Toronto welcomes Latin flavour

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  • 1. Focus: Peru Gkncore Xstrata completed the USS 1.47 bllBon Antapaccay expansion project at its Tintaya mine in 2012 Toronto welcomes Latin flavour Peru will keep one country's growth prospects on a 2014 PDAC menu that may be less appetising than usual C ould there be a better inaugural 'country sponsor'for this year's PDAC conference than Peru? As the mining investment world looks for good news stones amid the fog (let us imagine the gloom is becoming more translucent), Peru continues to build its case to be considered the emerging eco- nomic and mining powerhouse of Latin America. This year, as delegates at the major Toronto min- ing investment conference will bear often next month, development milestones for key resources projects give Peruvian government representatives and major investors in the country more opportuni- ties to trumpet the country's credentials. According to global accounting firm Ernst & Young (EY), latest data suggests that in 2014 Peru mining investments could reach a record of USS14 billion after hitting USS10 billion last year. That pre- vious record mark was driven mainly by large-scale projects such as Aluminum Corporation of China Ltd's (Chinalco) USS4.8 billion Toromocho copper venture, Freeport-McMoRan Copper & Gold Inc's US$4.4 billion Cerro Verde expansion, and Hudbay Minerals Inc's USS 1.8 billion Constancia project. While a recent International Monetary Fund (IMF) report warned lower commodity prices could unset- tle the Peruvian economy in 2014, others point to its growing resilience and to significant capital inflows and continued reforms that should prove helpful in continuing the country's healthy growth. "In recent years, Peru has achieved significant advances in social and development indicators as well as in macroeconomic performance, with very dynamic GDP growth rates, reduction of external debt, a stable exchange rate, and low inflation - which in 2013 was below the upper limit of the Central Bank target range of 1% to 3%,' EY says in its 2014-15 Peru mining investment guide. "The country has had continuous economic and political stability since the early 1990s. The Peru- vian economy has been growing by an average 6.4% between 2002 and 2012 - the highest 10-year average growth in Peru's history. This growth was largely driven by prudent macroeconomic policies, investor-friendly market policies and the govern- ment's aggressive trade liberalisation strategies. "Peru's rapid expansion has helped to reduce the national poverty rate from 48.5% in 2004, to about 24.5% of its total population in 2013." EY said growth was slowing in a context of lower prices for Peru's largest commodity exports, but the "country's economy remained strong in 2013, growing about 5%, down from 6 3 % in 2012*. "Despite the slowdown in 2013. Peru's economic growth will continue to be one of the strongest among peers, as the central bank now expects growth of around 6% in 2014," the firm said. "It is expected that the increase in mineral production will support Peru's economic growth over the next few years as metal pnces have weakened. Fast facts: Peru • Capital: Lima T Population: 29.99 million • Real GDP growth: 63% (2012 est) • Currency: Peruvian nuevo sol "An estimated US$593 billion is expected to flow into the country over the next few years... [w/fh] new mines and expansion projects expected to more than double its copper production by 2016. The mining sector has real potential for growth and further expansion." EY Peru country manager Jorge Medina Mendez says that as other parts of the world grapple with weak growth, Latin America is "moving ever higher up the global business agenda". "Peru, in particular, has staged a remarkable comeback from the difficult years of the 1980s and 1990s." he said. "After years of conflicts with Maoist terrorists and other challenges, Peruvians have seen a steady increase in income and a dramatic drop in poverty." Banking on growth Mendez said World Bank data showed that since 2004 alone, per capita income in Peru nearly dou- bled from US$5,530 in purchasing power parity terms to US$9,440 in 2011. National GDP grew from US$26.3 billion in 1990 to US$176.9 billion in 2011. Over the same period the national poverty rate fell from 58.7% in 2004, to 27.8% in 2011. Exports, a key source of foreign exchange, grew from 14.8% of GDP in 1999 to 28.7% in 2011. "As in most Latin American economies, high commodity prices have helped boost growth,' Mendez said. 'But the most important factors in Peru's turnaround are its sound economic policies. As a result of responsible macroeconomic steward- ship, the country's sovereign debt ratings have achieved investment grade ratings from Standard & Poor's and Moody's." Last August, S&P praised the administration of president Ollanta Humala, who is more than half- way through his term in office after narrowly win- ning the 2011 election, for its infrastructure
