by Lucien Chauvin

With base and precious metals riding at all time highs, Peru is doing its best to cash in by extracting raw materials as quickly as possible. Peruvians, largely left behind in the rapid expansion of recent years, are resisting the extraction. But the sheer weight of cash and increased use of social programs by miners is expected to prevail.

“Capital markets in Europe and the United States are looking at Peru because of its abundant resources,” says Roberto Dañino, VP of Hochschild Mining. “There are some social problems and regulatory issues that need addressing, but the level of investment should indicate that the climate overall is good,” adds Dañino, a former cabinet chief.

Take Querocoto, a little town tucked into a green valley in Peru’s northern Andes. Reached by an unpaved highway through the department of Cajamarca, it is home to the La Granja copper and gold deposit, which is being explored by Rio Tinto, the fourth company to probe Querocoto’s ore deposit in the past few decades. Others pulled out when international prices were low, or when they encountered problems with ore grade. But Rio Tinto’s results have been promising and it hopes to decide in the next 18-24 months if it will go into production.

Rio Tinto has fixed road access to Querocoto, while also covering the cost of new water pipes and rebuilding the church. It employs around 800 from a population of fewer than 5,000. A $3 million social fund has also been created for special projects like rural electrification.
“We are receiving investment and the company has created many jobs for local people, and this in only the exploratory phase,” says Querocoto mayor José Pérez. “We have a transparent relationship, so there are no complaints,” he adds.

But despite a government projection of private mining investment exceeding $10 billion in the next five years, there are few communities like Querocoto openly embracing the industry. Of almost 90 social conflicts recorded by the government in February, almost half were linked to struggles between communities and extractive industries. In the past six months there have been two non-binding referendums on mining – one in the far north and another in the deep south of Peru – with almost all votes cast against extractive projects.

President Alan García’s government, while recognizing the fears some communities have about mining, believes rising investment will eventually convince people it is best for development. It is also confident that huge mining resources will lure investors, even if social protest continues.

“Communities have to understand that mining investment is positive. This is a traditional mining country and economic development is grounded in mining, there is no other activity that can guarantee development,” says energy and mining minister Juan Valdivia.

While analysts agree, they are concerned about the government’s cavalier attitude to communities. “The government is playing with fire and may be burned by its poor attitude to social concerns outside of metropolitan Lima,” says Mark Turner, LatAm equity analyst at Hallgarten & Company. “The government’s social efforts are the obvious weak link in today’s Peru.”

Wealth Trickling Down
Part of the government’s plan is transferring more cash back to mining communities through a tax scheme known as the canon. The legislation requires 50% of taxes paid by miners be returned to departments where mines are located. This year the government will transfer around $2 billion.

The García government also created in late 2006 a system for “voluntary” contributions that mining companies will pay annually through 2011. Payments are equal to 3% of after-tax profits. Last year they were close to $180 million and the full amount over the four-year period should be close to $800 million, according to the ministry.

One plan that did not work was actually using the canon to make direct cash payments to residents. This was modeled on Alaska’s policy of transferring oil earnings – around $1,000 annually – to residents. Congress did not like the idea and voted down the bill late last year.
Congress also struck down a plan that would have designated 20 mining projects as in Peru’s national interest, allowing the energy and mines ministry to speed up permitting processes. The list included several controversial projects, such as the Chinese-owned Rio Blanco in northern Piura. Residents in districts near the project voted overwhelmingly against mining. The referendum was non-binding and the government blames “communist agitators” from anti-mining non-governmental organizations for stirring up trouble.

Iván Salas, an advisor on mining to Cajamarca congressman Werner Cabrera, says the government is mistaken in viewing the problem as only economic. Many communities oppose mining because they feel cheated by the government. “Communities want long-term, sustainable development, which mining does not provide,” says Salas.

Cash Overcomes Resistance
This opposition does not seem to deter investors. According to Canada’s Fraser Institute, which publishes an annual international ranking on mining, Peru jumped from the 52nd to the 28th spot in terms of attractiveness in the past year. The survey included the opinions of nearly 400 mining executive worldwide. 

Besides a “miner-friendly attitude,” Peru boasts a competitive tax burden, easier rules regarding land ownership and a long tradition of mining, says Hallgarten’s Turner.

Carlos Penny, who operates his own small Lima-based investment service, Pennynvest, sees Peru’s immense resources and mining tradition as a principal attraction. “Investment will continue, because of the country’s mineral wealth. There are some social problems, but companies are beginning to resolve these with community development projects. I think we will witness a major change in attitude in the near future,” says Penny.

Growth since regulations were changed in the early 1990s is striking. Investment between 1992 and 2007 topped $24 billion, according to the national mining, petroleum and energy society, well above that in any other sector. Mineral exports were $17.3 billion last year, some 60% of Peru’s total exports and up from $3.2 billion at the start of the decade.

Peru is now the world’s top producer of silver and number two in copper, surpassing the US last year with production at 1.2 million fine metric tons, according to the US Geological Society (USGS). The USGS also puts Peru second for zinc production, third in tin, fourth in lead and fifth in gold. And President García believes the country will continue climbing the ladder. “We have only scratched the surface, so to speak, in mining. There are experts who believe that only 5% of our mineral wealth has been identified,” he tells LatinFinance in a recent interview. 

Taking on Chile
García predicts that Peru could surpass neighboring Chile as the world’s top copper producer in the next five years if new projects and planned expansions of existing mines come on line as forecast.

The country’s geological institute reports that there were 8,159 requests for new mining concessions last year, up nearly 20% versus 2006. The amount of land involved topped 3.6 million hectares. More than 17 million hectares have been requested this decade.
“Copper is and will remain the number one target in Peru,” says Turner. He adds that gold, as well as other non-ferrous metals, iron – and even uranium – are other hot commodities in Peru.

The central highland department of Apurímac, one of the poorest in the country with poverty close to 80%, houses iron ore deposits that could be among the largest in South America, according to Penny. One deposit, held by Australia’s Strike Resources, is estimated to rival Bolivia’s Mutún iron ore deposit. Strike estimates that the deposit holds 780 million metric tons of high-grade ore.

Strike has another claim in nearby Cusco. It calculates that this deposit holds 500 million metric tons of ore.

Peru has only one iron ore mine, located on the southern coast. The mine, owned by China’s Shougang, has 1.6 billion tons of proven reserves, according to the ministry. The company plans to invest $500 million through 2011 to increase production by 20 million tons annually. The USGS lists Peru as the 17th largest iron producer for 2007.

Uranium Promise
A new possibility is uranium, thanks to increasing demand and relatively high prices. Peru does not produce the mineral, but there are nearly 10 foreign companies, primarily from Canada, prospecting in the central and southern highlands.

Most progress has been made by Canada’s Vena Resources, which has test drilled in Macusani, in the southern highlands of Puno department. Peru’s privatization agency, ProInversion, plans to promote uranium deposits and the energy and mines ministry, with the help of Canadian technical assistance, is drawing up norms for uranium mining. Legislation is expected before the end of the second quarter of 2008. 

Some sources, including the country’s nuclear research institute, estimate that Peru could produce around $1 billion in uranium. Congresswoman Susana Vilca from Puno has proposed a bill that would make promotion of uranium mining a national priority.
The ministry says there is still no conclusive data on potential reserves, but expects results from exploration this year. “We do not have uranium projects in our investment portfolio, says minister Valdivia. “We are only in the initial stage.” LF