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An Ever-Increasing Range of Providers
Peru’s mining sector is too big, and its potential for expansion too significant, to be ignored. Take security services, for instance: the business, previously controlled by local companies, has seen the arrival of large multinationals (Securitas and Prosegur) via acquisitions; or explosives, where the arrival of global players such as Orica and Maxam will certainly raise questions for the main Peruvian manufacturers who have traditionally been the leaders in this segment. As the market is increasing, so is the number of providers.
On the equipment side, all of the relevant multinationals are putting Peru at the forefront. The recent move by Komatsu to buy a 40% stake in their local distributor is a good example of this. The market is not negligible, as shown by the figures given by Mariela García de Fabbri, general manager, Ferreyros, a Cat distributor. “We started in the 1990s with four mining trucks and to date we have sold 350 of them,” García de Fabbri said. “These trucks work 24/7, therefore they generate a flow of revenues in parts and services. Roughly 42% of our sales come from product support.”
Ferreyros, which also represents Cat in Guatemala, El Salvador and Belize, had revenues of more than $1 billion in 2010, $952 million of which were generated within Peru. About half of that figure comes from mining.
The company has recently introduced the Cat 797 ultra class haul truck, whose first customer in Peru will be Chinalco at Toromocho. García de Fabbri notes delivery times have deteriorated as a result of booming demand, but the company is investing heavily to keep pace with the market. “As Ferreyros, we anticipate the needs of the local market,” García de Fabbri said. “We have already placed orders worth $500 million just for the mining industry, on top of the regular inventory worth $120 million. We have $60 million dollars in parts so we can respond immediately to our clients.”
Late last year Caterpillar announced its $8.6 billion acquisition of Bucyrus, another large player in mining equipment, which in turn had acquired the mining business of Terex earlier in 2010. Bucyrus expects dramatic growth in the coming years in Peru. “We now have 10 electric shovels in operation and by 2015 we are prospecting 40. Regarding large drills, we now have 18 and anticipate having 70 by 2015. We currently have 15 hydraulic excavators, but there is the potential to double this in the next five years. These are our estimates considering the most probable projects,” said Rafael Ponce de León, general manager, Bucyrus Peru, who adds “these are very large machines so it is not a question of price, but reliability and trust.”
Clients in the country include Antamina, Southern Copper, Chinalco and Xstrata. “Bucyrus has spotted Peru and Brazil as two of the fastest-growing opportunities in the near-term. We anticipate a great increase in copper production here and we have adapted our planning to cope with that growth. We have invested more than $300 million to expand the capacity of our Milwaukee factory, with a vision of satisfying the upcoming demand,” said Kristina Harrington, executive director, Bucyrus.
Swedish-based Sandvik and Atlas Copco are also benefitting from the improving business environment. Sandvik sold $100 million last year (65% of this in underground equipment) and expects $136 million in 2011. The company’s general manager in Peru, Hans Neumann, announced that Sandvik is seeking to target to more aggressively the surface mining side as well as material handling areas such as conveyor belts in difficult terrains, in which Peru offers interesting opportunities.
Meanwhile, Atlas Copco’s sales in 2010 were $120 million (a 40% increase year-on-year), with a strong focus on underground equipment such as blasthole drilling rigs and low profile loaders and trucks. The company’s rotary drilling machines for open-pit mining are also selling well.
Francisco Menéndez, general manager, Atlas Copco, advises mining companies to plan well in advance to ensure they will have the needed equipment and supplies in a timely manner. “There is no way the current installed capacity in the industry can match with the growing demand,” Menéndez said. “The sentence ‘I want this machine for yesterday’ has become ridiculous in today’s environment. This applies to accessories and spare parts as well. If the sector does not want to stop production, there is a need for better planning and larger inventories.”
Anthony Davis, managing director, Metso, agrees. “Those mining projects who take longer to get their orders in will get longer deliveries, so their project will take longer to start operating. It is a race,” Davis said.
The large multinationals that focus on equipment and solutions for minerals processing, such as FLSmidth, Weir Minerals, Metso and Outotec, are all present in Peru, developing solutions locally and also providing after-sales service for imported equipment. The abundance of small and medium-sized operations in the country also makes room for players specialized in smaller processing units, such as Ajani, a local company specialized in low-cost Merrill Crowe plants, and Tecpromin, a company originally from Chile.
Víctor Briceño, general manager, Tecpromin Peru, explained that working with medium-sized operations requires a lot of networking and a strong sales effort. “In Chile, 90% of the business comes through five or six big engineering houses, but Chile does not have a strong medium-sized mining sector,” Briceño said. “In Peru, we have about 50-60 medium-sized mines and projects and you need to contact these clients directly.”