  • 2. Focus: Peru Expansions Confirmed investment With feasibility studies Exploration Mining projects pipeline... mining and metals investment over the period 2014- 2020is estimated by Peru's Ministry of Energy and Mines to be around USSS9S billion. About 62% will be invested in copper projects, with gold and iron ore set for much of the rest. This diagram shows the projects involved. It distinguishes between expansions of existing operations, projects under construction for which investment is confirmed, projects for which feasibility studies have been carried out and exploration projects Las Bambas GiencoreXstrata (Switzerland) Qusllavsco Anglo American Qx%WcoS4(UK) Shoxin (jplotac de fldaves Shoxin (China) Minas Conga Ncvrmont. Buenaventura iPenù To romocho Oànalco- AUmhum (Corp. of China) Constancia Invicta Hudbay Peru SAC Imicta Mining Corp {Canada) (Canada) Ollachaa .Minero.'« írdCAustnia) San Luis Mian i Ventures SAC (Canada) Inmaculada liodadiïd Miningpk (USA) Corani Bear Creek Urning CUS) Shahuindo Crespo Soliden GoldCorp GnjpoKodixhld (Carada) (Peru) Grupo Mexico (Morico) Proy Fosfatos Cementos Poctnmayo (Peru. Korea. Japan) ñon Magistral CfupoMüpo GntpohUpo (Peru) (Peru) Aaha MarcobrolfcnaJosta Haquan t " SrKorv Mctoh Grupo SbcjÎ4 JCorao Resource^ LS-MUo Coopv Antom Mmmrfs ' (Canada) (Peni- Corea Japân) (Canada) J Ê u H o n d o » MkfckpOav La Granfa PampadaPongo O w o o k i oupSA GnpoVokm Anglo Amanean Uichiquiay SA R*> Tinto Naopnrhoo Group Co Cantm dJ HaBaigo 0 (Peru) (UO (UK-Australia) (China) (Peni) fi alian Jumau Coopm > (Oiina) 1 Condcnf* Resources AQM Cooper ZfrnMninGroop Wrfim Mirartg Zincotv kfatah Inc Aitoqii ox^jc/ Mm Hampton Paru Gtxjpo G Cfliril) (Canada) (Canada) (China) (Japan) (Canada) China) (Australia) (Per* StrAe Resources Peru SAC (AustnSa) Grupo Uraco Grupo G Costilo focus Venti«» (Mea ico) (Peni) (Canada) C m C c o H w f h a q a g Cuanro Resources Ine (Canada) Saémaeras da Sedi Gro—Mm ÀanCa (Canai)
  • 3. Focus: Peru investments. The ratings agency claims these pro- jects could be instrumental in increasing Peru's copper exports in the next few years. The wealth of possibilities in the country would have been unim- aginable two decades ago, Méndez said. Between 2011 and 2021, Peru's total exports are expected to rise a further US$223 billion, led by met- ak (US$8.6 billion} and manufacturing (US$7.693 bil- lion), with yearly exports likely to grow most to China <8.9%), India (8.2%) and Argentina (5.6%). Jose Blanco, principal of advisory firm Blanco Part- ners and chairman of the Australia-Latin America Business Council, said Chinese companies, which currently supported about a quarter of Peru's mining investments, would continue to be key players. Shougang Corp, one of China's largest steelmak- ers, plans to invest US$1.2 billion at its Marcona iron-ore mine to double annual output to 2 0 M t Chinalco's Toromocho mine expansion is expected to be at full capacity by the September quarter of this year, and Chinese interests are rumoured to be the likely buyers of the US$6 billion Las Bambas project that Glencore Xstrata pic is selling. But Chinese companies are not the only ones beefing up their operations in Peru. US-based Free- Nationalism worries fade At a time when commodity prices are weak and capital expenditure is bang < resource nationalism has been rearing i ugly head. Increased tax and royalty burdens, in addition to rising free-carried interests, have put many mining companies off investments and despite Peru's strong investment climate it has not been exempt from this. President Ollanta Humala built his 2011 election campaign around policy that would bring in more money for community projects in some of the country's poorest regions. Unfortunately, political party Gana Peru one of the vehicles to do this was a mining windfall tax that was received very negatively in the mining industry. But the president decided on a more considered fiscal policy that included redesigned and modified tax regulations that would raise an extra US$1.1 billion/y forthe state budget while retaining many of the country's investment credentials, according to EY. "This deal removed a cloud of doubt over the policies of the new government and resulted in a comprehensive mineral fiscal system reform, which became effective in October 2011,* the financial services firm said. This system, which applied to all existing and future