PERU MINING SECTOR 2019/2020 An EMIS Insights Industry Report Any redistribution of this information is strictly prohibited. Copyright © 2019 EMIS, all rights reserved. CONTACT US www.emis.com FOLLOW US ABBREVIATIONS BCRP Central Reserve Bank of Peru COCHILCO Chilean Copper Commission GVA Gross Value Added INEI National Institute of Statistics and Informatics MINEM Ministry of Energy and Mines Peruvian Agency for Environmental Assessment and OEFA Enforcement PROINVERSION Private Investment Promotion Agency SMV Superintendence of Securities Markets SNMPE National Society of Mining, Oil and Energy National Superintendence of Customs and Tax SUNAT Administration USGS United States Geological Survey Any redistribution of this information is strictly prohibited. Copyright © 2019 EMIS, all rights reserved. 01 EXECUTIVE SUMMARY p.5 Sector in Numbers Sector Overview Sector Snapshot Sector Outlook Subsector Outlook Driving Forces Restraining Forces 02 SECTOR IN FOCUS p.14 Main Economic Indicators Main Sector Indicators Sector Competitiveness Production Global Positioning External Trade Exports Imports Foreign Direct Investment Main Investment Projects Focus Point – Investment by Region Employment Focus Point – Employment by Region 03 COMPETITIVE LANDSCAPE p.31 Timeline Peru Mining Highlights Market Shares Copper & Gold Mine Competition Zinc & Lead Mine Competition Silver & Molybdenum Mine Competition Top M&A Deals M&A Activity 2017-2018 CONTENTS 04 COMPANIES IN FOCUS p.40 Southern Peru Copper Corporation Compania De Minas Buenaventura SAA Nexa Resources Peru SAA Minsur SA Shougang Hierro Peru SAA 05 REGULATORY ENVIRONMENT p.51 Government Policy 06 METALLIC AND FUEL p.55 MINERALS Highlights Main Events Metallic and Fuel Minerals Reserves Metallic and Fuel Minerals Production Focus Point – Gold Production Focus Point – Copper Production Focus Point – Zinc Production 07 NON-METALLIC MINERALS p.66 Highlights Main Events Non-Metallic Minerals Reserves Non-Metallic Minerals Production CONTENTS PERU MINING SECTOR 2019/2020 An EMIS Insights Industry Report CONTENTS 01 EXECUTIVE SUMMARY Any redistribution of this information is strictly prohibited. Copyright © 2019 EMIS, all rights reserved. 5 01 EXECUTIVE SUMMARY CONTENTS Sector in Numbers nd 7.1% 2 19.6% CAGR Largest Global Mine Producer of Silver, Share of Global Metallic Minerals Copper & Zinc Silver Reserves Mining GVA 2013-2018 14th 2.43mn 1.47mn Position tonnes tonnes Fraser’s Investment Copper Mine Zinc Mine Attractiveness Production Production Index USD 6.2% 201,547 3,934mn CAGR Number of Investment by Copper Mine Employees Foreign Mining Production Companies 2019-2026 Note: Data for 2018. Source: USGS, MINEM, INEI, Fraser Institute, BMI Research, BCRP PERU MINING SECTOR 2019/2020 6 An EMIS Insights Industry Report 01 EXECUTIVE SUMMARY CONTENTS Sector Overview Peru is one of the leading global players in the production of metallic minerals. In 2018, the country ranked second in the world in terms of mine output of silver, copper and zinc, with global shares of 15.2%, 11.6% and 11.3%, respectively. Moreover, it was third-biggest lead producer (with a 6.6% share), and the fourth-largest molybdenum and tin producer (with shares of 9.3% and 6.0%). In the period 2013-2018, the sector was affected by volatility in international metal commodity prices, which limited revenue growth from mining exports to a 3.4% CAGR, while export volume rose at a significantly higher average annual rate of 4.5%, and domestic output’s performance was strongest of all – it increased at a CAGR of 6.4%. Entry Modes The level of competition in the mining sector ranges from extreme concentration (with one or two relevant players) in the case of iron and tin; through a low level of competition in non-metallic minerals and a medium level in copper, silver and zinc; to a high level of competition in gold and lead. In 2018, domestic and foreign companies were very active in forming joint ventures for greenfield and brownfield projects, in order to secure adequate financing. A key example was the partnership between Chilean business conglomerate Copec and domestic miner Minsur for the joint development of the Mina Justa greenfield copper project, signed in April 2018. In the case of brownfield investment, in June 2018, US miner Newmont and its Peruvian partner Buenaventura sold a 5% stake in their Yanacocha gold mine to Japan’s Sumitomo in a USD 48mn deal, as the latter is particularly interested in co-developing Yanacocha Sulfuros, a mixed copper-gold project. Segment Opportunities Peru enjoys competitive advantages in the production of several metallic minerals, thanks to abundant proven and probable reserves and low labour costs. In 2018, the country had the world’s largest silver reserves (110,000 tonnes of fine silver or 19.6% of global reserves); its third-biggest reserves of copper (83mn tonnes, 10.0%), zinc (21mn tonnes, 9.1%), and molybdenum (2.4mn tonnes, 14.1%); and its fifth-biggest lead