Buried treasure: Production reaches far beyond the traditional high-revenue earners

Though best known for its copper and gold, Peru’s rich, polymetallic geology supports the production of a wide assortment of minerals. Peru has the third-largest reserves in the world of gold, copper, zinc and silver, according to the US Geological Survey. Indeed, data from the Ministry of Energy and Mining (Ministerio de Energías y Minas, MINEM) shows the mining sector’s investment portfolio of new and existing projects as totalling roughly $57.4bn.

Rankings

Within Latin America, Peru has also become the largest producer of gold, zinc and tin, and the second-largest producer of silver, copper, lead, molybdenum, mercury, selenium and cadmium, according to the “Mineral Commodity Summaries 2013” report. On a global scale, Peru ranks third in the production of silver, copper, zinc and tin; fourth in molybdenum and mercury; fifth in lead; sixth in gold; and seventh in selenium and cadmium. The non-gold and copper minerals – primarily zinc, lead, tin, silver, molybdenum and iron – contributed $3.55bn in total export revenues as of August 2013, equivalent to 23.34% of the national total, according to MINEM.

Global Price Forecasts

Rising demand from emerging market economies, particularly China, led to the commodities “super-cycle” which has seen mineral prices soar in recent years. This has undoubtedly affected production and further investment into mineral exploitation in Peru, which has seen revenues from mineral exports nearly double, from $14.74bn in 2006 to $25.92bn in 2012, according to MINEM.

Data from the World Bank’s Development Prospects Group show that prices of several metals, including silver, iron, lead, zinc and tin, all peaked in 2011. Despite decreasing in 2012, the prices of the majority of Peru’s secondary metals are forecast to remain high, rising slowly but steadily from 2013 to 2025.

The average price of tin, for example, decreased from $26.05/kg in 2011 to $21.13/kg in 2012; however, from 2013-25 it is expected to rise slightly before reaching $28.00/kg in 2025. Zinc is expected to follow a similar path – after falling from $2.19/kg in 2011 to $1.95/kg in 2012 the World Bank forecasts it will jump to $2.50/kg in 2025. Prices of iron ore, lead and silver are likely to remain relatively high up to 2025, though they are not anticipated to surpass 2011 peak prices. The average price of iron is expected to reach $1.50/dry tonne unit in 2025, slightly below the average price of $1.68/dry tonne unit in 2011, similar to lead (predicted to fall from its 2011 price of $2.40/kg to $2.30/kg in 2025). Average prices of silver are expected to decline slightly more, from $35.22/kg in 2011 to $25.00/kg in 2025.

Investment

Though the majority of the funds pouring into the mining sector are destined for copper projects – 63.36% according to August 2013 data from MINEM – there are positive signs of investment being funnelled into several other minerals. Investment in gold is $7.18bn or 12.51%, followed by iron ore with $7.06bn or 12.27%. After copper, gold and iron ore are polymetallics with $3.23bn or 5.62% and phosphates with $1.87bn or 3.26% of the total.

Iron

Iron plays an important role in the broader mining industry as high demand from China has attracted significant investment to iron ore projects. The fact that the value of iron has risen dramatically in recent years has also played a part. Between 2007 and 2011 the price of iron exported from Peru increased by 189.74%. In 2012 global iron ore prices appeared to be on the verge of collapsing as analysts predicted an economic slowdown in China. However, after a steep decline in September iron ore prices surged back in the last four months of 2012, increasing a hefty 60%. As of the second quarter of 2013, iron ore accounted for 3.8% of all mineral exports – good enough for fifth place behind copper, gold, lead and zinc. However, iron projects are receiving the third-highest level of investment behind copper and gold as its value continues to rise.

Though production was static from 2007-09, during 2009-12 it increased 51.5% from 4.41m tonnes to 6.68m tonnes. Production is expected to continue rising thanks to several new projects and the $1.2bn expansion of Shougang Hierro Peru’s Marcona mine, which is due to be completed in 2014 and will double the Chinese company’s production, although repeated strikes have disrupted production several times at Marcona over the past few years.

