Introduction: Prices and Policy Dovetail

Over the last decade, Peru has been among the most important destinations in Latin America for mining investment, and mineral production has grown significantly. Big challenges in the last few years have seen spending drop considerably - primarily the exogenous factor of weak metal prices - while cases of intractable social conflict persist at some mining projects. Over the last several months, the country has also seen unfold its worst political crisis in years, culminating in the departure of the President.

But presently, Peru is enjoying a period of relative political stability as new President Martín Vizcarra and his cabinet, which took office in March, mend fences with congress. In May, congress authorized special legislative powers for Vizcarra, as his government seeks to accelerate work on a 26-billion-sol (US$8 billion) flooding reconstruction program after the El Niño phenomenon devastated the northern coast last year.

The vote underscores improved relations between the executive and legislative branches since Vizcarra replaced Pedro Pablo Kuczynski (PPK), who was forced to resign ahead of an impeachment vote on his alleged ties to the scandal-plagued Brazilian construction firm Odebrecht.

The government is struggling to accelerate US$25 billion in delayed public-private partnership (PPP) concessions and is seeking to speed up the legal conformity of state land for infrastructure projects and hone the legal framework for the tax swap infrastructure program known as obras por impuestos. The largest investor in this program is Banco de Crédito del Perú (BCP), followed by mining companies Antamina and Southern Copper

"The economic uncertainty due to all these changes that have occurred in political circles has delayed investments," Miguel Pancorvo, CEO of Grupo Sura said in a recent interview. "We're gradually seeing a recovery in infrastructure projects that should be rebooted. We should see more of a push towards this in the second half, and private investment will come hand-in-hand with public investment."

President Martín Vizcarra. Source: AFP

For mining, indicators show growing confidence in Peru as an investment destination. The country ranked first in BNamericas' Mining Survey 2018 as the best mining investment jurisdiction in Latin America with 53% of responses, overtaking Chile. Just 9% said they agreed that political or legal uncertainty would deter investment in Peru this year, by far the smallest percentage in the survey. However, 73% of respondents said they believed social risk would deter mining investment in Peru, the highest rate of all the major Latin American countries. In that sense, the challenge is clear: investors are convinced; the task is to convince communities.

In May, the ombudsman expressed concern about an escalation in the number of social conflicts, with 32 new cases to date in 2018, across 17 regions. "Many relate to complaints about corruption and mismanagement on the part of local authorities, and their failure to deliver basic services and public works," says Eileen Gavin, Peru analyst at global consulting firm Verisk Maplecroft. "There has also been a rise in unrest in those regions affected by the severe floods in 2017, where reconstruction works have been painfully slow," she adds.

Political factors are also at play as the campaign heats up for the October municipal and regional elections. "The main risks are indeed social and political, mainly because of the upcoming national elections," says Ricardo Labó, former deputy minister for mining and founder of consultancy Labó Mining Strategies.

The government has worked tirelessly over the past couple of years to prepare the legal, social and political conditions to facilitate projects. The recent announcement of a US$1.3 billion investment by Chinalco in the Toromocho expansion is mainly due to the resolution of a seven-year-long land issue by the PPK government, according to Labó.

Like PPK, Vizcarra has a pro-mining mindset and has announced policy changes "to facilitate a smoother and more efficient investment process," says Gavin. However, his leadership ability still has to be tested. Vizcarra has pledged a strong focus on regional development to address the root causes of the historical tensions between central government, local communities and the extractives sector. Echoing this, energy and mines minister (MEM) Francisco Ismodes has indicated a push for better rural electrification.

Antamina mine. Source: SNMPE

In 2017, Peru's annual mining investment rose for the first time since 2013, registering an 18% increase, but at US$3.9bn remained painfully below the US$8.9bn peak of four years earlier, figures from the energy and mines ministry (MEM) show. Of course, Peru's mining industry had been impacted by the same factors that hit miners globally, the biggest one being depressed metal prices.

In that sense, a fundamental factor driving recent advances in Peru's mining projects has been markets. The rise in metal prices over the last year or two has spurred investment decisions; for construction-ready projects, the wait is essentially over. The risk now moves to earlier stage projects and ones that have not been able to resolve social conflicts.

"Results have been very favorable for companies this year. After years of contraction, we see companies generating investments and seeking efficiency," says Pancorvo. "This has been accompanied by a major increase in metals prices last year and that tendency is continuing this year, so the outlook is fairly positive."

(Cover photo: Buenaventura's La Zanja mine. Source: Stracon)

Figure: Mining Investment

Figure: Copper Prices


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