Considering the size of the industry, the competitive costs of labor in Peru and the mining experience gathered over the years, an increasing number of providers have begun manufacturing on Peruvian soil. Ingetrol, a Chilean manufacturer of portable drilling rigs, and Tumi, a producer of raise boring machines, are good examples of this.
“We are very happy with the quality we obtain in our Peruvian plant,” said Luis Silva, president and CEO, Ingetrol. “The skills of our people here are excellent, and the commitment and loyalty of the Peruvian workforce is fantastic. Very often, when I need to send people to visit our clients worldwide, I send Peruvian mechanics.”
The company could nearly double its production in Peru to reach 40 drilling rigs this year. “In our Peruvian plant we are concentrating on the lighter, more portable machines. This is due to the conditions of the business in Peru, where portability is paramount. Access can be very difficult and there is a need to minimize the impact on the environment and the local communities. We have our niche in the market, which is early exploration,” said Silva, who explains the company would like to expand its range of products to geotechnical rigs and even blasting equipment.
Tumi Contratistas was established in Peru as a raise boring contractor, but five years ago it started producing machines locally for the export markets using the technology developed by Stu Blattner in the U.S. This has dramatically impacted upon the company’s revenue breakdown, as equipment exports are now nearly half of the sales. As contractors, Tumi has eight machines in Peru, while as manufacturers they expect to sell five to six machines annually.
Elizabeth Armendáriz, general manager sales and operations, described the particularities of Tumi’s machines. “Our machines are easy to operate but they are very powerful,” Armendáriz said. “The smaller the machine, the less the mine has to blast for its operation, which makes our equipment very cost-efficient for mine development.”
“Raise boring is the safest way to do ventilation, ore passages, man ways, service and waste passages,” said Marc Blattner, deputy manager, Tumi. “It is also a very clean technology. We have recently created a machine called the SBM 450, which is the first of its kind. We can transform a raise bore machine into a boxhole machine in just an hour ‘underground,’ while others take over a day. This saves the customers time and money.” Tumi is currently setting up a new larger manufacturing facility in the outskirts of Lima as the foundations for future growth.
Another relevant manufacturer serving the industry is Tecnología de Materiales (TDM), Peru’s leading geosynthetics player. The company, established in 1992, has three plants in Peru, two of which are joint ventures: one makes HDPE geomembranes, one produces gavions and the third does emulsions and asphalt modification.
The company has offices in Chile and Brazil and also represents a number of foreign brands with products such as geogrids and corrugated pipes. Besides manufacturing, TDM also provides installation services. In Chile, for instance, it is taking care of 4 million square meters of geomembrane for Freeport McMoRan’s El Abra operation. “In almost all of the products we sell and in the services we offer, we were pioneers in the Peruvian market,” said Pierantonio Giacchetti, managing director, TDM.
Giacchetti stresses the importance of using the best materials in leaching pads. “Perhaps a mining company can save money in other areas, but not on the leach pad,” Giacchetti said. “The quality control is very meticulous. When we serve our clients, we provide the relevant quality certifications and perform proper field tests during the installation process.” Sales at the TDM group were $140 million last year and for the medium term the company would like Brazil and Chile to increase its share in the revenue breakdown.
Getting Strong in Mining
Over the last few years, service providers initially served other industries are increasingly targeting the mining sector. Tecsur, a company providing turnkey solutions in electrical infrastructure, counts on mining to become a very strong source of revenue for the future. The company, previously focused on the distribution business, has entered the industry with a $7.5 million transmission line project for Trevali Resources, a Canadian company.
“In the last years we have focused on serving the electricity companies. Now we have changed our vision because we can see enormous potential in the mining industry,” said Jorge Güímac, commercial manager, Tecsur. “In 2011, mining is expected to account for at least 50% of the projects division thanks to our work with Trevali Resources at the Santander mine. “In our strategic plan we want to develop new areas, in transmission and generation, and enter aggressively into the mining sector.”
Güímac affirms Tecsur, as a company owned by American shareholders, puts a strong focus on safety. “Our main competitive advantage to work with the mining sector is that we speak their same language when it comes to safety,” Güímac said. “We are not the cheapest option, but we are the safest one.”
