Removing red tape to maximise Peru's mining potential

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The mining sector can be described as one of the main engines of the Peruvian economy as it accounts for 12% of total GDP. It creates direct employment for 174,000 workers and indirectly accounts for another 1.5m jobs. In 2016 mining exports totalled $23.8bn – 65% of the country’s total merchandise exports.

Mining generates almost half the government’s revenues from corporate taxation and royalties – approximately $42.8bn over the last decade. Investment in mining has totalled over $56.2bn in the same period. In 2015 mining accounted for 20% of all private investment in the country; the level of private investment is prone to quite sharp cyclical variations, falling to 12% in 2016. In 2016 the Peruvian economy grew by 3.9%, with mining the largest single contributor to that expansion. Analysis by the central bank showed that mining contributed 1.94 percentage points to the country’s total growth rate.

Peru is recognised as an important player in global mining. In 2015 it was the world’s third-largest copper producer, moving up to second-largest in 2016. It was also the largest Latin American producer of zinc, lead, gold, indium and selenium, and the second-largest producer of silver, copper, tin, molybdenum, phosphoric rock and cadmium in 2016.

2016 Performance

Figures compiled by the National Society of Mining, Petroleum and Energy (Sociedad Nacional de Minería, Petróleo y Energía, SNMPE) show that there were significant increases in mining output during 2016. Copper production rose sharply by 38.4% to 2.35m tonnes, with gold rising 4.2% to 153,000 kg, silver up 6.7% to 4.37m kg, molybdenum up 27.8% to 25,800 tonnes and iron ore up 4.7% to 7.66m tonnes. These output increases more than offset falls in other areas of production including lead, down 0.4% to 314,200 tonnes; zinc, down 5.9% to 1.34m tonnes; and tin, down 3.7% to 18,800 tonnes. The strong growth in copper output reflected the start-up of the Las Bambas mine – which has a capacity of 450,000 tonnes per annum, making it the world’s fifth-largest copper mine – as well as increased production at Cerro Verde, which added 266,000 tonnes of annual capacity. In gold there were increases in a number of mines, including Ares, Shahuindo and Poderosa. Silver output reached a record 4.37m kg, thanks to increased output at Buenaventura, Ares and Casapalca, among others.

Leandro García, a senior manager at Minera Buenaventura – one of the top mining groups in the country, with seven mines producing gold, silver, lead and other metals – provided some background to OBG. “The mining industry here was very hard hit by falling international prices in 2014-15. We saw companies selling assets and making cost reductions. But in 2016 we began to see signs of progress with the beginnings of a price recovery,” he said.

García also said that the previous government had lacked clear policies for the mining sector, and that this had discouraged new private sector investment. He believes mining’s positive contribution to the economy has previously been overlooked, but was now being rediscovered under the new administration. Studies suggest that every new job in mining has the capacity to create seven additional jobs elsewhere in the economy. Mining also has a catalysing effect, stimulating innovation, such as the emergence of local manufacturing companies supplying equipment to the larger mines. As Marc Blattner, general manager of Tumi Raise Boring, points out, “Investing in research and development can optimise up to 2% of costs of Raise Boring operations alone.”

Through The Pipeline

SNMPE research manager María del Cármen Mendoza and colleagues also gave OBG a wider frame of reference to better understand developments in 2016. The key point that was made is that there is always a multi-year development process of varying durations between investment decisions and the final green light for new mining projects to be executed. How long the process takes is a function of both the general investment climate and the time required to process a range of environmental and social permits.

During the administration of President Ollanta Humala (2011-16) the environment was not very favourable to mining investment. “Unfortunately, investment fell during the Humala government. It is not that the government was hostile to mining – it did try to support the sector – but it was less supportive than it could have been. It tried but failed to stimulate new investment and it wasn’t helped by the fall in international metals prices,” Mendoza told OBG. Despite this, she argued that the big increase in production in 2016 reflected projects where the initial go-ahead had been given much earlier, in the 2000-09 period, mainly during the presidencies of Alejandro Toledo (2002-06) and Alan García ( 2006-11). Importantly, this was the period of high prices during the global commodities boom. Projects initiated in that period had taken years to move through the approvals pipeline, get to the construction stage and finally to the point at which production started. The net result was that Peruvian mining capacity was increased in 2016 to a higher floor level.

