BHP bets billions on Chile mines to face global copper crunch
BHP detailed to investors this week plans to spend $10.7 billion to $14.7 billion within about 10 years.
With the exception of political turbulence – something the country is accustomed to – 2019 was a year of relative stability for Peru.
In contrast to the social unrest and economic instability that upset many of its South American counterparts, such as Chile, Brazil, Argentina and Ecuador, a stable currency and strong fiscal balance sheet had positioned Peru for solid growth above its modest 2.6% GDP appreciation rate in 2019.
Mining investment to the tune of $6.15 billion, the highest mark since 2015, has been the cornerstone of Peru’s economic health
Mining investment to the tune of $6.15 billion, the highest mark since 2015, has been the cornerstone of Peru’s economic health, accounting for 60% of the country’s exports and over 50% of foreign investment.
2020 started on a positive note for Peru as the signing of a “phase one” trade agreement between the US and China on January 15th pushed the price of copper to a nine-month high of $2.88/lb. Although cumbersome bureaucracy has threatened the country’s mining competitiveness, the development of large-scale projects Mina Justa and Quellaveco offered a near- term path to substantially increase the production of Peru’s biggest mineral export.
By early February, a Chinese dynamic of a different kind conspired to send the red metal crashing to $2.50lb, a 13% drop in reaction to the escalating covid-19 outbreak, and a precursor to the freefall in March that saw copper dive to $2.10/lb, its lowest point since 2016.
In February the supply chain had already been disrupted, as a combination of stringent work from home (WFO) orders in China weakened demand and shipping companies reluctant to expose workers to the virus created bottlenecks.
“Today we have ships that have not been able to unload and there is cargo that cannot be delivered,” observed Juan Alonso Checa, Latam director of Noatum Logistics.
While the warning signs were there, few could have predicted the transformational impact of what actually occurred. Despite a 10% drop in attendance and the appearance of hand sanitizer at exhibition booths, the mood at PDAC in Toronto from 1st to 4th March was upbeat, buoyed by a large Peruvian delegation led by new Minister of Energy and Mines, Susana Vilca.
Merely one week later, the World Health Organization (WHO) would characterize covid-19 as a global pandemic and, on 15th March, President Vizcarra declared a country-wide stay-at-home order effectively shutting down the Peruvian economy and leaving only essential services running.
Anglo American withdrew the majority of its 15,000-strong workforce from its Quellaveco project in mid-March, maintaining only critical works.
“We have now decided to suspend non-critical works for up to three months, thereby providing greater certainty for planning a safe and responsible restart,” stated CEO Mark Cutifani, on April 23rd, before affirming that the company still expects production to start in 2022.
At sites already in production, such as Yanacocha (Peru’s largest gold mine operated by Newmont), critical activity such as heap leaching and environmental maintenance continued as operations scaled down.
MMG Ltd declared force majeure on copper concentrate supplies from its Las Bambas mine, according to a Reuters report from 9th April, followed by the company withdrawing its 2020 production forecast for Las Bambas on 13th April.
“The first quarter was very challenging for the entire business, but particularly for our largest operation, Las Bambas,” said Geoffrey Gao, MMG CEO, in a statement released on 23rd April.
On April 26th, Fortuna Silver Mines’ wholly-owned subsidiary, Minera Bateas, announced that six workers at its Caylloma operation in southern Peru tested positive for covid-19 and have been isolated in a while being monitored by medical personnel.
On April 27th, copper mine Antamina, owned by BHP and Glencore, reported 210 positive cases of covid-19. Worryingly, 87% of the positive cases were asymptomatic, an indication of how easily the virus can spread undetected.
The impact was by no means specific to Peru, as a Mining.com study from 6th April reported that the pandemic had cut over $280 billion from the market capitalization of the world’s top 50 mining companies in Q1 2020.
Peru’s hard stance to ensure the health and safety of its population is commendable considering the country relied on only 200 ventilators at the start of the pandemic.
Indeed, the case of Ecuador, Peru’s neighbor to the north, is a stark example of the devastation the novel coronavirus can cause. While Ecuador’s official covid-19 death toll as of May 7th sat at 1,654, the government reported that 6,700 people died in Guayas province in the first two weeks of April alone, far more than the usual 1,000 deaths there in the same period last year.
As the first country in Latin America, and one of the first outside China, to enforce a nationwide lockdown, Peru’s mining industry has felt the economic effects more acutely than other leading mineral producers. According to CRU figures, from 14th April 2020, mine production losses due to covid-19 stood at 85,000 tonnes (mt) for Peru, compared to 40,000 mt in Mexico, 21,000 mt in Canada, and 14,000 mt in Chile.
