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Mining Investment Impact on the
Peruvian Development
Jorge Merino Tafur
Ministry of Energy and Mines of Peru
March 2013
Why invest in Peru?
2
The Peruvian government continues to facilitate
the establishment and operation of businesses
Peru ranks second in the region in the
improvement of business regulations …
… and by 2050, it will be one of the fastest
growing economies in the world
Fastest growing economies
Ranking Country
1 China
2 India
3 Philippines
4 Egypt
5 Malaysia
6 Peru
SOURCE: Doing Business 2013 SOURCE: HSBC estimates / World Bank
3
Peru offers a favorable legal framework to attract
foreign investment
… supported by legal stability agreementsKey economic policy guidelines …
▪ Non-discriminatory treatment: Foreign
investors receive the same treatment as local
investors
▪ Free transfer of capital
▪ Free competition
▪ Guarantee for private property
▪ Freedom to purchase stocks from locals
▪ Freedom to access internal and external credit
▪ Freedom to pay royalties
▪ Network of investments agreements and
member of ICSID1 and MIGA2
▪ Participation in the Investment Committee of
the Organization for Economic Cooperation
and Development (OECD) – it promotes the
implementation of the guidelines for
multinational enterprises
Investors
▪ Stability of the regulations regarding non-
discriminatory treatment
▪ Stability of the income tax regime applicable
to dividends
▪ Stability to use freely the most favorable
exchange rate available in the market
▪ Stability of the free availability and remittance
of foreign currency, dividends and royalties
regime
Receiving companies
▪ Stability of the labor recruitment regimes
▪ Stability of the regimes for the promotion
of exports
▪ Stability of the income tax regime
1 ICSID: “International Centre for Settlement of Investment Disputes”
2 MIGA: "Multinational Investment Guarantee Agency”
Overview of mining in Peru
5
Silver 32
Zinc 31
Tin 31
Lead 41
Gold 61
Mercury 42
Copper 32
Molybdenum 42
Selenium 92
Cadmium 102
Iron ore 175
Phosphate rock 132
Peru is a leader in metallic and non-metallic
minerals
Mineral Production Ranking
Latin America World
SOURCE: MEM; USGS
6
And we are already strong in many areas; for
example, the Lima Stock exchange has attractive
regulations to finance juniors
▪ Currently there
are 39 mining
companies and
17 juniors listed
on the Lima Stock
Exchange (BVL)
▪ The Lima Stock
Exchange is the
only online
market place that
this segment
leading the
private
placement of
shares
7
No se puede mostrar la imagen en este momento.
The mining sector has been the fastest growing
sector and is one of the top GDP contributors
SOURCE: Central Bank of Peru; INEI; IHS; Economy Ministry
1 Cumulative Annual Growth Rate
2 INEI 2007 input matrix (not published yet so no official trend data is available for it) shows that the mining share in the economy is 14,4%
3 Includes refining of non-ferrous metals
5%
63
61%
5%
2001
10%8%
5%
2003
72
60%
12%11%
6%7%
4% 7%
12%12%
2011
181
46%
13%
13%
12%
9%
7%
2009
130
48%
13%
13%
10%
9%
7%
20072
107
47%
14%
13%
12%
9%6%
2005
79
51%
14%
13%
GDP/capita
Thousand
USD
2.9 6.14.53.8
11.8
12.7
13.8
16.2
8.1
CAGR1, %
11.0
2.62.4
GDP nominal prices
Billions USD
22.0
Construction
Transp & Com.
