Photographer: Andrey Rudakov/Bloomberg

Peru's Dream of Usurping Chile as Copper King Faces Roadblocks

Updated on
  • Mines slowed by red tape, rural opponents and transport issues
  • Investment in mining is picking up after a two-year downturn

The biggest obstacle to Peru’s dream of some day supplanting Chile as the world’s largest copper producer may be Peru itself.

Despite higher-grade ores and lower mining costs than neighboring Chile, the Peruvian government says the country’s potential in copper is being restricted by too much bureaucracy. Mine owners also complain about weak infrastructure and strong opposition to projects from people who fear increased environmental risks and disruption to their communities.

President Pedro Pablo Kuczynski, who was elected last year, is pushing expansion of the mining industry as a key to stimulating growth and reducing poverty. His government wants to exploit ore reserves that are the third-largest in the world. While copper output has been rising in the past two years, it remains well below the amount produced in Chile.

“We are not saying it will be easy,” Peru Mines and Energy Minister Cayetana Aljovin said in an interview, referring to matching Chile’s output. “We can reach those levels if Peru keeps sending positive signals. We need to create the necessary conditions for mining to grow in our country so the government can invest in basic services, healthcare, education and infrastructure.”

Peru already is the second-largest producer in the world. Last year it boosted output by 35 percent, driven by increases at the Las Bambas mine, run by Chinese-owned MMG Ltd., and by gains at Phoenix-based Freeport-McMoRan Inc.’s Cerro Verde, the largest copper mine in the Andean country. Based on data from the first eight months of 2017, Peru already has surpassed Chile as the largest supplier of mined copper to China, the world’s No. 1 metals buyer.

New Projects

The Peruvian government sees more growth ahead, with $51 billion of new projects slated to start in the next few years as demand from China grows and commodities prices recover. Copper on the London Metal Exchange has rallied 39 percent since the end of 2015, halting a three-year slide, though prices still remain well below their 2011 peak.

On Tuesday, Glencore Plc said it plans to increase its stake in Peruvian zinc miner Volcan Cia. Minera SAA by spending from $531 million to $965 million on Class A shares. Volcan said last month it’s exploring in three different areas in the country and would prefer to partner with a major international partner to develop its copper operations.

Peru’s production last year of 2.3 million tons of refined copper lagged behind its southern neighbor Chile, which supplied 5.5 million tons. Plus Chile remains an “attractive” place to invest, said Erik Heimlich, a copper analyst at CRU Group.

But if Peru can overcome obstacles such as local antipathy to mining, its growth possibilities are huge. “Peru’s potential in terms of resources is unquestionable,” Heimlich said last week by phone.

To get there, Minister Aljovin says the country has a three-pronged plan:

  • Reduce regulations and the number of permits required to mine 
  • Create a single government department where companies can request all required mining permits at once
  • Create a fund the government can use to invest in social programs in areas that may be affected by mining

At the moment, mining companies operating in Peru need to abide by 265 different rules and regulations, compared with 12 in 2001, the minister said. Of these, only 10 percent are under the Mines and Energy Ministry, with the rest under the aegis of a host of other governmental organizations, according to Luis Marchese, who runs the local assets held by Anglo American Plc and serves as head of Peru’s mining association.

General Zeal

“This has an impact on the country’s competitiveness and affects issues such as informal miners,” Marchese said. “How are you going to bring them into the system if there’s such a legal tangle?”

The bigger challenge, says Luis del Carpio, a professor at Pontificia Universidad Catolica del Peru’s business school, will be getting the general populace to join in the government’s zeal for mining.

“Bureaucracy doesn’t stop projects,” Del Carpio said by phone. “Community relations remain our Achilles’ heel. That’s the main reason why many projects are on the waiting list.”

Peruvian citizens living close to mines tend to oppose them, while citizens living far away tend to favor them, according to research by the International Council on Mining and Metals.

Road Blocks

“It’s exactly the other way around in other mining countries,” Tom Butler, ICMM’s chief executive officer, said at the recent Perumin mining conference in Arequipa, Peru. “A high proportion of Peruvians reject mining, and the situation around the issue remains highly polarized because people living close to the operations don’t feel empowered.”

MMG’s Las Bambas was the latest mining operation to face disruptions because of community protests. The company has agreements with villages around the mine, but some communities along the road oppose the traffic of heavy trucks that transport copper concentrate to Pacific ports. Five people have died in protests since 2015 and supply has been interrupted three times in the past year.

“We have been engaging with each of those communities and we are involved with the government,” Suresh Vadnagra, head of MMG’s South American operations, said in an interview. “We have made some real advances, but this is a long-term game.”

Antiquated Links

Infrastructure is a challenge in a country where road and rail links can be antiquated and some of the largest deposits are in the Andes, several thousands of meters above sea level and hundreds of kilometers from the sea. Despite government commitments to invest in remote regions, no projects have been made public yet.

“We are not seeing great changes in infrastructure investment that can lead us to think the situation will be different in five years’ time,” Del Carpio said. “Mining companies are developing their own infrastructure, but this means they need to invest more and projects become less competitive.”

Still, the example of Las Bambas provides hope. The only copper mine to start operating in Latin America last year, it became Peru’s second-largest mine within its first year of operation. MMG compared the deposit’s potential with the world’s largest copper mine, BHP Billiton Ltd.’s Escondida in Chile.

“To MMG, Peru is a strategic destination,” Vadnagra said. “Las Bambas is a platform for growth for the company, and we want to use that to grow more locally and at a regional level.”

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