Commodities: Miners exploit rich seams in spite of tax and local protests

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José Marún’s workplace is remote by almost any standards. The manager of Xstrata’s South American copper operations spends his time shuttling between an office in Lima and the high Andes mountains, where, spurred on by record prices, the London-listed company is rushing to build new mines.

Two of those mines, Tintaya and Antapaccay, are reached by a bumpy plane ride to the ramshackle town of Yauri. Other than mining, the area’s main industry is cheesemaking.

A third Xstrata project, Las Bambas, “is the most remote ore body in the country”, says Mr Marún. “When we came [here], there was no electricity. Until 2005 there was no telephone communication.” Workers commute by helicopter.

In recent months, Mr Marún and other mining executives have had another frontier to navigate: the corridors of power at the presidential palace in Lima.

Since the election in June of Ollanta Humala, who had campaigned on a promise of a 40 per cent windfall tax on the mining sector, the most important project for the industry has been damage limitation. The possibility of sharply higher taxes in Peru threatened to derail $42bn of planned mining investments in the country, which is among the world’s largest suppliers of metals (see box).

Peru is central to the growth plans of companies such as Xstrata. Together, Antapaccay and Las Bambas will add approximately 500,000 tonnes to its annual copper production by the end of 2014, at a projected cost of $5.7bn, giving the company the largest growth pipeline in this metal in the industry.

In the fortnight after Mr Humala became president, Xstrata saw its share price fall 8 per cent. The shares of companies with higher Peruvian exposure fell even further and the Lima stock exchange was forced to close after some local miners fell 15 per cent in a day.

But the country is of broader significance to the global economy than merely as a destination for foreign investment: with its large, untapped reserves, Peru could determine the balance of the market for metals such as copper, which are crucial to the growth of emerging economies. According to Macquarie, the Australian bank, Peru will be the source of a third of the planned new copper supply over the next five years.

Since the election, however, the miners’ lobbying efforts appear to have paid off. At the end of August, Salomón Lerner, the prime minister, announced that a decision had been reached on a new tax structure that would raise an additional 3bn soles ($1.1bn) from the mining sector each year. Miners expressed relief that the plan, whose details were still being finalised as it passed through Congress, would calculate a royalty based on their profits rather than revenues, and so shield them in periods of low profitability.

The uncertainty over taxes has nonetheless delayed much-needed projects in the country’s mining sector. By July, Southern Copper had invested just $160m of the $800m capital expenditure it had planned for the year in Peru, according to Oscar Gonzalez Rocha, the chief executive. Peru’s copper production was 3.1 per cent lower in the first half of 2011 than a year earlier.

Mr Marún of Xstrata says: “The moment you have uncertainties, you start to have rocks on the road and projects get delayed.”

But tax is not the only challenge for the industry in Peru. Protests from communities, whose villages often need to be relocated due to mining sites, have grown more vocal. In April, the outgoing government of Alan García cancelled Southern Copper’s Tia Maria project and in June it revoked the licence of Bear Creek’s Santa Ana project.

At the site of Xstrata’s Antapaccay mine, trucks and cranes move among homes dotted along the valley floor. The company is building new homes for 370 families whose church, school and community hall will be dismantled to make way for the mine.

Tintaya’s previous owner, BHP Billiton, sold it to Xstrata in 2006 after it was invaded by an armed mob. Now Luis Rivera, general manager of the two mines, says he spends 70 per cent of his time dealing with the communities, rather than day-to-day mining operations.

“I have had to learn how many litres of milk it takes to produce a kilo of cheese, and how long it takes to mature a gourmet cheese,” he chuckles.

Others are less cheerful about their engagement with communities. Mr Gonzalez Rocha of Southern Copper says the company is exploring in Argentina, Ecuador and Chile: “We are trying to do more diversification with other countries, in order not to have everything in one country that has problems like Peru.”

Most, however, are cautiously optimistic on the prospects for the mining industry under Mr Humala – investors included. Since the election, the mining-heavy Lima general index has rallied 7 per cent, bucking a crash in mining shares in almost every other world market.

In the same week as Mr Lerner announced the new mining tax, the government passed a long-awaited law on community engagement. Crucially for the miners, however, it did not give communities a veto over new projects.

Voicing a sentiment common in mining circles all over Peru, Eduardo Hochschild, executive chairman of the London-listed precious metals miner that shares his name, says: “We’re not cheering that it has passed – but it’s not nearly as bad as it could have been.”

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