises could see industrial action blight the remainder of his term.
“Garcia has done nothing yet. He is continuing the policies that Fujimori and (Alejandro) Toledo left,” he says. “Worse, he has put himself on his knees before the miners. The Garcia government has been a setback for the workers.”
Mining association SNMPE, which represents companies responsible for 98% of Peru’s mineral production, says that the state has to take better control of the mining sector for the benefit of all.
“The state has to fulfill its role and regulate. That is lacking,” deputy mining director Murillo says. “There is a lot of flexibility in labour laws and the sub-contracting law is imperfect.”
Lack of proper regulation and enforcement sees abuse of labour by mining companies, claims the federation.
“Workers have to work 12-14 hour shifts at some mines, collective agreements are minimized and there is a constant fight between workers and the companies. Yanacocha, Barrick, Southern Copper, Cerro Verde and Doe Run are the . . . (worst violators.) Antamina and Tintaya at least care about their human capital,” Castillo says.