Peru still ‘a good place’ to invest in copper mining, despite concerns over disruption - sources

Recent disruptions to Peruvian mines have raised concerns about social tensions reducing the attractiveness of the industry to investors, but market participants told Fastmarkets that they still rate Peru highly as a copper mining hub

Road blockades and demonstrations have led to a fall in copper output in Peru in 2022, the mining industry is wary about Peruvian president Pedro Castillo’s views on mining.

Those fears include the prospect of higher taxes or legislation that impedes the development of the sector, sources said.

But while some copper market participants have doubts, others told Fastmarkets that the Castillo administration acknowledges the importance of mining to the South American nation, especially in terms of helping to reduce economic and social inequality.

“The government recognizes the industry’s importance,” one market analyst said.

And Peru has abundant natural resources, relative political stability and sturdy legal and business systems to protect investment, sources said.

Fastmarkets’ copper concentrates TC index, cif Asia Pacific, was calculated at $86.80 per tonne on November 18, up by 1.17% from $85.80 per tonne a week before.

Government challenges

Concerns have been raised that the government is too inexperienced — Castillo was elected at the end of July, 2021 — to deal with the mining industry and that constant changes at the mining ministry (Minem) have caused instability.

“There have been impeachments and resignations and Castillo has had several different mining ministers... amid other problems,” Alejandro Álvarez, co-director of mining practices at Americas Market Intelligence (AMI) told Fastmarkets.

The ministerial merry-go-round of those responsible for mining “does not allow for ministers to focus on important issues” related to the industry, an analyst source said.

Inequality in Peru has helped to fuel the disruption of mining operations and there are concerns that Castillo could use mining to redistribute wealth by increasing taxes on the industry.

“Castillo did win the election on a platform of redistributing wealth from [the] mining [industry] to the poor,” said Álvarez. “And his party actually wanted a stronger stance on this — maybe even the nationalization of assets. But Castillo understands the importance of mining to Peru’s economy and wants to promote investment.”

An industry source pointed out, though, that Peru currently has a “poor reputation for security of investment” and that has not been helped by the perception that the current administration “is not experienced.”

The Fraser Institute, which runs an annual mining company survey, ranked Peru 14th out of 83 in 2018 in its Investment Attractiveness Index. In the 2021 index, however, Peru had slumped to 42nd out of 84, highlighting a drastic decline in mining company confidence.

Despite these concerns, however, market participants said Castillo’s government was aware of the importance of the mining industry. According to statistics from the Observatory of Economic Complexity — a online data visualization and distribution platform focused on the geography and dynamics of economic activities — copper ores account for more than a fifth (22.8%) of Peru’s exports.

For these reason Castillo is more pro-mining than his reputation may suggest, sources said, with an analyst adding that the “governments [of Peru] have always recognized the [mining] industry’s importance — whether they are left or right wing” politically.

“[Castillo] realizes mining is the lifeblood of the Peruvian economy,” Álvarez said, adding that the president’s awareness of the industry’s importance in the economy, paired with the stability of contracts, means that the mining industry is more broadly stable than some might imagine.

“The legal system, the property system and the size of government are all stable,” an analyst source said, and, without changes in these areas, the industry should remain protected.

Local protests

A major concern raised by industry sources was the disruption caused by conflicts between miners and the local communities where they operate.

Peru’s miners tend to face more acute issues in terms of local discontent than most nations, due to the proximity between the populated areas and the mines, according to one analyst.

“People live near the mines, which is not the same as in Chile,” he said.

That sentiment was echoed across the industry, with people highlighting the disruption mining can bring to local communities, along with more acute concerns relating to water and the environmental impact.

The close proximity between mines and populated areas also increases the likelihood that communities will ask for compensation and access to any economic improvements resulting from mining activities.

Concerns are particularly pronounced at MMG’s Las Bambas mine, where there have been a series protests by local communities.

“Tensions with Las Bambas have been mounting since 2016, with communities claiming that mineral wealth has not necessarily translated into better social conditions in the area,” said Álvarez.

But several market participants said that issues at Las Bambas should not be taken as the norm in Peru.

“Las Bambas should be analysed separately,” one source said, adding that Peru is a diverse place and that “people generalize, [so] the issues facing one mine in Peru aren’t necessarily true of all mines in the nation.”

Sources also highlighted the fact that while the miners often agree compensation packages with local communities, those agreements often end badly.

It is a “mistake to accept community demands and pay them [because] new people will always come and ask for more,” a local mining source in Peru said. And this feeling was reflected by other market participants who said that “paying off’ local communities [was usually] a short-term and unsustainable solution.”

Sources also highlighted concerns about the government’s response to disruption caused by local community protests.

Castillo’s government was elected on a platform of promoting indigenous rights and, some sources have argued, this has made the government reluctant to deal with protests at mine sites due to fears that it may be seen as being at odds with support for the indigenous communities.

“Some in the mining industry will say this uptick in unrest in recent months happened because the Castillo administration prioritized the right to protest over economic concerns of the companies,” said Álvarez. But he added that, conversely, “communities will say that the mining companies in far-away places [in] poor regions can become the de facto local government.”

If local people do protest, however, “nobody will help; you won’t receive support from the government,” a source at a company with mining operations in Peru told Fastmarkets.

Despite recent negative local media reports, sources told Fastmarkets that concerns were not new and related to the new administration, but have always been concerns.

“Some mining companies have always faced issues [and] there has always been social conflict,” an analyst source told Fastmarkets. “There are more than 1,300 mines in Peru, [so] it follows that some will face challenges,” he added.

Another analyst source said “there is nothing to worry about” and added that Peru was a stable country and that, broadly, legislation and regulation relating to mining have remained the same.

Duncan Hobbs head of research at Concord Resources commented that “Challenges to mining investment in Peru are widely recognized but surmountable”. He added that issues faced by the industry had solutions, “one way forward may be to focus on aligning the interests of all stakeholders, with returns to local communities directly linked to the ongoing commercial performance of operations”.

And other sources said they were “optimistic” about the future of copper mining in Peru.

There are signs too that some issues are being resolved, with production starting to pick up again, with a 13% increase in copper production in September compared with the previous year.

The continued investment and presence of large multi-national mining companies, such as Australia-based BHP — which recently announced that it will be increasing its presence in Peru — shows that the wider industry has confidence in the country.

“Companies keep investing and [that investment] has been growing since 2016,” a source told Fastmarkets.

Renato Rostás in São Paulo contributed to this report.

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