1. A research service from the Financial Times
CONSUMER:
MEXICAN
TELECOMS
RESOURCES:
POLITICS AND
PERU’S MINING
FINANCE: MAIN
BOND MARKETS
LOSE GROUND
INFRASTRUCTURE:
BRAZIL’S
PROGRESS
PREMIUM INVESTMENT RESEARCH SEPTEMBER 2014
Our survey suggests fixed-income managers are embracing risk
and increasing investment in frontier markets
AIMING FOR BIGGER YIELDS
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2. SEPTEMBER2014
3.0 RESOURCES AND TRADE
R
elatively cheap energy and high-quality deposits are significant comparative
advantages for Peru’s mining sector, and exports of gold, copper and other metals
now account for 60% of trade revenues. Lower prices have slowed the pace of
growth this year, but the government is confident about the future, with planned
investment in the sector of $19bn over the next two years and about $60bn over the next
six years.
However, extensive social conflicts, often involving small indigenous communities,
surrounding issues such as water and land rights continue to complicate the development
of Peru’s mining sector. In July alone, the state’s human rights ombudsman’s office, which
monitors these disputes, recorded 164 active conflicts of which 76 are related to mining.
Many projects have been affected. The most notable is Minas Conga, a $4.8bn copper
project that would extend Yanacocha, the joint venture between the US’s Newmont Mining
(NEM:NYSE), Peru’s Buenaventura (BVN:PE) and the World Bank’s IFC. Conga has been at a
standstill since protests erupted in November 2011. The project, in the Cajamarca region, has
become something of a cause célèbre for Gregorio Santos, the left-wing regional president
and vehement opponent of the project.
PERUVIAN GOVERNMENTAL STRUCTURE EMPOWERS REGIONAL PRESIDENTS
Cajamarca is far from being the only region where mining faces political obstacles. Other
regional presidents or candidates have got involved in anti-mining protests, frequently
using such controversies to heighten their profile and generate political support. These
conflicts highlight a broader weakness in the local government system introduced in Peru
in 2002 as a means to strengthen local democracy and encourage greater participation.
Regional presidents have considerable power, largely because they control regional
budgets fed by taxes from the mining companies. Under the canon mechanism, 50%
of mining taxes are allocated to local administrations to finance development and
infrastructure projects. However, much of the money is often diverted for other – sometimes
illicit – purposes. It has been hard to hold local politicians to account.
Peruvian political parties are weak and have a minimal presence in these often thinly
populated regions. Nepotism and clientelism are rife. No fewer than 18 of the 25 regional
presidents have been investigated on corruption allegations. Four regional presidents have
been arrested, three of whom (the presidents of Ancash, Cajamarca and Pasco – some
» Regional elections due to take place on October 5 could increase the risk of delays to
mining projects, slowing down sector growth.
» Regional presidents enjoy significant power under constitutional changes introduced
in 2002 and have already blocked the development of projects worth about $8bn. Local
leaders have often sided with their communities against mining companies, or
exploited frictions as a way to generate political support.
» LatAm Confidential visited four mining regions – Apurimac, Cajamarca, Cusco and
Puno – and assessed local political conditions elsewhere in Peru. Although the picture
is in no way uniformly negative, we believe there is a risk that “anti-system” candidates
could retain office in Cajamarca and gain ground in Cusco, Moquegua and Puno.
PERU: ASSESSING POLITICAL
RISK IN THE MINING SECTOR
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3. SEPTEMBER2014
RESOURCES
AND TRADE
PERU:ASSESSINGPOLITICAL
RISKINTHEMININGSECTOR3.1
of Peru’s most significant mining regions) are currently in jail. An arrest warrant has been
issued twice against a fifth.
REGULATORY STREAMLINING RAISES TENSIONS
Against this backdrop, in early July congress passed legislation (Law 30230) designed
to streamline the bureaucratic processes that slow mining development. In addition to
deregulation measures, the law streamlined environmental norms (reducing the time
allowed for approval of permits to 45 days) and eased health and safety provisions. While
applauded by business groups, the measures have been opposed by trade unions and could
further complicate relations with anxious rural communities, heightening tensions ahead
of the regional presidential elections scheduled for October 5.
Another measure designed to smooth mining development could have unwanted side
effects. The government is pushing for the expansion of a programme that allows companies
to invest a percentage of their tax obligations in infrastructure projects. The programme
generated PEN354m ($126m) of investment in 1H14. Mining companies have made extensive
use of the programme, with Southern Copper Corporation (SCCO:NYSE) and four other
mining companies among the ten most active adopters of the scheme.
However, the programme cuts into district and regional government revenues that would
have been due to them through the canon mechanism, aggravating shortfalls that have
resulted from declines in output. Transfers to regions with mining operations have fallen to
$1.1bn for 2014 – transfers reflect taxes paid in the previous year – down 23.2% from last year,
and this figure is likely to decline again in 2015 on continued falls in production this year.
This could further increase tensions ahead of the regional elections.