resource projects, was geared towards profits instead of sales, and introduced a Special Mining Tax' based on a sliding scale ranging from 2%-8.4% of operating profits. Meanwhile, royalties ranged from 1%- 12% of operating profits, compared with 1 % - 3 % of sales previously. In addition, a 'Special Mining Burden'on operating profits of 4-13.12% was installed for companies who signed fiscal stabilisation agreements under the General Mining Law. These companies could elect to make 'voluntary' payments with the Peruvian government, but it was not compulsory. EY said "President Humala's administration appears to have realised that in order to properly develop Peru's mineral industry, in addition to its important geological potential, it has to offer a favourable and competitive investment environment that attracts national and foreign capital towards exploration and mining activities,'EY said. Despite weak prices for many commodities and. accordingly, falling government receipts, there were "strong signs* that the government would take a more considered approach towards policy that affected miners. Indeed, Peru's minister of economy and finance, Luis Miguel Castilla. recently announced that the government was not considering a change to the tax and royalty system and may even promote new initiatives to encourage further investment. "According to global accounting firm Ernst & Young (EY), latest data suggests Peru mining investments could reach a new record in 2014 of US$14 billion after hitting US$10 billion last year" Supporters of President Ollanta Humala carry a banner saying Verv wins with Ollanta', a wordplay on his left-wing port McMoRan plans to spend US$4.4 billion to expand the Cerro Verde copper mine and Canada's HudBay is advancing Constancia. "Global emerging markets are experiencing some financial turbulence, with the recent sell-off in emerging-market currencies being the worst in five years and revealing the extent of the fallout from the US Federal Reserve's tapering of monetary stimulus and individual country factors," Blanco said. T h e markets in Latin America, including Peru, are not immune to this development, but it is fair to say that Peru is still doing well, both by regional and global comparison- According to the United Nations Economic Com- mission for Latin America and the Caribbean (ECLAQ, Peru will remain one of the most economi- cally dynamic countries in the region in 2014, with a GDP growth forecast of 5 . 5 % - second only to that of Panama. More optimistic forecasts are being made by the Peruvian Central Bank, which esti- mates growth for 2014 at 6%, and the Spanish bank, BBVA, which is estimating 6 . 3 % The IMF has named Peru "the leader of economic drive in Latin America", with forecasts of growth of 6.1% and an inflation rate of 2 % for 2014, the lowest in the region. Blanco suggested these estimates might need to be revised downward if financial tur- bulence worsens, but even if this were to occur, Peru would still remain relatively well positioned and ahead of most of the economies in Latin America. "Mining will continue to be a significant contrib- utor to economic growth in Peru in 2014 and beyond," he said. "As the world's third-largest producer of both copper and zinc, and its sixth-largest source of gold, Peru benefited significantly from the boom in the global commodities markets between 2002 and 2012, and it has an investment pipeline that should allow it to maintain solid momentum "As things currently stand, mining companies are planning to press ahead with projects in Peru. According to the Peruvian ministry of mining, the investment pipeline comprises some 50 major pro- jects that are either currently underway or awaiting approval and that are valued at some US$57.4 bil- lion - more than one-fourth of 2013's estimated nominal GDP. About US$36 billion are copper pro- jects, while gold and iron-ore ventures account for some US$7 billion apiece." While the investment plans sound impressive, Peru's mining sector is not without its challenges, including concern about falling mineral prices - a global issue - and about growing social opposition to some mining projects. Local residents adversely affected by mining activity have successfully halted new developments or the expansion of existing mines with large-scale protests, so how the govern- ment and mining companies address the commu- nity concerns will be crucial to the success or failure of the mining sector, according to Blanco. A licence to thrive "Achieving a social licence to operate is the single most important challenge that the mining industry faces in Peru,' said EY Peru corporate governance and sustainability leader, Beatriz Boza.
