It’s a dilemma: Mining accounts for well more than half of total Peruvian exports, bringing in $9.4 billion out of total export earnings of $15.9 billion in the first six months of 2016. But not a single new large-scale mining project is currently in development. Given the sector’s challenges, almost no-one wants to spend cash to boost capacity.
Investors spent just $1.6 billion to buoy mining through May, down 44.7% from the same period last year. The relatively meager $5 billion investment forecast for all of 2016 reflects the third consecutive annual decline since sponsors splurged a record
$10 billion in 2013, according to the Energy and Mines Ministry (MEM).
To be sure, declining mineral prices over the past three years have dampened enthusiasm, but that is far from the whole story. The government of newly elected President Pedro Pablo Kuczynski says Peru needs to address a series of issues, from slow permitting processes to social conflicts – some violent – that have stalled major projects.
Indeed, mining executives are hopeful. Kuczynski, a one-time minister of energy and mines, recognizes that reaching the goal of 5% annual economic growth during his five-year term will not happen if the mining sector continues to sputter, they say.
“The fundamental issue is political leadership. I am optimistic, because I think we will have leadership from someone who understands the sector, who knows how to listen and will focus on the country’s competitive advantages,” says Carlos Gálvez, vice president of finance at Minas Buenaventura, Peru’s largest precious metals producer and president of the National Mining, Petroleum and Energy Society.
The mining sector is being pulled along today by copper, traditionally Peru’s top export earner and in the midst of its largest expansion in the country’s long mining history.
Miners produced 1.1 million tons of copper in the first six months of 2016, a 51.5% increase from the same period last year, according to MEM. Based on a forecast that copper yield will more than double to close to 2.6 million tons in 2017, the country will easily rank as the world’s second-largest producer of the red metal after Chile.
The Central Reserve Bank (BCR) reports that copper revenues of $4.2 billion through June represented a nearly 15% increase from the previous year. That means that increased volume has compensated for much lower prices for the metal, which the BCR notes were down 22% from the 2015 level.
Copper fueled the record $42 billion in investment in mining in the five years between 2011 and 2016, giving Peru two of the world’s largest mines.
The $4.6 billion used to expand Cerro Verde, operated by Freeport-McMoRan, made it the planet’s second-largest copper producer after Escondida in Chile. Expansion was completed late last year and Cerro Verde began ramped-up mineral production in the second quarter of 2016.
Las Bambas, operated by Chinese-controlled MMG Ltd., follows just behind in third place. MMG completed the $10 billion construction of Las Bambas, the largest greenfield project in the country’s history, at the end of 2015 and began commercial production on July 1.
The enthusiasm for these projects has been tempered by the fact that their completion brings to a close Peru’s mine-building boom. “The record investment between 2011 and 2015 came thanks to projects that began much earlier. Nothing was fostered in the past five years, zero, so there is nothing in the pipeline. Now, with a cycle of adverse prices, we need to generate conditions that show companies that projects here are more competitive than in other countries,” says Gálvez.
Rómulo Mucho, a former deputy mining minister, says investment dried up because for nearly a decade the state has focused more on legislation than encouraging production. “What we have today are more laws, more norms [voluntary industry guidelines] and more forms. No-one stopped to look at the fact that we also have fewer projects and falling investment,” says Mucho, CEO of construction company Pevoex.
Mining executives say the Kuczynski government needs to streamline legislation to speed up projects. Gálvez estimates as much as $60 billion in investment could materialize, but won’t happen as long as operators require up to five years to receive all the required permits needed to start mine construction.
Gálvez says norms need to take into account the country’s competitiveness and international parameters, particularly regarding environmental standards. “A standard that is too high, that requires more than countries like Australia or Canada, will only lead to an increase in capex and a reduction in efficiency,” he says.
“We have the highest environmental and safety standards and modern mining knows that environmental protection is critical for the bottom line. No-one would imagine dumping residual water. Modern mining recycles all the water used because it makes environmental and economic sense,” he says.
Guido del Castillo, CEO of mining company Aruntani, does not blame the investment downturn on low commodity prices. He says no mines have closed in Peru, because production costs remain competitive, but investment has stalled because of state policies. “The problems come from all the new norms, making it impossible to know what we are supposed to do. There is a tangle of laws that can scare off even the most committed investors,” he says.
Aruntani operates three gold mines and is awaiting approval to start a fourth and is actively exploring other concessions in the country’s southern mineral belt. Del Castillo says the state needs to maintain high environmental standards and guarantee that the rights of communities are respected and that they benefit from mining, but he also believes that some of the legislation needs to refocus.
He points to a 60,000-ounce/year gold mine in the central Ayacucho region that has been stalled for 18 months because of legislation requiring consultation with indigenous communities before extractive projects are developed.
The problem is that the two communities near Aruntani’s mine consider themselves not indigenous, but peasant communities and have refused to take part in a consultation. The Culture Ministry has responded that consultation is a right that cannot be relinquished.
“The consultation law should be reviewed,” says del Castillo, who rails against “passing laws from a desk in Lima without considering how it actually impacts people.”
The law, he says, “is important for projects in the jungle, where communities maintain nomadic practices for hunting and gathering and require large territory. It should not have the same application in the highlands, especially in communities that do not even see themselves as indigenous.”
