In a tough market for
junior gold shares over the past three years, Peruvian mining stocks have
outperformed the mining indexes. Peru is a booming economy with well-defined
mining laws and a vocal mining protest movement that could be playing a
constructive role in future development. In this exclusive interview with The Gold Report, Maria Belen Vega and
Ricardo Carrión of Kallpa
Securities in Lima, Peru, analyze the protest situation and clarify the role
of mining as one of the leading sectors of the economy. Junior companies they
follow include mine developers, producers and a "pure Peru play"
explorer; some of these companies could repeat the outsized performance of
the last few years and become tenbaggers.
The Gold Report: Before we talk about
specific companies, let's talk about mining in Peru. Mining is big business
in Peru, but recently there have been a lot of protests. Newmont Mining Corp. (NEM:NYSE) Conga project gets the
most attention from the U.S. media. Can you give us an update?
Maria Belen Vega: Regarding the
importance of mining in our economy, it's important to highlight that mining
is in the interest of government, society and Peru as a whole. Peru is a
mining country. To give you some numbers, approximately 5.5% of gross
domestic product comes from the mining industry without accounting for the
supporting industry. Approximately 30% and 60% of total income tax collection
and exports, respectively, come from mining. Also, mining accounts for around
60% of the Lima Stock Exchange's (LSE) main indexes.
Exchange Composition By Sector
The protests started
because activists understand that mining is a lucrative industry in Peru.
Protestors feel that the communities are not getting their fair share of the
profits. To give you an idea, the canon minero
regulation establishes that 50% of the funds from income tax collection
derived from the mining industry is required to return to the region in which
the mine operates. If you take a look, most protests originated in the
regions that should have received funds from the canon minero.
While some local administrators live very well off these incomes, the
investment made from these funds was either not yet executed or not
profitable. So it makes sense that the communities want to receive some
benefit from mining.
Production in Peru
Another important issue
regarding mining in Peru is water. This is one of the main issues at Conga as
well as Southern Copper Corp.'s (SCCO:NYSE) Tia
TGR: So that's freshwater
MBV: Yes, water supply is an
important issue. Most mining projects in Peru are located in the upper part
of the Cordillera de Los Andes, which has a shortage of water. Mines can
consume large amounts of water, which often comes from rivers or underground
aquifers. The communities are concerned that mining could use too much of a
scarce resource because their main activities are livestock and agriculture.
It is interesting to
note that the mining protestors don't discuss pollution. Big mines in Peru
are strongly regulated and some of them are listed on at least one
international exchange. Companies like Southern Copper, Barrick
Gold Corp. (ABX:NYSE) or Compañía
de Minas Buenaventura (BVN:NYSE; BUE:BVL) have strong corporate governance
policies. Artisanal miners are mine polluters. There is even a contagion
effect where big projects become surrounded by informal miners who create
serious pollution problems.
TGR: It sounds as if the
opposition to mining is more about political issues and wealth sharing and
not so much because of environmental issues.
MBV: Exactly. In Peru, the
mining industry has done some of the work in infrastructure and healthcare
that should have been done by the government (roads, hospitals, bridges,
etc.) in the first place. Therefore, communities are not against the mining
industry as a whole, they just want to have a bigger piece of the pie.
Ricardo Carrión: A good example of
Peruvian mining politics is what just happened to Xstrata Plc's
project in southern Peru. Communities have a long list of requirements in
order to reach mining agreements. The most important change to the Xstrata
agreement was in the project ownership. The negotiated share was 3%, but the
community wanted its share upped to 50%. That gives you an example of the
political environment the miners face.
of Main Mining Projects in Peru
TGR: It sounds as if the
central government is pro-mining. So are the local citizens, but they want more of the benefits. Where do the foreign investors
fit into the picture? Investors need to get a fair return for the risk of
investing in a mining project.
RC: Taxes paid by mining
companies are one of the largest sources of income for the government. As
stated before, 30% of income tax collection derives from mining. The
government can't afford to lose that income and it's fully committed to
supporting investment in mining. Peru has approximately $50 billion (B) of
investments in the mining sector, which is one of the drivers for the
country's growth. The $4.8B Conga project is an example. The government has
supported Newmont while working to improve the project from a social point of
view. That is a win-win situation. The result is a better project overall.
The government is mediating between companies and communities in a way that
supports investment, growth and sustainability.
TGR: That was an example of
a large company. Does the government also support smaller mining companies?