  • 4. Focus: Peru "Income and regional inequalities continue to be a source of social conflicts, which have had a negative impact on a number of mining projects." Infrastructure investment remains critical to resource development In the 2012 World Eco- nomic Forum's infrastructure ranking, Peru placed 92 out of the 139 countries profied. One senior industry adviser in Peru said the country would only realise its full economic potential after reducing its infrastructure bottlenecks. It is no orphan on that front Estimates vary, but the investment required runs into billions of dollars and covers trans- port, electricity, water and communications. "In recent years, it is not so much the lack of availability of financing but the lack of admin- istrative capacity in the provinces for the spending shortfalls in infrastructure that con- tribute to feed anti-mining sentiments," an observer said. "Regional and local authorities are still sit- ting on billions of soles from canon, mining royalties and other levies collected over the last decade lying dormant in bank accounts, which could be used to fund new roads, hospi- tals, schools and water projects." According to EY, local and regional govern- ments only spent on average 7 5 % of the money available to be spent on infrastructure last year. "What is clear is that the private sector will need to respond to deliver the required invest- ment in infrastructure," the firm's audit mining and metals leader, Victor Burga said. "Doing so requires changes to historical approaches to infrastructure investment, which have typically been government-led, [fo] one which places private sector capital at the forefront" The Peruvian government had become highly proactive, providing the private sector with incentives to develop investment pro- jects. For example, said Burga, Peru's tax sys- tem induded provisions to grant a form of credit against income taxes to allow third- party investors to recover capital investments made in public infrastructure. "Mining and metals companies are respond- ing by building social infrastructure and involv- ing communities at an early stage," he said. There is also a lingering perception that Peru remains an investment destination for large mining companies and is less hospitable to juniors. Most of the world's major mining com- panies, including Glencore Xstrata, Newmont Mining Corp, Gold Fields Ltd, Freeport-McMo- Ran, Rio Tinto, Anglo American pic and Barrick Gold Corp. have operations in the country. Small Is good, too However. Blanco said: "There is definitely a role for junior mining companies to play in Peru and it is worth noting the growing number of such companies that are choosing to list on the Lima Stock Exchange. That said, the fall in
  • 5. Focus: Peru mineral prices in recent years has hit the junior sec- tor very hard and many are finding it difficult to maintain business as usual. "Given that market conditions are not as favoura- ble as they were during the 2002-2012 boom period, only those juniors that are well capitalised or that have highly prospective projects are likely to win the support of the market. There is plenty of exploration to be undertaken in Peru and junior companies are well suited to the task, but for many of them, the cur- rent focus is on survival rather than growth.* Another problem for Peru, also prevalent in neighbouring countries such as Colombia, Ecuador and Bolivia, is illegal mining and, in some cases, arti- sanal mining. Blanco said it was important, though, to distin- guish between the two. "Although both are conducted outside a regu- lated environment and therefore can be classified as illegal, there 3re several important differences between the two,* he said. The primary distinction is that, in many instances, the former tends to be car- ried on by drug cartels or terrorist organisations. This factor brings an added complication to the difficulty that governments face in overcoming the problem. The place to build a mining company Aim-listed Minera IRL Ltd has benefited from the rise of the Andean country. It has more than five years of profitable operations under its belt from its Corihuami gold mine in Peru, which has given it the confidence to launch another US$ 178 million project there. "Early in the last decade. Minera IRL carefully selected Peru as a top mining country in which to base ourselves and build a mining company," chairman Courtney Chamberlain told Mining Journal. A high, sustainable growth rate, low inflation and a poverty rate that had almost halved in the past decade was evidence of the country's investment credentials, he said "The political system works and successive governments have supported the industry with sound legislation and a supportive bureaucracy," he added. The company's Ollachea gold asset was one of a handful of projects being developed in the country, alongside others including Glencore Xstrata pic's Las Bambas copper project, and is due to come into production in the next few years. In January, Chamberlain said the 100,000oz/y operation was on course to receive its construction permit by the end of April, while financing for the project was expected by the end of the year. 