Is The Peruvian Government Becoming More Mining Friendly?

by: The Gold Report

With a credit rating higher than Mexico and Brazil, Peru should be high on the list of mining investors, but confidence has been shaken over the last few years when the government revoked some high-profile mining licenses. According to Lima-based Kallpa Securities Managing Director Ricardo Carrión and President Alberto Arispe, recent government actions might signal a reset, with the government even acting as a mediator between mining companies and the local communities. In this interview with The Gold Report, Carrión and Arispe detail the state of mining exploration in Peru and discuss companies actively exploring, including one that just received its long-awaited environmental approval.

The Gold Report: Ricardo, in June 2011 investors were surprised to learn that Bear Creek Mining Corp.'s (OTCPK:BCEKF) [BCM:TSX.V] license had been revoked for its wholly owned Santa Ana silver project. The Santa Ana licensing incident and other moves happened shortly after Ollanta Humala was elected Peru's president and tarnished the country's reputation as a destination for mining investment. That was then. Please tell us about what's happening now.

Ricardo Carrión: The government of Alan García revoked the license for the Santa Ana project, so Humala inherited that situation. Newmont Mining Corp. (NYSE:NEM) suspended the Minas Conga project, which was a flagship mining project of the Peruvian government, because of social and political issues.

The Peruvian government realizes that mining is a very important item on the agenda and is a cash cow. It has been upgrading the regulatory framework in Peru and simplifying the process.

The government has developed a new strategy to avoid another Minas Conga situation. We can see that strategy with Bear Creek's Corani project. The government has been supporting the Corani project by working with the mining group in structuring the environmental impact assessment [EIA]. That doesn't mean that the government will immediately approve the project, but it wants to bring to the community a fair project.

TGR: Do you think Minas Conga will ever reach production?

RC: It all depends on Newmont and Compania de Minas Buenaventura (NYSE:BVN), but we expect Conga to move forward in the next two or three years.

TGR: Standard & Poor's just gave Peru a new credit rating of BBB+ and that's higher than either Mexico or Brazil. However, many investors would prefer to put their mining investment dollars elsewhere. Why doesn't the perception match the reality in Peru?

Alberto Arispe: Peru is a smaller country than Mexico and Brazil, so it's not as much on the radar of investors. Also, most of the mining in Peru is in the highlands, the poorest area of the country. The risk of mining is higher in these areas than around Lima. There is a lot of inequality in the highlands, which leads to cultural clashes. That's why some of these companies have problems with local communities in the highlands.

Some companies have no problems, others have minor problems and others have a lot of problems. For example, Bear Creek is now working with the government of the local community with a lot of success in Corani, but it did a relatively poor job with the government in Santa Ana. Newmont did a pretty poor job in dealing with the locals in Cajamarca, but Freeport McMoRan Copper & Gold Inc.'s (NYSE:FCX) Cerro Verde has a very good relationship in Arequipa. There are projects that are going ahead with good community relations and there are projects that are not going ahead because they have done a bad job in dealing with the local communities.

TGR: So is it really about a lack of community engagement on behalf of the companies in most cases?

AA: I think so. It depends a lot on the company.

TGR: There is lots of good news too. Peru's central bank says it expects to see more than $40 billion [$40B] in private investment between 2013 and 2015 as some of the world's largest copper mines are built there. Tell us about some of the success stories of mining in Peru.

RC: Some of the most important ones are Las Bambas, which is in the hands of GlencoreXstrata (OTCPK:GLCNF) [GLEN:LSE]. It has spent about $4B. There is Freeport's Cerro Verde mine, which is expanding at a cost of another $4B. Newmont's Minas Conga is on the waiting list for now, but that is a $5B investment. Then you have "smaller" projects such as Toromocho, which is run by Aluminum Corporation of China [Chinalco], and Anglo American Plc's (OTCPK:AAUKY) $3B Quellaveco.

TGR: Do you think that the Peruvian government has learned from the Bear Creek and Minas Conga issues and has taken measures to make sure that those types of problems don't happen as frequently in the future?

RC: On the approval of the three EIAs, I know that the government has been trying to work closely with the companies and the communities, trying to be the mediator.

TGR: Is Kallpa itself seeing a greater interest from institutional and even retail investors in mining securities?

RC: Obviously we are not isolated from the problems around the world. The TSX Venture has had low liquidities for the last few months and investors are afraid of mining ventures. My impression is that we probably will be out of this problem in the next 6 to 12 months. I think the worst is over.

TGR: I think that's the general consensus out there. What other companies would you like to talk about?

RC: Luna Gold Corp. (OTCPK:LGCUF) [LGC:TSX; LGC:BVL] has been in operation for several years, but is now gaining the interest of investors. The company's projects are in Brazil. It's quite an interesting asset and the company is running very well. The only issue is the correlation with the gold price. Gold prices, as you know, are well off their peak.

TGR: Is Luna listed on the Lima Stock Exchange?

RC: Luna Gold is a very peculiar case because its asset is in Brazil, but it's listed here in Peru. The project was originally created by Luis Baertl, who is Peruvian, and he was also involved in the Toromocho story, which was one of the most successful transactions that we have seen here in the public market. He has connections with several Peruvian shareholders. That has brought to the company good liquidity in the Peruvian market.

