Miners look to Latin America

Photo by Leticia LozanoPeruvian peasants demonstrate against mining companies during the final day of a global industry conference in Arequipa, Peru. The protesters claim that mining is polluting water supplies and damaging farmland.

Photo by Leticia Lozano

Peruvian peasants demonstrate against mining companies during the final day of a global industry conference in Arequipa, Peru. The protesters claim that mining is polluting water supplies and damaging farmland.

Arequipa, Peru — Oscar Gonzalez, chief executive of Southern Peru Copper (PCU-N), wears a wry smile on his face — and with good reason.

As copper prices reach 16-year highs and demand for the red metal outstrips supply, his Mexican and Peruvian mines are expected to bring in US$3.8 billion in sales and US$1.2 billion in profit this year — record sums that have catapulted the once-diminutive company into the big league of global miners.

Willy Strothotte, Xstrata‘s (XTA-L, XSRAF-O) chairman, tells a similar story. He expects turnover from the Swiss-based company’s copper business to jump 50% to US$1.6 billion this year. Xstrata is already the world’s eighth largest miner by market capitalization, up from 36th place just a few years ago.

“People have commented on the favourable timing of our move into copper,” Strothotte chuckles, referring to the company’s purchase of MIM Holdings, Australia’s largest copper miner, in 2003.

Meanwhile, Mexico’s Industrias Peoles (IPOAF-O), the world’s top silver producer, expects its sales to reach US$1.5 billion this year, a fifth more than in 2004.

That has translated into more business for everyone. Mining machinery and technology companies displaying their wares at the biannual International Metals Conference in this southern Peruvian city in early September reported a 70% rise in interest in business compared to 2003, as miners upgrade their kit to process low-grade reserves.

“We have had huge interest from dozens of companies, from Barrick Gold to BHP Billiton,” said Ricardo Herzog, South American director of Canadian minerals machine maker Heath and Sherwood.

But if miners are riding the current boom and not afraid to boast about their profits, they are also asking: “When will prices return to earth?”

And don’t mention the costs of rising commodity prices on operations or the increase of virulent anti-mining movements in Latin America.

While the party isn’t over yet, some are predicting a change in miners’ fortunes as early as next year, as world economic growth slows, dampening demand for raw materials.

“I think copper prices will eventually fall and we see the price of copper at US$1.40 a pound in 2006 from around US$1.70 today,” said Gonzalez in Arequipa. Chile’s governmental copper agency, Cochilco, is more pessimistic, and puts next year’s price at around US$1.25 to US$1.30 per lb., in line with analyst estimates such as those of HSBC Securities.

New reserves eyed

The challenge now for miners is to make the most of strong prices while the cycle — and the global copper deficit — lasts, tapping new reserves outside of North America, where many of the mines are mature. Indeed, Phelps Dodge (PD-N), the world’s second-largest copper miner, expects its Tyrone mine in Arizona to be exhausted in the near future, while Xstrata’s Ernest mine, one of the world’s biggest underground copper mines, is seen running out of ore by 2013.

David Naccarati, president of Phelps subsidiary Phelps Dodge Mining, says it is time to turn to Africa, while Xstrata and others, such as Britain’s Monterrico Metals (MNA-L) and South Korea’s KORES and LS-Nikko Copper are looking to Latin America to yield new supplies.

Phelps Dodge hopes to reach a deal with Congo state miner Gcamines to develop Tenke Fungurume, one of the world’s biggest copper deposits, despite the risks of operating in a country where the rule of law has been weakened by civil war and dictatorships. Although Phelps Dodge is coy about its plans, Gcamines says Tenke Fungurume could eventually yield 400,000 tonnes of copper a year. According to a recent report by Toronto’s Paradigm Capital, the deposit’s copper grade is triple the best grade in Chile, the world’s top copper producer. “You can’t ignore that kind of grade,” said Naccarati.

Xstrata, meanwhile, is betting on the mineral potential of Queensland in northern Australia and hopes to begin mining at its two Roseby deposits in 2012, replacing the Ernest Henry deposit. Roseby could initially produce 70,000 tonnes copper and 25,000 oz. gold annually. But Latin America is where the company’s real interest lies. Xstrata aims to have its Peruvian deposit Las Bambas, which it bought for US$121 million last year, operational in 2010. The deposit could increase the Andean nation’s copper output by a quarter and lift gross domestic product by about 1%, according to government estimates.

“We have around 500 million tonnes of reserves, which is substantial,” Strothotte said.

Xstrata, which is 40%-owned by Swiss commodities trader Glencore International, has opened an office in Santiago, Chile, which it plans to use as its base to explore for metals and make acquisitions. It also has a 62.5%-option to develop the Tampakan copper deposit in the Philippines, which could begin production in 2011.

Xstrata declined to say which Latin American deposits it is targeting, but analysts assert that Peru’s Rio Blanco and Toromocho copper projects, both showcased in Arequipa, would be very suitable. Situated in Peru’s central Andes, Toromocho could begin production in 2010 with an annual output of 300,000 tonnes, making it one of the biggest copper mines in Peru and the world’s third-largest producer of the red metal, says Charles Preble, president of Toronto-listed Peru Copper (PCR-T, CUP-N). The deposit has reserves of about 1.6 billion tonnes of copper ore, as well as molybdenum and silver, and could have a 20-year life span, he said. An open-pit mine processing some 150,000 tonnes of sulphide ore a day, the project still needs to secure financing and Peru Copper’s option on the project runs out in June 2008.