REGIONAL ELECTION OUTLOOK VARIABLE
Assessing the outcome of the election is complicated. The weakness of local parties means that
the field of candidates in many of the regional races is very wide: 15 candidates are competing
in Arequipa, for example. In addition, with only a month-and-a-half to go before the elections,
many would-be candidates are still to be formally registered by the electoral authority.
In four regions – Cajamarca, Cusco, Moquegua and Puno – political leaders who are
opposed outright to mining projects are running for office and enjoy significant levels of
support, especially in rural areas. We believe there is a chance that some of these candidates
could win office, with several very large projects potentially affected (see map).
KEY REGIONS PRESENTING POLITICAL RISK
In Cajamarca, Gregorio Santos, the regional president arrested and imprisoned earlier this
year, is running for re-election (the electoral law only bars candidates who have actually been
convicted of a crime). Mr Santos is a committed opponent of mining (he once told our local
researcher that the province of Cajamarca could happily survive on revenues from coffee,
grapes and cacao). He has perhaps predictably claimed that his arrest and prosecution has
been orchestrated by the mining companies and the Ollanta Humala government.
But on our visit to this conflictive region we found that the controversy does seem to have
undermined support for him even in the eastern province of Celendín, where Minas Conga
is located. In local polls, he has been running second with about 17% of the potential vote,
compared with the 30% he won in 2011. Community leaders were, however, still antagonistic
towards the Conga project, largely due to fears about potential water contamination.
In the district of Querocoto – also within the Cajamarca region, where the La Granja
copper project is being developed by Rio Tinto (RIO:ASX) – the mood was more optimistic.
Rio Tinto has begun to work with the community and has formed a trust (the La Granja
Social Fund) that sponsors development projects for local entrepreneurs.
In Cusco, Oscar Mollohuanca – the former mayor of Espinar, who led anti-mining
protests there in May 2012 – is in the race to replace incumbent René Concha, who is not
running. Mr Mollohuanca was briefly jailed for his role in the protest against Glencore
Xstrata’s (GLEN:LSE) Tintaya-Antapaccay project that left two people dead. Another
candidate polling well in Cusco is Benicio Ríos Ocsa, who heads a centre-left regional
PERU’S MINING RADICALS
CAJAMARCA:Gregorio Santos,
jailedregionalleaderandanti-mining
activist,runningforofficeasregional
president
CUSCO:Oscar Mollohuanca,
formermayorofEspinar,led
anti-miningprotestsinMay2012,
runningforoffice.Benicio Ríos
Ocsa:centre-leftpoliticianlinkedto
informalminers’organisation,also
pollingstrongly
MOQUEGUA:Zenón Cuevas Pare,
opposesdevelopmentofQuellaveco,
andhasledprotestsagainstmining.
Runner-uptocurrentPresident
MartínVizcarrain2011
PUNO:Walter Aduviri,leaderof
anti-SantaAnaprotests,astrong
earlyrunner.Popularinruralareas,
butweakinurbancentres
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4. SEPTEMBER2014
RESOURCES
AND TRADE3.2 PERU:ASSESSINGPOLITICAL
RISKINTHEMININGSECTOR
Sources: Peruvian ministry of mines and energy, LatAm Confidential
ANCASH
Hilarion/CompañíaMineraMilpo
Magistral/CompañíaMineraMilpo
Racaycocha/MineraPeñolesdePeru
San Luis/ReliantVentures
CAJAMARCA
Minas Conga/Newmont,Buenaventura
La Granja/RioTinto
Galeno/Lumina
Michiquillay/AngloAmerican
AREQUIPA
Cercana/JunefieldGroup
Cerro Verde/FreeportMcMoRan
Pampa de Pongo/JinzhaoMiningPeru
Tambomayo/CIAdeMinasBuenaventura
Tia Maria/SPCC
Zafranal/MineraAQMCopperPeru
APURIMAC
Anama/Anabi
Haquira/MineraAntaresPeru
Hierro Apurimac/ApurimacFerrum
Las Bambas/Minmetals
Los Chancas/SPCC
CUSCO
Accha/ExploracionesCollasuyo
Cerro Copane/MineraCuervo
Constancia/HudbayMinerals
Crespo/CompañíaMineraAres
Quechua/CompañíaMineraQuechua
PUNO
Corani /BearCreek
Explotacion Bofedal II/Minsur
Ollachea/CompañíaMineraKuriKullu
Santa Ana/BearCreek
MOQUEGUA
Chucapaca/CanterasdelHallazgo
Fundicion/SouthernPeruCopperCorp.
Los Calatos/HamptonMiningPeru
Quellaveco/AngloAmerican
Ref. De Ilo /SouthernPeruCopperCorp.
Lima
PIURA
Fosfatos/FosfatosdelPacifico
Project/Company
Key:
Totalprojectinvestment($m)
Rio Blanco/RioBlancoCopper
Salmueras de Sechura/
AmericasPotashPeru
PASCO
Quicay II/CompañíaMineraCentauro
LAMBAYEQUE
Cañariaco/CañariacoCopperPeru
TACNA
Toquepala/SouthernPeruCopperCorp.
