Peru’s Mining Growth And Pains

LIMA, PERU — While much of the rest of the world struggles to put last year’s economic slowdown behind it, Peru has been surging ahead with almost Chinese-levels of growth.

Once condemned by economists as a beggar sat on a bench of gold, the country is moving at full throttle to exploit its considerable natural benefits with the aim of catching up with regional powerhouses like Brazil and Chile.

The man who arguably put the country on this path to prosperity now languishes in prison: before resigning over corruption allegations and being jailed for human rights abuses, President Alberto Fujimori implemented radical economic reforms, such as removing price controls, lifting restrictions on foreign investments and privatizing state-owned businesses

His successors, including current incumbent Alan Garcia, have continued to build on this model, pushing for free trade agreements with the world’s largest economies and greater investment from multinationals.

As well as mineral deposits of copper, gold, zinc and other metals, the country is blessed with significant reserves of oil and gas, raging rivers, huge forests and fertile valleys.

The mining sector has been growing rapidly after decades of stagnation, when the sector was hit first by state intervention and then terrorism.

Already the world’s second-largest gold producer, Peru last year overtook the United States to become the world’s second-largest copper producer.

President Garcia says he now wants Peru to catch up with southern rival Chile, the world’s top producer of the red metal.

Given that Chile still produces four times as much copper as Peru, that may be blue-sky thinking, but mining companies active in Peru seem determined to fulfill the country’s promise.

The industry has invested US$8.7 billion over the last five years, hitting a record US$2.8 billion last year, according to Peru’s Ministry of Mines and Energy.

But this is only the beginning. According to the influential mining and energy association SNMPE, mining companies will invest close to US$35 billion in the country over the next five to seven years.

“We believe that Peru is an exceptional position with regards to its natural resources to develop mining activities,” says SNMPE president Hans Flury.

Projects in the pipeline include major expansions of existing mines such as Southern Peru Corp.’s Toquepala pit, the Freeport-Mc-MoRan Copper & Gold (FCX-N) controlled Cerro Verde operation and the Antamina mine, whose owners include BHP Billiton (BHP-N), Xstrata (XTA-L) and Teck Resources (TCK. B-T, TCK-N).

The Antamina expansion, valued at US$1.3 billion, recently received final approval from its owners.

The project seeks to exploit a 70% increase in mineral reserves announced in 2008 by expanding the mine fleet and adding a concentrator line.

This should increase production of copper and zinc concentrates by more than 30% once complete from 2012, and extend the mine life by six years to 2029, Minera Antamina’s corporate affairs manager Gonzalo Quijandria says. “This is going to be the biggest investment in Peru this year,” he says.

Southern Peru, part of Grupo Mexico (GMBXF-O) controlled Southern Copper (SCCO-N), plans to expand copper production at its Toquepala mine by around 100,000 tonnes a year.

New mines are also planned. Southern Peru has begun consultations with local communities in the region of Arequipa for its Tia Maria project which is expected to produce 120,000 tonnes copper per year.

In February, Anglo American (AAUKY-O) said it expected to announce the launch of its long-awaited Quellaveco project during the first half of the year: the mine, which has been on the company’s books for at least a decade, would produce around 225,000 tonnes copper annually.

A second project, Michiquillay, in the north of the country, is at a much earlier stage of development, but could produce close to 300,000 tonnes copper a year, the company said.

Another mining giant betting heavily on Peru is Xstrata: it already operates the Tintaya mine, bought from BHP Billiton in 2006, but is looking to increase production by mining the nearby Antapaccay deposit by late 2012.

It is also exploring the larger Las Bambas project since 2004 although due to the lack of infrastructure in this remote area of southeastern Peru, development is expected to take until the second half of the decade.

Peru has also become one of the major destinations for Chinese investment in South America.

Aluminum giant Chinalco plans to invest US$2.2 billion building the Toromocho mine, tapping into one of the world’s largest undeveloped copper deposits.