Current Timeline

The new government has set about speeding up the mining projects pipeline. In March 2017 Gonzalo Tamayo, the minister of energy and mining, said the government was taking a range of measures to simplify and shorten the administrative process required to obtain mining permits. One initiative is to refund value-added tax charged during exploration work in the event that mining companies failed to find commercially viable deposits; it was argued that such a move would encourage more exploratory work to be undertaken.

SNMPE research manager Mendoza outlined the complex and time-consuming approvals process that the new government is now seeking to simplify. A company might start by acquiring the sub-surface mining exploration rights to a particular block of territory. To begin exploration work it would need to file an environmental impact study (Estudio de Impacto Ambiental, EIA) on the nature and duration of the work intended, the number and type of drilling rigs to be used, and other details. The company would also need to determine, in consultation with the Ministry of Culture, whether the community in the area is composed of “original inhabitants”, or indigenous groups, and determine their social and anthropological characteristics. This in turn might trigger further conditions or technical studies relating to the required treatment of local communities.

If exploration work is allowed and the company wants to move ahead to develop the mine, a second major EIA report is required to cover all environmental and social impacts of the project, including an eventual mine closure or project exit plan to be implemented at the end of the concession. A multitude of further permits are also required at this stage, many issued by different stand-alone government institutions; there is a certification to guarantee there will be no damage to sites of archaeological importance for example. The mining company must buy or rent the surface land and obtain the necessary rights of way to permit access by road or rail and secure power supplies. It needs to produce a water use impact study and secure the approval of other water and river users in the area, such as farmers. It also requires a construction permit for all installations, and specialised permits for the use of chemicals, the treatment of waste and the use of various types of explosives.

Community Approval

The SNMPE explains that, as currently constituted, the approval process can take four to five years or even longer – in some cases, approval has taken closer to 10 years. A number of companies may get stuck at specific stages in the process, having to resubmit requests for permits, or may abandon projects entirely. No entity questions the need for establishing environmental and social criteria for assessing the desirability of mining development, thus the debate hinges around the length of time the process takes, whether there is excessive red tape and whether each step can be managed more effectively. A key link in the approvals chain, coming at the tail end of the process, is community approval. This is widely seen as one of the most difficult steps given that the criteria for achieving it are not always clearly defined. SNMPE officials note that some major mine development projects, such as Conga and Tía María, have achieved their environmental approvals but remain unable to progress because they lack local community go-ahead.

Fraser Rankings

Peru performed very well in the 2016 annual survey of 2700 mining companies, carried out by the Canada-based Fraser Institute. The survey ranks 104 mining jurisdictions around the world by their attractiveness based on a combination of government policies and geology. “When considering overall investment attractiveness (policy and geology) Peru (28th) surpassed Chile this year as the most attractive jurisdiction in Latin America,” the institute reported. Chile dropped to 39th place, down from 11th overall the previous year. In contrast, Peru rose by eight places, from 36th in 2015. At the global level, the most attractive jurisdictions were listed as Manitoba in Canada, Western Australia, Nevada in the US and Finland.

It is worth noting, however, that the Fraser Institute results placed Peru somewhat lower in the ranking when assessing the attractiveness of mining policy on its own, stripping out the attractiveness of the geology. According to the institute’s Policy Perception Index, Peru ranked 54th in 2016 and 55th in 2015. The report cites a chief exploration officer commenting, “Situations where the government does not enforce established surface access agreements deter future investment in Peru.” Opinions surveyed by detailed policy area also highlight some perceived weaknesses in Peru: 43% of respondents cited uncertainty concerning “environmental regulations”; 44% cited “regulatory duplication and inconsistencies” as a concern for potential investment; 61% expressed at least some concern over “uncertainty over disputed land claims”; and 62% expressed hesitancy to invest as a result of “socioeconomic agreements/ community development conditions”.

