Off the Record: Peru’s Miners See CSR, ESG, Innovation as Key to Unlocking Funding
Miners & Investors
Published: 30 May 2019 09:51
As Latin America braces for another potential tailing dam collapse, Miners & Investors speaks with CFOs at Peruvian miners and their investors about the industry’s challenges and opportunities for the year ahead, with many prioritising ESG, community engagement and cost-cutting in a bid to adjust to a funding environment that has widened the divide between major and junior miners across the region.
Conversations more often than not began with talk of Las Bambas, the road blockade at MMG’s copper mine that begun in February and which took over two months to resolve. The protest reaffirmed social conflicts as the number-one (above ground) risk for Peruvian mining projects, something that producers are directing significant resources towards in order to mitigate.
The CFO of a major miner told Miners & Investors that the company had 55 people on payroll focused purely on Corporate Social Responsibility (CSR) in South America; they among others reinforced a sense of urgency around the need for a proactive – rather than reactive – CSR strategy, identifying social concerns before they boil over into full-blown conflicts.
Many stressed the importance of taking a nuanced approach. Recognising that particular concerns and wants varied between different local communities enables a best-fit approach rather than a one-size-fits-all.
Since 2011, for example, Anglo-American have engaged local stakeholders through a series of organised roundtable discussions ahead of the Quellaveco project, to tailor its CSR strategy to the needs of the community. But there remain many cases where this kind of forethought is found lacking.
Many also voiced grievances about government action or, as some argued, a lack thereof. State presence remains reduced in many geographically remote areas where mining companies operate alongside farming communities. Ubiquitous access to camera phones, and the international support of local communities by NGOs, makes the government weary of taking action. Some producers complained that even when the law was on their side in the event of a conflict, government resolutions put in place did not wholly recognise this.
Producers stressed the importance of responding to local community grievances, but there was a common perception that some protestors are looking to collect higher rents once an agreement had already been put in place. Others blasted what they saw as the rising participation of ‘professional agitators’ in protests.
Regardless of what, or who, is exacerbating conflicts, such friction is an key part of mining that producers must deal with. Addressing these social concerns are essential for the successful execution of the three major Peruvian projects that achieved financial close in 2018.
Majors: Profitability Over Production
Three major projects in Peru – Minsur’s Mina Justa, Anglo American’s Quellaveco, and Chinalco’s Toromocho expansion – account for the bulk of the current construction pipeline for the country.
Progress on the Quellaveco copper project, which was purchased by Anglo American in 1992, is seen as a big win for the government, and a good sign for other majors and investors. The mine is reported to cost USD5bn over four years, and was de-risked by increasing Mitsubishi’s equity share from 18.1% to 40%. Previous causes of delay included the rigorous permitting and regulatory checks, and the 2014-2015 commodity pricing downswing, by which Anglo American in particularly was affected.
The cost of the Toromocho expansion, which represents one of the largest copper reserves in Peru, is billed at USD1.3bn. One investor noted that while the project, which entered construction last summer, requires the notable displacement of local communities, it has avoided Las Bambas-style headlines so far. It is worth noting that in February this year, Junin’s Superior Court ruled in favour of a petition for preventive measures from Morococha Antigua’s local residents. Expansion is currently proceeding away from Morococha Antigua, though the area is scheduled for works in 2021.
Minsur secured USD600mn of project financing for Mina Justa last August, with four ECAs joined by a dozen commercial banks. One ECA we spoke with said that there were banks they thought they would see but that did not participate in the end, giving the impression of a very competitive financing landscape for mining majors.
As the three majors turn towards construction, the pipeline for others in Peru prior to 2021 is empty. CFOs said that they were orientating themselves towards ‘profitability over production’. They have three priorities to address: small-scale expansion; reducing leverage; and returning dividends. With Peru’s majors in cash-rich positions, shareholders are asking how the companies will be taking full advantage of the opportunity to return value. Presently, most companies are not looking at aggressive expansion but instead ‘optimising and operating’ their current activities, cutting costs rather than increasing production.
A key component of this is innovation, both technical and financial. CFOs are on the lookout for new combinations of financing tools that could unlock cheaper financing. Meanwhile, producers are looking at a whole array of technological developments that could cut costs and allow them to outperform competitors. Widespread automation of mines offers massive cuts labour and insurance costs, but that transformation is slow-going. Quicker wins can be found through the use of lower-cost remote controlled technologies to perform tasks like onsite ore analysis, for instance, or the use drones for site visits. Innovation is about cutting costs and adding value to mining projects. Expansion is not a burning priority for majors presently, yet as deposits are depleted, green and brownfield development efforts seem likely to coalesce around cost-cutting. Thus, while most majors are currently conservative, they continue to keep their eyes peeled for new acquisitions.
Juniors: Financing and Regulatory Challenges
The financing environment for junior producers in Peru contrasts starkly to that which majors find themselves in. As the drought for mining in equity markets continues, exploration companies must turn to alternative sources of financing. Talk in Peru focused on royalty and streaming companies; whilst not the preference for all juniors, with the IPO/SPO door closed currently, it is one of the few options available.
At the same time, stakeholders also commented on the over-saturation of the market – the high number of exploration companies makes it harder for any to achieve financing in public markets, with many arguing that a correction is needed.
An obstruction to all producers alike is Peru’s permitting system. As in many Latin American countries with strong mining foundations, Peruvian mining projects undergo a rigorous permitting process. Given the environmental and social risks that mining projects carry, the importance of this is well recognised.
The two common complaints miners levelled at the system, however, is that there is no clear timeframe given throughout the permitting application process, and they must go through multiple authorities.
SENACE (Servicio Nacional de Certificación Ambiental para las Inversiones Sostenibles) was established four years ago to resolve this issue, hoping to providing a single authority and single permit for all; but general consensus among producers is that it has not achieved this. Other concerns were voiced over the long-term plans for legal stability agreements. The income tax incentive is a boon for miners in construction phase, allowing them to offset risk of future tax changes. Producers voiced concerns as congress is poised to revise such agreements; to what degree will become clearer.
Social conflicts and painful permitting systems should not obscure the many positives present in the region. Peru’s strong macroeconomic conditions help give confidence to investors. Majors have maintained good access to financing and are positioned to optimise operational efficiencies and profits. Depletion of current deposits will also provide impetus for new acquisitions and expansions beyond 2021, creating new opportunities for majors and juniors alike. In the meantime, Mina Justa, Quevallaco and Toromocho will serve as litmus tests for whether progress is being made in dealing with local communities in Peru.
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