'Macquarie Bank is taking the lead on that. We expect them to finish the due diligence at the end of this quarter," Chamberlain said.The Australian bank would handle the debt portion of the US$ 178 million bill, which was likely to be 50% of overall costs, while options for the remainder included streaming, royalties and a host of other "mezzanine options', he added. Minera was also consulting with engineering, procurement, and construction management (EPCM) contractors, hopeful that costs would decrease from the definitive feasibility study issued at the end of the year. "There is lots of interest on the engineering and consultancy front. (These] companies are struggling so we see opportunities to actually reduce our costs from a year or two ago. There are a couple of areas where we can drive down costs." he said. Chamberlain was quick to talk up the benefits of local stakeholder engagement in Pern, an issue that has been the downfall of some companies, such as Newmont Mining Corp and its Minas Conga copper-gold project "Community relations sometimes get negative press but, properly managed as true partners, the local inhabitants are often the greatest asset * Without doubt. Minera has something to crow about. A 5% participating interest for the local community at Ollachea. once in production, combined with local involvement at a very early stage of planning had fast-tracked the project. "The community is very much part of the project. We consulted heavily on the environmental impact assessment (ElA)and had not one rejection to the published EIA,"he " i d . Of course, the geology also plays a part in the country 's pull. "Peru is home to the widest part of the Andean mountain range, which offers excellent geology for new discoveries and great mines. Our Ollachea discovery is demonstrative of this." Chamberlain said - Daniel Cleeson "The IMF has named Peru "the leader of economic drive in Latin America" with forecasts of growth of 6.1% and an inflation rate of 2 % for 2014, the lowest in Latin America" T h e Colombian government is seeking to have illegal mining induded in the list of international crimes. It, together with other members of the Andean Community of Nations (CAN), agreed on January9,2014, to applya set of measures to com- bat the illicit activity. Basically, Colombia, Ecuador, Peru and Bolivia have committed to destroying machinery and even properties related to unlawful mining if they can't be seized." Illegal mining is detrimental to Peru and other countries for a range of reasons. Primarily of course it causes significant environmental damage, and its proceeds are often used to finance other illegal activity. The state is deprived of the corresponding revenue from production. T h e environmental damage caused also tar- nishes the reputation of mining generally, as many citizens in these countries do not fully understand the difference between illegal mining and that which is conducted by the majority of mining com- panies, which adheres to the strictest environmen- tal standards and is conducted in a sustainable manner,* Blanco said. "It is therefore in the national interest that the government succeeds in bringing illegal mining under controL* It is estimated that only 0.32% of the country's total territory was being explored in 2013 (0.29% in 2012), and only a small percentage of its mineral reserves are being exploited: in 2013, perhaps only 0.9% of its territory was under exploitation (0.8% in 2012). "Within Latin America, Peru has. perhaps, the greatest untapped potential for new discoveries and production,* EY's Mendez said. 'Peru's clear and simple mining law and excellent geological potential has helped the country to attract one of the largest budgets for minerals explorations and development in the world. However, it is believed that Peru has the capadty to double or triple the current level of output, especially in base metals." Peru has 13% of the world's copper reserves, 4 % of its gold, 2 2 % of its silver, 7.6% of zinc, 9 % of lead and 6 % of tin reserves, according to the most recent data from Peru's Ministry of Energy and Mines. In 2013 the mining sector accounted for 5 % of the country's GDP, while mineral export revenues reached US$ 19 billion by the end of October - more than half the country's total exports. Peru has about 200 operating mines and a pile of major projects waiting to be developed. "We rate Latin America very highly based on its mineral endowment and potential for discovery and development as indicated by an increase in explora- tion investment over the past 18 months compared to Australia and North America," said the managing director of one international minerals consulting firm looking to set up shop in the region It also has relatively lower operating costs - par- tkularlyfor exploration- although sovereign risk var- ies from country to country, so government policy making will determine where investment flows. We expect the major mining economies of Mexico, Chile and Brazil to continue to dominate... in this region, but we see plenty of opportunity remaining in less developed markets, such as Pern." Peru may well be the one to overtake the rest in the decade ahead. - Staff reporters V