Outlook 2018: Peru miners to tap window of opportunity

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Friday, January 5, 2018

Peru, the world's second largest copper and silver producer, is preparing a slew of mining projects as surging metals prices, an investor-friendly government and benevolent capital markets encourage mining companies to make up for the past two years of scant activity.

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Both local and international firms are expected to start work in 2018 on new copper, tin, iron ore and precious metals initiatives, while several major expansions are scheduled to come online even as companies increase exploration spending across the country.

The Peruvian mining industry has lined up a US$51bn mining investment portfolio over the next decade, which the energy and mines ministry (MEM) expects will boost copper output 30% by 2021.

In 2016, the Andean nation produced 2.35Mt copper, 153,006kg gold, 4.37Mkg silver, 1.34Mt zinc, 314,174t lead, 18,789t tin, 7.66Mt iron ore, 820t cadmium, 10.56Mt phosphate rock and 266,236t coal.

Mining investment, which slumped to about US$4bn in 2017 from a peak of US$10bn in 2013, is expected to rise about 12% this year after President Pedro Pablo Kuczynski's government passed legislation to accelerate permitting and ease strict environmental standards, according to Scotiabank.

"We're starting to see movement amongst the companies -they've started investing more in exploration, equipment and engineering." said Luis Marchese, head of the national society of mining, petroleum and energy (SNMPE). "That will require decisive action including the central, regional and local governments."

Projects

Without a doubt the most eagerly anticipated project, at the head of a host of copper properties, is Anglo American's US$4.9bn Quellaveco venture, pending since 1992.

Anglo, which has invested US$1bn in Quellaveco to date, plans to finish a 53km access road and advance works such as a dam in 2018 while the company waits for a final board decision at mid-year. Kuczynski, a former investment banker and ex-energy and mines minister, has been pushing for this project since winning the 2016 presidential elections.

Peruvian miner Minsur, meanwhile, plans to start work on its US$1.3bn, 90,000t/y Mina Justa copper project in Q4 once a feasibility study has been approved. Australian engineering firm Ausenco was expected to sign an engineering and procurement contract.

Lima-based Minsur is also working on its US$200mn B2 tin tailings project, designed to extend the life of its San Rafael mine. The 5,000t/y project will treat 7.6Mt of 1.05% grade tin tailings over a nine-year period.

Another project the government expects to start up this year is Chinalco's US$1.3bn plan to expand production capacity at its 250,000t/y Toromocho mine by 45%. Due to technical problems, the mine only produced 168,376t in 2016.

Nexa Resources unit Milpo has also announced it will work on engineering studies this year for its Magistral copper project, while the government also plans to put the US$2bn, 200,000t/y Michiquillay copper-gold-silver-molybdenum initiative up for bids in February.

Expansion projects include Southern Copper's US$1.2bn expansion of its Toquepala concentrator plant, due for completion in the second quarter. The company, which also plans to finish a US$50mn high pressure grinding roll (HPGR) system at the mine by Q1, has invested US$744mn to date to double concentrator capacity to 217,000t/y.

Also expected in 2018 are the start-up of a US$216mn, 7km conveyor belt, 43.8Mt/y crusher and a US$30mn tailings thickener at Southern's Cuajone mine. The company had invested US$195mn in the project through the third quarter of 2017.

Shougang Hierro Perú, the country's only iron ore producer, is also on track to complete a US$1.5bn expansion project in the second half. It is expected to double production capacity at the San Nicolás processing plant to 20Mt/y.

Fellow Chinese miner Jinzhao Mining plans to start construction at its US$2.5bn Pampa de Pongo iron ore project in the second quarter after securing final permits from the energy and mines ministry. The project, which has 3.4Bt in reserves and involves US$1.3bn in mine development and US$1.2bn in plant construction, is designed to produce 22.5Mt/y.

Precious metals investment, meanwhile, includes Newmont Mining's recently approved US$250-300mn Quecher Main project at its Yanacocha gold mine. Quecher Main, which is designed to produce 200,000oz/ gold, is expected to begin production at the start of 2019.

Newmont's partner at Yanacocha, precious metals producer Buenaventura, is also investing about US$100mn to de-bottleneck operations at its Tambomayo and Orcopampa gold mines, Uchucchacua (silver) and Marcapunta (copper).

At the same time, Canadian precious metals miners Barrick Gold, Tahoe Resources and Bear Creek Mining are also accelerating projects.

Barrick may start work at the end of the year on the first stage of a US$640mn expansion of its Lagunas Norte gold mine, while Bear Creek is looking to push ahead with its US$585mn Corani silver-lead-zinc project, which would produce 8Moz/y silver over a 18-year mine life. Tahoe is also moving ahead with an US$80mn expansion of its Shahuindo gold mine.

Prices

"The increase in mining investment responds to an improvement in metals prices," Scotiabank Perú analyst Erika Manchego wrote in a report. "This has made it possible to improve companies' balance sheets and allocate more funds to invest in equipment renewal and exploration, which had been in a slump in recent years when metals prices were falling."

Peru's exports rose to an estimated US$44.435bn in 2017 as metals prices staged a comeback last year led by copper (+31%), zinc (+29%), gold (+12%) and silver (+6%), according to the central bank.

Metals account for 60% of the country's export revenue, which had dwindled during the past three years of slumping prices.

Growth in China continues to drive base metals markets, while the US and Europe are also increasing purchases of industrial metals such as copper, zinc, lead and tin, according to ratings agency Moody's.

"We see China growing 6-7%, and demand for metals growing 2-3%/y, which is fine," Moody's analyst Barbara Mattos said. "There is upside risk for several metals in terms of market fundamentals like in the case of zinc, where we've seen a strong recovery in prices for lack of supply."

Instability

But while Kuczynski and key government officials such as energy and mines minister Cayetana Aljovín have publicly expressed their backing for mining projects, investors were rattled when Kuczynski narrowly survived an impeachment vote last month.

The president, who faced charges Brazilian construction firm Odebrecht hired investment funds linked to the Kuczynski while he was a government official, denied any wrongdoing before an opposition-controlled congress on December 21.

But his decision days later to pardon disgraced former president Alberto Fujimori, serving a 25 year prison sentence for human rights abuses and corruption, sparked violent protests and the resignations of cabinet ministers, congressmen and key advisors who saw it as a move to avoid being impeached.

Added to the reigning sense of political instability is the fact 2018 is an election year in Peru, when voters will elect presidents of 25 regional governments and thousands of mayors across the country.

"The political complexity will continue if we consider that municipal and regional elections will be held in October," said César Peñaranda, chief economist at the Lima chamber of commerce. "This introduces a critical variable for investments, namely uncertainty, which can affect the forecasts for public and private investment."