All that glitters: Capitalising on sustained high prices for gold and copper

The exploitation of copper and gold resources has been a key element in Peru’s mineral and indeed broader economic development over the past decade. Together, copper and gold accounted for 76% of all mineral exports in 2011, bringing in revenues of $10.7bn and $10.1bn, respectively, according to the Ministry of Energy and Mines (Ministerio de Energía y Minas, MEM).

RANKINGS: Increased production of copper has seen Peru steadily climb the global rankings, moving up six places from its position as the world’s eighth-largest producer in 2000 with a market share of 4.2%. By 2011 Peru’s market share reached 7.7%, becoming the world’s second-largest producer of copper behind only neighbouring Chile (33.7%) and ahead of mining giants China (7.4%), the US (7%) and Australia (5.8%).

On the other hand, growth in the production of gold has been slightly less dynamic, although the soaring price it garners has ensured regular increases in export revenues. Peru now ranks as the world’s sixth-largest gold producer with 6.5% of the global market share behind China (13.8%), Australia (10.2%), the US (9.2%), South Africa (7.6%) and Russia (7.6%).

EXPORT MARKETS: The strong economic growth of resource-hungry emerging markets has driven copper demand in recent years – China alone now accounts for more than one-fifth of global demand. It is only fitting then that China is Peru’s primary market for copper exports, accounting for 26.5% of total copper exports in 2010, followed by Japan (13.8%), Germany (8.4%) and the US (7.2%). The Swiss purchased the largest share of gold exports with 49.2%, followed by Canada (31.7%), the US (15.9%) and Italy (3.1%).

Increased copper prices are generally attributed to simple supply and demand. Copper prices have risen from $1813 per tonne in 2000 to $8828 in 2010, according to World Bank data, largely due to rising demand from rapidly growing emerging market economies. Spikes in gold prices, on the other hand, are explained in a variety of ways, from gold being inversely correlated with real interest rates to its ability to act as a safe haven in difficult economic times. Either way, the soaring price of gold, which according to World Bank data increased from $279 per troy ounce (toz) in 2000 to $1568 in 2011, has prompted a spike in investment in exploitation activities all over the world.

COPPER PRODUCTION: Peru’s main copper belt is found inland among the Andes along its southern, central and northern coast. In 2011 28.7% of all copper came from the central province of Ancash just north of Lima. It was followed by southern Arequipa (24.6%), Tacna (12.3%), Moquegua (12.3%), and Cuzco (7.7%). Despite relatively little production coming from the northern regions of La Libertad and Cajamarca, recent discoveries have started pulling investment north.

Copper production increased an average of 7.6% annually in the first decade of new millennium jumping from 554,000 fine tonnes in 2000 to 1.28m fine tonnes in 2009. However, production in 2010 fell 2.8% to 1.25m fine tonnes following dips in production reported by mining companies Xstrata (13.2%), Antamina (5.6%) and Southern Peru Copper Corporation (5.4%). Historically, Southern has been Peru’s largest producer, although recent expansions by Sociedad Minera Cerro Verde, owned by Freeport-MacMoran, and Compania Minera Antamina, a joint venture between BHP Billiton (33.75%), Xstrata (33.75%), Teck (22.5%) and Mitsubishi Corporation (10%), mean that three companies now produce more than 75% of Peru’s copper. In 2011 Antamina produced 347,059 fine tonnes (28.1%), Cerro Verde 302,905 (24.5%) and Southern 295,842 (24%).

GOLD PRODUCTION: Gold is found in large quantities in the northern provinces of Cajamarca and La Libertad, which accounted for 31% and 27% of Peruvian gold in 2010, respectively. They were followed by Madre de Dios (13.8%) in the Amazon basin to the east and Arequipa (10.6%) along the south-western coast. Annual gold production grew at an average annual rate of 3.9% between 2000 and 2009 – an increase from 4.26m toz to 5.92m toz. Gold production, similarly to copper, slowed in 2010, dropping 11% to 5.25m toz as a result of decreased production reported by Yanacocha, down 29%, Barrick Misquichilca (-22%) and Ares (-22%). Yanacocha, a joint venture between Newmont and Buenaventura, was responsible for 1.46m toz (31.5%) of Peru’s 2010 production followed by Barrick Misquichilca with 998,000 toz (21.5%), Buenaventura 385,000 toz (8%) and Aruntani 208,000 toz (4.5%). In 2011 gold production slipped 0.004% on output from the year before.

EXPLORATION & EXPANSION: Given the high prices of both gold and copper, it is no surprise to find that the top-five investors in 2011 were Minera Yanacocha ($1.15bn, 16.9%), Xstrata las Bambas (763m, 10.5%), Minera Chinalco Peru (750m, 10.4%) Xstrata Tintaya ($668m, 9.3%) and Antamina ($640m, 8.9%). Much of Peru’s expected $50bn in mining investments over the next decade will come from the construction of new gold and copper mines as well as the expansion of existing mines. In 2010 10 mines had already completed MEM’s environmental impact assessments (EIAs), although Newmont’s $4.8bn Minas Conga gold mine and Southern’s $1bn Tía María copper mine have both seen delays due to the re-evaluation of EIAs. Xstrata will invest $5.7bn between its $4.2bn las Bombas and $1.5bn Antapaccay copper projects. Other large-scale projects include Chinalco’s $2.2bn Toromocho copper mine and Anglo American’s $3bn Quellaveco copper mine, which has yet to receive approval of its EIA. At the time of writing the $1.2bn expansion of the Antamina copper mine was 70% complete. Cerro Verde’s $1bn extension of its copper mine is due to be complete in 2012, while the $400m capacity upgrade of Barrick Gold’s Lagunas Norte gold mine and the $600m expansion of Southern’s Toquepala gold mine are also scheduled to come on-line in 2012.

DOWNSTREAM: Downstream gold and copper activities such as smelting and manufacturing are limited in Peru. Southern Peru Copper Corporation runs a copper smelter in the southern coastal city of Ilo, as did Doe Run Peru, though its smelter was closed in 2009 after filing for bankruptcy. Southern gave its Ilo smelter a $520m upgrade in 2007, increasing capacity to 1.2m tonnes per year in preparation for the completion of its Tía María mine. The Peruvian government is trying to attract a northern smelter to support the copper mines being developed in that region.

According to World Bank estimates, the global price of copper is projected to remain above $8000 per tonne in 2012-14 before beginning to fall to a low of $5500 in 2018. Gold prices are likewise predicted to remain above $1400 per toz for the following three years before dropping to around $1000 per toz in 2017. Prices are not expected to return to pre-2005 levels, although such is the volatility of commodity markets that the possibility should never be ruled out entirely.

For now both copper and gold are experiencing periods of sustained high prices. With significant reserves and huge amounts of investment coming in, Peru is in a perfect position to capitalise, provided it can successfully navigate the social and regulatory challenges.