Social Pushback

Social, environmental and labour conflicts can pose challenges to the operations of mining companies in Peru. Broadly speaking, there are two categories of concern. The first is the impact of new mining development on local communities, where there can be a range of demands relating to the provision of local services, such as roads, electricity, education or water availability. The second involves labour disputes over terms and conditions at already established mines.

In terms of social and environmental disputes, Minera Buenaventura’s García told OBG there was a relationship between major stakeholders that could be envisaged as a triangle, with the three key participants being the government, the mining companies and the local communities. Each has legitimate interests, and harmonious development depends on an approach that balances their different needs and does not give too great a priority to one over the others. A number of mining executives shared with OBG some of the issues they encountered while conducting business. A key point was that many developments are undertaken in isolated parts of the country, where the presence of the Peruvian state has been minimal. For some communities, the arrival of a mining company may be their first real contact with modern Peru and, as such, is a cultural shock.

In pursuit of the community agreement required in the latter stages of the approvals process, mining companies may agree to provide local amenities and services, sometimes under the tax scheme Works for Taxes. Yet the local residents may be unclear about the different responsibilities of the mining company and the government. The situation is made more complex because of the long delays in other approvals. One manager said outsiders, whether genuinely well-meaning lobby groups or political militants, may raise unrealistic expectations among local communities. Sometimes reasonable demands – for instance, water supplies and electricity – are replaced by what was described as “extortion”, that is, demands by individual community leaders for money in exchange for development approvals. In early 2017 the office of the Peruvian ombudsman said there were 212 social conflicts in the country, of which 155 were “active” and 144 were “socio-environmental” and related to extractive industries such as mining. Most were concentrated in mining areas such as Apurímac, Áncash and Cusco. Industry executives say a reduction in these social conflicts would be a major boost to the operating environment. The administration of Pedro Pablo Kuczynski has taken two key measures to try to reduce social tensions over mining. One is to increase regional government budgets to allow for what is called a “social advance”, resulting in early spending on improved infrastructure and services in areas of mining development. The other is to expand the public Works for Taxes programme, which allows mining companies to provide facilities such as schools or health and community centres, in lieu of taxes.

Labour Disputes

In March 2017 workers at Freeport-McMoRan’s Cerro Verde copper mine – Peru’s largest copper mine with a 2016 output of nearly 500,000 tonnes – stopped work for 18 days to demand a larger share of mining profits. A settlement was eventually reached, with the company agreeing to improve family health care benefits and earlier payment of an otherwise unchanged profit share.

In April 2017 Southern Copper Corporation faced industrial unrest among its workers at the Toquepala and Cuajone mines, which had a combined output of 310,000 tonnes in 2016. While Southern Copper executive president and CEO Oscar González said the new Peruvian government had improved the investment climate, he was critical of labour union action. “A union in a country that is facing economic problems can’t paralyse a company and keep it from generating revenues for the state,” he said at a conference in April 2017. Southern Copper was also hoping for resolution of a social conflict that had held up development of its proposed $1.4bn Tía María copper mine. Since 2015 farmers have opposed the mine, arguing that it would harm the environment in a local valley. The mine has a prospective capacity of around 120,000 tonnes per annum. “We hope Tía María can happen but there is a question mark, it depends a lot on the government acting appropriately,” González said.

Illegal Gold Mining

Illegal gold mining has long posed a serious problem in Peru, with negative impacts in terms of crime, land ownership, tax evasion, the environment and the rule of law. Peru is the largest gold producer in Latin America and the sixth-largest in the world. It is estimated that unregistered small-scale gold mining operations are spread out within the Peruvian Amazon – an area of roughly 51,800 ha that is affected by varying degrees of deforestation and mercury poisoning.

