Peru’s Copper Opportunity

The metal of the future is already the metal of the moment

“Copper is the new oil,” stated Goldman Sachs in May 2021, citing a surge in green capex combined with the lack of copper mining projects as the factors that will lead to a multi-year bull market. Trafigura, the world’s biggest copper trader, sees the red metal hitting US$15,000 a ton (US$7.50/lb) in the coming years, according to head of copper trading, Kostas Bintas. “Copper demand is going to be psychedelic,” proclaimed Robert Friedland, speaking at Mines and Money London in November 2020 (caveat: he also sells copper).

Precious metals producers are on the hunt for copper deposits, with Barrick chief Mark Bristow describing it as “a fantastic strategic asset”. Producers of other base metals, such as zinc-focused Nexa Resources, are looking to develop copper projects. In the case of Nexa, its Magistral greenfield property in Ancash is expected to move into production in 2024, according to CEO of Nexa Peru, Ricardo Porto, who stated: “There is a lot of talk about a commodities supercycle and the one commodity that is indisputably linked to this cycle is copper.”

Quite simply, everyone is bullish on copper, and for good reason. From infrastructure-based government stimulus packages, to ‘the green reset’ where Europe and the USA are all aligned in their plans to move away from fossil fuels, the transition will be driven by copper, supplying material for solar, wind, energy storage systems, electric vehicles (EVs) and EV charging stations.

Global EV + PHEV (Plug-in Hybrid Electric Vehicle) sales reached 3.24 million in 2020, compared to 2.26 million for 2019, and are expected to rise to over 21 million units by 2030. The average petrol engine vehicle requires 20 kg of copper, a hybrid 40 kg, and a plug-in EV 109 kg, while the cars of the future will need as much as 163 kg of the metal. As an example of how quickly the switch towards EVs could be completed, in July 2021 the European Union proposed an effective ban for new fossil-fuel cars starting in 2035.

Although the mid to long-term consensus on copper is favorable, few could have predicted how quickly demand would pick up in the short-term, particularly in the context of a global pandemic where economic growth has been sluggish at best. Surging demand from China and dwindling copper warehouse stocks sent the red metal to an all-time-high in May 2021, with futures trading over US$4.80, a remarkable figure less than a year since copper had cratered to 4-year low of US$2.10/lb in March 2020.

Peru, as the world’s second largest copper producer, will undoubtedly benefit from rising prices. However, there is a pervasive feeling that the country could produce a lot more than it currently does. Multiple large-scale projects remain undeveloped, stuck in a quagmire of permitting complications and community conflicts. Even projects with permits in hand, such as Tía María – the poster-child of undeveloped Peruvian mining assets – are not guaranteed to get the green light, as emphasized by former president Martín Vizcarra, who stated that the project would never be developed under his administration.

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“Peru produces 2.5 million tonnes of copper annually, so every cent the copper price goes up represents an additional US$50 million in revenue. It is an opportunity the country cannot miss.”

Rómulo Mucho, General Manager, Pevoex

If the struggle has been difficult under moderate governments, how much worse could it get under Castillo? Which bank would fund a project when the State is threatening to take 70% profit?

“Peru produces 2.5 million tonnes of copper annually, so every cent the copper price goes up represents an additional US$50 million in revenue. It is an opportunity the country cannot miss,” stated Rómulo Mucho, general manager of Pevoex and president of Agromin 2021. The event, taking place in November 2021, looks at creating synergies between mining and agriculture, two industries with intrinsic links to local communities.

Indeed, unification should be the operative word for the newly elected Perú Libre regime, as conflicting interests have contributed to an unstable political backdrop. Marcobre’s Mina Justa is moving into production in July 2021, and combined with Anglo American’s Quellaveco, due to start in 2022, Peru has a platform to produce 3 million tonnes of copper annually by 2023. However, ironing out social conflicts and establishing a semblance of political continuity will be key for Peru to continue this upward trend and close the supply gap with Chile.

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Stimulating Project Development

With copper trading above US$4/lb since February, free cash flow is expected to fuel expansions, technology investments, exploration and M&A. In addition to the need to make up for time lost during the 2020 lockdown, there is some urgency for Peru to expedite project development and take advantage of the momentum that high metals prices bring. Not only to aid economic recovery, but also because the country’s post-Quellaveco pipeline lacks major greenfield projects.

Money alone will not be enough to ensure projects are given the green light, as lengthy permitting processes and social tension have resulted in a number of high-quality projects being held back.

“The government does not think mining deserves a dedicated State policy, and that damages the industry’s prospects. Investment arrives in countries with legal and political stability,” observed Rómulo Mucho, who added that a dedicated, proactive State policy could expedite projects which would yield good returns.

These projects include Jinzhao Mining’s Pampa de Pongo, particularly attractive with iron ore trading over US$200 per tonne, and the Río Blanco mine in Piura, which would add over 200,000 mt/y of copper, but mining is pretty much banned in this region of Northern Peru, according to Mucho.

Even areas where mining is widely accepted, such as the mining corridor of southern Peru, have seen road blockades which caused a loss of sales worth more than US$500 million to MMG-Las Bambas.

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Another of Peru’s copper producers with a project subject to a judiciary process is Southern Peaks Mining (SPM) and its Ariana asset. Adolfo Vera, SPM’s president and CEO, weighed in on the matter: “Ariana is a project that SPM will definitely build, as I have always maintained, because there is no technical support for any of the claims of those who oppose the project.”

SPM hopes to be able to restart construction by the end of 2021, with production to start by the end of 2022. Vera stated that once in production, Ariana will be a low cost producer, adding 20,000 mt/y copper concentrate to the company’s profile.

The importance of stimulating project development goes far beyond the royalties and taxes paid to the government, as the largest projects create vast ecosystems of suppliers, who in turn provide for their families, generating wealth spent in industries such as agriculture, hospitality and consumer goods. A large percentage of the 120 companies interviewed for the 2021 edition of GBR’s Peru Mining publication are actively working on Anglo American’s US$5 billion capex Quellaveco project, from engineering through to equipment components, catering and maintenance. Copper is often talked about in macro terms – the role it will play in the energy transition – but the jobs it creates also sustain countless families on a micro level in countries such as Peru and Chile.

Discussing the progress of Quellaveco, Tom McCulley, CEO of Anglo American Peru, revealed that construction was 50% complete as of May 2021, and mining ore should start by the end of the year. The mine is expected to be fully operational in 2022. “Since I have been here, I have seen the tremendous opportunities that Peru’s mining sector presents, and I think this should be emphasized more than it is,” stated McCulley. “As an industry we need to sit down with government and figure out how we are going to capture this opportunity to benefit the Peruvian people. If we are not careful, and too many restrictions are introduced, future investment is going to dry up or go somewhere else.”

Image courtesy of Southern Copper Corporation