Even in a period of generally weak demand for metals, the mining sector’s contribution to Peru is enormous. If the country’s economy can survive with current metals prices, what couldn’t it do when prices improve?

The mining sector outperformed government expectations and grew more than 11% in 2001, despite plummeting world prices. Average copper prices fell 13% on the London Metal Exchange last year and zinc fell 21%. The price of tin dropped 22%. Together these metals account for more than a fifth of Peru’s exports.

So how has the sector managed to grow so strongly? A lot of the answer boils down to just one word: Antamina.

The range of superlatives and statistics surrounding this copper and zinc mine, which began commercial production in October 2001, four months ahead of schedule, shows just why Peru expects that during 2002 – Antamina’s first full year in production – the mining sector could grow some 15-20%.

Antamina is the world’s largest copper and zinc mine, a $2.3 billion investment by four companies: Noranda and Teck Cominco of Canada, Australia-based BHP Billiton, and Mitsubishi of Japan. That sum represents 40% of all mining investment in Peru since 1998, and a study by the Apoyo consultancy estimates that around $960 million of the total investment has stayed within Peru. Some $750 million of it has gone to the local private sector. At its peak the construction employed 10,000 people.

Antamina alone is expected to add an extra 1.4 percentage points of growth this year. Apoyo estimates that the mine will buy goods worth around $220 million this year. Peruvian suppliers will get 70% of these contracts. It further forecasts the project will double incomes within five years in its zone of operations in Ancash province, 270 kilometers north of Lima.

The operators say Antamina will be among both the world’s largest and lowest-cost copper and zinc producers, with average annual production of 675 million pounds of copper and 625 million pounds of zinc in the first ten years. The mine, more than 4,000 meters above sea level, has enough reserves to last 22 years.

Antamina’ annual exports are expected to be worth around $700 million during its first full year of operation, depending on metals prices. In future years, the mine’s annual export revenues are forecast to cover one-third of Peru’s debt service costs.

Overall, Peru’s exports of copper during 2001 rose 6% to almost $1 billion in spite of the slump in world prices that is forcing output cuts. In January, for example BHP Billiton, which has a 33.75% stake in Antamina, announced that it was temporarily curtailing production at its Tintaya operations in Peru, where it had been producing 90,000 metric tons of copper a year.

Low copper prices are also the main reason why Southern Peru Copper Corporation (SPCC), another copper giant and one of Peru’s leading companies, has not so far proceeded with a long-planned new $600 million smelter. SPCC is one of the world’s top ten copper producers and its output of 755 million pounds in 2001 exceeds even Antamina’s expected copper production. However, low world prices drove SPCC’s sales last year down to $658 million from $711 million. Net income fell by half to $92.9 million last year.

This was in spite of production records in blister copper and cathodes at the company’s smelter and refinery at Ilo, where SPCC plans a replacement smelter, a decision initially sparked by environmental commitments. Oscar González Rocha, SPCC’s president, says the company – which last year was weighing up two competing proposals to build the plant – is now studying a third alternative, while hoping the government will allow the project some specific tax concessions.

“It may not be until the middle of the year before we are in a position to begin the project,” González Rocha says, admitting that the current price environment does not generate much enthusiasm. SPCC’s commitment is to have the plant ready by 2006. The company is expecting to buy copper from Antamina and from Tintaya to process at Ilo once the expansion is complete. González Rocha says this will benefit both parties and also add more value to Peru’s exports.

Meanwhile, SPCC is completing the expansion of its concentrator at its Toquepala mine. This should be ready in July, increasing daily milling capacity by one-third to 60,000 metric tons per day and raising annual production of copper concentrates by more than 120,000 metric tons. The company will then produce all its own supply of concentrates.

SPCC is also studying a plan to increase the capacity of the refinery at Ilo from 280,000 metric tons of cathodes annually, up to 360,000 tons. If the study confirms the project’s viability, the expansion could start next year, says González Rocha: “We are always looking for ways to achieve more efficiencies.”

Looking for Efficiencies
Buenaventura, another of Peru’s leading mining companies, is also looking for efficiencies and productivity improvements. The company had a good year in 2001. Carlos Gálvez, vice president and CFO, says increased output at the Yanacocha mine – worked by Buenaventura in partnership with Newmont – helped push Buenaventura’s gold output, including its equity share of Yanacocha, above one million ounces for the first time. Yanacocha is Latin America’s largest gold mine.

In July, Buenaventura’s Antapite gold mine also started production, after a $26 million investment, and Gálvez says the mine should produce 70,000 ounces of gold over the following 12-months. Feasibility studies are under way for two more potential gold mines, at La Zanja and Tantahuatay, which could each produce around 100,000 ounces of gold a year and would require an investment of around $30 million each.

Gold continues to be Peru’s leading export, accounting for about 15% of exports. The country’s total gold exports rose 2% last year to $1.17 billion. Buenaventura also produced a record 12 million ounces of silver last year.

But in common with many other mining companies, low prices forced Buenaventura to close some marginal operations in 2001, to improve results. The company sold two holdings and suspended operations at two other mines. “We have to be focused on the type of projects we want. Our strategy is to focus principally on precious metals,” Gálvez says. “How can a little lead, zinc or silver mine compete with something like Antamina? It’s not possible. The best thing is to get out,” he says. “If we had an extraordinary project, it would go ahead and wouldn’t be ruled out just because it was zinc or whatever. But we haven’t anything like that and our options are more in gold and silver.”

The company has even postponed a $300 million investment for a zinc mine called San Gregorio. Indeed, the company has dropped zinc production entirely from its five-year plan, and is now concentrating instead on producing 10 million ounces of silver and 1.5 million ounces of gold.

Gálvez says previous governments did not back Buenaventura demands for surface rights it needed to develop San Gregorio, leading to postpone the project repeatedly. Now the government is more supportive but zinc prices have plummeted, so Buenaventura is prepared to wait, despite earlier plans for a feasibility study in 2002 and a 2004 start. “Now it is cold,” says Gálvez, explaining that a smaller project is under review. “With these price levels it is not easy to talk about doing a zinc project.”

General Support
Generally, the mining sector professes support for the Toledo administration’s mining policies. In the closing days of Fujimori’s administration, some benefits for the sector were erased, which SPCC’s González Rocha says caused “unease” in the industry. But the new government has since reversed these changes, and a well-received law that Congress passed in January will allow mining companies to claim expedited sales tax refunds when contracting from suppliers during a mine’s exploration process. Previously, companies had to claim the tax as a credit against future sales – which in the case of something as long-term as a mining development could be years later. “This is an incentive for investments that, after all, are high risk,” Gálvez says. “How do we make Peru attractive compared with other countries? This is a way that the government has chosen.”

González Rocha says he hopes the government’s interest in promoting mining investment continues, “And we can get more of the benefits re-established that did exist.” According to Buenaventura’s Gálvez, “Jaime Quijandría [minister of energy and mines] has the same agenda as any mining entrepreneur.” Adds Gálvez: “He is very clear that his main role is to promote investment in Peru’s mining sector and that he has to work to make the conditions as competitive as possible. There is not a comma I would change in what has happened [under the present government] in the mining, oil, and energy sectors.”