Mining3
Commerce
Manufacturing
Other sectors
The mining sector has grown to more than 20 % OVER THE PAST 12 YEARS, contributing with more than 20 billion Dollars to the GDP in 2011
8
▪ ~30% of economic growth is due to
large investments and increasing
mining production
▪ Additional growth means that the
economy will generate $ 57 billion
GDP more, or in per capita terms,
the mining sector will make the
average Peruvian 10% richer by
20161
Looking forward, mining will continue to be the
growth engine of the economy
Economic growth
6.9
4.7
2016
2.2
2015
6.8
4.6
2.4
4.4
2.2
20142013
6.36.8
4.8
1.5
Explained by other sectors
Explained by mining sector
24 32 32
Share that mining
represents
35
1 $7.800 instead of $7.100
Percentage
SOURCE: Central Bank of Peru; IMF; INEI; Interviews with financial institutions
9
Current mining portfolio investment has reached
its maximum historical values, and represents an
increase from its current production share
+35% CAGR
12,226
2007
24,693
54,610
20122011
53,761
2010
41,951
2009
35,471
2008
Peruvian mining
portfolio/
Worldwide
mining
investment
1.7
+118%
3.7
Peruvian mining
revenue/
Worldwide
mining revenues
Forecast mining portfolio invesment
Evolution ($ Millions)
International share
2011; Percentage
SOURCE: MEM; MEG; Global Mining CapEx Model
35% growth per year
10
6
7
10
10
16
18
22
9China
Switzerland
Japan
Mexico 2
PeruOther
USA
Canada
Australia
Peru receives investors from a very diverse
set of countries
2012
$ Million
China
USA
Canada
Australia
Switzerland
Japan
Mexico
Brazil
South Africa
Peru
UK
Other
12,219
9,800
8,739
5,670
5,200
3,790
3,460
1,638
1,600
1,120
700
744
54,680
SOURCE: MEM
Percentage of total
Investment portfolio by country
The current projects are highly diversified between the various countries.
11
… which will significantly increase Peru’s mining
production
SOURCE: MINEM
Mineral
Production
2016
SilverThousand
fine ounces109,919 130,059
ZincThousand
TMF1,3 1,6
LeadThousand
TMF230 285
GoldThousand
fine ounces5,343 6,347
Production
2011
Copper 1,240 2,768Thousand
TMF
Growth
2011-16
18%
23%
24%
19%
123%
12
10
13
Rest
Iron ore
12
Gold
Copper
64
Copper, gold and iron ore capture 90% of the
investment portfolio, with copper explaining 64%
$ Million
Copper
Gold
Iron ore
Phosphate
Silver
Zinc
Potassium
Polymetallic
34,937
7,302
6,780
1,044
1,026
290
125
3,176
54,680
SOURCE: MEM
Percentage of total
Investment portfolio by mineral
2012
13
0
500
1000
1500
2000
2500
3000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Because of the growth of copper
production in Peru
1991 1994 2003 2012 2016
INVESTMENT PROMOTION
Promotion processes of investment in the mining
sector in the decade of the 90´́́́s has led the
sustainable growth of copper production
TMF x 1000
2 800
Peru mining competitiveness
15
By 2016, Peru will be the second global producer of
copper significantly reducing the gap with Chile
SOURCE: Cochilco; MEM; Project Specific Information
2,8
+100%
0,8
+442%
2016
5,6
2014
5,5
1,6
2011
5,3
1,2
2008
5,3
1,3
2005
5,3
1,0
2002
4,6
ChilePeru
Annual copper production
Million tons
16
Moreover the country is rich in economically
attractive minerals
SOURCE: MEM; USGS; McKinsey Basic Materials Practice
1
1
4
6
8
9
13
23
Tin
Zinc
Lead
Copper
Silver
Phosphate
Iron ore
Gold
1
4
2
3
6
Peruvian Reserves
Global share
Global
rankingCurrent (2012) Expected (2020-2025)
Copper
Gold
Met Coal
Iron ore
Nickel
Silver
Zinc
Uranio
Lead
Potassium
Phosphate
Lithium
Copper
Gold
Met Coal
Nickel
Silver
Zinc
Uranio
Lead
Potassium
Phosphate
Lithium
Iron Ore
Economic
attractivenes
High
Medium
Low
Thermal Coal
Thermal Coal
8Tin
Tin
9
13
17
Currently, more than 90% of copper operations in
Peru are in the first two quartiles of the cost curve
SOURCE: Wood Mackenzie
1 Includes cost to concentrate or cathode, transport, Tc/Rc
NOTE: Normal costing normalized by copper equivalent. Price used USD 362,7 c/lb in 2012
