Fortune favours the brave: Stability proves key to significant growth in foreign investment

In recent years mining companies from around the world have come to Peru in search of precious minerals and driven by demand for raw materials in emerging giants such as China, Brazil and India. The improved political and economic foundations that have been established following the tumultuous 1980s and 1990s have also played a key part in assuring the long-term stability of investments. Nevertheless, the sector still faces several challenges to sustain investor confidence, most notably strong anti-mining lobbyists in Lima and local protests over the development of new mines.

Climatic History

Historically, the country has been considered a high-risk investment destination due to its political, and to an extent, economic instability. However, the development of a more stable environment following the cessation of armed conflict with the Shining Path has also been a boon to the industry.

The General Mining Law of Peru (Supreme Decree No. 014-92-EM), established in 1992, has provided a strong framework, with legislative decrees No. 662, No. 708 and No. 818 ensuring promotion, incentives and guarantees on both foreign and private investments in the sector. The mid-1990s saw the privatisation of state-owned companies across the economy, including several mining operations, thus opening the door to an era of foreign investment in Peru’s resource-rich Andes.

Planned Investment

According to data from the Ministry of Energy and Mining (Ministerio de Energías y Minas, MINEM), planned medium-term mining investments as of August 2013 totalled $57.4bn, with only $4.13bn (7.17%) of that coming from domestic sources. Copper remains the largest draw for foreign investors, accounting for $36.37bn (63.36%) of the sector’s investment portfolio. Gold, set to receive $7.18bn (12.51%), is followed by iron, which has planned investments of $7.06bn (12.30%). Zinc and silver mining projects are also being developed to a lesser extent, with $820m (1.42%) and $750m (1.31%) destined to each.

Origins & Destinations

China is the largest foreign investor in the sector, accounting for $13.82bn (24.02%) of incoming funds. The Asian giant recently overtook the US as Peru’s largest trading partner, almost entirely thanks to its import of the country’s mineral resources. China is followed by the US at $9.95bn and 17.33%, Canada ($9.66bn, 16.82%), Switzerland ($5.2bn, 9.06%) and Australia ($3.79bn, 6.6%).

Almost half of the investment in the sector is destined for exploration, a crucial component for long-term success in the industry. According to figures from MINEM, more than $26.02bn (45.24%) is earmarked for exploration projects, compared to $19.64bn (34.15%) for projects which have already had their environmental impact assessment (EIA) approved, and $9.33bn (16.21%) for the expansion of existing projects. Indeed, the sector contains some of the largest foreign investment projects in the country, including the currently disputed Minas Conga ($4.8bn), Las Bambas ($4.2bn), Cerro Verde ($3.57bn) and Quellaveco ($3bn).

Challenges

Negotiating with local communities remains one of the largest obstacles for foreign investors. Social conflict continues to affect the sector in some areas as local communities protest the establishment and/or further development of mining activities for a variety of reasons. Foreign companies can have a particularly difficult time without local assistance due to the numerous governance, cultural and linguistic differences found throughout the country.

Misinformation and poor communication often lie at the heart of disputes between mining companies and local communities, an issue MINEM is seeking to address by providing free education and presentations on the benefits of the sector. The industry still has a stigma attached to it as a result of poor environmental practices in the past, a fact that has also brought foreign investment of another kind. Non-governmental organisations and environmental lobbyists, many of which are financed internationally, have become a major force in the sector in terms of shaping public opinion. Other grievances include allegations of government corruption and the lack of infrastructure and security.