Several planned large-scale copper projects could double production

At a time when miners around the world are pulling back capital expenditures, which is in turn limiting production growth, investment is pouring into Peru and fuelling what may become a copper boom. Several large-scale copper projects – often called megaproyectos in Peru – are due to begin production between 2015 and 2017. These projects have the potential to transform the industry and greatly impact the Peruvian economy by roughly doubling domestic copper production.

The scenario of 100% production growth is an optimistic one, but it is feasible. Projects accounting for more than 2m tonnes per year of additional copper production are in the pipeline, and Peru’s copper output in 2013 was slightly less than 1.4m tonnes. While it is unlikely that all of these projects will come to fruition or meet their targets, approximately 1.4m tonnes of the planned production appears likely.

Chinese Investment

The influx of investment in copper is thanks largely to Chinese investors. As the world’s largest consumer of copper – accounting for almost half the global market – and among the primary consumers of other materials such as iron ore and zinc, China has sought to acquire base metal resources around the world to secure its supply. Peru has become a key target of Chinese acquisitions and exploration, and today more money enters Peruvian mining from China than from the US and Canada combined.

Las Bambas

The biggest of the Chinese-backed projects is Las Bambas. Set to be one of the world’s top three copper mines, Las Bambas is expected to produce 450,000 tonnes of copper per year once it achieves peak production. As of mid-2014 the mine had 950m tonnes of ore reserves at an average grade of 0.73% copper and an estimated mine life of 23 years.

Las Bambas was developed by Glencore, the Swiss mining giant. However, it is now under Chinese ownership. Glencore sold Las Bambas to a Chinese partnership including MMG, Guoxin International Investment and state-owned CITIC Metal for $7bn in 2014. The sale of the mine was completed in order to meet a requirement stemming from Glencore’s $29bn acquisition of Xstrata, an Anglo-Swiss miner with offices and significant business interests in China. Chinese regulators had conditioned their approval of the sale on Glencore’s divestment of certain copper assets, as the regulators argued that without the divestments Glencore could have manipulated the global copper price. Glencore subsequently used the cash from the Las Bambas sale to pay down debt and distribute cash to investors.

In October 2014 MMG announced that capital costs to develop the mine had risen to between $2.7bn and $3.2bn, up from $2.4bn estimated by Glencore in 2013.

MMG also pushed back the estimated start date for commercial production to the first quarter of 2016 from previous projections that production would begin in 2015. Additionally, the company announced the discovery of several exploitable portions of the concession that had not been thought to be commercially useful at the time of the purchase from Glencore.

Toromocho

The most demanding of the large copper projects is Toromocho, developed by Chinalco, the Chinese state-owned mining company. With peak output estimated at between 270,000 and 300,000 tonnes per year, Toromocho could have a significant impact on Peruvian copper production, as well as Chinalco’s balance sheet. But, so far, it has been unprofitable. As of late 2014 Chinalco had invested $4.8bn in the project, but had experienced a one-month setback in March 2014 soon after beginning production.

Some of the causes of the mine’s setbacks are clear.

For example, in December 2013 the mine began operating only to be shut down several months later after an environmental inspection. The regulator found that Chinalco’s facilities were dumping acidic effluent into nearby lakes and ordered the plant to immediately cease operations until the problem was fixed. At the time, Chinalco said the mine would return to operations by the third quarter of 2014.

The long holdups have led to a great deal of speculation in Peru and in the international press about the other issues possibly facing Toromocho and the viability of the project. The foremost concern is the high level of arsenic that likely pollutes Toromocho’s ore, as arsenic content has sometimes made other potential mining sites in central Peru economically unviable. Miners typically have not invested in concessions with these characteristics; however after years of exploiting cleaner mines depleting their reserves, companies have looked seriously at opportunities that were once considered marginal. Today, the limits that many foundries place on the acceptable level of arsenic in ore mean that Toromocho’s production would likely be refused. Héctor Collantes, a mining analyst at Credicorp Capital, told OBG that the significance of high arsenic levels at Toromocho will depend on whether or not the global mining industry adapts to an environment in which higher arsenic content is the norm. “The optimists say that since it appears to be a change in the industry, then soon the refineries in China and elsewhere will adapt and it will not be a problem,” he said. If this does not occur, then mines producing “dirty” copper concentrate will be forced to continue to sell their production to middlemen who mix it with cleaner copper from other mines. This practice decreases margins and could threaten Toromocho’s ability to perform as originally expected.

Smaller Chinese Projects

Another Chinese-backed project is El Galeno, a copper, gold and silver project owned by China Minmetals and Jiangxi, both Chinese state companies. El Galeno is a $2.5bn project that is expected to produce as much as 200,000 tonnes of copper per year. Río Blanco is a copper and molybdenum project controlled by Zijin Mining, a publicly owned Chinese corporation. This $1.5bn project has reserves of 1.3bn tonnes of copper and was expected to begin production of 200,000 tonnes of copper per year in 2011. However, the project has been mired in conflicts, sometimes violent, with the local community. In 2011 Monterrico, which began the Río Blanco project and subsequently sold it to Zijin, agreed to pay settlements to 33 Peruvians who had protested against the mine’s construction in 2005 and claimed that they were tortured by the police in retaliation. In 2009 at least two Río Blanco workers died when the site was attacked by members of local communities. The project has been stalled for several years and no timeline exists for the beginning of operations.

Other Projects

In addition to the Chinese projects, several other large-scale projects are under way, backed by American, Canadian, British and Australian capital. The biggest of these is Río Tinto’s La Granja project, which has 2.8bn tonnes of reserves. Estimates of the mine’s production have ranged from 300,000 to 500,000 tonnes of copper per year.

Already one of the biggest mines in the country, Cerro Verde, controlled by the US-based Freeport-McMoRan, is in the advanced stages of a significant expansion. The project, which will require a total investment of $4.4bn, will add between 270,000 and 300,000 tonnes of copper per year to the mine’s 2013 production of 261,000 tonnes. The expanded mine is due to begin operating in 2015, with commercial output expected to come in 2016.

HudBay Minerals, a Canadian company, will invest a total of between $1.5bn and $2.bn in its Constancia Mine in Cusco. Of the large-scale projects currently being developed, it is likely to be the first to come on-line with commercial production scheduled to begin in 2015. Target production at the mine is 100,000 tonnes of copper per year, with lower levels of production expected in its first year of operations.

As Peru’s “mega” projects advance towards completion, the mining sector and the national economy are in something of a holding pattern. Both mining and GDP growth slowed in 2014 and only modest recoveries are expected in 2015. However, if a majority of these planned projects successfully enter production, and 1m tonnes or more are added to annual copper production, Peru and the mining sector could return to the levels of growth that turned the country’s economy into one of the most dynamic in the region in the last decade.