Peru’s mining industry Gearing up for a new wave of investment TABLE OF CONTENTS Peru: an overview.............................................p90 This report was researched and prepared by Production and development.............................p92 Global Business Reports (www.gbreports.com) for Exploration..................................................p98 Engineering & Mining Journal. Communities and the State..............................p101 More competition in engineering and construction..p103 Editorial researched and written by Alfonso Tejerina, Equipment.................................................p108 Elisa L. Iannacone, Clotilde Bonetto Gandolfi and Mining services in Peru...................................p112 Miguel Pérez-Solero. For more details, please contact [email protected]. Cover photo courtesy of Ferreyros. A REPORT BY GBR FOR E&MJ AUGUST 2014 MINING IN PERU Peru: An Overview Currently in a transition period, Peru must unlock its vast pipeline of mining projects. Antamina, located at 4,300 m above sea level, is Peru’s largest copper and zinc producer. Photo courtesy of Antamina. It has been nearly a year since Arequipa most controversial project, Yanacocha’s Newmont’s press release implying that the hosted its biggest Perumin convention ever, Minas Conga, could restart activities as company would take its money somewhere amidst an enthusiastic atmosphere full of well, although that will depend heavily on else. Still, Peru must be aware that in to- optimism. There, President Humala de- the outcome of the regional elections to day’s globalized economy, competition is scribed the expanding mining activity in the be held later this year. Yanacocha’s main the name of the game. As Christian Laub, country as a transformational change for shareholders, Newmont and Buenaventura, president of the Lima Stock Exchange, said: Peru, and not just a cyclical effect of high may reduce Minas Conga’s total capex from “We do not compete with ourselves, but commodity prices. $5 billion to $4.5 billion. with other countries. Mining companies For that transformational change to hap- have a budget for projects, and as a country pen, Peru must continue to attract invest- Long-term vision we must be proactive to promote respon- ment even when markets are down and big Investment in Peru’s mining industry was a sible mining.” mining companies—many under new lead- record-breaking $9.5 billion in 2013. How- What worries critics is not the short term: ership—are cutting costs and thoroughly ever, according to Alfredo Remy, mining Peru should receive $9 billion worth of in- reviewing where to put their money next. industry leader at PwC, “Peru needs more vestments in the mining industry this year, A combination of external and internal projects beyond 2016. Our government in- in spite of the market conditions. “In terms factors (the latter related to political prob- dicates that the mining GDP will grow by of investment, what is affected by low met- lems and social conflicts) has indeed caused 9.2% in 2014, but that is the result of the al prices is exploration, and that is not a a slowdown in project development over the big projects that are already ongoing.” high portion of the total investment portfo- last months. Meaningful exceptions can be Peru’s government has been expanding lio. When a project enters the construction found in Chinalco’s Toromocho, Hudbay the value of the country’s project portfolio phase, it cannot be stopped. Additionally, Minerals’ Constancia and Cerro Verde’s to nearly $60 billion. Many of these proj- companies are executing investment projects large expansion, which are both advancing. ects are still up in the air, however, and to achieve cost reductions. These projects The long merger process between Glen- initial investment decisions cannot be taken will not stop either,” said Eva Arias, president core and Xstrata also created delays at Las for granted. At the peak of the conflict over of the Mining, Petroleum and Energy Society Bambas, a large copper asset under con- Conga, Peruvian officials did not appreciate (SNMPE), the main industry association. struction, which Glencore finally agreed to sell in April to a Chinese consortium led by Hong-Kong listed MMG, an arm of Minmet- als, for $5.85 billion. There are, however, signs that late 2015 and 2016 will see the mining industry ex- perience a boost. Southern Copper’s $1 bil- lion Tía María copper project should receive environmental impact assessment (EIA) approval before the end of this year. Then, a production decision for Quellaveco is ex- pected from Anglo American in late 2015. Slowly but steadily, Rio Tinto is advanc- ing its La Granja copper project, considered to be the seventh largest undeveloped cop- per deposit in the world. Finally, Peru’s Alfredo Remy, mining industry leader at PwC. Christian Laub, president, Lima Stock Exchange. 