Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Over the last two years, the country of Peru has had an enormous question mark lingering above it in the eyes of investors. When Ollanta Humala was elected president last year, it appeared that the mining industry could breathe a sigh of relief, signifying an opening of access to one of the world’s most underexplored mining countries. Backlashes from protesters slowed the progress on the mining projects of companies such as Newmont Mining (NMC:CA)(NEM:US), Xstrata (XTA:LSE), Southern Copper (SCCO:US), Anglo American (AAL:LSE) and Bear Creek (BCM:CA), while other companies such as Rio Alto Mining (RIO:CA) have had more successful forays into Peruvian culture.
What is undeniable is the potential for Peru, given fact that less than 1% of the country is being exploited today (0.77%), and only 14% of the country has been staked. And the Peruvian government is in a bind, as it has a $1.7 billion trade deficit with the United States and a changing populace on its hands. Despite these setbacks for Humala and his administration, Peru has maintained its position as the world’s top producer of silver, second in zinc, third in copper and tin, fourth in lead and sixth in gold. Much of what’s being developed now are projects that were initially started and worked on in past decades by the government, when these resources were under national control. Even today as foreign interests swarm around the massive potential of these resources, the government sustains itself with the export of these minerals, comprising as much as 60% of the nation’s export revenue in 2010.
What we’re seeing today from the projects that are in production are the result of work that was done by the Peruvian government in the 70s and 80s. These were later sold off when privatization occurred, while the government has been living off of the royalties. Today, growth comes from the success of these projects, and Humala is doing everything in his power to see future projects come to fruition.
Public Relations and Appeasement
Overcoming poverty is a cause worth fighting for, and when coupled with a growing radicalized environmental movement, can also be quite dangerous. In the case of Newmont’s proposed Minas Conga gold mine, many issues were in need of address before the project could go forward. While the federal government is typically seen to be performing the will of the people, in this case the approval from the government only served to spark more controversy, as locals near the proposed project feared potential water shortages. The result was a compromise, where Humala ensured ample water for towns near the mine site, and promised that any new mines that posed a threat to the water would be quashed.
Newmont responded in kind, accepting the decision and earmarked an additional $200 million to the project’s original $4.8 billion price tag, making it the most expensive mine in Peruvian history. But, the potential of a producing Conga far outweighed the added costs, as projections for the mine are pegged between 580,000 and 680,000 ounces of gold annually.
On a smaller but more palatable scale, Rio Alto recently announced production from its La Arena Gold Mine at 55,973 ounces of gold during Q1 of this year. Selling at a price per ounce of gold at $1,664 generated cash proceeds of $91.4 million to Rio Alto, while the mine set cash cost per ounce produced was $439. When including the government’s royalty and workers’ profit participation, the costs were more like $651 per ounce. But an even more impressive figure to look at here is how less than three years ago, this stock was worth $0.07 and today it’s worth over $4.20.
When production isn’t slowed by angry masses, profits can flow. And in Peru, this process can move even quicker than in other parts of the world.
The Saudi Arabia of the Mining World
Historically speaking, Peru was a centre-piece to the Spanish conquest of the Americas, due to the proliferation of artisanal mines. Compared to other parts of the world, Peru requires so much less effort to obtain minerals, akin to the effort required to obtain petroleum in Saudi Arabia. There are so many minerals available in Peru, yet so little effort has gone into obtaining them, as there has still been a dearth of exploration completed so far. Yet, in certain areas, it seems that all one must do is scratch the surface, and they’ll be on their way to finding gold, copper, silver, zinc or iron ore. There are numerous potential mine sites left, and production soon follows. This could be the reason why all that work done by the government in the 70s and 80s didn’t explode into more mines, as there were too many sites to choose from.
For Inca One Resources (IO:CA), they believe they’ve found a project that represents one of the last few to go through the government’s preliminary stages and be close to production before being privatized and sold off. The Las Huaquillas Project lies within the Miocene Metallogenic Belt of central and northern Peru; a belt that stretches over 900kms and hosts several economic epithermal and porphyry gold-copper deposits including the high-sulphidation Yanacocho gold mine. So far, four separate zones have been identified, including the Los Socavones and El Huabo epithermal gold-silver zones and the San Antonio and Cementario copper-gold porphyry zones.
Community Building
At their present stage of development, Inca One seems to be taking precautionary measures by reaching out to the community that surrounds the Las Huaquillas. Still impoverished, this community relies upon the sales of its coffee trade, which was ramped up when coffee prices jumped from $0.70/lb to a high of $3/lb. Today, that price is around $1.60/lb, and the only way for the producers to meet their numbers of yester year, is to increase production.
Thankfully, Inca One’s President and CEO, Edward Kelly’s background includes a foray into the coffee business, which resulted in profit maximizing efforts on behalf of a major chain. He and his team are working to help the locals retool their production methods to get more from their land by doubling and even tripling their yields and leave them less susceptible to price fluctuations of their prized commodity.
By improving the lives of the surrounding community, Inca One seeks to mitigate any issues that could potentially arise with public dissent. Going forward, they’re working with over 100 families on improving the coffee production, and therefore the livelihood of the people that will in turn return the favour by allowing Inca One to operate unfettered.
The Bottom Line
From the outside, the Peruvian mining industry can appear to be a rocky endeavor (no pun intended), but worthwhile if handled appropriately. It seems that Newmont is back on track, having agreed to meet the water needs of the locals, while quelling the fears of a populace hesitant to roll out the red carpet for foreigners. Meanwhile, Peru’s President Humala is doing all that he can to ensure that less of the Newmont and Bear Creek incidences occur on his watch.
Humala’s job is made a lot easier when the companies themselves do their part to make nice with the communities the plan to operate in. In the case of Rio Alto, they went into production quite quickly, compared to many other parts of the world, and still remained quite profitable as production began this year. Others are seeking the same sort of smooth transition, such as Inca One and its endeavor to improve the coffee output of the locals and its own output as it moves towards its own goals on Las Haquillas.
With over US$40 billion slated for Peruvian investment over the next decade, it’s going to take the cooperation of all parties to reap the benefits that Peru’s massive mineral resources can provide. Perhaps with the doubt that still lingers from the recent protest-related headlines, the value embedded in Peru is a smart contrarian investment before it really takes off.
G. Joel Chury
for the Bottom Line Report
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