Grupo Vivargo, a Peruvian family owned company, active since the 1940s doing international freight road transport, has evolved to specialize in the oversize transportation needs of the mining sector, as well as other related services such as lifting and erection. The company currently works on three fronts: the rental of equipment (trucks, platforms, cranes, lifts and other related equipment); the representation of JLG, an American brand producing scissor lifts and telehandlers among others; and the management of storehouses, a service provided on-site at new mining projects or expansion ventures, with final clients such Southern Copper.
“Last year was an important year for us in terms of decisions. The crisis caused a halt in mining investments for a few months, but now we have decided to put all our trust in Peru,” said Cristopher Varas, general manager, Grupo Vivargo.
The company is a great example of the levels of growth that the mining sector is experiencing. Sales have rocketed from $400,000 in 2005 to $4.2 million last year. For 2011, the aim is $7 million as a result of fresh investments in new equipment. “The mining industry has the highest standards, really different from other industries. This is why we are investing in the latest technology so as to always be up-to-date with the market’s developments” said Víctor Varas, president of the board, Grupo Vivargo.
Vivargo originated in Arequipa, but has opened an office in Lima to serve the mining operations in the center and north of the country. Geographical coverage is indeed a key aspect for providers in Peru, especially in emergency situations where stopping an operation can cost the mining company a fortune.
Opertec, a Peruvian company dedicated to multi-brand installation and maintenance of conveyor belts, knows very well about this. About 30% of the company’s revenue comes from emergency stops; being at the mine as quick as possible is essential, explained Fernando Barrio, general manager, Opertec. “Peru is a very large country with a very difficult geography. We need to develop a strategy of immediate response, with a presence close to the mining operations, and still be profitable,” Barrio said. “Right now, our advantage is that we can deal with five fronts simultaneously, but we want to take maintenance to the next level, implementing a holistic, preventive approach, with a permanent presence in the mining sites.”
Opertec was created as a service-focused spinoff of Tecnomina, a long-standing distributor of materials for mineral and aggregates transport systems, as well as processes involving wear abrasion and corrosion. Mariana Barrio, general manager, Tecnomina, believes both Tecnomina and Opertec need to focus on cost reduction. “Other service providers, mostly from Chile, are trying to enter the Peruvian market; however their costs are higher than ours. Before our products were too expensive for medium sized operations, but since last year we have entered that segment providing economic solutions,” she said.
Niche Consultancy Services
The increasing regulations regarding the sustainability of the mining sector have raised the demand for highly specialized services in areas that were not seen as a priority a few years ago. Peru is a millenary country with a lot of remains from ancient civilizations. Mining projects, therefore, cannot go ahead without the authorization of the Ministry of Culture regarding archeological aspects. In this context, it is necessary to hire specialists that will develop all the relevant archeological studies.
“Peru has a long history of human settlements, going back 14,000 years,” said Humberto Salini, general manager, Asesoría y Servicios Especializados (ASE), an archeological consultancy. “We actually know very little about our own history. Even at the highest altitudes, there are lots of traces of previous settlements.” About 25% of ASE’s business currently comes from mining; a figure they want to increase to 40%. The company also does archeological studies for infrastructure projects, such as roads, ports and pipelines.
“When a junior company arrives, normally the first contacts are a law firm and an environmental consultancy,” Salini said. “We are trying to pass the message that they can also hire us directly, because we have a very good track record in the Peruvian mining sector already.”
Salini advocates that ASE’s services should be seen as a bonus to projects, rather than a mere compliance with the country’s regulations. “If we are at the project from the early stages, we can become a real added value,” Salini said. “We must not forget that in our country there are many archaeological sites with symbolic value to local communities, so if this is not considered and resolved from the beginning, this aspect can create a social conflict.”
The existence of communities, together with the legal requirements for public participation (see next article), also requires focused experts to ensure a smooth relationship between the industry and the locals. Óscar Díaz, CEO, Viceversa Consulting, a company qualified to do EIAs and specialized in community relations, assures communication efforts must be adapted to the public. “Local populations are not formed by engineers, therefore you need to explain the basic aspects of the project,” Díaz said.
Díaz explained the experience gathered by Peruvian specialists in community relations is already being exported throughout the Americas (Viceversa has done projects in Argentina, Bolivia, Chile and Honduras). “There are two concepts: legality and legitimacy,” Díaz said. “Legitimacy means that the parties signing a contract believe in that contract. Mining companies often think that with having good lawyers and a signed contract the problem is over. The reality is that the problems start once you have the signature.”
Although the levels of investment in specialized consultancy services will be directly proportional to the profits of the mining operations (today at excellent levels), the good news is that, unlike other countries where mining may be less developed, companies can easily hire these sorts of specialists.