José Picasso, Chairman, Volcan Compañía Minera: Interview

Interview: José Picasso

How much is Peru dependent on Chinese demand for minerals? Is boosting added value the answer?

JOSÉ PICASSO: In the short and medium term, dependence on Asian markets will continue and there is very little that Peru can do about it. China is the biggest importer of copper, zinc and lead, and with projected growth of at least 7% over the next few years, Chinese demand for minerals will continue. Peru is not alone, as this question can be asked of all major mining countries, including Canada, Chile and Australia. A possible solution to this dependency is indeed generating locally added value. Nowadays, 75% of the minerals mined in the country are exported as concentrates and only 25% are refined. We have to build mineral refineries across the country, in order to export processed metal instead of ore concentrates. This would help to improve Peru’s trade balance, which is estimated to be negative for 2014. There are only two working refineries, Southern Copper’s refinery in Ilo that processes copper and another in Cajamarquilla that can only process zinc. There is a third refinery in La Oroya that is capable of handling different kinds of minerals, but it is not operational. It is very difficult to develop new refineries, as they involve significant investments. The return is estimated over a very long term, and for this there needs to be very high political and legal stability. Even with all the right incentives, it would still be difficult to compete with China due to the differences in labour and financial laws in both countries. This will continue as long as the China-Peru free trade agreement is in place.

Who is best suited to explain planned new developments to local communities?

PICASSO: The problem is more related to education than communication. There are too many people that do not grasp the benefits that accompany significant investments in their region. This is not limited to mining but also industry, tourism or hydrocarbons. These less educated communities are being manipulated by agitators and non-governmental organisations, and they either reject any contact with the private sector, or make unreasonable demands. This situation has also led to strikes at big mines, such as Antamina and Volcan, taking a toll on the country’s image. This is making Peru lose competitiveness in the sector and companies are reconsidering starting projects here. The government needs to exert its authority to ensure the viability of projects that are of national interest.

Permit delays can take as long as two years. How costly is this to business?

PICASSO: The revised 2014 GDP growth forecast, from 5.5% to 3%, shows the country cannot afford the level of bureaucracy in developing mining projects. Production in 2013 was below estimates forecast by the Peruvian Economic Institute in 2011, as efforts to raise production were incomplete. Copper production was 1.3m tonnes, compared to the estimated 3.3m tonnes; zinc was 1.3m tonnes, compared to the expected 1.6m tonnes; and silver reached 110m ounces, as opposed to 126m. Peru’s environmental requirements are higher than those of more developed countries, like Canada or Chile. Just getting an exploration permit can take two years. Las Bambas, a mine recently acquired by a Chinese consortium, has had to revise its production start date from June 2015 to end-2016, and increase its investment by $3.2bn. Announcements such as the one in Cajamarca, where the regional president has stated that mining projects with more than $5bn investment would not be carried out, have an overall negative impact on Peru’s international image.

There is also the question of public servants not having the necessary training and resources to handle all the projects that are being presented, combined with a lack of willingness to sign anything in case they are accused of corruption. Unless the central government is willing to get more involved and reduce bureaucracy, it will be difficult for even a third of the $55bn pipeline of mining projects to come through.