Image courtesy of Nexa Resources

In March 2018, in his capacity as Peru’s vice-president, ambassador to Canada and former governor of the Moquegua region, Martín Vizcarra gave a talk at the PDAC Convention. During his speech, he outlined the successful public-private collaboration that led to the development of the Quellaveco copper project by Anglo American. The audience listened with excitement because they knew they were likely to be sitting in front of the next president of the country; at that point, the then head of state, Pedro Pablo Kuczynski (‘PPK’), was under fire due to the Odebrecht corruption scandal and other internal matters.

PDAC was indeed one of the last public appearances by Vizcarra before becoming the country’s president on March 23, 2018, following PPK’s resignation. While the new administration failed to end the political noise during the first months of Vizcarra’s tenure, the new president finally cornered the opposition-controlled Congress with a referendum whereby nearly 86% of Peruvians voted in favor of banning the re-election of parliamentarians. This was seen as a popularity boost for Vizcarra in his attempts to move government initiatives forward.

In parallel to all this, and with the exception of public infrastructure projects that were affected by corruption and scandal, economic activity continued in the country. The mining industry, empowered by better commodity prices and the general restart of activity that is typical of mining cycles after a downturn, was no exception.

2018 brought three significant pieces of good news to the industry in Peru: the US$1.3 billion expansion project at the Toromocho copper mine, operated by Chinalco; the start of construction of Mina Justa, a US$1.7 billion copper project; and the final green light by Anglo American to build the Quellaveco copper operation, a project with an estimated capex between US$5 billion and US$5.3 billion. On top of these ongoing investments, Chinese miner Shougang completed the expansion of its Marcona iron ore operation in mid-2018 as well.

Putting figures into perspective, total mining investment amounted to US$4.95 billion in 2018, according to the latest information released by the Ministry of Energy and Mines (MEM). This represents close to a 26% increase over the US$3.93 billion investment in 2017 (a year ago, MEM had published that mining investment in 2017 was US$4.92 billion, but this has been revised since). While the expectation for 2019 is quite positive, with official estimates to reach around US$6 billion, these amounts still lag behind the record investment figures of the super-cycle period between 2011 and 2015, where the annual average was around US$8.4 billion.

REALIZING THE COUNTRY’S POTENTIAL

While no one expects a commodity boom like the one of those years, an old theme persists, and this is that Peru could fare much better in terms of project development. Luis Rivera, president of the Peruvian Institute of Mining Engineers (IIMP in its Spanish acronym), pointed at Peru’s enormous geological potential: “Peru is a relatively large country with 1.3 million square km, but it is small if compared to continent countries like Canada, the United States or Australia; yet, Peru has all the metals that are important to the industry.”

“What we do not have is political stability,” Rivera continued, referring to the regional and local elections held in Peru in October 2018. “There is political noise in some regions, and that prevents the country from translating its potential into real investment. If Peru could develop projects like Tía María, for instance, we would have double the investors; we would be even more attractive than Canada,” he assured.

In any case, the global mining market is moving. Peru doubled its copper production in a matter of just a decade, between 2007 and 2016, positioning itself as the world’s second largest producer after Chile, and the country continues to have a very promising pipeline of copper projects. In a context of higher demand for copper due to global electrification, this is an enormous opportunity for Peru to keep promoting its mining industry.

Furthermore, major gold companies have started what is seen as a new wave of mergers and acquisitions, led by the Barrick-Randgold and the Newmont-Goldcorp combinations. Peru is the sixth largest gold producer according to the United States Geological Survey (USGS, 2017 data), and ranks seventh in terms of reserves so, again, the country’s geology is not under question – Peru just needs to promote an environment that is business-friendly enough to attract those companies that not only have the financial capacity to take projects into production, but also operate with the highest environmental and social standards.

Víctor Gobitz, CEO of Peruvian precious metal miner Buenaventura, commented on the latest M&A activity in the gold segment: “These transactions are a result of the increased difficulty to find large deposits in the gold industry, and of the more stringent regulations that make it harder to develop new projects. The price of gold reaching more than US$1,300 per oz is also a consequence of this situation.”

