20 May 2019
The mining sector is emerging from what has been arguably its most challenging period in the 21st century. The commodity supercycle boom at the start of the century generated high expectations for the mining sector as emerging markets grew rapidly, led by the BRICs. With the price of most base metals peaking in 2012, the subsequent downturn cast shadows over the sector worldwide and disproportionally affected commodity-producing countries, many of them in South America.
From 2017 onwards, however, the sector enjoyed a sustained recovery, with a slow but steady upsurge in activity from South Africa to Mexico. With a positive outlook projected for low and stable prices in the medium term, the sector’s existential conversation now revolves around how best to plan, optimise resources, and ensure collaboration among industry players, government and local communities for the upcoming commodity upcycle.
Given that 2019 represents an important crossroads for the sector globally, OBG held a closed-door roundtable on the mining sector in Lima. In collaboration with our partner EY and with a host of guests from around the world, the private event looked to create a platform to discuss the crucial issues for the sector in 2019, and in particular how they relate to the Peruvian context.
Participants included:
• Harry van Schaick, Regional Editor, The Americas, Oxford Business Group
• Paul Mitchell, Global Mining and Metals Leader, EY
• Manuel Fumagalli, Executive Director, Barrick Gold Perú; and President, National Society of Mining, Oil and Energy
• Beatriz de la Vega, Energy Partner, Ernst & Young Perú
• Ricardo Porto, CEO, Nexa Resources
The conversation looked at three major themes: bringing technology to the forefront of all mining activity to boost productivity and increase margins; forecasting and adapting to the future of commodities on a global scale; and discussing a mining new deal to explore how to create comprehensive, robust and inclusive frameworks among all stakeholders in the sector.
Peru at a glance
The geological situation of Peru – crossed by the world’s largest above-ground mountain range, the Andres ¬– has gifted the country with rich deposits of a wide range of minerals. Mining production represents 60% of the value of total exports, of which 50% is made up by copper and 30% by gold. Around 11% of private investment and 10% of GDP, 5% of the employed labour force and 5% of the country’s fiscal revenue comes from the sector.
Peru is the world’s second-largest producer of copper, silver and zinc; the fourth largest of lead; and the sixth largest of gold. The production of copper is particularly important to the country’s mining industry. Production exceeded 2.4m tonnes and is expected to reach 3m tonnes by 2024, closing the production gap further with the world’s largest producer, Chile.
Peru is already ranked among the world’s most important mining producers. This is the result of a combination of the open business environment, relatively low production costs, and the world’s largest silver reserves, third-largest copper and zinc reserves, and seventh-largest gold reserves. As a consequence, Peru has received around 10% of all global mining investment in recent years. This importance has been accentuated by the strong economic growth enjoyed by the country in recent decades.
Bringing mining to a new technological frontier
As in any other industry, technological advances have allowed mining to improve its overall productivity. The progressive development of digitalisation, automation, data management, the internet of things and artificial intelligence will transform almost every process from the extraction of minerals, to safety, transport and human resources.
Panellists discussed how technology had previously been used only in certain parts of the value chain, but now the central focus must be on using digitalisation. This can lead to increased margins for companies, allowing resources to be more effectively used elsewhere. Mining has traditionally been more resistant to the digitalisation process than other industries, and there is a necessity for the sector to change this reality in order to ensure that it does not fall behind other sectors in the constantly shifting global economy.
There is a general consensus on the adoption of all technological innovations, not just digitalisation, since such a capital-intensive, extractive industry cannot solely rely always on digitalisation to increase margins.
The issue of innovation was also discussed, in particular how to boost innovative practices across the entire value chain. It was concluded that although it is important for the state to create conditions for companies to innovate and develop modern practices, the private sector should be responsible for leading and catalysing the innovation.
In the past, a lack of collaborative practices between the public and private sector has stunted such policies, and there are calls for a more synergistic relationship. Observations were made regarding the positive effects of more innovative practices on both environmental quality standards and security of the mines.
The future of commodities
Driven by demand for fibre optics and electric cars, some commodities have their futures intrinsically linked to new world trends in industries such as ICT and sustainable mobility. Panellists were confident that the global market, in particular Peru, will continue to demand copper for many decades to come. Traditionally an old world material, copper is increasingly seen as a cornerstone for global industry and communications. This is largely led by China, and in particular its state-owned companies, which account for around 50% of all demand.
This will be accompanied by heightened demand for other new metals, such as lithium, or possibly rare metals like tungsten and cobalt. The high-conductivity nature of gold will also play an important role in the demand for this precious metal, which has already been finding uses and applications in new industries such as nanotechnology, electric vehicles and mobile phones.
A ‘New Deal’ for mining
In a country like Peru, which has historically been affected by social issues, new policies to benefit local communities – involving both public and private actors – are essential for future growth in mining. Panellists pointed to their tax contributions and how little of it is invested in tangible infrastructure for local communities, either in the form of roads or desalination plants.
The issue for companies often centres around effective communication with local communities and Peruvian society at large. This should come hand in hand with an anticorruption drive, ensuring no money paid in royalties is being diverted away from its intended benefactors. One particular comment highlighted connection between the internal improvement of companies’ corporate governance and their relationship with society as a whole. This will be crucial in the future, considering Peru’s intention to join the OECD.
Lastly, panellists spoke of digital and cultural transformation of mining practices and institutional interactions. These could not only boost livelihood outcomes for communities, but also lead to greater focus on long-term sustainable practices as part of an overarching social contract that minimises negative effects of the sector.
The geological wealth of Peru, the activation of a new investment cycle in the sector, and the willingness of companies to invest in technological advances could make mining one of the most dynamic sectors globally – and therefore one of most attractive in Peru.
Efficiency and productivity improvements and new frameworks designed to benefit communities in mining areas should be at the forefront of the sector’s development over the coming years, especially considering the positive growth projections forecast in the medium term. The question now remains how to adapt the sector universally to this new normal – not just in Peru, but around the globe.
Read More from OBG
