pwc.com/pe Mining Industry Doing Business in Peru Doing Business - Mining 2013 1 Contents Introduction 4 Peruvian economy – an overview 5 8 The mining industry 9 Metallic mineral production 13 Non-metallic mineral production Mineral prices 14 15 Main mining units 20 Exports 24 Mining investments 26 Reserves 27 Portfolio of mining projects 29 Mining Potential 30 Mining Policy 31 Social and environmental impacts 34 Mining legislation 46 Industry institutions 49 PwC capabilities 50 Contacts 51 Acronyms Doing Business - Mining 2013 2 Executive Summary Peru has an enormous economic strength in the form of multiple mineral deposits and is currently ranked 4th in the world1. It currently occupies 7th place among the Top 10 leading mineral - producing countries, with an estimated production value of US$ 27,063 million2. The primary competitive advantage for Peruvian mining is its diversification of minerals being produced: copper, gold, silver, lead, zinc, tin, molybdenum, iron, cadmium, mercury, selenium, indium and other metals. It is the region’s top producer of zinc, tin, lead and gold, and occupies second place in the produc- tion of copper, silver, molybdenum, mercury, selenium, cadmium and phosphoric rock. Currently, Peru has a sufficient reserve of minerals to generate a constant flow of metal production for several decades, according to the United States Geological Service. The ready availability of hydro - electric and thermal energy resources, such as gas, within Peru, makes the cost of energy a competitive advantage for mining activity. Together with other factors such as the system of land registry, granting of mining concessions, which is one of the most modern and practical in the world, as well having a Risk Capital Segment (Junior Stock Exchange) inside the Lima Stock Exchan- ge. Mining companies can find the political and socio-economic environment within Peru very attractive. Mining activity has been one of the main factors of the development of the Peruvian economy in the last decade. Between 2003 and 2012, investment in mining has grown by more than 2,700%, advancing from US$ 305 million to US$ 8,568 million and currently has a 47% share of the total announcements of private investment projects for the period 2013-2015, according to the Banco Central de Reserva (BCRP). At the same time, mining activity contributes 14.7% of the Peru’s gross domestic product (GDP). Mining activity generates 10% and 16% of all tax revenues for Peru. The mining industry is Peru’s primary export industry and generates more than 210,000 direct jobs per year. Mining also produces 9 indirect jobs in various sectors within the economy.3 Mining’s contribution to Peru has gone even further with the need for mining companies to play a social role together with the generation of value for their shareholders. This behavior is consistent with the results of our 2013 global survey of CEOs in which they recognize the importance of strengthening the bridge between industry and society to achieve success. In 2003, the mining companies undertook work with the government to undertake voluntary activities for Sustainable Development in key mining centers and their regional support areas. In the five-year pe- riod 2007-2011, almost 26.1 million people benefited from projects of local development, education, self- employment, infrastructure, nutrition, health and others, which involved investments of US$460 million. The Peruvian Government is very aware of the importance of mining for the country. For that reason, it provides its support to the sector in a framework of legal stability, economic freedom and investment promotion. The principal objective of Peruvian mining policy is to develop mineral resources rationally, respecting the environment, and creating conditions for the mining companies and society in which they live and work to come together in harmony. This document is the first in a series of Doing Business, which exclusively covers the mining sector. It provides a description of the key aspects of the sector to help you to make investment decisions in Peru. We feel that our 89 years of experience in Peru gives us a clear understanding of this great industry and, together with the professionalism, objectivity and financial acumen for which we are known, we hope we can be of service to you as you explore Peru. 1Fraser Institute, 2009. 