Ricardo Carrión and Alberto Arispe of Peru-based Kallpa Securities have a boots-on-the-ground view of the politics, legal battles and investment climate for precious metals mining in the Andes. In this interview with The Mining Report, Arispe and Carrión detail the new, positive developments afoot in this region and explain why investors should get involved now, before the rest of the world catches on.
The Mining Report: What percentage of Peru's known precious metal base resource reserve is under active development?
Ricardo Carrión: There are many large projects currently in development in Peru. There are also projects on hold for the moment because of social issues. The bottom line is that about 60% of the precious metals resource base is active, and there are a substantial number of projects waiting in the pipeline.
TMR: At the governmental level in Peru, what policy and economic changes are positively affecting mining operations?
Alberto Arispe: A year or so ago, the administration of Peru President Ollanta Humala began accelerating the process of permitting mining operations. What makes this interesting is that Humala won the 2011 national elections on a very anti-mining platform. The market was quite scared of what might happen in Peru. The Humala administration changed the tax regime for mining companies; it slightly increased royalties and taxes. This was viewed positively by the market, which had feared a much higher increase. Then there was a period during which the government was neutral on the mining industry.
But toward mid-2012, the administration in Lima began to implement a series of reforms that make the permitting process much more efficient. This was in response to the huge Conga project being paralyzed by protests from the locals. The government is now much more active in mediating the conflicts surging between the mining companies and the local communities. For example, the government is investing a lot of money and roundtables to change anti-mining politics.
TMR: Are those volatile local issues environmental issues or wage/labor issues?
AA: Some of the local leaders are environmentalists, but in my opinion, the problems are mainly political. The local leaders gain popularity and votes by saying that they are defending the local community and the environment against the abusive mining companies. They say that there is environmental contamination. But the people of Cajamarca, which is where the Conga project is, are becoming increasingly distressed that Cajamarca is one of the few regions in Peru that is not growing economically. It is one of the two poorest regions in Peru, in fact. Because of the mining industry, other regions have been able to reduce their poverty rates. The elections for regional governors at the end of this year are very important for the mining industry: A lot of pro-mining leaders are running against a lot of anti-mining leaders.
TMR: What are the different directions that the year-end elections could go?
RC: Mining is always the first item on the agenda of candidates running for president of a regional government. As you know, controversial items always are given more weight during campaigns and mining is one of them. In 2011, there was a face-off between a leftist candidate and a candidate from the right. The candidate from the left won and there was a lot of political and market volatility. The worst is over. All of the candidates [or at least most of them] now understand the economic importance of mining.
TMR: Given that there is still opportunity for political volatility, why are you so bullish?
AA: There just was a Peruvian high court ruling in a dispute involving Bear Creek Mining Corp. (OTCPK:BCEKF) [BCM:TSX.V], which is a Canadian junior company with assets in southern Peru in Puno. In 2011, there was a revolt in Puno over Bear Creek's Santa Ana project and the local communities blocked the project. The police killed protestors. It was a disaster. President Alan García took the license for the project away from Bear Creek.
Bear Creek's stock dropped more than 50%. But the company stayed alive because during this time, Bear Creek was able to keep working its Corani project, which is bigger than Santa Ana. Now the courts have ordered the government to restore Bear Creek's mining license.
In Peru, mining investments represent nearly 12% of GDP. Mining represents 30% of governmental revenues and 60% of exports. The government needs this money from the mining industry to continue with its social programs. That is why it has turned more friendly to the industry. All of us want the government to be more proactive and accelerate permitting to get the mining industry moving faster.
TMR: Any other gold miners for us to watch in South America?
RC: Rio Alto Mining Ltd. (NYSE:RIOM) [RIO:TSX.V; RIO:BVL] has producing gold assets and it has a new copper project in the works. It will release a bankable feasibility study on that project early next year. When gold prices go up, it will thrive.
TMR: Rio Alto has extended the life of its main mine in Peru, although the grade has been reduced. Is there a future for mines that are coming to the end of their high-grade life?
RC: Grade reduction is a general trend in the market. Grades are simply not as high now as they were 10 years ago. There are still mines that have high grade and low cash costs, but only a few. The new trend is to produce at lower grade and to manage the costs. Rio Alto lowered its cash cost and kept a good margin intact, even though it is slightly lower.
TMR: Thank you for your time today.
AA: You are welcome.
RC: Thank you, Peter.
This interview was conducted by Peter Byrne of The Mining Report and can be read in its entirety here.
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. Carrión holds a bachelor's degree in business administration from Universidad de Lima with 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.
1) Peter Byrne conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
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