500
JUNÍN
Toromocho/MineraChinalcoPeru
1,500
125
1,599
470
3,000
40
TBD
750
346
4,820
4,800
1,000
2,500
4,800
TBD
1,790
110
490
165
170
71
4,600
3,280
130
1,400
1,122
1,050
1,200
TBD
1,320
3,300
TBD
2,800
2,300
6,031
1,560
750
TBD TBD
TBD TBD
Antamina/BHPBilliton,GlencoreXtrata,TeckTBD TBD TBD
500
Copper Gold Iron Lead Molybdenum Phosphates Potassium Silver Tin Zinc
Peru’s mining battlegrounds and four regions to watch
movement which has links to an influential organisation of informal miners. Informal
miners – usually organised as independents or co-operatives that lack government permits
and do not comply with environmental, labour or tax laws – sometimes oppose big
projects. A representative told us that the union enjoyed strong political influence in rural
areas in both Cusco and Puno.
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5. SEPTEMBER2014
RESOURCES
AND TRADE3.3 PERU:ASSESSINGPOLITICAL
RISKINTHEMININGSECTOR
In Moquegua, where Anglo American (AAL:LSE) is seeking to launch the $3.3bn
Quellaveco copper project, Zenón Cuevas is making a second run for regional president. He
came in second in 2011 to Martín Vizcarra, who is not running for re-election. Mr Cuevas led
a major protest against mining and the canon mechanism in 2008. He opposes the Quellaveco
development. With the company still undecided about how to proceed, it is possible that
victory by Mr Cuevas could well lead them to abandon the project.
In Puno, another region where informal miners’ organisations wield influence, Walter
Aduviri is polling 10% of votes, making him the early front-runner in a crowded field. Like
Mr Santos, Mr Aduviri is a hard-line opponent of mining development (again basing his
economic strategy on agriculture and tourism). He led the 2011 protests – the Aimarazo –
against the Santa Ana silver project planned by Canada’s Bear Creek Mining (BCM:CVE),
leading to the annulment of Bear Creek’s permit. The project is relatively small, but we
understand that the cashflow it generates would allow the bigger $574m silver mine at Corani
to go ahead. Bear Creek obtained an environmental permit in May, but the company is now
waiting on a social licence from the regional government. Our visit to the alpaca farming
communities of Chicuito, Carabaya and Macusani, which have in the past been at the centre
of the Bear Creek protests, found residents still worried about potential water issues.
OTHER POTENTIAL FLASHPOINTS
In a number of regions, populist candidates – sometimes linked to the disgraced and
imprisoned former president, Alberto Fujimori – represent a different kind of risk to
business, often pushing policies that complicate the launch of projects rather than
completely blocking deals. In Cajamarca, for example, the current leader in opinion polls,
with 21%, is Osías Ramírez, a populist candidate of the party formed by Mr Fujimori’s
daughter, Keiko. Absalón Vásquez, a congressman and agriculture minister in Mr
Fujimori’s government (1992-2000), is in third place.
In Ancash, César Álvarez, the former president sacked and imprisoned following
allegations of corruption, will stay on the sidelines, but a close ally, Waldo Rios
Salcedo, is showing up strongly in the polls. A June survey gave Mr Ríos 18% of the vote
– leading in the region. He has proposed sharing some of the revenue generated under
the canon mechanism with locals, offering PEN500/month to each household in Ancash. In
Pasco, Klever Meléndez Gamarra, imprisoned following corruption allegations, still plans
to run for another term.
We believe that local grievances could influence election results in a number of other
regions, especially since many races are extremely competitive and have no clear leader. In
the region of Piura, regional mayors near the Rio Blanco copper project are restive, while
in Lambayeque, a small group of farmers are opposed to the Cañariaco copper project. In
both cases, regional presidents have remained supportive of mining plans.
In the region of Arequipa, no fewer than 15 candidates are competing for the regional
presidency and there is as yet no clear leader in polls. However, the decision to award an
environmental permit to SCC’s Tia Maria project – stalled for three years and worth $1.4bn
– in August could lead to a rise in tensions with local farmers in the Islay district. The
farmers opposed the project on the grounds that it affected their water supply, but LatAm
Confidential understands that SCC now plans to use desalinated sea water instead.
We believe that risks of disruption in Apurimac – home to the Las Bambas copper mine,
operated by China’s MMG (1208:HKG), a unit of state-controlled China Minmetals – are
minimal. Traditionally one of the poorest regions in Peru, Apurimac has been growing
steadily for the last 15 years and is now relatively prosperous. We visited Abancay, the
regional capital, and Chalhuahuacho, the closest town to the first phase of Las Bambas. We
discovered an upbeat mood, with building work and new commercial developments evident
in both places. There is no poll data, but Elías Segovia Ruíz, the moderate regional president
who is running again, is widely expected to secure another term in office. Mr Segovia has
worked with mining companies to negotiate the relocation of communities displaced by the
Las Bambas project. 450 families are being moved from the village of Fuerabamba to a new
settlement at Nuevo Fuerabamba.
$3.3bnCostof
Anglo
American’splanned
Quellavecocopperprojectin
Moquegua,whichisopposed
byregionalpresidential
candidateZenónCuevas
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