Asked if Buenaventura, one of Peru’s largest mining companies with a market cap of over US$4 billion (February 2019), could engage in inorganic growth, Gobitz was cautious: “The recent tailings dam disaster in Brazil must make mining companies think before making acquisitions. At some point Vale grew a lot through M&A, but when you buy an asset, you also buy its liabilities,” he said. While the company does not rule out acquisitions, especially within Latin America, Gobitz referred to Buenaventura’s wide project portfolio in Peru as the main focus of the company for now.

CREATING CLUSTERS

Looking at the future of copper production, the country envisions more multi-billion dollar investments to continue closing the gap with the red metal leader, Chile. Pablo de la Flor, executive director of the National Society of Mining, Petroleum and Energy (SNMPE in Spanish), noted that Peru has a portfolio comprising 48 projects worth US$60 billion in future investment, and half of these projects are in copper: “If you look at the main 20 copper producing mines in the world today, only four of them started in the 21st century. So, Peru has the potential to bring new capacity at very competitive costs, in a context where older mines are becoming more expensive,” he said.

While Peru is probably a couple of decades behind in its mining development with respects to Chile due to the political instability of the 1970s and 80s, this can be seen as an opportunity, as the country has the chance to start new mines with the latest technology to assure the lowest cost per pound of copper produced. Additionally, labor and power costs in Peru are more competitive than in Chile.

One of the main objectives ahead is the creation of mining clusters, where providers can set up efficient service shops close to the mining operations, and where miners can share certain infrastructure. A move in this direction has already been taking place in the Arequipa region, with the large copper production coming out of southern Peru.

Luis Rivera, president of IIMP, gave more details about this: “There is already a natural mining cluster in Arequipa: Matarani is the largest port in the world for mineral concentrates, handling 6 million tonnes annually (mt/y), while the port of Mollendo is critical to receive inputs for mining operations. Meanwhile, the pampas of Uchumayo, Majes and La Joya are transforming into industrial service hubs for the mining sector.”

While there has been great progress in the south, there is still room for more industry integration in the area with the development of the large Las Bambas copper district in Apurimac. Also, to the other end of the country in the north, some industry leaders see an opportunity to go one step further and have several large copper projects in the area share actual operations infrastructure: for instance, a tailings dam, a processing plant or a concentrate pipeline.

“In the north we have Michiquillay, Galeno, Conga, Yanacocha’s sulphides, La Granja, Tantahuatay and Cerro Corona,” explained Carlos Gálvez, former president of SNMPE and current president of the organizing committee of PERUMIN, the country’s main mining conference and exhibition. “To develop all these projects, we cannot look at them as isolated endeavors; we need to consider the wider picture with an optimized plan, making the most of new technologies,” he affirmed.

Of course, for this to happen, the State needs to play a key role to coordinate the different projects, develop the underlying infrastructure and collaborate with the industry on a sustainable development plan, bearing in mind that most mineral deposits in Peru are located in remote and economically underdeveloped districts.

Suresh Vadnagra, president of Minera Las Bambas, the country’s third largest copper producer, gave his view on the matter, reflecting on his experience in the remote district of Apurimac where Las Bambas operates: “What needs to come first, the infrastructure that incentivizes the mining projects or the mining projects that support the development of infrastructure? It is a catch-22 situation. Whatever way we look at it, this requires significant coordination between the various parties.”

A PLAN FOR 2030

In recent times, industry leaders have been pushing government authorities to develop a long-term vision of the industry that goes beyond the individual mandates of the different governments. Looking back, the mining ministers lasting more than two years in office have been the exception, and the last four have held office for less than a year each.

In August 2018, the Martín Vizcarra government created the so-called Center of Convergence for Good Mining and Energy Practices. Beyond its pompous name, the objective of this body is to define a strategy to develop the country’s project portfolio by 2030, in a timely and sustainable manner.

This includes several pillars, from the promotion of investment to the articulation of State institutions in the areas of influence, in order to close gaps in economic inequality and infrastructure. Carlos Gálvez of PERUMIN, however, concluded that these objectives need to translate into real action: “The mining industry is a key strength for Peru: it represents 11% of GDP, 60% of exports and 20% of all taxes collected by the State. Now, we need president [Vizcarra] to take a leadership role, with a vision for the country and a strategy to meet it, taking advantage of his relationship with the regional governments to persuade the population of the need for mining investment.”