Funding set to boost Arequipa mining sector, despite setbacks

Arequipa is a key mining region in southern Peru, topping national production in copper and molybdenum in 2016, largely as a result of the recent expansion of operations at the Cerro Verde mine. According to the Ministry of Energy and Mines ( Ministerio de Energía y Minas, MINEM), as of January 2017, Arequipa had a mining investment portfolio of $5bn, representing 10.7% of the total investment in Peru and ranking fourth in terms of regions attracting mining investments in the country, following Cajamarca, Apurímac and Moquegua.

However, the sector has faced a number of challenges. In Peru, external factors, such as global mineral and metal prices – as well as the company’s engagement with stakeholders and actors at all levels – determines whether mining projects move forward or not. Mining companies have learned that a successful social strategy goes a long way towards ensuring the development of a mining project. In Arequipa, one project in particular, the Tía María copper mine, has failed to garner community support and resulted in protests and clashes with police.

These issues notwithstanding, the government has taken a series of measures aimed at facilitating the development of mining projects across the region. The deployment of funding for public investment projects in mining areas has been crucial, and are being deployed to help unblock priority investments such as Tia María. While this effort remains under way and has yet to produce the intended results, it is a welcome step in that it contributes to creating a better environment for social dialogue.

Copper & Molybdenum Powerhouse

As a region, Arequipa led Peruvian copper and molybdenum production in 2016, a rank it kept into early 2017. In 2016 Arequipa produced 524,024 fine metric tons (FMT) of copper and 9580 FMT of molybdenum, accounting for 22.3% and 37.2% of the total production in Peru and amounting to increases of 103.4% and 187.5% year-on-year (y-o-y), respectively. In January 2017 the southern Peruvian region produced 43,238 FMT of copper and 1062 FMT of molybdenum, accounting for 22% and 55.4% of the country’s production market and expanding by 17.9% and 67.1% y-o-y, respectively.

Cerro Verde Expansion

Arequipa’s increases in production are largely due to the expansion in Cerro Verde mine’s extractive operations. In May 2016 the $5.3bn project raised annual productions of copper by 272,000 tonnes and molybdenum by 6800 tonnes, as well as extending the leaching facility’s lifespan until 2027. In addition, the Sociedad Minera Cerro Verde (SMCV), the Arequipa-based mining company that runs the Cerro Verde mine, enhanced its copper concentrate production capacity, with the construction of a second copper concentrate producing facility, increasing overall processing capacity from 120,000 tonnes to 360,000 tonnes per day. The SMCV now owns one of the largest combined concentrating facilities in the world.

The SMCV currently produces the highest amounts of copper and molybdenum in not only in Arequipa, but also in Peru. According to the latest available data by MINEM, copper production at the Cerro Verde mine grew by 18.1% y-o-y, reaching a total of 39,072 FMT in January 2017, the equivalent of 22% of the country’s total copper production.

This is coming after Cerro Verde had already topped copper production in 2016, with 522,134 FMT of copper, representing an increase of 104% y-o-y and a market share of 22.2%.

Molybdenum production increased by 67.1% y-oy, totalling 1062 FMT in January 2017. Although, despite declining production at Southern Peru Copper Corporation (SPCC), the latter still held on to the first rank in molybdenum production.

Taking Care Of Business

Successful social strategies have been key to the development of Cerro Verde’s expansion projects. With the availability of water being a sensitive issue, and in view of the company’s substantial operational needs in this regard, Cerro Verde decided to contribute through the construction of a wastewater treatment station. The company built a dam in 2004 and a potable water plant in 2011, and the construction of a wastewater treatment station to clean up the Chili River has emerged as a mutually beneficial project.

The investment in infrastructure for local communities – as part of a social strategy aimed at helping to ensure project development – is expected to cost considerably less that the overall cost of the project. Indeed, the wastewater treatment station cost approximately $500m, whereas the entire expansion project is assessed to cost about $5.3bn.