reserves (6mn tonnes of fine lead, or a 7.2% share). In the case of non-metallic minerals, Peru’s reserves are rather limited and production is mainly focused on supplying domestic demand. In 2018, huge lithium resources, amounting to around 4.71mn tonnes, were discovered on the Macusani plateau (Puno). However, as noted below, regulatory issues mean that their exploitation is still a matter of dispute. Government Policy Given the importance of the mining sector for Peru’s economy, the government is generally reckoned to look favourably on most mining segments. However, the lack of a regulatory framework for the handling and transportation of radioactive material has the potential to stop – or at least significantly postpone – the development of Peru’s large lithium-uranium resources, discovered in 2018 on the Macusani plateau in Puno region. Source: MINEM, INEI, USGS, UN Comtrade, El Comercio, Diario Gestion PERU MINING SECTOR 2019/2020 7 An EMIS Insights Industry Report 01 EXECUTIVE SUMMARY CONTENTS Sector Snapshot Peru Mining Sector PRODUCTION Production Value: Production Volume: USD 36,164mn 75.8mn tonnes Metallic and Fuel Metallic and Fuel Minerals: 31,122 USD mn Minerals: 14.0mn tonnes Non-Metallic Minerals: Non-Metallic Minerals: EXPORTS 5,042 USD mn 61.8mn tonnes USD 28,823mn* Export Value 19.2mn tonnes* Export Volume DOMESTIC MARKET** Copper Ore: USD 14,925mn USD 7,588mn Gold Ore: USD 8,239mn Domestic Market Value Zinc & Lead Ore: USD 4,093mn 44.4mn tonnes Others: USD 1,566mn Domestic Market Volume IMPORTS** USD 160.95mn KEY PLAYERS REVENUES Import Value 1. Minera Cerro Verde: USD 3,054mn 0.57mn tonnes 2. Southern Peru Copper: USD 2,572mn Import Volume 3. Buenaventura: USD 1,167 mn 4. Nexa Peru: USD 828mn 5. Volcan: USD 775mn Coal: USD 62.0mn Copper Ore: USD 36.9mn Others: USD 62.0mn Npte: Data for 2018. * Data excludes coal exports. ** Note: Data corresponds to 2017. Source: MINEM, USGS, UN Comtrade, SMV, Company Data PERU MINING SECTOR 2019/2020 8 An EMIS Insights Industry Report 01 EXECUTIVE SUMMARY CONTENTS Sector Snapshot Peru Mining Sector In 2018, the production of Peru’s mining sector amounted to USD 36.2bn (4.5% up y/y) and 75.8mn tonnes of minerals (25.6% up y/y). The majority of domestic production was destined for foreign markets, consolidating the country’s position as a leading global supplier of several metallic mineral products, including copper, silver, zinc, tin, lead and gold. In 2018, mining exports stood at USD 28.8bn (6.0% up y/y), accounting for 79.7% of domestic production value, with the bulk of external sales comprising copper ores and concentrates (USD 14.9bn), gold ores and concentrates (USD 8.2bn), and zinc & lead ores and concentrates (USD 4.1bn). In 2018, the mining sector employed 201,547 people, of whom 32.9% were employed directly by mining companies, and the rest by contractors. In 2018, Arequipa was the leading region in terms of mining employment (with a 15% share), thanks the variety of minerals explored and extracted there. In that year, Arequipa was the biggest copper and molybdenum producer, the third-largest gold producer, the fifth-biggest lead producer, the sixth-largest silver producer and the seventh-biggest zinc producer among the 25 regions of the country. Junin region ranked second in terms of employment, with a 9.5% share, due to its role as Peru’s leading producer of non-metallic minerals (mostly calcium carbonates). In addition, Junin was the largest silver producer, the second-biggest zinc producer, the third-biggest lead producer, and the fifth-largest producer of copper. In 2018, the companies operating in Peru’s mining sector made investments worth USD 4.95bn (up 0.5% y/y). Of these, 79.5% came from foreign companies with mining operations in the country, with the remaining 20.5% coming from domestic players. Plant equipment accounted for the bulk of funds, with a share of 28.5% in total investments, followed by infrastructure works (21.9%), preparation of terrain (15.4%), mining equipment (13.3%), and exploration (8.3%), while the remaining 12.6% was used for various other purposes. In 2018, Southern Peru Copper Corporation (SPCC), a subsidiary of Grupo Mexico, was the largest investor, with USD 614.8mn, followed by Anglo American Quellaveco SA, a joint venture between British miner Anglo American Plc and Japan’s Mitsubishi, with USD 510.0mn. In 2017, the last year for which data is available, mining sector imports in value terms were negligible compared to exports, reaching just USD 160.9mn, as Peru is self-sufficient in most minerals. The main import product for the year was coal (USD 62.0mn or 38.5%), which is mostly used for electric power generation. According to EMIS Insights estimates, the domestic metallic and non-metallic minerals market had a size of USD 7.6bn in value terms and 44.3mn tonnes in volume in 2017 .Two minerals had a combined share of 61.9% of the domestic market in terms of value: calcium carbonates (37.1%) and zinc (24.8%).