Some of these smaller operations are carried out in a legal grey area. They may, for example, have national authorisation to break ground, but lack the necessary regional environmental and operational permits. There is evidence that the distribution and export of illegally mined gold is in the hands of a network of criminal groups. In early 2017 US authorities arrested a suspect, Juan Pablo Granda, who, according to court documents, had allegedly begun buying illegal gold in Peru in 2012, “smuggling [it] through a shifting array of Latin American countries” and eventually bringing $3.6bn worth of gold into the US in the four years to 2015. Upon taking office in July 2016, the new administration began to implement a series of measures designed to formalise and legalise these small-scale mining operations. The government announced a combination of stricter environmental regulations, a more streamlined process for issuing mining permits and financial incentives to formalise mine operations. The number of national permits required to start a mine were cut from six to three.

In September 2016 a total of 70,000 illegal miners were reported to have agreed in principle to formalise. But CooperAcción, an environmental lobby group, argues that there is no real willingness to formalise given that many small-scale operations are profitable precisely because they evade controls and taxes. It also claims that cooperation between federal and regional enforcement agencies is poor. Marta Ojeda, an official at the National Forest and Wildlife Service, told OBG, “The laws exist, but there isn’t effective action being taken to enforce them.”

Upswing

Peruvian mining in 2017 looks encouraging, said Marco Contreras, an analyst at Kallpa Securities in Lima. He expects international metals prices to keep improving: zinc prices could rise further as mine closures have created a global shortage, and copper prices could be helped by a recovery in Chinese motor vehicle sales as well as prospects of increased US sales under the Donald J Trump administration. Contreras expects copper prices to rise by 13% to an average of $2.50 per lb in 2017, with zinc also up, gaining 21% to $1.15 per lb. Contreras also expects gold prices to rise 4.2% to $1300 per oz. This, he argues, points to a strong outlook for Peru’s mining companies, particularly since many have an internationally competitive cost structure. Consequently, he expects locally based and listed companies, like Southern Copper and Cerro Verde, to experience rising profits and share prices, along with smaller polymetallic miners such as Volcan and Milpo.

While most analysts agree with this broadly positive outlook for the sector, some have articulated a criticism: growth has the potential to be even stronger because they believe Peru is not currently maximising its opportunities. A key element in the discussion is whether mining, along with other related private sector activities, can deliver the desired turnaround in investment levels in 2017. The total of planned future investments in mining, as calculated by the government, is valued at $46.9bn across 47 different projects. Government officials hope $15bn of these projects will be executed over the next five years. But Luis Marchese, president of the SNMPE and general manager of Anglo American in Peru, told OBG, “I’d like us to be more ambitious. Investing $15bn over the next five years would add around 800,000 tonnes of production capacity. We can do better than that.”

Total mining investment dropped by 44% to $4.25bn in 2016. Some officials have suggested it will recover in 2017, but there is at least one forecast – by consultancy EY – that is contrary to these hopes. The firm believes mining investment will fall again in 2017 by a further 6%, to $4bn.

Outlook

The medium-term outlook is certainly positive, with a range of new mines set to be developed, including Quellaveco in the Moquegua region, where work could start late in 2017. Projects that could come to fruition in 2018 include the Mina Justa and Marcona mines in Ica, the Ollachea gold mine in Puno and expansion works for the Toromocho project in Junín. Work on the Pampa de Pongo iron reserve in Arequipa is expected to start in 2020, and at the Laguna Norte gold mine in La Libertad in 2021. Marchese has argued that to get these and other projects moving, the government must move to lighter regulation of the industry. “In the last few years, the pendulum of regulation has swung in the direction of over-regulation,” he said. “We must get the pendulum back to a more reasonable position for the benefit of our country’s citizens.”

 

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The Report: Peru 2017

Mining chapter from The Report: Peru 2017

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