“We’ll take a decision next year on whether we exercise our option,” Preble said. “Development and construction will take at least three years, so we’re looking at 2010 as a possible start-up date.”

Rio Blanco, owned by Monterrico, is a similar-sized project that could come on stream as early as 2008, producing 220,000 tonnes of copper a year and up to 3,000 tonnes of molybdenum. Monterrico is also hopeful that the project, near Peru’s northern border with Ecuador, will provide more reserves at nearby deposits, extending the life of the mine beyond 2030. But the US$800-million startup cost of the project in a remote corner of Peru without road links means Monterrico needs a partner, be it Xstrata or another major miner. Poland’s KGHM Polska Miedz (KPMD-L), one of Europe’s biggest miners, has said it is considering a 35% stake or more in the project.

And while all the action appears to be taking place high up in Peru’s Andes, Canada’s Chariot Resources (CHD-T) has also been showing off its Marcona copper project in southern Peru as a potentially important deposit due to begin production in 2009. Set in the bleak desert of Peru’s coast, Chariot is hoping for an output of 90,000 tonnes a year at Marcona, also known as Mina Justa. Having bought the deposit from Rio Tinto (RTP-N) and Shougang Hierro Peru last year, the company has secured a contract to sell 90% of the mine’s copper concentrate output and 70% of the cathode output to South Korea.

“LS-Nikko and KORES have agreed to take the cathodes at market price for the life of the mine,” said Carol Fries, a senior manager of Marcobre, the joint venture formed by Chariot, KORES and LS-Nikko. “We see the pit having a fifteen-year life and we’re looking at a US$200-million cost of setting it up,” Fries said at the Marcona booth in Arequipa.

While Peru is busy showing off its plentiful projects — it also aims to auction off the promising La Granja and Michiquillay copper deposits by the end of next year — miners in Arequipa said they feared that the growing number of anti-mining protests could scupper many grand plans.

BHP Billiton (BHP-N,
BLT-L), for instance, was forced to shut down its Tintaya copper operations for almost a month at the end of May after protesters broke into the mine to demand more social spending for the nearby town of Espinar in southeastern Peru. The protests raised eyebrows in particular because BHP Billiton’s community agreement was considered to be “one of Peru’s best,” according to Juan Penarrieta, manager of geological cartography company Eagle Mapping, who works in the region.

That has prompted a rethink among officials about how best to deal with protests which until now have often been blamed on radical non-governmental organizations, misinformed farmers and even drug traffickers in Peru — the world’s second-largest cocaine producer after Colombia.

According to Peru’s prime minister, Pedro Pablo Kuczynski, one of the biggest culprits is the country’s so-called mining canon, a system whereby half of all income tax paid by miners goes back to the region where metals are unearthed.

“The mining canon isn’t working,” Kuczynski said, referring to suspicions among miners that regional governments are misspending much of their mining income and generating resentment among local communities who see no benefit from the hugely profitable industry.

That view is backed up by Peru’s finance minister, Fernando Zavala, who said that the government has no way of monitoring how town halls spend the canon, or if the money even gets spent.

“Look at Huancavelica province in central Peru,” he said. “Last year it spent US$220,000 on renovating its main square and building an underground auditorium at a time when more than half the population there lack drinking water, sanitation and sewerage.”

According to Peruvian NGO Cuidadanos Al Dia (Citizens in the Know), the town hall of Ilave near Peru’s southern border with Bolivia, plans to spend more than 90% of its mining tax income this year on children’s playgrounds.

“It’s not just about money, but about how it is spent,” Zavala said.

Many mining regions in Peru are poor, and schools and hospitals are at the point of collapse following years of government neglect, while the state is highly centralized in the Peruvian capital, Lima.

New royalty

Peru recently introduced a controversial royalty on mineral sales to generate more money for mining regions, but few see it as making any difference.

“The amount of money transferred to mining regions in Peru has risen 1,148% between 2001 and 2005, but people aren’t seeing public works and this is fuelling the mining conflicts,” said Beatriz Boza, director of Cuidadanos Al Dia.

Kuczysnki said he plans to propose a new scheme whereby mining companies are involved more directly in managing the canon revenues, allowing them to take part in local infrastructure development in return for tax incentives.

Zavala said he has sent a bill to Congress to force town halls to save part of their annual mining revenue to ensure they still have money in their coffers when the boom cycle tails off. NGOs, meanwhile, are calling for the government to set project parameters for municipalities — especially as Peru holds presidential and legislative elections in April 2006 — and encourage town halls to set up small businesses.

A rare success story is that of the small district of Independencia in Ancash, central Peru, which has used mining canon income to set up a waste recycling business, exporting plastic and paper waste to China.

But Peru also has its poor environmental record to clean up if it is to win support for such projects as Rio Blanco, which has already faced resistance for fears mining will pollute local water sources. According to the World Bank, Peru has 610 depleted mines that have not been properly closed and a third of those do not have a registered owner.

Many villagers who see such mines still leaking chemicals in rivers consider that all mining activity will be just as damaging. “We estimate that Peru needs $250 million to deal with the mines, but so far, the government has given three million soles (US$914,000),” said Renan Poveda, the World Bank’s representative in Peru.

Still, that should not deter investors in Peru, said Carlos Santa Cruz, a senior executive for Newmont Mining (NMC-T, NEM-N) in South America. He believes Peru’s Andes have to learn to embrace mining because it is the only industry that will bring roads, electricity and water-treatment plants to austere areas where geography makes large-scale agriculture impossible.

“Mining can mean very healthy development,” Santa Cruz told delegates in Arequipa.

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