As the industry becomes more dynamic globally, new strategies are required to avoid fresh growing pains
It has been an interesting start to the year for the mining industry. With decent gold and silver prices and a very positive upward trend in base metal prices over the last months, miners worldwide seem to have more confidence in the near-term future. In Peru, leaders surveyed confirm that activity is picking up and that operators, after a great deal of cost-cutting and efficiency-searching, are finally in a healthier position to make the investments in capital equipment, exploration and other fields that had been deferred for the last three years.
It has been a long journey through the down-cycle. This experience should ensure that, while companies finally look for growth and new brownfield or greenfield projects, they do not neglect to focus on maintaining low production costs. According to Víctor Gobitz, president of the Peruvian Institute of Mining Engineers (IIMP) and CEO of Buenaventura: “The mining industry is a price-taker. We cannot assign different attributes to what we produce to sell it at a higher price, like the automotive industry does, for instance.”
Hence the efforts by mining operators to keep a sustainable cost base and assure their margins. Peru is already one of the most competitive mining producers worldwide, as highlighted by the International Monetary Fund in a recent report. Reasonable labor costs and a favorable exchange rate during 2016 played their part, but managers locally also implemented a number of strategies to make the most of their existing operations.
Luis Rivera, executive vice-president for Gold Fields in the Americas region, explained how the company achieved significant savings at their Cerro Corona gold-copper mine in Cajamarca during 2016. The measures implemented included the use of additives to diminish fuel consumption, a more productive blasting process, the implementation of the Dispatch system for more efficient haulage, the installation of a gravimetric circuit for higher gold recovery and an increased copper recovery rate through the use of better reagents. “In 2017, we are trying to improve our mine wall conditions to access deeper mineralization with higher grades. This, coupled with our better cost position, would allow us to expand our reserves and extend the mine life. Also, we have 7 million metric tons (mt) of oxides that are not included in our mining plan today. Before the end of the year we could have a feasibility study for a leaching process facility,” said Rivera.
Such efforts are replicated across the underground segment as well. Hochschild Mining, a precious metals producer, currently has all-in sustaining costs of $11.5 per ounce of silver equivalent, as compared to $22 five years ago. Meanwhile Southern Peaks Mining has reduced the production cost at Condestable, a medium-sized copper operation, from $42.9/mt processed in 2013 to $25/mt today.
Adolfo Vera, president and CEO of Southern Peaks, explained that the company has always been comfortable hedging some of their production to minimize the risk of short-term market fluctuations, but emphasized that they have also introduced significant longer-term changes to the operation since they acquired the asset from Trafigura in 2013: “We have migrated towards massive methods that are less labor intensive. 70% of our production is achieved through sub-level stoping, as opposed to 30% before […] A paradigm shift is to see Condestable as a poly-metallic mine and no longer as a copper mine. In the past, we have always focused on the copper head grade, but now we analyze the copper-equivalent grade,” Vera said.
Addressing the shortage of new projects
According to estimations from the Ministry of Energy and Mines and Peru’s Central Reserve Bank, total mining investments fell by nearly half year-on-year, from $7.5 billion in 2015 to less than $4 billion in 2016. As Las Bambas and the expansion of Cerro Verde saw their completion, there are no new copper mega-projects on the horizon, at least not immediately. The $1.2 billion expansion of Southern Copper’s Toquepala operation is currently the largest project under implementation, but since social issues put a stop to emblematic projects such as Conga and Tía María, the general election and a fairly depressed copper outlook did not help the industry push for new ventures.
To date, there are no new investment announcements being made, yet winds of change can be felt. The election of Pedro Pablo Kuczynski last year, a business-friendly president, wiped off the uncertainty about the general direction of the country’s economy for the next five years. Production constraints at Escondida in Chile and Grasberg in Indonesia, two of the largest copper mines worldwide, have accentuated the upward trend of the copper price in recent weeks, providing a better picture for new project developers. Last but not least, the election of the CEO of Anglo American in Peru, Luis Marchese, as president of the SNMPE, the main industry association, is a sign that the company will sooner or later move ahead with the Quellaveco copper project, after years of back and forth.
It seems clear that Peru will receive new greenfield investments over the next years, but for that to happen, the authorities need to make sure all the conditions are met for investors to spend money in Peru rather than in other jurisdictions. Competition is tough and countries like Ecuador and Argentina are taking decisive steps towards developing their mining industries. Companies with assets in Peru, like Fortuna Silver and First Quantum, for instance, have already acquired assets in Argentina. In the case of First Quantum, the company is currently building its Cobre Panama project, a massive $5.4 billion investment in Central America, after which it will decide to go ahead with either Haquira in Peru or Taca Taca in Argentina.
On the regulatory side, Peru is considered to be fairly competitive, and it has certainly proven to be a friendly investment destination for the last quarter of a century, a track-record that Argentina, with tax retention on exports and currency exchange limitations only abolished recently, cannot match yet.
If anything, with the development of the industry over the boom years, Peru has suffered from an overregulation effort. According to Augusto Cauti, a legal advisor specialized in mining: “The legal framework in Peru is generally favorable to mining investments. However, when metal prices increased and social demands were not addressed by the State, several short-term political and regulatory measures created a bureaucratic obstacle for the day-to-day operations of projects […] While mining is an extractive activity, from a regulatory standpoint it works as a ‘regulated sector’ in several aspects, like the power or the telecommunications sectors.”