Despite the bleak short term impact, president Vizcarra was able to act quickly due to Peru’s fiscal strength.
According to Bloomberg, the Andean country has accumulated savings in the past decade equal to about 15% of GDP, or 117 billion soles ($34.4 billion).
The government can spend savings during the peak of the pandemic and tap into bond markets when conditions are favorable.
“Investors are taking the long view and rewarding countries that are being proactive in tackling the virus,” said Guido Chamorro, co-head of hard-currency debt at Pictet Asset Management in London, a statement Peru will hope holds true as the country looks to resuscitate its economy in the wake of the pandemic.
On April 29th, the Peruvian government announced a four-stage reactivation plan designed to open up its economy gradually. From a mining standpoint, large-scale open-pit operations and construction projects of national interest restarted in May.
In June, large-scale underground mining (> 5,000 mt/d), medium-scale open-pit mining (> 350 mt/d), greenfield exploration, and worker camps are due to reopen. This will be followed by medium-scale underground mining and greenfield exploration without camps (including processing plants) in July. Finally, in August, the reactivation of the rest of the mining activities will be granted.
On May 6th, Pablo de la Flor, executive director of the National Society of Mining, Petroleum and Energy (SNMPE), stated he expects mining companies to ramp up to around 80% of normal production levels within a month.
“We are talking about 39 operations by 22 large mining companies,” De la Flor told Reuters by phone. “These represent approximately 95% of (local) copper production, 65% of silver production, 62% of zinc production and 26% of gold production,” he added, noting that the near-paralysis of mining production and the fall in metal prices globally has led the SNMPE to project a drop in the value of mining exports in 2020 of between 15% to 20%.
“The lockdown on 15th March caught the mining industry by surprise,” stated Víctor Gobitz, new president of the Peruvian Institute of Mining Engineers (IIMP) and CEO of Buenaventura, Peru’s largest precious metals company.
In his interview with Global Business Reports, Gobitz spoke of the peculiarities the sector presents, with isolated camps where miners work and live on shifts that are typically 14 days long, with seven days off.
“To adapt to the pandemic, these shifts could be extended to 30 days work and 15 days off, or to even longer periods like in the 1990s, if the mining workers agree,” he suggested, adding that extended shifts will become the new norm when the industry reopens during 2020, with very strict protocols to control people and cargo movement.
On 15th April, the Peruvian government approved the protocol to move personnel to mining operations through Ministerial Resolution No. 111-2020-Minem.
This includes personnel from mining or production units that have completed their workday in accordance with a special labor regime or have complied with mandatory social isolation, in order to return to their residence or place of work.
In addition, Article 2 of the ministerial resolution specifies that the interprovincial transport of passengers by air can be granted by the General Directorate Civil Aeronautics for the operations of air cargo transport, special air transport, air work and other activities of civil aeronautics.
For mining contractors, those in charge of large workforces at mine sites, the covid-19 pandemic will have a significant and permanent impact, according to Gianflavio Carozzi, general manager of AESA: “It will also present opportunities to introduce change at a faster pace as we have had to react (by necessity) to cope with the crisis and as such, have brought down paradigms such as remote work and the use of technology.”
Elaborating on the practical changes that will need to be implemented at mining operations as production is ramped up, Carozzi summarized: “It will change the way we operate and interact. It will change current health and safety protocols in order to preserve social distancing, and it will change the way we staff operations as mobilization will be limited.”
What could these safety protocols be and how will they be measured? Professor Neil Ferguson of Imperial College London has said that a significant level of social distancing could be necessary until a vaccine is found, which optimistic estimates envisage is at least 18 months away.
As lockdown restrictions are loosened and mining companies ramp up production, monitoring employee behavior for larger workforces will be paramount to mitigate risk.
With this in mind, Canadian startup Minetell has created an enterprise SaaS (software as a service) platform that measures and monitors covid-19 risk exposure and control performance, and is offering a 60-day free trial to help essential service workers during the height of the pandemic.
“Our platform delivers actionable and reliable information into the hands of decision-makers so they can ensure their workplaces are safe for their employees and their families, contractors and community partners,” explained Michael Hartley, CEO and founder of Minetell, who added that the remote deployment model the company has been using since its inception two years ago means it does not have to adjust to the current context.
Another company helping mining companies during the lockdown is Micromine, offering free licenses to its software for the month of April, as well as free online training.
“In one day, we had 1,500 requests for licenses globally,” said Guido Perez, Micromine’s Latam and US regional director, remarking that the company had developed a strategy to implement its For Pitram solution remotely without having to go to site.