Copper cost curve 2012
600
700
Direct1, indirect cost and taxesc/lb
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 Productionkt
0
100
200
300
400
500
Peru
Rest of world
40 52 2 6
x Peruvian production per
quartile
COPPER EXAMPLE
92% of Peruvian assets are in the first two quartiles of costs
18
300
200
100
0
Productionkt
15,00010,0005,0000
Direct1, indirect cost and taxesc/lb
700
600
500
400
100
200
0
300
400
500
600
700
Direct1, indirect cost and taxesc/lb
5,000 10,000 15,000
Productionkt
0
Moreover, by 2025 the country will continue to
have a competitive position on the cost curve
… while Chile will face higher costs
Peru will have 70% of its expected production in the
first two quartiles of the cost curve …
PeruRest of World
x Percentage of Peruvian
production in each quartile
20 30 24 26
ChileRest of World
1 Includes cost to concentrate or cathode, transport, Tc/Rc
NOTE: Normal costing normalized by copper equivalent. Price used USD 300 c/lb in 2025
SOURCE: Wood Mackenzie
1282447
2025 2025
COPPER EXAMPLE
Chile will have the half
19
Specifically, in energy Peru is competitive and no
bottlenecks are foreseen in the near future
SOURCE: Wood Mackenzie; MEM; BBVA; COES; SNMPE
NOTE: Supply takes into consideration only new supply from hydroelectric and thermic stations, not solar nor eolic ones. Demand includes all new announced mining
projects
1 Difference between total installed capacity and maximum instant energy supply is due to potential losses related with lack of inputs (e.g., water), and transmission
losses
11.0
8.3
2015
9.4
7.0
2013
8.4
6.3
2017
Instant supply
Total Installed Capacity1
Demand
Energy supply and demand
GW
ENERGY EXAMPLE
Energy cost 2012
c/kWh
6.4
EEUU
Ø 10
Zambia
Peru 8.1
Canada 8.2
China 8.3
Mongolia 9.0
Argentina 10.4
Australia 12.7
Polonia 12.9
Chile 15.2
6.6
20
4.9 times the annual budget
More than 5.100 Km of roads
17.1 times the annual budget
Annual Education budget could
be increased in 36%
Construction of 74 hospitals
11.6 times the annual budget
US$ 2,000Million in additional
fiscal revenue1
1 Average price of copper 2013 of the main Investment Banks – Bloomberg assumed: $ 8,000 /ton
And mining brings a virtuous development
cycle resulting in social inclusion
1.5 million additional
yearly production of TM
Copper by 2016
or
or
or
or
or
Country development based on rational use of natural resources
22
The mining industry in Peru is generating an emergingindustry through an associative model with a high gradedevelopment in training and technological innovation at acompetitive level.
Mining is not just an extractive industry; the 12 percent ofthe Peru’s GDP in 2011 gives proof to this. It is the thrivingforce that will pull us along with the oil and gas industryenvisioning the development for the following decades.
Peru has achieved a great wealth through the miningindustry with rationalized exploitation and plans to establishthree geographic zones for additional industry development.
Let`s strengthen the following aspects:
23Source: PROINVERSION
ECUADOR
COLOMBIA
BRAZIL
NORTHERN MACRO-REGIONTERRITORY DEVELOPMENT
BAYOVAR
PORT
Copper Projects
Silver ProjectsGold Projects
Iron Projects
Hydropower StationPACIFIC OCEAN
NORTHERN IIRSA
CAJAMARCA -PIURA TRAIN
C.H. RENTEMA
1525 MW
C.H. CUMBA 4
825 MW
C.H. MANSERICHE
7550 MW
C.H. CHADIN 2
600 MW
C.H. BALSAS
915 MW
BAYOVAR PROJECT
• FOSFATOS
• DIATOMITAS
• SALMUERAS
• CALCAREOS
Railroad
COPPER-GOLD PROJECTS
FOR US$ 20 000 Millon
24
CENTRAL MACRO-REGIONTERRITORY DEVELOPMENT
Copper Projects
Silver Projects
Gold Projects
Iron ProjectsLIQUEFACTION PLANT
LA OROYA
METALLURGICAL
COMPLEX
CENTRAL IIRSA
PERU- BRAZIL
TRANSCONTINENTAL RAILROAD
BRAZIL
Source: PROINVERSION
CALLAO PORT
LA OROYA
25Source: PROINVERSION
Copper Projects
Silver Projects
Gold Projects
Iron Projects
SOUTHERN MACRO-REGIONTERRITORY DEVELOPMENT
FRACTIONATION
PLANT
BOLIVIA
CHILE
PACIFIC OCEAN