Leaving aside regulatory matters, the social aspects are key, as shown by the fact that large mining projects have been derailed by unsolved disputes. Obtaining a social license has become an important risk factor that companies need to address from the beginning, and getting the go-ahead to build the mine and initiate production does not guarantee that the operation will not be halted later on. Las Bambas, one of the country’s largest copper mines, reached commercial production last year but has had to find alternative routes to take its concentrate to the port of Matarani as the locals have blocked the main road for months. Meanwhile, Hochschild Mining had to stop production at the Pallancata mine for more than a month due to another road blockade that ended in late January.
Ignacio Bustamante, CEO of Hochschild Mining, explained that the government played a proactive role in settling the dispute with the community, but he added: “Looking at the future, the government’s role must be that of preventing conflicts. In this respect, the authorities need to better understand the sector and have more intelligence on the different actors around the mines. Hochschild’s operations are located in very remote areas where the State has no presence at all. In the Pallancata conflict, some of the demands from the community were related to services that must be provided by the State, not the company.”
Another aspect to be considered is the domino effect that a conflict in a particular operation can have over a neighboring mine or project. First Quantum Minerals, for instance, decided to postpone resettlement discussions with the communities in the Haquira project, a deposit hosting 6.5 million mt of copper, until the social context in Apurimac calms down a bit. Haquira would require around 1,000 people to resettle. Mike Parker, general manager for South American projects at First Quantum, explained the rationale behind this move: “The region of Apurimac is undergoing profound changes with the influence of Las Bambas and nearby Constancia in Cusco to some extent. That still has to settle down. Dialogue tables have been created in an effort to allow the central government, Las Bambas, local authorities and communities to discuss how to implement pending development projects. That situation does not bode well for a project like ours to try to talk about resettlement, so completing the EIA is the priority while we still engage with the local communities to keep a positive relationship.”
The authorities should take these issues very seriously because not long ago First Quantum had a clear plan to build Haquira after Cobre Panama, while today the company is keeping its options open with the possibility of building Taca Taca in Argentina first. Taca Taca would require no community resettlement, even though longer-term political risk in Argentina also needs to be taken into consideration (Taca Taca is a 28-year project).
In any case, most leaders agree that the Peruvian government needs to extend its presence across Peru’s vast territory to reach the country’s dispersed population with basic social services, otherwise the communities will demand mining companies address these needs. The model of the Mining Canon, whereby a percentage of the income tax paid by the mines goes to the regional and local governments, has proven ineffective. Earlier this year, the central government approved a decree to create the so-called Social Advance Fund, which aims at investing in basic infrastructure for the local population in target areas where big investment projects are expected to take place. While this is a good move and shows the Kuczynski’s government good intentions, how this fund will actually be deployed remains unclear.
To build trust, mining companies also need to play their part, abandoning their classic low profile and explaining to the wider population how the mining industry works. In the words of Víctor Gobitz, president of IIMP: “The mining sector is perceived as distant because it is an activity that takes place mostly in the high Andes, where human development indexes are very different to those in the cities. This generates high expectations that are difficult to manage”.
A fresh look at project development
Over the last years, the various Peruvian governments have boasted of the country’s extensive mining project portfolio to attract investors worldwide. Even with some unfortunate exceptions where projects were stopped, official figures show that the industry invested $53.5 billion in Peru between 2006 and 2015. According to the Ministry of Energy and Mines, the portfolio of mining projects now stands at $45.5 billion, a third of which corresponds to projects that already have their environmental impact assessment approved.
Some of these projects have been in the pipeline for far too long. While the Southern belt has developed tremendously over the last years, the large copper and gold projects in the north are not seeing much movement. After Conga was suspended, the copper price went down and the project became economically unviable. Meanwhile, anti-mining sentiment in the region of Cajamarca remains high, as shown by the results of the general election last year.
For both economic and social reasons, industry leaders are asking for a fresh, cooperative approach to mining development. For any project, building all the required infrastructure can become too costly now that metal prices are not expected to go back to the boom levels of 2011. Then, from an environmental and social perspective, reducing the footprint of these mega-projects seems a necessary step to obtain the social license in regions where mining is a hot potato of political debate.
In the words of Luis Rivera of Gold Fields: “Mega-projects will need to capture some synergies that will translate into shared railways, shared tailings dams, shared pipelines and shared roads. Only this way can both the footprint and the costs that currently make projects unfeasible be reduced.”
Víctor Gobitz of Buenaventura and IIMP agreed: “In Chile there is already an example of this type of collaboration, with Goldcorp and Teck. In the case of Peru, Quellaveco sits in a region with existing infrastructure. Similarly, you could have different players working together in Cajamarca’s copper area, where you have Michiquillay, Conga, Galeno and even La Granja […] With all these projects put together, Cajamarca could produce over 1 million mt/y of copper.”
The plan seems ambitious but reasonable, and would be better implemented if the government acted as a catalyst for industry efforts, designing and implementing a macro, long-term plan for the development of the country and its mining industry. Peru is already one of the largest mining countries worldwide, but there is enormous potential left.