Another Chinese mining company, Jinzhao Mining Peru, is investing $3.3bn in its Pampa de Pongo project in Arequipa, which when completed in 2015 is forecast to produce an additional 15m tonnes per year. Australian Strike Resources’ local subsidiary, Apurimac Ferrum, is also constructing a new $2.3bn mine, which is expected to have an annual capacity of 20m tonnes. When all three projects are completed, iron ore production could reach 55m tonnes per year – more than eight times its 2012 output.

Lead

Lead was the leading mineral export in 2012 after copper and gold, accounting for $2.5bn – 9.65% of total revenue derived from mineral exports. By August 2013, export value reached $1.13bn or 7.39% of total mineral export revenue, according to MINEM. Relatively stable pricing over the past five years – in 2012 exports were sold at 11.6% less than 2007 prices – combined with slow and steady increases in production have seen lead overtake zinc to become the third-highest export earner. However, as of August 2013 no investment in new or expanding lead mines was reported by MINEM, a situation that will likely see lead’s proportional contribution to revenues decrease in the short to medium term.

Zinc

Zinc has traditionally been the sector’s third-highest revenue generator. However, a combination of falling production and lower prices has resulted in export revenues dropping some 47.58% over the five-year period between 2007 and 2012. Even so, zinc accounted for 5.13% of mineral exports in 2012, bringing in some $1.33bn in revenue, and posting 6.48%, or $991m, in the first eight months of 2013, bringing it to fourth place, according to MINEM data.

Compañía Minera Milpo’s $290m polymetallic Hilarión project is expected to increase zinc production when it eventually comes on-line, though it is still awaiting the results of technical studies and has yet to gain a successful environment impact assessment (EIA). Peru is also home to a zinc refinery operated by Brazil’s Votorantim Minerals, where a $500m expansion was completed in 2012. Additionally, Compañía Minera Antamina finished the $1.3bn expansion of its copper and zinc mine in Ancash in 2012.

Tin

Though they peaked in 2008 at around 40,000 tonnes, exports of tin have fallen to 24,900 tonnes in 2012 and 15,000 tonnes up until August 2013. Nonetheless, despite a 51.72% increase in price between 2007 and up until August 2013, revenues from tin have decreased 11.6% to $526m in 2012. After reaching a decade high of $1472/lb in April 2011, the price of tin exports then dropped significantly in the second half of the year, finishing at $880.94/lb at year-end, the latest figures available.

Molybdenum

Used primarily in the manufacturing of alloys, the production of molybdenum has increased only slightly from 2007 to 2012, rising 18.75% from 16,000 tonnes to 19,000 tonnes, before falling back to 16,790 tonnes in 2012. Prices of molybdenum have decreased significantly in recent years – in Peru the value of molybdenum exports has gone down 51.06%. As a result, after realising some $943m in export revenues in 2008, molybdenum brought in less than half that amount, $435m, in 2012.

Silver

Despite being the world’s largest producer of silver in 2010 and the second-largest producer in 2011, behind Mexico, the mineral now accounts for less than 1% of all mining export revenues in the country. Even after seeing its price increase from $4.63/troy oz in 2002 to $26.72 in mid-2013, silver revenues reached only $209m in 2012 and $310m by August 2013. This is predominantly due to an 82.87% decrease in the production of silver from 2007 to 2012. However, with the third-largest reserves of silver in the world, behind Mexico and China, and $750m being invested into silver projects, production should begin to climb once more in the coming years. The most notable silver project under development is a $574m mine being built by US-based Bear Creek Mining Company in Corani, Puno, which is expected to be operational in 2015 and will add 2.68m oz to annual silver production.

A Strong Foundation

The diversity of Peru’s mineral resources has, to an extent, helped stabilise the growth of export revenues as cyclical commodity declines in the price of one mineral are at times offset by increases in the price of another. This was the case when the export prices of molybdenum and zinc declined between 2007 and 2011, just as the prices of iron and silver began to soar.

Of the country’s minerals, aside from gold and copper, iron ore will likely see the greatest increase in production in the short term; however, zinc and silver should both improve and begin to see production expand once again as investments come on-line.

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The Report: Peru 2014

Mining chapter from The Report: Peru 2014

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