Chile, Peru must meet energy challenges as mining booms

VANCOUVER — The Andean nations of Chile and Peru are firmly established as the top copper producing locales in the world. Chile holds the number one spot with annual production clocking in at roughly 4.9 million tonnes, while Peru sits in second place with output totalling 1.2 million tonnes per year.

Not surprisingly, both countries expect significant foreign investment inflows over the mid-term, with Chile projecting US$100 billion between 2012 and 2020, and Peru courting a US$54 billion capital injection over the next four years.

In Chile, mining giants BHP Billiton (BHP-N) and Rio Tinto (RIO-L, RIO-A) committed to a US$4.5 billion expansion at the Escondida copper mine in mid-February. Despite lower realized copper prices — profit fell 15% to US$871 million over the first quarter — the joint-venture partners have approved plans to boost production by 80% to 1.3 million tonnes of copper by 2015.

Codelco, Chile’s national copper corporation, announced US$5 billion worth of capital development programs for 2012, including a US$875 million underground expansion at its Chuquicamata copper operation, the world’s largest open-pit mine.

Codelco is also chasing 49% of Anglo American’s (AAUKY-Q) regional subsidiary, Anglo American Sur, with an eye on the large Los Bronces copper mine where Anglo is completing a US$2.8 billion operational upgrade. Over the longer term, Codelco reportedly plans to spend roughly US$17.5 billion to increase copper output to 1.8 million tonnes by 2014 and 2.1 million tonnes by 2020.

Vancouver-based major Teck Resources (TCK.B-T, TCK-N) could jump in on the Chilean spending spree, having recently filed a technical report on its huge Quebrada Blanca Phase 2 expansion to the tune of US$5.6 billion. Though the high-priced project could be considered marginally economic at copper prices below $3.50 per lb. it follows the theme of major miners taking bullish long-views on the red metal. The expanded operations would kick-start in 2016, and the upgrade could extend the life of the mine by 30 years, at least through 2047.

Meanwhile in Peru, other big-time mining outfits are seeking to increase development spending with a series of capital-intensive projects, though civil and regional political issues continue to haunt the country, with a series of anti-mining protests pitting pro-industry President Ollanta Humala against various regional interests.

Newmont Mining is wrestling with the most expensive mining development ever attempted in Peru at its US$4.8-billion Minas Conga copper-gold development in the Cajamarca region. The company is facing staunch opposition from environmental groups concerned with the destruction of a series of alpine lakes. Newmont reported capital cuts at Minas Conga following the civil unrest as spending sunk to US$440 million for the year, compared to an original estimate of US$1.5 billion.

Swiss mega-corporation Xstrata PLC (XTA-L) is earmarking a combined US$5.7 billion for the Antapaccay expansion at its Tintaya copper mine in Peru’s Espinar province and its Las Bambas copper project in Peru’s northern Cotambamba and Grau provinces. The Tintaya-Antapaccay brownfield expansion has been also been victimized by regional tension and episodic violence.

The Aluminum Corporation of China (Chinalco) is investing US$2.2-billion in its Toromocho copper project in Peru’s Junín region, scheduled for construction in 2013, while integrated producer Southern Copper (SCCO-N) —  a unit of Grupo Mexico —  is ramping up investment in Peru by between 15% and 20%, highlighted by its US$1.2 billion Tia Maria copper project.

Chile has pledged to boost its copper production by 9.6% to 5.75 million tonnes this year, and Peruvian authorities have targeted a 75% surge by 2015, which would increase the country’s output to 2.2 million tonnes per year. Along with aggressive resource expansion come infrastructure challenges, especially in regards to power, which has led to a concurrent investment boom in the alternative energy sectors — mainly liquid natural gas (LNG) and hydroelectricity.

According to a recent World Bank led study, demand for energy in Peru is growing by 9% annually — expected to jump to 6,140 megawatts (MW) by 2020. Chile is experiencing an even larger boom with energy requirements expected to triple over the next 15 years. The Chilean government is targeting an 8,000-MW capacity increase by 2020, bumping its power supply up to 25,000 MW. Chile is in a unique position with no domestic oil or natural gas reserves.

Civil activism has tossed a wrench into Chilean expansion plans, however; as two major hydro projects in the country’s southern Patagonia region have been entangled court proceedings. The 2,750-MW, US$3.2-billion HidroAysen hydro project — a joint-venture between Chilean utility company Colbun and Spanish energy outfit Endesa — has been delayed by lawsuits, while Xstrata Copper and Australia’s Origin Energy have run into similar problems with the US$3.6 billion Energia Austral hydro dam.

“The increase in appeals against projects, aside from delaying them, is influencing the increase in energy prices and is inhibiting investors,” Chilean deputy energy minister Sergio del Campo told Reuters on June 14. “It’s definitely a barrier.”

Chile is also looking at natural gas to meet growing energy shortages. Santiago daily newspaper La Tercera reported in late April that the Chilean government was looking to boost LNG reserves in a bid to add as much as 500 MW annually from alternative energy sources starting in 2015.

Miners are contemplating various capital projects in an attempt to solidify the energy situation in Chile, with BHP reporting in April that it may look at building a power station in the northern part of the country, while Teck told Bloomberg it is considering locations and providers for a power station in the Atacama Desert.

Peru is similarly under pressure to bump up power capacities, as an International Finance Group (IFC) report speculates the country could require between US$11 billion and US$13 billion in energy investment by 2020. Minister of Energy and Mines Jorge Merino said during a presentation at Reuters Latin America Investment Summit in late May that Peru will require a 540-MW per year increase just to cover domestic demand. The government has put together a series of concessions for private hydroelectric projects in an attempt to add 2,000 MW to its power matrix by 2021.

Hydro electricity currently accounts for roughly 55% of Peru’s energy production, with the government approving the US$530-million Chinecas hydroelectric-irrigation project on Peru’s northern coast in early May. The country is looking internationally for energy investment, with companies from Brazil, Spain, China, and Japan interested in potential hydro-expansion projects. Peru has been conducting reverse auctions on renewable energy contracts since a 2008 legislative decree labelled renewable resource development a national priority.

Though Peru is a heavy producer of natural gas, vis-à-vis its Camisea fields, the country has only recently began looking at using the energy source on a broader domestic basis. Peru’s state-run utility company Petroperu is negotiating a 25% stake in Brazilian developer Odebrecht‘s 1,000-km, US$5 billion pipeline that would transport natural gas from Peru’s southern Camisea fields to petrochemical plants and shipping ports in the north.

Brazil has been a big player in the Peruvian natural gas industry recently, with state-run Petrobras expected to invest US$150 million in exploration and development through 2012. The pipeline would also service Brazilian petrochemical company Braskem, which is in the process of building a US$3.5 billion plant in Peru. A production increase could also serendipitously help Chile, with speculation that a new shipping avenue will open up increased LNG shipments to other Andean nations.

“This is one of the most important projects in the history of the country, because it’s going to generate a petrochemical poll with investments of around US$15 billion,” Merino told Reuters during the investment summit.