The broader issue of community relations – and conflict – has plagued mining projects for nearly two decades. Peru’s Ombudsman’s Office, which monitors conflicts, reported 154 active social conflicts in July, 76 of which involved disputes between mining companies and communities. Some of these conflicts have been on the Ombudsman’s list for many years.
The vast majority of conflicts revolve around economic benefits and environmental issues, particularly water. A conflict over water and relocation killed the Tambogrande gold mine planned by a Canadian company in the northern Piura region early in the last decade, and environmental conflict has kept the Rio Blanco project, held by China’s Zijin Mining Group also in the Piura region, on hold for almost 10 years.
Unrest has become emblematic of this decade. The Santa Ana silver mine was cancelled by the state in 2011 after violent social protests. The operator, Canada’s Bear Creek Mining, filed an arbitration case against the government over the $600 million project. Minas Conga, an extension of Minera Yanacocha that is run by Denver’s Newmont Mining and Peru’s Buenaventura, was stopped in late 2011 and has been stalled indefinitely.
Newmont delisted it as a project in a filing with the U.S. Securities and Exchange Commission earlier this year. Tía María, owned by Grupo Mexico’s Southern Copper Corp., first ran into trouble in 2010. The agreement was reworked, but similar protests last year, which left several people dead, put the project once again on hold.
Gálvez says social acceptance is one of four pillars required before Minas Buenaventura would consider another project. Companies can work out the first three – technical, economic and environmental feasibility – he says. But social acceptance is the most delicate.
“It depends on three components: the image and perception of the company that is interested in a project, the positive or negative disposition of the population to the project and, fundamentally, political leadership from the government. This was totally absent during the previous five years” of former President Ollanta Humala’s government, he says.
While the Kuczynski administration has not presented its long-term plan for mining, it says the government will follow a multi-pronged approach to address key issues concerning community opposition and bureaucracy that has unnecessarily slowed projects and investment.
The president has announced a strategy he calls adelanto minero, which basically means the state will move into areas before projects are approved to make sure that basic services are met.
Kuczynski says it is unfathomable how Cajamarca, home to four gold mines and a long list of projects, could be one of the three poorest regions in the country. Cajamarca counted just over half the population as living in poverty in 2015, according to the National Statistics and Information Institute.
Gálvez says the strategy simply recognizes what everyone knows. “The state has been absent from the countryside. Another way of saying this is ‘remediating historic abandonment,’” he says.
Kuczynski says that a solution to the stalled $1.4 billion Tía María project would involve providing more water to farmers in the Tambo Valley. Constructing the Paltuture dam in neighboring Moquegua, which the state identified as a public works project years ago, but never built, would resolve the water issue.
The president met with CEOs of two international mining companies, Anglo American and Rio Tinto, before he took office to convince them to move ahead with projects where they already have concessions. Anglo American’s Quellaveco copper mine in Moquegua, in the south, would require a $3.3 billion infusion, while funding for Rio Tinto’s La Granja copper concession in the northern Cajamarca region could be north of $5 billion.
“Rio Tinto has a long history of exploring, operating and investing in Peru. Rio Tinto supports President Kuczynski’s goal of making Peru an even more attractive place to invest while ensuring that international companies collaborate with local communities to create broadly shared benefits,” says Maria Alejandra Delgado, general manager of Rio Tinto Exploration Americas.
A source at Anglo American who asked not be identified said the conversation between Kuczynski and CEO Mark Cutifani “ranged from general topics around mining and the global economy to the Quellaveco project.”
He says that, while a decision would depend on a number of factors, Quellaveco is a very attractive organic growth option for Anglo American, calling copper “one of our three core businesses.”
The Kuczynski government also inherited a simmering conflict over wildcat mining, which two previous administrations were unable to resolve. It has kept in place, for now, a measure that allows the military to assist the National Police in case of protests by illegal miners in three southern regions, including Madre de Dios, the epicenter of the problem.
In Madre de Dios, located in Peru’s southeastern jungle, unregulated placer miners who use washing, dredging or hydraulics to recover minerals, have mined an estimated 9.6 metric tons of gold in the first six months of the year, despite the fact that they have no formal concessions through MEM. One of the Humala administration’s final acts in late July was to extend for another 60 days a health emergency in Madre de Dios to address the impact of mercury used in placer mining.
Kuczynski and a large contingent of his Cabinet ministers visited Madre de Dios in early August to address the issue. “The president has been very clear that we have a proposal for formalizing mining in Madre de Dios,” said Premier Fernando Zevala at a press conference on August 10.
Del Castillo says that the first thing the state needs to do is “stop seeing wildcat miners as illegal. We are talking about 20 tons of gold and more than $1 billion annually. Everything has been distorted since [the state] started calling these miners illegal.”
Not everyone sees amnesty as a solution, however.
Manuel Pulgar-Vidal, who stepped down as environment minister in July after nearly five years on the job, cautioned that formalizing wildcat miners could add to the environmental destruction that they have already inflicted on Peru. “We need to decide as a nation if we want placer mining. There is no way to do placer mining in the jungle without destruction,” he says. LF