Peru's mining sector looks to become primary copper supplier in Latin America

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Copper production in Peru is on an upward trend. As a result of a big expansion in output in 2015, Peru overtook China to become the world’s second-largest copper producer. That increase was mainly due to new capacity at the Las Bambas project, owned by Chinese-Australian company MMG, and at the Cerro Verde mine, controlled by Freeport-McMoRan of the US. Gonzalo Tamayo, the minister of energy and mines, has said he expects production to rise from 2.4m tonnes in 2016 to close to 3.1m tonnes in 2021. Speaking in April 2017 he said that the country had a total of $47bn worth of mining projects in development and that 61% of that total, or $28.8bn, were copper mines. “World-class projects like Toromocho, Constancia and Las Bambas show Peru’s capacity to move forward with mining investments and output growth, in an appropriate environmental and social framework,” he said.

In the short term, however, after the big surge in 2016, copper output is expected to grow at a more moderate rate in 2017. In 2016 copper production rose by 38.4%, largely because of capacity expansion. According to the economic studies department at Scotiabank, a further increase of 8% can be expected in 2017, taking the total up to 2.5m tonnes.

Major Players

That increase would be achieved in part because both Las Bambas and Cerro Verde would have their first full year’s operation with expanded capacity. MMG stated in its fourth quarter report of 2016 that it expected the Las Bambas mine to produce between 420,000 and 460,000 tonnes of copper concentrate in 2017, equivalent to 18% of national production of the metal. This would make the mine the second- or third-largest copper producer in the country.

The largest single producer is the Cerro Verde mine, and Freeport-McMoRan is predicting 2017 output to be 550,000-560,000 tonnes, an increase of 10-20% on the preceding year. If that forecast is fulfilled, Cerro Verde will have a 22% share of national copper production. The other top copper producer is Antamina, which operates a polymetallic mine of the same name and is expected to vie with Las Bambas for second place in the country, since it is estimating output to remain broadly stable at around 430,000 tonnes in 2017.

Battle For First Place

Peru has traditionally been somewhat overshadowed by Chile when it comes to copper mining, as Chile is the number one producer in the world. But in early 2017 various analysts said Peru – recently elevated to number two in production by volume – was edging ahead in some respects, such as in future exploration prospects and cost competitiveness.

Diego Hernández, a leader of Chile’s private sector mining association Sonami, notes that, “Here in Chile there have been no new incentives in terms of mining policy for many years, but Peru is making a special effort.” Analysts highlighted the new Peruvian government’s attempts to reduce bureaucracy and red tape in the process of issuing new mining permits. Iván Arriagada, executive president of Chile’s Antofagasta copper mining group, described Peru as “a great place for the mining business”.

Still, some Peruvian copper mining leaders pointed out that it, too, had its share of challenges. Marcelo Bastos, director of operations at Las Bambas mine, said that uncertainty in social conflicts could increase costs significantly in Peru. Mining executives from both countries agreed that competition between the two could have beneficial effects. “There is healthy competition. As neighbours, we are always looking at what is happening on the other side, and that can create a virtuous circle,” said Luis Marchese, manager of Anglo American in Peru. Others pointed out that competition could increase the overall attractiveness of both countries together as a copper mining hub; it might also persuade the two governments to increase cooperation in some key areas, such as inter-connecting the two power grids to provide more resilient energy supplies in northern Chile and southern Peru.

Private Sector Decisions

With international copper prices expected to continue recovering in 2017, a number of global mining companies were considering the right point at which to develop new mines. Hennie Faul, head of copper at UK-based Anglo American, said the company was still focusing on strengthening its finances after the long global price slump, but would evaluate its development options before the end of 2017. High on its list of priorities was the Quellaveco deposit in southern Peru, a development potentially worth $6bn. “For Anglo American, copper is one of our three key commodities and our key project there is Quellaveco,” Faul told OBG. He added that the decision on whether to give the mine the green light was being discussed on the basis of current price levels continuing. “I don’t expect a rapid change in the price,” said Faul.

Another player, Chinalco, said it was increasing its investment in the Toromocho copper mine. Executives at the company said they expected output to rise by 13% in 2017 to around 190,000 tonnes – up from a less-than-expected 168,000 tonnes in 2016. Work was expected to start on the second phase of mine development, which would add a further 70,000 tonnes of annual capacity.

Chinese Input

Chinese companies continue to show strong investment interest in Peruvian mining in general, and in copper in particular. The Ministry of Energy and Mines said that as of early 2017, Chinese companies had a total of $10.2bn in pending investments across seven projects in the Peruvian mining sector, representing the largest share of the overall portfolio with 21.7%. The total excluded the $10bn Las Bambas project, since it is now in production and no longer an upcoming development.

The primary outstanding projects backed by Chinese investors include Pampa de Pongo, Arequipa; Galeno, Cajamarca; Don Javier, Arequipa; Explotación de Relaves, Ica; Rio Blanco, Piura; the expansion projects at Toromocho, Junín; and Marcona, Ica. After China, the major foreign sources of mining investment were Canada with $8.75bn or 18.6% of the total, and the US with $6.1bn or 12.9%. Companies from the UK, Mexico, Australia, Brazil and Japan are also investing in Peruvian mining.

Central Bank Projections

The outlook for the Peruvian copper sector in 2017 is for continued growth, but at a slower rate than in 2016. According to a report from the central bank (Banco Central de Reserva del Perú, BCRP) published in early 2017, the metallic mining sector grew by 21.2% in GDP terms in 2016, mainly due to the increased copper production from the Las Bambas and Cerro Verde mines. The report expected international copper prices to continue a process of recovery: prices had gained 5% in the year to February 2017.

In that same month, copper averaged $2.70 per lb globally. Taking into account some early 2017 disruptions to global copper supply and strong demand from China, the BCRP revised its global price forecast for the metal. After falling 11.7% in 2016, the BCRP calculated that the average annual copper price would gain 19.8% in 2017 to reach $2.64 per lb, a level that would hold broadly stable in 2018.

The BCRP expected output levels to reach something of a plateau in 2017 and the years immediately following. Compared to Scotiabank’s 8% prediction, it expects 10.5% copper output growth in 2017 to 2.5m tonnes, easing to 5.9% growth and 2.66m tonnes in 2018, when increased capacity at the Southern Copper-operated Toquepala mine comes on-stream, as is expected in the second half of 2017.

The difference between this positive but slowing copper growth rate and a more dynamic medium-term performance would, in the eyes of many analysts, depend on the government’s ability to help accelerate the mine development project pipeline by removing bureaucratic obstacles to the mine approval process. According to Rodrigo Prialé, president of the Third Congress of International Mine Management and general manager of Gerens, the most probable scenario for mining would be a period of relatively low growth until some new big projects are approved and begin construction. He noted that projects on the same scale as Las Bambas could take seven to 10 years to become fully operational.

Peru, indeed, has a successful record in copper mining and still has a range of mines to develop. Looking over the last 15 years, copper production has expanded at an average annual rate of 7.8%.

 

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The Report: Peru 2017

Mining chapter from The Report: Peru 2017

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