Peru’s extraordinary mineral wealth and political stability ensure the country remains one of the world’s favorite mining destinations
A brief study of the history of Peru’s fascinating civilizations reveals how linked mining has been to the country’s developments. Over 1,000 years before the Spaniards killed Inca Emperor Atahualpa after robbing him of his gold and silver, the Señor de Sipán, a leader of the Moche culture, was buried with a number of precious objects including a famous necklace, half of gold and half of silver, symbolizing the equilibrium between the two main gods, the Sun and the Moon. Nearly a millennium before this, the Chavín culture had already mastered the art of jewelry as well. The raw materials were always mined.
In today’s Peru, mining continues to be a central activity. The country hosts a rapidly-growing economy that has expanded uninterruptedly for the last 12 years and boasts tremendous optimism toward the future. Peru is currently attracting a wave of investments in agribusiness, power generation, oil and gas and, of course, mining. The latter leads the way. The announced construction of Las Bambas, a mega copper project by Xstrata, will be the largest ever single investment in the country, with a planned expenditure of $4.2 billion. Copper production is expected to nearly treble with the upcoming investments, moving from the current 1.25 million metric tons (mt) of fine copper to 3.5 million mt six to seven years from now.
The economic and legal stability that Peru has enjoyed since terrorism was thwarted in the 1990s, is such that this year’s presidential election is not even perceived as posing the traditional political risk common in Latin America. The three candidates leading the polls (Alejandro Toledo, president from 2001 to 2006; Luis Castañeda, a former mayor of Lima; and Keiko Fujimori, the daughter of former president Alberto Fujimori, now in jail) are expected to follow the same macroeconomic recipes that have boosted development so far. GDP has increased by an average of 5.6% annually between 2001 and 2010, according to IMF data. Even Ollanta Humala, a long shot contender perceived as a replica of Venezuela’s Hugo Chávez, has significantly moderated his views.
According to the Peruvian Ministry of Energy and Mines, the mining sector has a project portfolio worth $41 billion; $28 billion of which will be directed toward copper projects. While critics argue this figure may be overoptimistic as it does not take into account the social conflicts that are delaying some projects, such as Southern Copper’s Tía María or Anglo American’s Quellaveco, the perceived attractiveness of Peru as a mining-friendly country is at historically high levels. At the middle of the economic crisis, global exploration expenditure contracted dramatically (-42% in 2009), however in Peru it only decreased by 18%. Peru was indeed the third largest recipient worldwide for exploration expenditure that year; only Canada and Australia could boast more.
“I have never seen a cycle like this in my 52 years in the industry,” said Richard Graeme, senior vice president and general manager of Lumina Copper SAC, a Chinese-owned company working on the Galeno copper project in northern Peru.
The metal prices bonanza and the closeness to the presidential elections have prompted the demand by certain politicians for higher taxation of mining profits. But leaders in the industry fret this could seriously jeopardize the country’s ability to attract new investments. “We are in the good part of the cycle and both companies and countries need to take advantage of that,” said Luis Carlos Rodrigo Prado, lawyer at Rodrigo, Elías & Medrano law firm and president of the Canada-Peru Chamber of Commerce. “However, you cannot just create new taxes that would not work in a slightly different environment. Right now the regional and local governments have millions in their bank accounts that cannot be invested, therefore at this point in time it does not make sense to give them more money. Besides, it is more beneficial for the country to attract huge new investments than to raise the taxes.”
For Hans Flury, until very recently president of the National Society of Mining, Oil and Energy (SNMPE). “We need to be competitive. Our neighbors have similar geography and rich resources so legal stability is key to attracting investment. The higher the taxes, the less attractive the country becomes.”
Along with the natural resistance of any business to pay more taxes comes the frustration of mining companies that see that the money they pay does not translate into much needed investments in health, education and infrastructure. A big proportion of the so-called mining canon (50% of the income tax which goes directly to the regional and local authorities of the areas where producers operate) is still waiting to be spent due to the inability of the different public bodies to develop projects. Furthermore, some of this money is eventually dedicated to populist ventures such as the erection of grandiose monuments or the construction of bullrings in the same areas that may not even have sewage systems.
Hence the success of voluntary contribution, an agreement reached between President Alan García and the main mining players, according to which producers contribute a further 3.75% of their net profits for development projects. In this instance it is mining companies themselves who decide how to spend this money in collaboration with multilateral bodies and NGOs. According to many leaders surveyed, the scheme has proven highly successful and it should be renewed once it expires at the end of this year, yet the presidential candidates may want to present their own alternatives if elected.