BRAZIL
INTER-OCEANIC
HIGHWAY
CAMISEA
MATARANI PORT
MARCONA PORT
GAS PIPELINE
Gas pipeline
Camisea Gas pipeline
Social Impact
27
INVESTOR
COMMUNITY STATEMINING
SUSTAINABLE DEVELOPMENT
PROJECT Sustainable
Development
The State accompanies
the process from the
begining
NEW MINING RELATIONSHIP POLICY
PRIORITY WATER
28
• TRUST
• SOCIAL FUND
• SOCIAL PEACE
• WHILE OPERATING
PROFIT
• INFRASTRUCTURE
• EMPLOYMENT
• TRAINING
COMMUNICATION AND CONTINUOUS PRESENCE IN THE AREA OF INFLUENCE OF PROJECTS
EXISTENCE AND
INTEGRATION
INTO COMMUNITYHarmonious and
balanced
Participating
communities, local
governments and the
State
COMMUNITY
STATE
Social responsibility strategy before mining exploitation
Awareness
Social climate for investment
DEVELOPMENT
ROUNDTABLE
SUSTAINABLE
DEVELOPMENT
29
The National government is working on the most critical
regulatory aspects today
▪ Regulating the 2011 Prior Consultation Law to eliminate
uncertainty and guarantee smooth implementation of
projects
▪ Securing the right economic and technical resources for
SENACE, the new agency that will process environmental
studies of detail.
▪We would like to strengthen the ecological and economic
zoning to convert it into a growth opportunity
While we recognize the recent decline in international
institutional rankings, we are taking concrete actions to
strengthen our position
30
Peruvian Mining contributes to sustainable development of all regions of Peru
SUSTAINABLE MINING IN PERU
Private investment opportunities
in Energy
32
Portfolio of hydrocarbon concession projects
for 2013
Southern region gas pipeline Called 2,431 3Q 2013
Southern region energy node To be called 1,200 2013
Supply System of LPG
for Lima and CallaoCalled 260 3Q 2013
Supply system of LNG
for domestic marketCalled 252 4Q 2013
Mass use of natural
gas nationwideCalled 180 3Q 2013
4,323Total
1
2
3
4
5
Project Current statusEstimated
investment
($ Million)
Planned
award date
33
Southern region gas pipeline1
CALLED
▪ Location: Cusco, Arequipa and
Moquegua
▪ Description: Concession to
design, finance, build, operate
and maintain a natural gas
distribution system
▪ Estimated Investment: US$
2431 M + IGV
▪ Type of concession: Self-
sustained
▪ Estimated award date: 3Q
2013
34
Southern region energy node2 TO BE CALLED
▪ Location: Moquegua
▪ Description: Concession to design,
finance, build, operate and maintain
thermal plants using natural gas
from Camisea to generate electricity
(900MW) for regional users and
export purposes (1,200 MW)
▪ Estimated Investment: US$ 1200 M
▪ Type of concession: Self-sustained
▪ Current status: Promotion plan was
approved
▪ Estimated award date: 2013
TO BE CALLED
35
Supply system of LPG for Lima and El Callao3 CALLED
▪ Location: Runs from Ica region to El
Callao (Lima) port
▪ Description: Concession to design,
finance, build, operate, and maintain
an LPG transport system from the
producer facilities (Pisco) to El Callao
(Lima)port
▪ Estimated investment: US$ 260 M
▪ Type of concession: Self- sustained
▪ Competition factor: Lowest cost of
transport
▪ Concession term: 20 years plus
construction period (28 months)
▪ Current status: Second version of
contract under elaboration
▪ Estimated award date: 3Q 2013
CALLED
36
Mass use of natural gas 5 CALLED
▪▪ Location: 11 cities to be supplied under
two concessions;
– Southern region - Arequipa,
Moquegua, Ilo and Tacna
– Northern region - Chimbote, Trujillo,
Huaraz, Cajamarca, Chiclayo,
Lambayeque and Pacasmayo
▪ Description: Distribution system of
natural gas (transport, regasification at
each city, supply to final users)
▪ Estimated investment: US$ 180 M
▪ Type of concession: Self-sustained
▪ Competition factor: Largest number of
users connected
▪ Concession term: 20 years
▪ Current status: Second contract version
to be published in March 2013
▪ Estimated award date: 3Q 2013
CALLED
37
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