Ms. Denisse Becerra (LatAm Confidential)

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SEPTEMBER 2014

3.0 RESOURCES AND TRADE

Relatively cheap energy and high-quality deposits are significant comparative advantages for Peru’s mining sector, and exports of gold, copper and other metals now account for 60% of trade revenues. Lower prices have slowed the pace of growth this year, but the government is confident about the future, with planned

investment in the sector of $19bn over the next two years and about $60bn over the next six years.

However, extensive social conflicts, often involving small indigenous communities, surrounding issues such as water and land rights continue to complicate the development of Peru’s mining sector. In July alone, the state’s human rights ombudsman’s office, which monitors these disputes, recorded 164 active conflicts of which 76 are related to mining.

Many projects have been affected. The most notable is Minas Conga, a $4.8bn copper project that would extend Yanacocha, the joint venture between the US’s Newmont Mining (NEM:NYSE), Peru’s Buenaventura (BVN:PE) and the World Bank’s IFC. Conga has been at a standstill since protests erupted in November 2011. The project, in the Cajamarca region, has become something of a cause célèbre for Gregorio Santos, the left-wing regional president and vehement opponent of the project.

PERUVIAN GOVERNMENTAL STRUCTURE EMPOWERS REGIONAL PRESIDENTSCajamarca is far from being the only region where mining faces political obstacles. Other regional presidents or candidates have got involved in anti-mining protests, frequently using such controversies to heighten their profile and generate political support. These conflicts highlight a broader weakness in the local government system introduced in Peru in 2002 as a means to strengthen local democracy and encourage greater participation.

Regional presidents have considerable power, largely because they control regional budgets fed by taxes from the mining companies. Under the canon mechanism, 50% of mining taxes are allocated to local administrations to finance development and infrastructure projects. However, much of the money is often diverted for other – sometimes illicit – purposes. It has been hard to hold local politicians to account.

Peruvian political parties are weak and have a minimal presence in these often thinly populated regions. Nepotism and clientelism are rife. No fewer than 18 of the 25 regional presidents have been investigated on corruption allegations. Four regional presidents have been arrested, three of whom (the presidents of Ancash, Cajamarca and Pasco – some

» Regional elections due to take place on October 5 could increase the risk of delays to mining projects, slowing down sector growth.

» Regional presidents enjoy significant power under constitutional changes introduced in 2002 and have already blocked the development of projects worth about $8bn. Local leaders have often sided with their communities against mining companies, or exploited frictions as a way to generate political support.

» LatAm Confidential visited four mining regions – Apurimac, Cajamarca, Cusco and Puno – and assessed local political conditions elsewhere in Peru. Although the picture is in no way uniformly negative, we believe there is a risk that “anti-system” candidates could retain office in Cajamarca and gain ground in Cusco, Moquegua and Puno.

PERU: ASSESSING POLITICAL RISK IN THE MINING SECTOR


SEPTEMBER 2014

RESOURCES AND TRADE

PERU: ASSESSING POLITICAL RISK IN THE MINING SECTOR3.1

of Peru’s most significant mining regions) are currently in jail. An arrest warrant has been issued twice against a fifth.

REGULATORY STREAMLINING RAISES TENSIONSAgainst this backdrop, in early July congress passed legislation (Law 30230) designed to streamline the bureaucratic processes that slow mining development. In addition to deregulation measures, the law streamlined environmental norms (reducing the time allowed for approval of permits to 45 days) and eased health and safety provisions. While applauded by business groups, the measures have been opposed by trade unions and could further complicate relations with anxious rural communities, heightening tensions ahead of the regional presidential elections scheduled for October 5.

Another measure designed to smooth mining development could have unwanted side effects. The government is pushing for the expansion of a programme that allows companies to invest a percentage of their tax obligations in infrastructure projects. The programme generated PEN354m ($126m) of investment in 1H14. Mining companies have made extensive use of the programme, with Southern Copper Corporation (SCCO:NYSE) and four other mining companies among the ten most active adopters of the scheme.

However, the programme cuts into district and regional government revenues that would have been due to them through the canon mechanism, aggravating shortfalls that have resulted from declines in output. Transfers to regions with mining operations have fallen to $1.1bn for 2014 – transfers reflect taxes paid in the previous year – down 23.2% from last year, and this figure is likely to decline again in 2015 on continued falls in production this year. This could further increase tensions ahead of the regional elections.

REGIONAL ELECTION OUTLOOK VARIABLEAssessing the outcome of the election is complicated. The weakness of local parties means that the field of candidates in many of the regional races is very wide: 15 candidates are competing in Arequipa, for example. In addition, with only a month-and-a-half to go before the elections, many would-be candidates are still to be formally registered by the electoral authority.