RC: Yes, the government
understands that without junior explorers, there won't be big mines. It's not
that they are pushing exploration companies to make a discovery. We have
clear exploration regulations that are friendly for foreign investors. Last
year, Peru implemented new regulations aimed at junior companies. The new
regulation is called "Prior Consultation." The regulation requires
having an agreement with the community before starting exploration. This is
not a big change because that is the way most companies have been doing
business for the last decade, but now it is formally part of the Peruvian
regulation. As before, without a "Prior Consultation" you can't do
anything on the ground.
TGR: Let's discuss some
specific companies that you cover. Candente
Copper Corp. (DNT:TSX; DNT:BVL) has a potentially large
project with approximately $1.5B in capital expenditures (capex).
How is a junior going to finance a project that big?
main goal is to develop a world-class deposit in order to be saleable while
evaluating going into production. Currently, the Cañariaco
project is in the prefeasibility stage and Candente
has just received approval by the government and communities (surface rights
agreements) to start drilling. It has been working on those permits since
2010 and has $20 million (M) in cash to start the next drilling campaign to
get the project into feasibility.
Production in Peru
One of the main
questions is how a $70M market-cap company can finance a $1.5B capex. If the feasibility study is positive and Candente proceeds to IAS approval, I believe that the
share price will likely go up. That scenario should increase the market cap
to at least $100M. From there, financing options include a joint venture with
a major copper company or offtake agreements
because the resource is approximately 70% copper, 20% gold and 10% silver.
The company is evaluating corporate sources of financing that might include
faces several challenges including infrastructure. What does it look like
MBV: I visited the project
late last year. Most projects in Peru are at high altitude, but at 3,000
meters (m), Candente is relatively low. The project
is literally a greenfield—there is a lot of vegetation there. It takes
six hours to get to the project from Chiclayo, which is the capital of the
Lambayeque region. Half the distance is on paved roads.
metallurgy may be a challenge. The ore at Cañariaco
has a moderate arsenic content, which may result in smelting penalties. The
prefeasibility study included a roasting processing unit to reduce the
arsenic content yet achieve high recoveries of the metal. Based on what is
known today, the problem has been solved and investors are not punishing the
stock price for that reason but mainly for the delay in getting the permits
to start drilling.
Currently, Candente is valued at less than $0.01/lb
copper; it has 10 billion pounds (Blb) copper in
equivalent resources. This valuation is much less than other companies like Panoro Minerals Ltd. (PML:TSX.V: PZN:FSE; PML:BVL), which has a 4 Blb copper project valued at $0.03/lb,
which is still less than latest copper acquisitions in Peru in the range of
$0.05-0.07/lb. Based on that metric, it is one of the most undervalued
companies listed on the LSE's Venture Exchange.
TGR: Another small miner you
cover is Rio Alto Mining Ltd. (RIO:TSX.V; RIO:BVL). Compared to Candente, Rio Alto has a different and much smaller
deposit. It is a gold oxide deposit, which lends itself to much lower capex and quicker startup. Since you have covered it, it
has done really well. It is more than a tenbagger
from your first research report. Do you have an update and where you think it's going?
MBV: Rio Alto is one of the
biggest success stories on the Lima Stock Exchange. It listed in November
2009 at $0.33/share and now, quotes at $4.20/share. Rio Alto has a two-stage
project. The first is the gold oxide deposit, which is now in production. The
second one is the copper-gold sulphide project,
which is moving toward development. Originally, management bought a deposit
that was undervalued (in prefeasibility) but that was able to start
production rapidly. It took the company less than two years—very fast.
Now Rio Alto ranks 8th among Peruvian gold producers. It is a success story
in both Peru and Canada.
Production started in
May of last year and met management's target of 50,000 ounces (500 Koz)/year. The target for 2012 is producing between
150–160 Koz gold @ $550–600/ounce cash
cost. As of H1/12, they have produced more than 100 Koz.
Currently, mine capacity is being increased from 24,000 tons (24Kt)/day to 36
Kt/day, financed by a prepayment facility with Red
Kite Explorer Trust. One of the management's goals is to finance all
expansion without shareholder dilution. This expansion will allow it to produce
above 200 Koz/year by 2014.
Rio Alto's next step
will be the completion of the feasibility study for the sulfide project. The
size of the resource is over 4 Blb copper plus 5.6
million ounces (Moz) gold and there is ongoing
drilling. The target is to begin production by 2016.
