Peru's recent instability is not stopping mining investment.

BY Alfonso Tejerina

Stepping Out of the Political Shadow

March 05, 2018

Photo courtesy of Austin

As Peruvian families celebrated Christmas together last December, there was a certain level of trepidation as to what may happen in the new year. Alberto Fujimori’s pardon by President Pedro Pablo Kuczynski (PPK) left many of Fujimori's critics in shock after months of political unrest that led to the impeachment process of PPK, which the president narrowly avoided. 2018 arrived with uncertainty but the status quo nervously returned. A new and, so far, stable cabinet has coincided with rising metal prices, increased metal export revenues and further speculation that a new wave of mining projects will begin construction. 2017 represented a year of hope that the mining industry was starting to turn following years of decline. 2018, so far, is confirming that the upcycle has finally arrived.

Víctor Gobitz, president of the Peruvian Institute of Mining Engineers (IIMP), has been generally positive about the situation following the political turmoil. “The political noise is not affecting the main vectors of the country’s economy. With improved mineral prices, mining companies are embarking on expansions, brownfield explorations and improved productivity projects, and those are certainly going ahead. However, for new projects, the political uncertainty may have a bigger effect,” he said.

Ricardo Labo, vice-minister of mines, is also optimistic that the recent political unrest will not have a direct impact on the mining sector. “Mining investors have a long-term view and look at the next five, 10 or 20 years. In Peru’s long mining history, political and social situations have not had a major impact on investment. Although there were some concerns over the recent political instability, Peru’s increase in investment speaks for itself."

Indeed, after three consecutive years of decline, total mining investment in Peru increased by 15.7% and reached US$4.92 billion in 2017.

New Year, New Projects?

The Ministry of Energy and Mines has defined five key objectives for 2018. These include making feasible the existing pipeline of projects, some of which have been pending for many years now. Speculation surrounding key potential investments continues to grow: there is expectation that projects like Mina Justa, Quellaveco, Pampa de Pongo and Corani will begin construction over the coming months, although the triggers are yet to be pulled. As an example, Anthony Hawkshaw, president and CEO of Bear Creek Mining, remained cautious regarding Corani's potential construction schedule: “There is only one chance to build a project correctly. It is wiser to spend additional time and investment now on engineering than to rush ahead. We are being deliberate, thorough and patient to minimize potential risks.”

Corani, one of the largest undeveloped silver deposits in the world, has a significant zinc content. With the zinc price reaching an 11-year high, one would assume there would be pressure to act. However, the project requires a capital expenditure of US$585 million, a large amount for a junior company, and Hawkshaw and Bear Creek's shareholders have seen a lot of failures over the years arise from rushing into construction. “When I was a lecturer, I used to tell my students: think first, write later. You can process much more when you are thinking rather than when acting and I believe this is the right approach for us," he concluded.

The main stars in Peru's project pipeline, however, are copper projects. While Anglo American has already invested a sizable amount on the early works for Quellaveco, a final construction decision is not expected there until the middle of the year. Likewise, Minsur should also give the go-ahead to its Mina Justa copper project, and Chinalco, after a very challenging ramp-up at Toromocho over the last years, should finally proceed with the mine's expansion.

Upcoming Elections: The Social Aspect

Peru will be conducting regional and municipal elections on October 7th, and once again, mining will be on the agenda. While the changing of authorities may produce added hurdles in terms of bureaucracy and relationships, the sector has been generally positive on the potential outcomes of the ballot. Indeed, many believe that there has been a change in how communities and politicians perceive the mining industry, especially in regions where anti-mining sentiment has been high. Phil Dalke, vice-president and managing director of Tahoe Peru, said: "Our relationship with our communities can change depending on the different dynamics, however we strive to make our communities partners in our sustainability projects. We sense that many of our communities want more mining activity."

To ensure new mining projects can be developed in Peru, mining companies have adapted their engagement with the local populations and many are now doing more to build closer ties. Elsiario Antúnez de Mayolo, COO and general manager at Bear Creek, has made community relations a priority for the Corani project. “We have been developing skills and business ideas within the community to create long-term benefits. Mines are always temporary and cannot support the community forever, so it is important to guarantee the long-term future of the local populations," he said.

Meanwhile Luis Rivera, executive VP Americas at Gold Fields, the company running the Cerro Corona mine, declared: "We are used to working in Cajamarca. It is not the easiest environment, but since we started there has not been much opposition. We hope that, with the election, the political side of things will be more favorable to mining moving forward."

Jorge León Benavides, leader of the Peru delegation to PDAC at the Canada Peru Chamber of Commerce, shared similar hopes with regard to the upcoming election, particularly in Cajamarca: "In Cajamarca, communities were told that they would receive support for agricultural development, but seven years after the suspension of Conga, that region continues to be one of the poorest areas in the country. Now, many people want mining investment to be back. The regional governor is an anti-mining and anti-establishment activist, so whoever replaces him should bring positive change."

Moving Forward

GDP growth in 2017 was only 2.5%, an insufficient figure for a country on its way to further development. Mining will continue to be the key driver of Peru's economy, and taking advantage of the high metal prices will be key to building momentum and unlocking a new wave of mining investment. As has been the case in the last two decades, mining projects may prove to be a significant catalyst for Peru to climb the ladder of economic development. The government expects a sizable 20% increase in capital expenditures in mining this year, and if the most immediate projects do see the light in time, 2019 will be an even better year for the industry.

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