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John Quigley and Andrew Willis: Could Peru's new president get comunities to agree with mining ?



Mine superpower status awaits Peru if new leader can woo farmers

Arriving late to the mining boom helped Peru defy a global freeze on project spending as prices plunged. Now the pipeline's drying up, and the country's chances of joining neighboring Chile as a copper superpower depend largely on the next president's affinity with remote communities.

For Pedro Pablo Kuczynski, who secured the majority of votes in Sunday's presidential election, the task won't be easy. 

While outgoing President Ollanta Humala oversaw a surge in investment and output as China's MMG Ltd. and Freeport-McMoRan Inc. brought on new operations, other companies such as Southern Copper Corp. and Newmont Mining Corp. shelved projects amid community opposition that spiraled into violent protests.

Mining accounts for half of Peru's exports and the industry's golden decade for investment helped boost incomes and reduce public debt. The country is challenging Chile's position as China's top copper supplier, with a 28 percent share in the first four months of the year, according to Bloomberg Intelligence.

But there's a long way to go in a nation where community opposition is among factors holding up $22 billion of mining projects, according to the central bank, and no large mines have started construction since 2012. Convincing people that mining is a boon rather than a threat to their communities may determine the industry's future.

Start Again

“You're just going to have to sit down again and start talking to whoever represents a community or the whole community, whatever it takes,” Cesar Perez-Novoa, co-head of research for Latin America at BTG Pactual, said by telephone. “Talk to them about what they need, and how their lives could improve and benefit from royalties and the mining canon.”

Peru has all the ingredients for a successful mining industry, including geological potential, low costs, water and energy, said Perez-Novoa, a Peruvian who lives in Santiago. Ores are typically much richer than neighboring Chile.

Close all those tabs. Open this email. Sign Up Projects by companies including Glencore Plc, Freeport and Chinalco Mining Corp International pushed investment to a record $9.7 billion in 2013 and fueled a surge in copper production in recent months. Investment will be about $4.5 billion this year, no more than $2.5 billion next year and could fall to $1 billion in 2018 if conditions don't improve, according to Carlos Galvez, president of mining industry group SNMPE.

Red Tape

Successive governments have largely left companies to negotiate community support in areas lacking even basic public services, and did little to foster a favorable climate for investment, he said. At the same time, red tape has exploded in recent years with the introduction of new environmental laws.

“It would be an insult to go from almost $10 billion of investment to $1 billion but that's what will happen if companies don't obtain permits and the social license for new projects,” Galvez said by phone from Lima. “The new president needs to show leadership, which has been lacking up to now.”

Compounding the community opposition are low metal prices that have seen companies cut spending and output to protect margins. Copper is heading for a fourth straight year of declines and is down 56 percent from a 2011 peak.

“It's never been this hard to get a mine up in the world, and at present, conditions could not be worse,” said Kenneth Hoffman, senior metals and mining analyst at Bloomberg Intelligence. “And with so many copper-producing areas expected to see water shortages due to global warming, it may only get worse.”

Expanding access to clean drinking water in Peru's hinterland has been slow. Fifteen percent of Peruvians living in rural areas lack access to suitable drinking water within a kilometer of their homes, compared with 20 percent a decade ago, while 43 percent of rural homes lack sanitation, according to the World Health Organization.

“There's an asymmetry,” Jose de Echave, a former deputy environment minister now working with non-governmental organization CooperAccion, said by telephone. “People feel the legislation favors mining investment and doesn't protect their rights. The great majority of conflicts are environmental -- issues related to water, pollution.”

Seven people were killed last year during protests against MMG's Las Bambas mine and Southern Copper's Tia Maria project.

Wall Streeter

Boosting mining development in Peru while protecting the environment and building community trust will require strong political will and clear proposals, De Echave said.

Kuczynski, a former mining minister and Wall Street veteran, will focus on removing obstacles to the biggest projects, such as Rio Tinto Plc's La Granja mine in Cajamarca, through increased public works and accelerating permitting, said economic adviser Alfredo Thorne. The electoral office is expected to announce Kuczynski as Peru's new president in the next few days.

Both he and his presidential rival Keiko Fujimori favor redistributing mining royalties to include communities further away from deposits that currently receive none of the benefits. They also back streamlining the permitting process.

Frente Amplio, which will have the highest number of seats in the new Congress after Fujimori's party, will oppose any attempts by the new government to soften labor and environmental legislation or push ahead with the most controversial mining projects, said Veronika Mendoza, a leftist leader who endorsed Kuczynski.

‘Blood and Fire'

“Governments have used blood and fire to impose mining projects without respecting the rights of peasant and indigenous communities,” Mendoza said. “The communities around Conga and Tia Maria have decided that those projects shouldn't go ahead and they'll have our support.”

Peru needs to remove obstacles to investment in time for the next uptick in demand, said Galvez.

“Countries should be ready to develop projects in a timely way when the market is asking for them,” he said. “The stars must be aligned.”


John Quigley is a Bloomberg Economy, Government & Finance Reporter, former Editor-in-Chief, CRU Steel News at CRU International and News Editor, Agra Europe/Informa. Andrew Willis is a Bloomberg reporter base in Bogota . Petroleumworld does not necessarily share these views. This column does not necessarily reflect the opinion of Petroleumworld.

Editor's Note: This commentary was originally published by Bloomberg, on June 9, 2016. Petroleumworld reprint this article in the interest of our readers.

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