“The infrastructure is so much better than in 1999 when I arrived in Peru,” said Darrell Wagner, general manager, Barrick. “There could be more roads, clinics and schools, but the country is making a lot of progress. Poverty is reducing and the levels of nutrition and education have increased. I am inclined to believe that mining has been a key factor in that change.”
A Commodity-based Economy
The boom of the mining industry has not been accompanied by the development of the related industries that can add value to the minerals extracted. When the global financial crisis hit in 2009, Doe Run, a company operating a very large metallurgical complex in the Andean city of La Oroya, suspended activities in the middle of a dispute with the Peruvian government over the implementation of various environmental projects. For many years, La Oroya’s sad fame was for being one of the most polluted cities in the world. In the middle of the dispute, the SNMPE expelled Doe Run from the association for its reluctance to fulfill its environmental commitments. The closure has left Southern Copper and Votorantim as the main producers of refined metals in Peruvian soil.
“The closure of Doe Run is a step back for the processing industry, but I am sure the space they have left will be taken by new investors,” Flury said. “I believe we will move toward more value-added production with the help of the free-trade agreements the country has been signing in recent years.”
A similar situation applies to hydrocarbons. The rich gas fields in Camisea have completely changed the country’s energy matrix, while a quantity of this gas is also exported. The current plans for petrochemical sites are the logical step forward. Transforming a raw materials economy into an industry-based economy will not be achieved overnight.
“There is a limit to the manufacturing of final products Peru can manage because you need to be close to the destination markets,” Flury said. Concentrates will continue to play an essential role.”
Laurence Stefan, managing director of Macusani Yellowcake, a Canadian company exploring for uranium in the Peruvian highlands at more than 4,000 m above sea level, said. “We try to explain to the locals that mining is part of their future because it is the easiest way to generate jobs. Toyota will never set up a plant in Macusani and start producing cars there. The first industrial stage in any society is mining.”
Raising the Bar
Safety will always be an issue for mining operators. Last year an extraordinary rescue operation in Chile grabbed the world’s attention and ended when 33 trapped miners returned safely home. The sad reality, however, is fatalities are commonplace in the industry, as shown by the recent accidents in coal mines in Colombia.
The number of people killed in Peru’s mining sector increased from 56 in 2009 to 64 last year according to the statistics of the Ministry of Energy and Mines. That is over one fatality every week, which is a figure far from satisfying. Generally speaking though, the standards in Peru have improved dramatically over the past few years, thanks mainly to the initiatives of multinationals and the larger national producers. “To work in Antamina, any worker needs to have two weeks of training with 14 different courses. The standards are extremely high,” said Walter Piazza, managing director of COSAPI, a large Peruvian engineering and construction firm.
The problem is not all companies in Peru are Antaminas and Barricks. The country’s mining industry is highly atomized, with many small operations, some of whom may not necessarily play by the same rules. “Most of the incidents happen in companies that take shortcuts when it comes to applying the different health and safety regulations,” Flury said. “They take advantage of the local population to expose their workers to risks that are unacceptable. As an industry we need to work toward having zero fatalities, even though we know that is very difficult because sometimes it is individuals who take unnecessary risks.”
Peru has many narrow-veined underground operations which present their own safety challenges. “The risks in underground mines are bigger than in open-pit mining, especially with regard to rock falling,” said Ignacio Bustamante, CEO of Hochschild Mining, a Peruvian silver producer listed in London. “We have halved our accident rate in the last three years, but we need to continue improving. We are implementing the DNV safety system and we have already completed level 6 at our Arcata and Pallancata mines. This is positioning us among the safest underground mine operators in South America.”
The challenges do not only originate from the operational side. With a number of mega-projects in the pipeline that will be developed nearly simultaneously over the next two to three years, the construction phase of the new sites will have to be seriously taken care of. These projects will involve the participation of thousands of workers. The expected shortage of labor as a result of this boom will mean that many of these workers will not have previous experience, thus increasing the risks of accidents.
“We are convinced we can reduce the incident rate to zero. Some people believe it is impossible, but we believe it can be achieved,” said Hernando Graña, executive vice president of Graña y Montero, Peru’s largest engineering and construction group. “You need to give the responsibility of safety to every single worker. They all need to feel they are part of the structure. Moreover, to maintain good safety levels, clients need to be reasonable with the timings. Luckily the mining industry understands this.”
