New Factors in Peru's Mining Boom

Peru is one of the world's mining powerhouses. It holds 13% of the world's copper reserves, 4% of gold, 22% of silver, 7.6% of zinc, 9% of lead and 6% of tin reserves. But right now UK coverage of Peruvian mining is dominated by protests, with billions of dollars worth of projects being delayed or cancelled. The reasons for these protests are complex. Sometimes they are because of genuine environmental concerns. Sometimes they are being propelled by the shadowy forces of illegal miners, drug lords and contraband smugglers.

But sometimes they are because the mining company has not got the approval of the local community. And that last factor is one that investors can control. Indeed there is a London-listed miner whose good relations with the local community should help it develop a transformative new project. Getting on with the local community can make the difference between a successful project and a failed one. Peru’s president Ollanta Humala came to power on the promise that he would share the spoils of the country’s economic boom with its rural majority. So far that hasn’t happened.

Lots of complicating factors, such as inefficient or corrupt local authorities, have impeded Humala’s attempts to boost investment in remote areas. As a result the rural communities feel betrayed and are determined to stop projects that they feel are violating their rights. At times the protests, which involve thousands of people, have got so bad that Humala has declared martial law to take the extraordinary measures needed to quell them.

But these problems don't mean that there are not great opportunities in Peru's mining sector.

A long history of exploitation

For centuries, tales of Peruvian gold have enticed European investors. In the 16th century, reports of the wealth in the then Inca Empire lured Spanish conquistador Francisco Pizarro to what is now modern-day Peru. His first two attempts failed, but eventually the persistent Pizarro managed to establish a toehold in the country. Like modern-day international investors, Pizarro was keen to profit from the country’s natural resources – albeit through slightly different means.

First, he captured the Inca emperor, Atahualpa, and demanded a roomful of gold as a ransom. Then, once he had received the gold, he killed the emperor anyway – the first of many treacherous deals that would make local people wary of foreigners that come to exploit the country’s natural resources. In the centuries following Pizarro’s arrival, Europeans would develop different ways to exploit Peru’s gold. When the indigenous mineworkers were almost wiped out by European diseases, the Spanish brought in slaves from Africa and following that, from China. In the 19th century, slavery was abolished in Peru, yet working conditions and pay meant that life for many miners was not far off it. In short, the post-Inca history of Peruvian mining is one of exploitation. A story where the foreigners, their descendents or international companies pushed the unwilling local population to unlock the country’s incredible mineral reserves.

Nowadays, a lot of that has changed. Working conditions and pay in legal mines are good, making it a sought-after job. Yet, the history of opposition between international bosses and local workers and communities remains. After all, Peru’s mining projects take place in the poorest, most remote parts of the country; places where the community’s memory of the 500-years of oppression haven’t yet been replaced by the fruits of the country’s two-decade-old economic boom.

Investing in miners that communities trust

But mining projects in Peru don’t have to end that way. In fact, last week LatAm INVESTOR interviewed the country manager and founding partner of a London-listed Peruvian miner who reckons that his firm has found a formula to avoid these types of conflicts on their projects. Diego Benavides founded Minera IRL (Aim: MIRL) in 2000. Together with his Australian partner, Courtney Chamberlain, they sorted through a range of projects before securing exploration rights to a “small, but exciting” 140,000-ounce gold deposit high in the Peruvian Andes.

By 2007, they had a bankable feasibility study and tapped British capital by listing it on Aim. In the last decade, they’ve taken the mine from planning to production and churned out hundreds of thousands of ounces of gold.

Buoyed by their success, the pair led the firm on an ambitious expansion plan. They spent $11m on a fellow Aim-listed gold miner, which gave them the rights to a 360,000-ounce gold deposit in Argentina and a further 260,000 hectares of exploration rights. They also – and this is the bit that should interest readers – bought the rights to a one million-ounce gold deposit in the south of Peru.

All of this expansion, coupled with a slide in gold prices in the last year, seems to have worried investors with Minera’s share price tanking by around 90% since its April 2011 peak. But that could be about to change…

The key to the transformation will be the Ollachea project in Peru. If everything goes to plan, the company is due to get financing and construction permits this summer and then produce its first gold in 2016.

Why the optimism? Well, for starters, the project looks likely to get financing. A lot of gold investors have been put off by the yellow metal’s slide, but with it currently trading at $1,250 an ounce, Minera’s estimated production cost of less than $600 per ounce looks pretty safe. I also fancy construction to go without a hitch. After all, this same management team have a good track record. But the real reason for the optimism is the community relations.

Minera’s solution: Make the locals shareholders

When the company bought the exploration rights to the area from Rio Tinto, it didn’t just plough straight into work. Instead, it spent about 15 months talking with the Ollachea community, to win their consent too. Permission was eventually given after Minera agreed to launch all sorts of health and education programmes. Then, once a feasibility study had confirmed that there was a giant mining project to be had, Minera approached the community to negotiate another contract.

This 30-year contract had another slew of programmes, but the truly radical part was that it gave the community a 5% shareholding in the subsidiary that will operate the project. The only catch was that the community only gets its shareholding once the mine starts production. “Now they can’t wait for us to begin work soon enough”, enthuses Diego Benavides. “While other communities are trying to stop projects, this community wants us to go even quicker.” In fact, he continues, the only ones not happy with the deal were the other mining companies. “Some of them were angry. They felt that by doing this, I was undermining them in future negotiations with communities.”

Time will tell if the approach pays off.