TGR: How can an investor
find the next company like Rio Alto? Which companies on the Lima Stock
Exchange resemble the Rio Alto of three years ago?
MBV: There are many
companies on the Lima Stock Exchange with potential. One of the more advanced
juniors is Sulliden Gold Corp. (SUE:TSX;
SDDDF:OTCQX; SUE:BVL). Sulliden is a Canadian company
whose main project is Shahuindo, a gold project
located in the Cajamarca region. Shahuindo could
become a world-class gold deposit because of its medium-to-high grade and
potential to build a low-cost deposit with a potential increasing resource.
Currently, it has 2 Moz in Indicated resource and
an additional 2 Moz Inferred. In 2011, Sulliden developed a 70,000m drilling campaign to
increase the resource size and improve its classification in order to achieve
TGR: That 4 Moz was from the June resource that was just released?
MBV: Yes. The 4 Moz is information from 2011's resource estimation
prepared according to Canadian NI 43-101 requirements. Because all of the
companies listed at LSE's Venture are dual listed in Toronto, everything
reported must meet Canadian standards. Pending is the new resource estimation
from the latest 70,000m campaign that should increase the actual resource
Shahuindo project is located in Cajamarca. Isn't
that home to Peru's mining protest movement?
MBV: Yes. Cajamarca is a
region located in northern Peru. But besides being known for mining protests,
the region is home to many world-class mines including Newmont's Yanacocha & Conga, Barrrick
Gold's Lagunas Norte and Rio Alto's La Arena (the last two are located 30km
south from Shahuindo).
TGR: So there should be lots
of good mining infrastructure and good technical support.
MBV: I visited Shahuindo three months ago and it has some of the best
infrastructure in Peru. It is not located at high altitude:
2,800–3,000m above sea level. It's a three-hour drive from Cajamarca
city with half on a paved road. It has a 3km power line on the project.
Additional infrastructure for the transmission line is being built up to
supply energy to the community.
consideration is that Sulliden deals directly with
landowners at the property. Currently, Sulliden
owns 85% of the surface rights for constructing the open-pit mine. This
situation is different from many juniors that still need to negotiate and
purchase surface rights. Besides, dealing with landowners tends to be much
easier than with communities.
The most interesting
feature of Shahuindo is the deposit. Sulliden has identified three main mineralized zones;
only one has been strongly drilled and included in the current resource
estimation. And that's from the oxides only. The sulphides
are another potential deposit that has not yet been drilled. As mentioned
before, a resource estimate is planned for this month. Another catalyst for
share price growth would be the IAS approval after achieving feasibility.
Located in Cajamarca, the same region of Newmont's Conga project, there is
some risk attached such as delay in the environmental impact study
approval/startup of the project. Despite Shahuindo
being located 80km from Conga in Cajamarca and subject to the same regional authorities
as Conga, Sulliden is following the process and
will submit the IAS study to the ministry this year to advance and construct
TGR: What other challenges
will Sulliden need to address?
MBV: The management is
confident that it will have no problems developing a mine, but the project
has risks due to the social and political situation in Cajamarca. I believe
that's one of the main reasons why the company is undervalued right now. Even
though there are high expectations with the new resource estimation, the
stock is undervalued because of the junior mining market and the social risk
tied to Shahuindo being located in Cajamarca.
TGR: Maybe it can benefit
from Newmont investing in social capital there.
MBV: Yes. One of the other
advantages of Sulliden compared to other juniors is
that Sulliden has $50M in cash. It doesn't have a
cash requirement for at least one and a half years. That is a big plus.
TGR: What other companies do
you follow that the readers might not know about?
MBV: Minera IRL Ltd. (IRL:TSX; MIRL:LSE; MIRL:BVL) is one of them. Minera IRL has three main assets. It owns the producing Corihuarmi gold mine near Lima and the soon-to-start-up
project Don Nicolas in Patagonia in
Argentina. The third asset is the Ollachea gold
project located in the Puno region of southern Peru.
Minera IRL was a company
listed first on the Alternative Investment Market (AIM) in London. Initially,
it was listed on the Venture segment in Peru and after Corihuarmi
started production, it migrated to the main board. It was a success case for
the Lima Stock Exchange. Corihuarmi is a small mine
with a remaining three-year life of mine at approximately 30 Koz gold/year. After closure, in 2015, Don Nicolas will
start production. As of today, Don Nicolas is a small project of about a 360 Koz gold resource that now is subject to higher costs due
to Argentina's economic outlook and risks, mainly exchange rate policies.