In four regions – Cajamarca, Cusco, Moquegua and Puno – political leaders who are opposed outright to mining projects are running for office and enjoy significant levels of support, especially in rural areas. We believe there is a chance that some of these candidates could win office, with several very large projects potentially affected (see map).

KEY REGIONS PRESENTING POLITICAL RISKIn Cajamarca, Gregorio Santos, the regional president arrested and imprisoned earlier this year, is running for re-election (the electoral law only bars candidates who have actually been convicted of a crime). Mr Santos is a committed opponent of mining (he once told our local researcher that the province of Cajamarca could happily survive on revenues from coffee, grapes and cacao). He has perhaps predictably claimed that his arrest and prosecution has been orchestrated by the mining companies and the Ollanta Humala government.

But on our visit to this conflictive region we found that the controversy does seem to have undermined support for him even in the eastern province of Celendín, where Minas Conga is located. In local polls, he has been running second with about 17% of the potential vote, compared with the 30% he won in 2011. Community leaders were, however, still antagonistic towards the Conga project, largely due to fears about potential water contamination.

In the district of Querocoto – also within the Cajamarca region, where the La Granja copper project is being developed by Rio Tinto (RIO:ASX) – the mood was more optimistic. Rio Tinto has begun to work with the community and has formed a trust (the La Granja Social Fund) that sponsors development projects for local entrepreneurs.

In Cusco, Oscar Mollohuanca – the former mayor of Espinar, who led anti-mining protests there in May 2012 – is in the race to replace incumbent René Concha, who is not running. Mr Mollohuanca was briefly jailed for his role in the protest against Glencore Xstrata’s (GLEN:LSE) Tintaya-Antapaccay project that left two people dead. Another candidate polling well in Cusco is Benicio Ríos Ocsa, who heads a centre-left regional

PERU’S MINING RADICALS

CAJAMARCA: Gregorio Santos, jailed regional leader and anti-mining activist, running for office as regional president

CUSCO: Oscar Mollohuanca, former mayor of Espinar, led anti-mining protests in May 2012, running for office. Benicio Ríos Ocsa: centre-left politician linked to informal miners’ organisation, also polling strongly

MOQUEGUA: Zenón Cuevas Pare, opposes development of Quellaveco, and has led protests against mining. Runner-up to current President Martín Vizcarra in 2011

PUNO: Walter Aduviri, leader of anti-Santa Ana protests, a strong early runner. Popular in rural areas, but weak in urban centres


SEPTEMBER 2014

RESOURCES AND TRADE3.2 PERU: ASSESSING POLITICAL

RISK IN THE MINING SECTOR

Sources: Peruvian ministry of mines and energy, LatAm Confidential

ANCASHHilarion / Compañía Minera Milpo Magistral / Compañía Minera Milpo

Racaycocha / Minera Peñoles de Peru

San Luis / Reliant Ventures

CAJAMARCA

Minas Conga / Newmont, BuenaventuraLa Granja / Rio Tinto

Galeno / Lumina

Michiquillay / Anglo American

AREQUIPACercana / Junefield GroupCerro Verde / Freeport McMoRanPampa de Pongo / Jinzhao Mining Peru

Tambomayo / CIA de Minas Buenaventura

Tia Maria / SPCCZafranal / Minera AQM Copper Peru

APURIMACAnama / AnabiHaquira / Minera Antares PeruHierro Apurimac / Apurimac FerrumLas Bambas / MinmetalsLos Chancas / SPCC

CUSCO

Accha / Exploraciones Collasuyo

Cerro Copane / Minera Cuervo

Constancia / Hudbay Minerals

Crespo / Compañía Minera Ares

Quechua / Compañía Minera Quechua

PUNOCorani / Bear CreekExplotacion Bofedal II / MinsurOllachea / Compañía Minera Kuri KulluSanta Ana / Bear Creek

MOQUEGUAChucapaca / Canteras del HallazgoFundicion / Southern Peru Copper Corp.Los Calatos / Hampton Mining PeruQuellaveco / Anglo AmericanRef. De Ilo / Southern Peru Copper Corp.

Lima

PIURAFosfatos / Fosfatos del Pacifico

Project / CompanyKey:

Total project investment ($m)

Rio Blanco / Rio Blanco CopperSalmueras de Sechura / Americas Potash Peru

PASCOQuicay II / Compañía Minera Centauro

LAMBAYEQUECañariaco / Cañariaco Copper Peru

TACNAToquepala / Southern Peru Copper Corp.