2Wood Mackenzie / Gerens 3MINEM, IPE and SNMPE Orlando Marchesi Fernando Gaveglio Humberto Salicetti Lead Partner, Mining Lead Partner, Assurance Lead Partner, Advisory Doing Business - Mining 2013 3 Introduction The Top 10 mining producers of 2012 (In millions of US$) Peru has been synonymous of mineral wealth since the six- teenth century when the silver from its mines, extracted by the Spanish conquest, flooded the Old World markets. Sin- Production value Part. % ce then, the phrase Vale un Peru (English: “Worth a Peru”) was coined for the country. The Peruvian nation is home of China 168,958 25.8 an enormous mining richness, expressed in numerous cop- per, gold and polymetallic deposits, the potential of which, Australia 76,795 11.7 measured in terms of volume, has been ranked as the four- Chile 47,963 7.3 th largest in the world by the Fraser Institute (2009). Brazil 38,138 5.8 The ancestral mining tradition of Peru, its private inves- Russia 34,929 5.3 tment promotion policies, the commercial opening of the sector and the potential of its resources; have permitted USA 31,304 4.8 the country to reach the first positions in the region and Peru 27,063 4.1 in the world as a producer of minerals. According to Wood Mackenzie, Peru occupies the seventh place in the ranking South Africa 23,122 3.5 of mineral producing countries, with a production value of US$27,063 million. India 22,778 3.5 Canada 19,741 3 The privileged position of Peru is determined by the pro- duction of copper, gold, silver, lead, zinc and tin of its Total 654,328 100 % mines; and complemented by the production of other ma- Source: Wood Mackenzie / Gerens terials such as molybdenum, iron, cadmium, mercury, se- lenium and indium. The diversification of the supply that the country enjoys is recognized by mining investors and Ranking of mining production 2012 constitutes its main competitive advantage compared to the other countries of the region. Latin American ranking World ranking Peru is the world’s seventh largest mining producer thanks Zinc 1 3 to the diversification of its supply of commodities, which exceeds that of its mining competitors of the region. In par- Tin 1 3 ticular, Peru possesses great resources and reserves of the three metals with greatest demand on a global level: iron, Lead 1 4 copper and gold, in that order. No country of the region Gold 1 6 possesses this competitive advantage, of which Peruvian mining expects to take advantage in the next 3 to 4 years Cooper 2 3 Silver 2 3 Another of the country’s competitive advantages is its low energy cost, 50% of that of Brazil and 67% of that of Chile, Molybdenum 2 4 its main mining competitors in South America. This is due Mercury 2 4 to the ready availability of hydro-energetic and thermal re- sources (gas of Camisea) offered by the Peruvian territory, Selenium 2 9 unlike what occurs, for various reasons, in neighboring Cadmium 2 10 countries. Phosphoric Rock 2 13 Peru also has advantages in terms of production costs. Iron 5 17 This is the case of the large copper mines, of which avera- ge costs in the country total Ctvs US$, 624/t, compared to Source: United States Geological. Survey and Anuario Minero 2012 MINEM Ctvs US$,963/t recorded by the copper mines in Chile, the world’s main producer of this commodity. Another important factor that should be considered is the system of land registry and granting of mining conces- Cost of energy (In US$ x kW/hour) sions, one of the most modern and functional in the world, which has become a case study for other mining nations. Chile 0.15 Finally, Peru has the advantage of having a Risk Capital Brazil 0.10 Segment (Junior Stock Exchange) inside the BVL (Lima Stock Exchange), the only one in Latin America, which has Peru 0.5 made it possible to attract exploration companies and the financing of some of them in previous months. Source: MINEM Doing Business - Mining 2013 4 Peruvian economy – an overview The economy of Peru is a success story, recognized by international organisms such as the International Mo- netary Fund (IMF) and in the various economic forums. It occupies the fifth position in South America, due to the size of its Gross domestic product based on purchasing-power-parity (PPP) and the fourth place of the 20 best countries and frontier markets in the world to invest in, according to the Bloomberg Markets magazine. The data comes from Bloomberg’s own financial-market statistics, IMF forecasts and the World Bank. Countries were also rated on areas of particular interest to foreign investors: the ease of doing business, the perceived level of corruption and economic freedom. The merit of Peru responds to its solid macroeconomic performance and its economic model based on the mar- ket economy, the subsidiary role of the State, the free initiative of private investments, macroeconomic stability, trade liberalization, the promotion of local and foreign investment, the stimulation of free competition, legal stability and social inclusion. South America: GDP 2013* based on purchasing-power-parity US$ Thousand million Brazil 2,466.6 Argentina 776.3 Colombia 532.1 Venezuela 408.8 Peru 352.9 Chile 341.9 Ecuador 162.7 Bolivia 58.8 Uruguay 56.7 Paraguay 46.1 Source:IMF (*) Estimate IMF.