Start up at Don Nicolas will give Minera IRL
continuity in the gold production. Don Nicolas will run for three years, in
time for Ollachea to start production.
gold deposit is Minera IRL's main project with 2.6 Moz in resources. Ollachea
accounts for more than half of Minera IRL's value.
The Ollachea project is in the feasibility stage
and is planned to be an underground mine with a nine-year life of mine
producing approximately 120 Koz/year. Compared to
its first projects, Ollachea is big. The strategy
of Minera IRL is continuity in production and
demonstration of growth.
Minerals is another one that you cover. Could you briefly give us an
Minerals is a copper pure play. Panoro's portfolio
is composed of 14 projects located in the well-known Andahuaylas-Yauri
copper district, home of Xtrata's Las Bambas, Hudbay Minerals Inc.'s
(HBM:TSX; HBM:NYSE) Constancia and First Quantum
Minerals Ltd.'s (FM:TSX) Haquira. Bottom line, it's
a well-known copper district in Peru.
Within its portfolio, Panoro has two development properties, one of which is
the Cotabambas project with 2.4 Blb
copper. The project has a lot of geological potential having defined a
resource with copper grades above 0.7% and gold content above 1 gram/ton.
Also, the deposit has no major contaminants.
In 2011, Panoro drilled 30,000 additional meters to increase the
resource; the estimate is expected by mid-August. HudBay
Minerals has a 6% stake on Panoro and there is a
lot of speculation in what HudBay's interest is in Panoro's project. Panoro's
strategy is to use its expertise in Peruvian regional copper exploration and
development to find saleable deposits that can be bought by major copper
TGR: Are most or all of
those projects in Peru?
assets are all in Peru.
TGR: So that's an
exploration pure-play in Peru?
MBV: Exactly. Panoro is a strategically located copper exploration and
development company. It has a quality and well-known board and a lot of
potential to bring its assets into world-class copper deposits. Panoro and the other companies mentioned should be on an
investor's watch list.
TGR: To wrap things up, can
you summarize the mining investment situation in Peru? There are protests,
but also positive developments that aren't widely reported in the North
American investment markets. Maybe investors need to look past the
sensational news, as there may be opportunities.
MBV: Mining is an important
industry for Peru—the government and the people understand this.
However, of the $53B in mining investments in Peru, only 3% is local. The
other 97% comes mainly from China, U.S., Canada, Australia and Switzerland.
Peru has a capital deficit for mining investment. That's why the Peruvian
government is committed to mining and foreign investment. In time, the
protests will be resolved between the companies, government and communities
so that everybody will benefit from the industry. Everyone is aware that we
need this capital, investment, jobs and development. Of course, foreign
investors will also benefit from playing a part in the mining industry in
TGR: Thank you for your
Maria Belen Vega currently serves as an
investment analyst of corporate finance for Kallpa
Securities in Lima, Peru. Through pre-professional training, she developed
expertise in the area of Peruvian securitization, its structure and risks.
She later served as an analyst of transfer pricing at KPMG and provided
support to the investment risk unit of AFP Profuturo.
She has a Bachelor of Economics degree from Universidad del Pacifico.
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 specialization in
finance and capital markets.
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1) Alec Gimurtu of The Gold Report conducted
this interview. He personally and/or his family own shares of the following
companies mentioned in this interview: Southern Copper Corp.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Sulliden Gold Corp. and Minera IRL Ltd. Streetwise Reports does not accept stock
in exchange for services. Interviews are edited for clarity.
3) Maria Belen Vega: I personally and/or my family own shares of the
following companies mentioned in this interview: Rio Alto Mining Ltd. and Sulliden Gold Corp. I personally and/or my family am paid by the following companies mentioned in this
interview: Rio Alto Mining Ltd., Candente Copper
Corp. and Panoro Minerals Ltd. I was not paid by
Streetwise Reports for participating in this story.
4) Ricardo Carrión: I personally and/or my
family own shares of the following companies mentioned in this interview: Rio
Alto Mining Ltd. and Panoro Minerals Ltd. I
personally and/or my family am paid by the following
companies mentioned in this interview: Rio Alto Mining Ltd., Candente Copper Corp. and Panoro
Minerals Ltd. I was not paid by Streetwise Reports for participating in this