Project Pipeline

When outlining the list of priority projects in the region for 2015, Arequipa’s regional government identified four mining projects – including Cerro Verde’s expansion and a set of development projects – including the Pampa de Pongo iron ore mining project, the Zafranal copper-gold project and Tía María copper mine, together accounting for 77% of the total priority investments identified for implementation between 2015 and 2018. While Cerro Verde has already begun operating, the remaining projects are still in the pipeline.

Pampa De Pongo

According to local reports, Chinese conglomerate Zhongrong Xinda Group (ZXG) is planning to invest $1.5bn in developing Pampa de Pongo, specifically in the construction of an underground mine, aiming for an annual production figure of 10m tonnes of concentrate iron ore and 1m tonnes of surface sands. Estimates indicate that there are 3.8bn tonnes of verified iron reserves.

Pampa de Pongo itself features among a set of seven Chinese mining investments in Peru, totalling about $10.1bn. China currently holds approximately 35% of mining investment in Peru, yet its increase in recent years in Peru has also raised concerns about growing social and environmental conflicts in this sector, which may have motivated the signature of China’s first environmental agreement with a Latin American country when visiting Peru in late-2016.

An environmental impact assessment (EIA) had been obtained in 2015, but depressed global iron prices in recent years, combined with the financial difficulties of the previous owner, apparently provoked delays in the project’s development. Production is expected to begin in 2021.

In addition, the ZXG is planning on spending $1.5bn in the installation of a metallurgical industrial park designed to refine and melt copper, in addition to the construction of an iron metallurgical plant.

Zafranal

The Zafranal copper-gold mining project is set to be operated by the joint venture company Compañia Minera Zafranal. Canadian mining company Teck Resources will hold an 80% stake with Japan-based Mitsubishi Materials holding the remaining 20%. The project’s development constitutes an estimated overall investment of $1.2bn.

A preliminary feasibility study was completed in May 2016, and a further feasibility study is expected to be ready by the end of 2017. Zafranal is estimated to have a 19-year lifespan, holding combined measured and indicated resources of 952.5m kg of copper and 1.1m oz of gold. However, according to the operator itself, Zafranal will only run a profit if the price of copper stands above $6.60 per kg of copper. Moreover, while it would appear that there has been no major opposition to the project, as of December 2016 it remained to be seen whether the dialogue implemented in May 2016 to engage with local communities would secure their full support.

Renewed Interest

Tía María, a $1.5bn copper project operated by the SPCC, the government expects construction to start in 2019. Located near the valley of Tambo, in the province of Islay, the project has been in operation for more than 20 years and, while its contested EIA was approved in May 2013, as of early 2017 the project had yet to move forward with construction, having previously faced strong popular resistance, partly based upon widespread suspicions of potential water contamination to the Tambo river and the subsequent impact on neighbouring agricultural activities.

The project comprises two mineral deposits, La Tapada containing 425.4m tonnes of copper and Tía María with 225.4m tonnes. At the time of writing, both the government and the SPCC expressed confidence in regards to the project’s progress.

President Pedro Pablo Kuczynski visited the valley of Tambo in January 2017, offering solutions to the availability and distribution of water, a key challenge in the area. This included, among other things, a commitment to financing and executing a comprehensive water project, including wastewater draining and treatment, as well as the construction of a dam with a 100m-cu-metre capacity, which would benefit the development of agriculture. During the presidential visit the governor of Arequipa, Yamila Osorio Delgado, told local media that the corresponding project studies would be concluded in 2017, with commencement beginning sometime in 2018.

Government Support

To further facilitate the development of mining projects going forward, the government of Peru HAS decided to take a series of measures. These include the deployment of the Social Advancement Fund (Fondo de Adelanto Social, FAS), which allocates money for water, electricity and agricultural infrastructure projects in rural areas with poor financing; public investment projects in mining areas; fostering inter-ministerial cooperation to overcome lack of compliance affecting local community trust; and reducing bureaucratic red tape and taxes in mining exploration.

Critically, the government is counting on activating the FAS to finance the construction of the Paltuture dam in Arequipa and thus hopefully solve existing water scarcity challenges in the valley of Tambo, expand the agricultural frontier in the area and facilitate social dialogue with local communities.