As companies use the current context to invest in training and plan for the post-covid landscape, the need to recover lost production could present opportunities for service providers, according to Fernando Samanez, VP mining equipment and sales for the Pacific Rim at Metso.
“When things restart and ramp up, there could be a lot of opportunities as mining producers look to compensate for lost production by increasing throughput,” he reflected, adding: “When plants are restarted and looking for 5% more throughput, for example, new technology will have to be implemented.”
While mining producers have had to adjust their yearly production forecasts in light of the WFO order, Peru’s junior community is dealing with new challenges that have compounded the already daunting task of advancing projects in a country that has seen exploration budgets decrease for the previous three years, dropping 13.5% from $413 million in 2018 to $357 million in 2019.
Even before the pandemic, the leading authorities in Peru’s mining industry were vocal in their acknowledgement that the climate for exploration must become more attractive if Peru is to maintain a healthy project pipeline.
Manuel Fumagalli, president of the National Society of Mining, Petroleum and Energy (SNMPE), said: “Permitting times and regulations have increased in the last decade, and as such the country has lost competitiveness,” also commenting that the SNMPE is working with the government to streamline the permitting process, as the discussion to move the ILO 169 public consultation (consulta previa) from the exploration stage to the feasibility mining project development stage, gathers pace.
“The government needs to see where there is potential and act quickly, because investors are tired of waiting two or three years to know if there really is potential and cannot continue to invest if they are uncertain there will be a sufficient or a timely ROI,” stated Jorge Granda, general manager of AK Drilling, who remarked that by losing these opportunities, Peru loses its competitiveness and funds go to other jurisdictions.
If the urgency to expedite the excessive bureaucracy was already apparent before the covid-19 outbreak, the abrupt halting of one of the key value-creating activities of the exploration process – drilling – has added further delays to project advancement.
Furthermore, those still waiting for drill permits have seen their meetings with the Ministry of Energy and Mines (MEM) put on hold.
In March 2020, Magnitude Mining entered into a definite agreement for a qualifying transaction with private company Pucara Resources, with the new entity of Pucara looking to list publicly once permits are in hand.
“At PDAC 2020 we received notice from the MEM that their first workshop with Pucara was scheduled for 28th March, however, due to the national lockdown to minimize the spread of covid-19, this workshop was delayed,” related Steve Zuker, Pucara’s president and CEO.
Zuker went on to say that Pucara expects no community opposition to its proposed exploration drill program, but until the workshop has been completed the company cannot define a date to go public.
For those with permits already in hand, such as Regulus Resources, the lockdown has prompted a shift in focus with drill programs postponed as operational and corporate teams work together online on tasks to further understand the geology, engineering and economics behind their projects.
In the case of Regulus, being able to advance this work means the company is considering bringing forward the PEA for its AntaKori project to early 2021, according to CEO John Black.
“When these crashes happen in the markets, like we have seen in reaction to covid-19 and we saw in the global financial crisis in 2008, for juniors it really highlights the importance of having an excellent project, experienced management team and access to capital to come out the other end,” reflected Black.
Another well-funded junior poised to weather the current storm is Tinka Resources, which raised C$18.5 million in January 2020 through a strategic partnership with Buenaventura, who bought a 19.3% stake in the company at a remarkable 100% premium to the share price when it was announced. Discussing how the current crisis could impact the markets moving forward, Tinka CEO Graham Carman commented: “On the positive side, there will be a reduction in supply from the shutdown or production cuts at many operations, which will mean base metals prices should recover quicker once we get back to more normal supply-demand conditions.”
One of the potential silver linings to emerge from the post-pandemic landscape should be the elevated role that the mining sector will play in reviving global economies, especially in countries such as Peru that rely on the taxes and royalties paid by metals producers.
Furthermore, the need to stimulate depressed economies could lead to streamlined permitting processes. “The pandemic will emphasize the importance that the mining industry has to Peru’s economy and in the communities in which we work,” suggested David Kelley, president and CEO of Chakana Copper.
Prior to the shutdown, Chakana completed a detailed ground magnetics survey, and is currently interpreting the survey’s results to further its understanding of the geology at the Soledad project.
The current context has also created a climate ripe for M&A activity in the precious metals space, as gold broke the US$1700/oz barrier in April, causing shares prices of producers and royalty companies to spike after a brief dip in mid-March. On 14th April, news that Barrick had entered into an option to acquire a 70% stake in Golden Minerals El Quevar project in Argentina should alert the South American junior community that high potential projects are becoming attractive options for cash-rich producers looking to buy at an opportune time.
(This article first appeared in the Global Business Reports)
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