Shougang Iron and Steel Group, one of the first Chinese companies to invest in Peru’s mining industry, is also eyeing a $1.1-billion expansion of the Marcona iron ore mine to double production from almost 440,000 tonnes last year.

The coming into force on March 1 of a free trade agreement between China and Peru is expected to further strengthen links between the two countries: right on cue, Chariot Resources (CHD-T), owner of the advanced Mina Justa copper project, announced the same day that it is being taken over by Hong Kong-listed investment company China Sci-Tech Holdings.

The bulk of investment forecast over the decade is in projects that are still at a feasibility or prefeasibility stage.

These are worth close to US$27 billion but how many of them will come to fruition is unclear.

That will depend not just on how metals prices evolve over the next few years — although most experts believe they will remain high — but also on how well mining companies convince local communities that their project should be developed.

The rapid growth of Peru’s mining industry over the last 20 years has been accompanied by a rise in social conflict, much of it is associated with new investment projects.

Much of the wrangling between investors and locals is small-scale, but sometimes these tensions boil over into violent conflicts, costing lives and putting back projects by years.

Last June, more than 60 people died in clashes between police and indigenous farmers angered by government plans to turn over their lands in the northern Amazon for oil exploration.

And in November, three more were murdered when gunmen attacked the Chinese-controlled Rio Blanco mine project in northern Peru — a project wracked by conflicts with local people since its inception.

According to Carlos Vives, promotions manager at state oil agency Perupetro, local leaders often exploit investment projects for their political ends, adding unwanted heat to already tense relations.

Sometimes more sinister forces are at work.

Ricardo Briceo, head of Peru’s largest business federation CONFIEP, blamed last year’s attack on drugs traffickers determined to prevent foreign investment bringing attention to their patch.

But whatever the particular causes behind each clash, at the heart of all of them lies the huge gap between Peru’s centre and its provinces.

While uptown Lima increasingly appears like the business district of any modern city, villages in the highlands and jungles of Peru often lack a range of basic services like paved roads and running water.

Central government is often completely absent.

When Xstrata sent its first teams of geologists and sociologists to its remote Las Bambas property, they found subsistence farmers bartering goods for a lack of conventional currency.

And given Peru’s recent history of terrorism and military oppression, people living in such areas are sometimes understandably wary of newcomers and their promises.

In order to spread more of the benefits of mine investment with the regions, the government has implemented a mining canon which diverts 50% of mine tax revenues to the local governments where the mines are located.

But this has done litt
le to reduce tensions: impoverished regional governments often lack the capacity to spend the millions of dollars now entering their coffers and when they do, it is sometimes frivolously spent on new municipal buildings or sports stadiums when their constituents may lack access to drinking water or electric light.

The mining industry is working hard to improve its image, supporting major social projects in the provinces so all people, not just employees and their families, can benefit from their presence.

In Ancash, Minera Antamina supports the Ally Micuy program, which aims to improve child nutrition in local communities. In the two years to June 2009, it helped reduce chronic malnutrition among under fives from 30% to 23%.

The industry is also turning on those members who are seen as not pulling their weight.

In January, the powerful SNMPE threw out Doe Run Peru for failing to fulfill commitments to make environment improvements to its La Oroya metallurgical complex, considered one of the world’s most polluted sites.

The focus now is on presidential elections in 2011 to elect a successor for Garcia who cannot stand again.

Ollanta Humala, the left-winger who narrowly lost to Garcia in 2006, has maintained a relatively low profile in recent years, but others are jockeying to take his place if he does not run.

They are looking to build on the pockets of disaffection to create a national movement which could turn next year’s elections into a major test for Peru’s mining boom.

“I am concerned to see how some politicians or candidates, instead of seeing investment as a trampoline to achieve more, portray it as something that is going to affect the development of the poorest groups,” SNMPE’s Flury said last month.

The extent to which politicians can lay the country’s problems at the feet of the mining industry will depend on how much companies show themselves capable of helping to solve them.

–Based in Santiago, Chile, the author is a freelance journalist specializing in mining.