Southern, Buenaventura need more operating efficiency

Southern Copper and Buenaventura, the leading producers of copper and precious metals, respectively, are battling slumping metals prices, writedowns and social conflicts.

Inteligo SAB's chief mining analyst, Luis Ordóñez, spoke to BNamericas about metals prices, the companies' approach to new projects, dealing with social conflicts, government policy and cost-cutting.

BNamericas: Southern Copper is still profitable despite low copper prices, but Buenaventura has faced difficulties with declines in both precious metals prices and production. How do you see the company coping?

Ordóñez: Buenaventura's main problem is the viability of its mining projects. Nothing is happening with Conga and management doesn't seem to be interested in moving it forward. There's no real progress there. Apart from the social viability, the financial viability is becoming less and less attractive. We see gold with a downward tendency. There's no reason to think there'll be a major turnaround in gold prices this year as inflation is low and the US dollar is strong.

Southern was able to turn around the situation of low prices by producing more, bringing online a new plant, reducing unit costs and improving margins. Buenaventura ought to do the same and find a way to make their operations more efficient. The super cycle of prices is over and they need to adapt to this new scenario.

BNamericas: Other Peruvian miners like Hochschild, Volcan and Milpo have successfully cut costs by upgrading operations and firing workers. Can Southern Copper and Buenaventura follow suit?

Ordóñez: Southern has made improvements in some processes to reduce costs. Buenaventura is fairly limited in that aspect. That is the way out when prices are down, however. If they don't achieve more efficiency and better recovery rates to reduce cash costs and improve margins when metals prices are down, they're not going to do well. The only way to overcome declining sales volumes is to increase production as a way of bringing down fixed costs.

BNamericas: Southern is facing renewed protests against its Tía María copper project in Arequipa. Should that be a concern for investors, given that the government has given the project the go-ahead? And how do you see the government's role?

Ordóñez: Southern needs to be more proactive in dealing with the population at Tía María, they need to be open and responsible, and share the benefits of mining with the population. Southern needs to work on a long-term relationship with the community as stakeholders in the project, something that will be vital for the long-term viability of the mine. Mining operations near the coast tend to have a better relationship with their surrounding communities.

The government, meanwhile, has had a poor performance dealing with social conflicts, like the protests over the youth employment law. They need to rectify their political mistakes.

BNamericas: The price outlook for copper, gold and silver looks pretty bleak. Do you see a turnaround any time soon?

Ordóñez: We have a negative outlook on gold in the short term due to lack of inflationary pressure. We're a little more optimistic on silver because it has fallen too far. The ratio of gold to silver shows the drop is excessive, and silver is a more industrial metal with more applications than gold. We're a little more pessimistic on copper due to the global situation, the crisis in Greece.