90 E&MJ • AUGUST 2014 www.e-mj.com MINING IN PERU A cost equation Overcoming challenges As elsewhere, Peru’s mining companies While 2013’s fall in metal prices and uncer- are adjusting to the new scenario to make tainty about future trends are probably the their business sustainable at current metal biggest culprits of the sector’s slowdown, prices. Managing costs has become essen- industry leaders surveyed also blame the tial, and it is an area where Peru is well current government for its lack of proactivity positioned, said Remy of PwC: “The country to push new projects forward. At a regional offers low production costs if compared to level, the anti-mining activism of the Caja- other countries in the region, in spite of in- marca government has shown the weak- flation. That is partly due to our energy cost, nesses of a poorly managed decentralized which is 50% lower than Brazil’s and 67% political system. lower than Chile’s.” Yet, with its array of challenges, the in- For companies, adjustments have im- dustry continues to see Peru as a key min- plied sacking a good amount of workers, ing country. Diego Ortega, director of the Ernesto Balarezo, executive VP Americas, Gold cutting down exploration budgets and push- La Granja project at Rio Tinto, emphasized Fields. ing providers for aggressive discounts. As that there are 14 ICMM members with the industry goes back to the basic funda- executive vice-president for the Americas at projects or operations in the country. “That mentals of the business, companies are also Gold Fields. shows the level of confidence that investors trying to present their costs differently, to Jorge A. Ganoza, president, CEO and co- have in Peru,” he said. avoid the distortions of low cash costs that founder of Fortuna Silver, further developed Looking at the country’s activity, it is translated into negative cash flows. on this: “The cash cost leaves behind an hard to believe that mining is in decline in “We have learnt a lot during the last important part of the expenditures that, if Peru, yet it is true that the sector is cur- decade. We do not talk about the ounces not invested, would cause the mine to close rently relying on past investment decisions produced, but about cash flow. We do not down, such as tailings dams, camp im- and the uncertainty of this year’s regional talk about how many projects we have or provements or equipment. At the end of the election and of the 2016 presidential poll how many countries we are in, but about day, everything is in the companies’ finan- is not helping. A new wave of investments how much cash we are generating. We talk cial reports, but certainly using the ‘all-in in the billion-dollar range, including Tía about the all-in cost and all-in sustaining cost’ helps have a more fluid communica- María, Quellaveco and Conga, would cer- cost and not about the cash cost, which is tion with shareholders. Having said that, it tainly boost the industry’s optimism in Peru a concept that had many hidden or non- is not a perfect way to measure your capac- for the long term, ensuring overall economic reported data,” explained Ernesto Balarezo, ity to generate cash flow.” growth continues as well. www.e-mj.com E&MJ • AUGUST 2014 91 MINING IN PERU Production and development Windows of opportunity Hudbay Minerals’ $1.7 billion Constancia project will start production later this year. Photo courtesy of Hudbay Minerals. A good old-time cliché is that a time of cri- copper project, expected to start produc- about 1.38 million mt, a 5.9% increase sis is also a time of opportunity; indeed, tion later this year and reach full capacity year-on-year but still far from the coun- those who have been successful enough to in 2015. try’s potential. Peru’s main producers are move their projects forward over the last Constancia’s construction decision was Antamina with 461,000 mt from a single couple of years of slowdown have benefited taken at a moment where many other proj- operation; Southern Copper with 308,000 from better power and equipment prices, at ects were put on hold, but when suppliers mt; Cerro Verde, operated by Freeport Mc- a time when the correlation between offer (such as power generators) had already MoRan and participated by Sumitomo and and demand is significantly different than invested in new capacity to deal with Buenaventura, with 261,000 mt; and An- in 2011. On one hand, economic growth in foreseen upcoming demand. “The power tapaccay from Glencore (previously Xstrata) Peru (+5% in 2013) continues to attract generators anticipated many new projects, with 151,000 mt. new providers from all around the world and that put us in the greatest negotiat- This year copper production will increase in fields like engineering, construction and ing position. We secured power for 10 again, thanks mainly to the addition of Chi- equipment.