500

JUNÍNToromocho / Minera Chinalco Peru

1,500

125

1,599

470

3,000

40

TBD

750

346

4,820

4,800

1,000

2,500

4,800

TBD

1,790

110

490

165

170

71

4,600

3,280

130

1,400

1,122

1,050

1,200

TBD

1,320

3,300

TBD

2,800

2,300

6,031

1,560

750

TBD TBD

TBD TBD

Antamina / BHP Billiton, Glencore Xtrata, TeckTBD TBD TBD

500

Copper Gold Iron Lead Molybdenum Phosphates Potassium Silver Tin Zinc

Peru’s mining battlegrounds and four regions to watch

movement which has links to an influential organisation of informal miners. Informal miners – usually organised as independents or co-operatives that lack government permits and do not comply with environmental, labour or tax laws – sometimes oppose big projects. A representative told us that the union enjoyed strong political influence in rural areas in both Cusco and Puno.


SEPTEMBER 2014

RESOURCES AND TRADE3.3 PERU: ASSESSING POLITICAL

RISK IN THE MINING SECTOR

In Moquegua, where Anglo American (AAL:LSE) is seeking to launch the $3.3bn Quellaveco copper project, Zenón Cuevas is making a second run for regional president. He came in second in 2011 to Martín Vizcarra, who is not running for re-election. Mr Cuevas led a major protest against mining and the canon mechanism in 2008. He opposes the Quellaveco development. With the company still undecided about how to proceed, it is possible that victory by Mr Cuevas could well lead them to abandon the project.

In Puno, another region where informal miners’ organisations wield influence, Walter Aduviri is polling 10% of votes, making him the early front-runner in a crowded field. Like Mr Santos, Mr Aduviri is a hard-line opponent of mining development (again basing his economic strategy on agriculture and tourism). He led the 2011 protests – the Aimarazo – against the Santa Ana silver project planned by Canada’s Bear Creek Mining (BCM:CVE), leading to the annulment of Bear Creek’s permit. The project is relatively small, but we understand that the cashflow it generates would allow the bigger $574m silver mine at Corani to go ahead. Bear Creek obtained an environmental permit in May, but the company is now waiting on a social licence from the regional government. Our visit to the alpaca farming communities of Chicuito, Carabaya and Macusani, which have in the past been at the centre of the Bear Creek protests, found residents still worried about potential water issues.

OTHER POTENTIAL FLASHPOINTSIn a number of regions, populist candidates – sometimes linked to the disgraced and imprisoned former president, Alberto Fujimori – represent a different kind of risk to business, often pushing policies that complicate the launch of projects rather than completely blocking deals. In Cajamarca, for example, the current leader in opinion polls, with 21%, is Osías Ramírez, a populist candidate of the party formed by Mr Fujimori’s daughter, Keiko. Absalón Vásquez, a congressman and agriculture minister in Mr Fujimori’s government (1992-2000), is in third place.

In Ancash, César Álvarez, the former president sacked and imprisoned following allegations of corruption, will stay on the sidelines, but a close ally, Waldo Rios Salcedo, is showing up strongly in the polls. A June survey gave Mr Ríos 18% of the vote – leading in the region. He has proposed sharing some of the revenue generated under the canon mechanism with locals, offering PEN500/month to each household in Ancash. In Pasco, Klever Meléndez Gamarra, imprisoned following corruption allegations, still plans to run for another term.

We believe that local grievances could influence election results in a number of other regions, especially since many races are extremely competitive and have no clear leader. In the region of Piura, regional mayors near the Rio Blanco copper project are restive, while in Lambayeque, a small group of farmers are opposed to the Cañariaco copper project. In both cases, regional presidents have remained supportive of mining plans.

In the region of Arequipa, no fewer than 15 candidates are competing for the regional presidency and there is as yet no clear leader in polls. However, the decision to award an environmental permit to SCC’s Tia Maria project – stalled for three years and worth $1.4bn – in August could lead to a rise in tensions with local farmers in the Islay district. The farmers opposed the project on the grounds that it affected their water supply, but LatAm Confidential understands that SCC now plans to use desalinated sea water instead.

We believe that risks of disruption in Apurimac – home to the Las Bambas copper mine, operated by China’s MMG (1208:HKG), a unit of state-controlled China Minmetals – are minimal. Traditionally one of the poorest regions in Peru, Apurimac has been growing steadily for the last 15 years and is now relatively prosperous. We visited Abancay, the regional capital, and Chalhuahuacho, the closest town to the first phase of Las Bambas. We discovered an upbeat mood, with building work and new commercial developments evident in both places. There is no poll data, but Elías Segovia Ruíz, the moderate regional president who is running again, is widely expected to secure another term in office. Mr Segovia has worked with mining companies to negotiate the relocation of communities displaced by the Las Bambas project. 450 families are being moved from the village of Fuerabamba to a new settlement at Nuevo Fuerabamba. O

$3.3bn Cost of Anglo

American’s planned Quellaveco copper project in Moquegua, which is opposed by regional presidential candidate Zenón Cuevas


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Ms. Denisse Becerra (LatAm Confidential)