Another company on the radar of many Peruvian and Canadian investors is Rio Alto Mining Ltd. (NYSE:RIOM) [RIO:TSX.V], mainly because it has a good combination of exposure to a producing asset and exposure to a development asset. The company started production in 2011 and performed better than expected. Now Rio Alto is in the process of starting the second phase, a copper project. It is doing all the engineering to bring to the table a low capital expenditure [capex] project that can be easily financed, which can be the best strategy for that type of project. Rio Alto is advancing very well and it doesn't have financing needs for now, so it's a very interesting company where you have a good combination of risks.

TGR: Rio Alto is producing more gold from La Arena than it had issued under its guidance for 2013. How long can that continue?

RC: Rio Alto has had excellent production during the first and second years because in the first year it had the benefit of having higher grades than expected. In the second year it was mainly because Rio Alto began an expansion, so even though the grades were lower, the company was able to put more ore in the plant. For this year, Rio Alto is estimated to have basically the same level of production, around 200,000 ounces [200 Koz] gold. This will become harder to maintain in subsequent years. That's why the second project is so relevant; in the mid-term that second project will have the capacity to offset the decrease in gold production.

TGR: Does that mean that Rio Alto will need less financing to develop its copper asset?

RC: Rio Alto will need to access several types of funding sources for the project. The project is estimated to cost $250-300 million [$350-300M]. In the copper environment we typically hear higher numbers for capex, so the initial investment for this second phase is extremely reasonable. In terms of cash position and according to our estimates, the company will probably have around $100M by that time. To complete the financing it can use several mechanisms, such as streaming, offtake agreements, joint ventures. Because Rio Alto has a good balance sheet from the first project, that will allow it to come up with a good deal.

TGR: The first part of La Arena is gold and the second phase will be copper-gold, correct?

RC: Yes, although it is a copper project, the gold content is three times what is in the first project. It's around 3 million ounces [3 Moz] of gold.

TGR: What are some of the promising developers in Peru?

RC: We have three companies on the radar of investors, companies in the process of getting final EIA approvals. One of them is Bear Creek, which has Corani, a large-scale silver-lead project.

TGR: How far away is the EIA for Bear Creek?

RC: Bear Creek submitted documents in December. We expect to see results by the end of this month or maybe next month.

TGR: What's the situation with Bear Creek's Santa Ana and Corani projects?

RC: Bear Creek is in discussion with the government on Santa Ana. I think there's good will on the part of the government to solve the situation, but it will take time. In my opinion, one option can be to sell the project because the government revoked the license to operate in a border zone. That license solely applies to foreign investment. If a Peruvian group were to acquire Santa Ana, it would not need that special license and could put the asset in production very quickly.

Corani is a huge project with a capital expenditure probably around $600-700M. It's a big deal for the company. When the time comes, Bear Creek will probably need to make an agreement with a major group to develop the project. For now it seems comfortable with the progress on Corani. It has cash, which is very important. Bear Creek raised around $100M around November 2010 that was supposed to be invested in Santa Ana. Bear Creek should have $70-80M left, so for now funding is not an issue.

TGR: And at the bottom of the food chain are the explorers.

RC: With explorers there is also a wide range of risks. On one side are all those companies that have been drilling for a couple of years, have come up with a bigger resource and are entering the stage of developing the first economic studies, like preliminary economic assessments and prefeasibility studies.

TGR: Do you have any parting thoughts on the mining equity space in Peru and investing in mining equities in general at this stage?

RC: One of the main issues that we have now is liquidity in the markets. We have been seeing low volumes in our local exchange, the same as on the TSX and TSX Venture exchanges, but it's improving. Even though we have had some very bad months, in the last few weeks we have seen a little change. We need to see an improvement in liquidity. Then we need to see stable metals prices. The rapid drop in the gold price in April was a shock for investors and some are still concerned about the gold price. If we have stable metal prices and liquidity coming back to the market, we will see more activity.

The best catalyst for our local market, at least on the mining side, is to see transactions. The junior market is based on confidence and confidence relies on the ability of the junior miners to set up a deal and sell the project. Good transactions can really boost the interest on equities.

TGR: What do you think is going to bring about that kind of confidence? New discoveries? A couple of breakthrough stocks?

RC: The best catalyst for confidence is to see a junior company getting a good deal with a major. We saw such a transaction a month ago. We need to see more transactions at high valuations to bring companies back to the market.

TGR: Thanks for your insights.

This interview was conducted by Brian Sylvester of The Gold Report.

Ricardo Carrión is the managing director for capital markets and corporate finance for Kallpa Securities in Lima, Peru. He served as a senior analyst of Banco de Credito in the areas of corporate banking, corporate finance and capital markets and was an adviser to Lima's Stock Exchange. Carrion holds a bachelor's degree in business administration from Universidad de Lima with a specialization in finance and capital markets.

Alberto Arispe is CEO of Kallpa Securities SAB, a Peruvian brokerage and boutique investment house. Previously, he was a vice president of emerging markets institutional equity sales at Fox-Pitt Kelton. Arispe has more than 18 years of experience in capital markets. He has a Master of Business Administration from the Stern School of Business at New York University and a bachelor's degree in economics from the Universidad Catolica del Peru. He is a professor of finance at Universidad de Lima.

Disclosure: 1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Gold Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Ricardo Carrión: I or my family own shares of the following companies mentioned in this interview: Rio Alto Mining Ltd. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Rio Alto Mining Ltd. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

4) Alberto Arispe: I or my family own shares of the following companies mentioned in this interview: Rio Alto Mining Ltd. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Rio Alto Mining Ltd. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

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