The Problem of Informality
One of the greatest problems that the industry faces in Peru is informal mining which is causing environmental damage in parts of the Amazon jungle. The negative impact of this activity goes far beyond the deforestation and pollution produced locally, according to Percy Arhuata, general manager of Inmet (currently in the process of merging with Lundin). “Informal miners are the biggest polluters and they do not implement the right environmental standards. This is a problem for the industry as a whole and affects formal companies because irresponsible mining generates bad press among the farming communities. As a result there are social conflicts.”
For Miguel Cardozo, president of the Association of Explorers of Peru (AEPE) and president and CEO of Alturas Minerals, “Informal miners should not exist: they damage the environment and put their lives at risk. However, how can you stop them? You can try to formalize them but it does not work; as long as metal prices are high, you will have informal miners.”
The paradox of informal mining is that it would be easy to track down how the informal production is channeled toward the formal market, Rodrigo Prado explained. “For the first time the government has started to take a strong stand against informal mining in the area of Madre de Dios and it now faces social problems,” he said. “Even NGOs act differently against illegal miners than they do against big mining companies because this is perceived as a social issue.”
Looking on the Bright Side
The good news is the wave of investments in the extractive industries and the great performance of the Peruvian economy over the past years have helped reduce poverty rates significantly. The middle classes have expanded and although the country still has an enormous infrastructure deficit, the panorama on this front has improved as well. The mining sector, as the engine of the economy, needs to continue playing a key role in this success story.
“Investment is driving economic growth and generating new opportunities for Peruvians. When I was a student in university the GDP per capita was $1,000; it is more than $5,000 today, so we are on the path to development,” said Mariela García de Fabbri, general manager of Ferreyros, the distributor of Caterpillar in Peru.
Alberto Arispe, general manager of Kallpa Securities, a broker that sponsors junior companies’ listings in the Lima Stock Exchange, gives an idea of the magnitude of this evolution. “As little as 20 years ago, Peru was in a state of pessimism. Between 1988 and 1990, GDP was down 25%, inflation was 30% per month, there were bombs in the streets nearly every day and the people had no hope in their country. Many just wanted to leave and work abroad. Today the economy is solid. We are signing free-trade agreements with many countries, foreign direct investments continue to increase and the poverty rate has decreased from 65% in 2000 to about 33% today.”
This happy period, coupled with Peru’s geological richness, has promoted the country to be the largest or second largest producer in Latin America for gold, copper, silver, zinc, lead and tin. Peru also produces iron ore, tungsten and molybdenum. In spite of its already world-class production figures, Peru’s exploration potential is still huge in each of these metals, while the country also offers very interesting uranium opportunities. Gold production, however, is set to decrease over the next years unless new sizeable reserves are found. Gold output in 2010 was 5.25 million oz according to official data, an 11% decrease on 2009.
However Fernando Gala, vice minister of Mines, believes the country’s position in gold reserves is actually very positive if compared to other large producers such as China (see interview) and judging for the record levels of expenditure in gold and copper exploration, the industry firmly believes there is still a lot to be found. “Peru is a powerhouse of metals. I believe we have not yet seen the true potential this country has, even in metals no one has thought of before, such as nickel. The country is just starting,” said Jorge Benavides, president and CEO of zinc-focused Zincore Metals.
On the other hand, Lima is becoming a financial hub in South America for risk-hungry investors willing to put their dollars in exploration ventures. The announced integration of the Lima stock exchange (including its successful junior segment) with those of Santiago in Chile and Bogotá in Colombia will only provide a better vehicle for investors across the region to fund new, promising projects.
In this context, it is of no surprise that industry leaders have a great feeling about the future of the mining sector and for the country as a whole. “Our economy is growing really fast. At 8% GDP growth the expectations are high. I would invite people to come and work in Peru,” said Enrique Ramírez, general manager of Pan American Silver.
“Peru is mining-friendly. The country has an experienced workforce and good service providers in place. In addition to this, it is a well-established democracy and is on sound financial footing—Peru has an investment grade. Peru is just a fantastic mining country,” said Damon Barber, CEO of Hong Kong-based CST Mining, who last year acquired Chariot Resources and its Mina Justa copper project in Peru.
Provided the next administration follows similar economic policies and invests in infrastructure and education to cope with this growth, the love affair between Peru and miners from around the world is set to go on for at least another decade.