Despite headlines about deadly protests and the collapse of funding for
juniors, Ricardo Carrión and Alberto Arispe of Kallpa Securities in Lima
remain steadfastly optimistic about the future of mining in Peru. In this
interview with The
Gold Report, Arispe and Carrión highlight the mining-friendly
government, the new production from many sources and point to several juicy
projects that lack only the means to further unlock Peru's mineral riches.
The Gold Report: Canadian and Australian miners have
realized a 25–30% premium due to the strong U.S. dollar. How has the U.S.
dollar affected Peruvian miners?
Ricardo Carrión: Peruvian miners have realized a similar benefit
due to currency exchange. This factor has resulted in lower costs for the
Peruvian industry. In addition, miners have also benefited from lower prices
in oil. But the question is has this cost reduction offset lower metal
prices, and the answer is no. Lots of companies are still struggling with
current market conditions.
TGR: How has the mining industry fared since President Ollanta
Humala was elected in 2011?
Alberto Arispe: Humala ran in 2011 on a radical, antimarket
platform. Presidential elections in Peru use the runoff system, so in order
to win a majority in the second round of voting, he had to moderate his tone
and make alliances with more moderate parties.
He then raised royalties and taxes on the mining industry. These were
modest increases, however, made after much consultation with the industry.
Given how radical Humala seemed at first, the industry was relieved. Since
2013, Humala's administration has become openly market friendly and has
worked to solve the problems faced by, for instance, Newmont Mining Corp.
(NMC:TSX; NEM:NYSE) over its Conga project.
TGR: The Peruvian government is more mining friendly, but what
about the Peruvian people? Last month, several protestors were wounded and
one was killed in the dispute over Southern Copper Corp.'s (SCCO:NYSE) Tia
Maria mine.
AA: This is not a national problem. It is a more localized problem
fomented by some NGOs, radicals and some politicians. Two or three big
projects are having local difficulties, but many big projects are moving
quickly to production without these difficulties. HudBay Minerals Inc.'s
(HBM:TSX; HBM:NYSE) $1.8 billion ($1.8B) Constancia mine is almost finished.
Next door, Las Bambas, a $5.2B project that MMG Ltd. (1208:HKSE) bought from
Xstrata Plc (XTA:LSE), should be producing in 2016. Freeport-McMorRan Copper
& Gold Inc.'s (FCX:NYSE) Cerro Verde copper mine is basically doubling
its capacity. Peru's copper production will soon double from what it was in 2014.
TGR: President Humala is not eligible to run again in 2016. Is this
a cause for concern?
AA: It's too early to worry about that. Let's see what the polls
are saying at the start of next year. Right now, the leading candidates are
very market friendly.
The main worries that Peruvian mining faces are lower gold, silver and
copper prices and the collapse of financing for projects owned by juniors.
TGR: Will the dearth of financing lead to an increase in mergers
and acquisitions?
RC: I already mentioned the Las Bambas takeover. It is rumored that
Southern Peru Copper will make a move on Anglo American Plc's (AAUK:NASDAQ)
large Quellaveco project. But this is only a rumor that was later denied by
Southern Peru Copper.
Among the juniors, Indico Resources Ltd. (IDI:TSX.V) just got into an
agreement for 70% of its Ocaña copper project to a private concern, Aruntani
S.A.C., for $18.6 million ($18.6M). This is an interesting deal, which we
have valued at about $0.10 per pound ($0.10/lb) of copper, which is high
given current market conditions.
TGR: Which Canadian juniors are having legal problems with the
Peruvian government?
RC: Bear
Creek Mining Corp. (BCM:TSX.V) is running an arbitration process with the
government of Peru over the license to operate the Santa Ana project, its 47
million ounce (47 Moz) silver project. Just to clarify, the government did
not expropriate the project but revoked the license to operate in a border
zone. All foreign companies need this permit to start a project. Barring a
resolution, this dispute will be adjudicated in Washington, D.C., in
September 2016. The legal experts will testify in favor of Bear Creek, but
the decision to seize Santa Ana was a political one, and a decision to give
it back would have political consequences.
I expect a good result for Bear Creek, perhaps by the end of 2015, which
would be a good omen for the mining community in Peru. Santa Ana is an
excellent project, with an after-tax net present value (NPV) of $80.2M and an
internal rate of return (IRR) of 24.9%. Its capital expenditure (capex) is
low, only $70.8M, and can start production very quickly.
TGR: How much of an overhang does Bear Creek suffer as a result of
Santa Ana?
RC: When you analyze junior companies, you give higher valuations
to those with good assets ready to start construction. In late 2010, Bear
Creek shares were trading around $12. After the expropriation and the market
crisis, shares fell to $1.05. Obviously the collapse in the silver price also
affected Bear Creak heavily, along with many other companies in the industry.
TGR: Bear Creek has another Peruvian silver project, Corani. When
will we get a feasibility study of that?
RC: Real soon. This will be an update of the 2011 feasibility. That
showed a resource of 270 Moz silver, 3.1 billion pounds lead and 1.7 billion
pounds zinc. It showed an initial capex of $574M, an after-tax NPV of $463
and a 17.6% IRR. The updated feasibility will adapt Corani to current market
conditions and lower the capex.
TGR: Will Corani get financing?
RC: Bear Creek is talking to several parties and examining several
strategies. There are various alternatives: streaming and offtake agreements,
joint ventures (JVs). I'm pretty sure a combination of these will finance
Corani.
TGR: Bear Creek's market cap is $112M. Is it a takeover target?
RC: Any small company with well-advanced projects—meaning good
assets—could face hostile takeover attempts. Bear Creek is one example, Panoro Minerals
Ltd. (PML:TSX.V: PZM:FSE; PML:BVL) is another.
TGR: Explain how the Peruvian government has regulated artisanal
mining.
RC: There are two types of artisanal mining in Peru. There is
flat-out illegal mining, which is often harmful to the environment. And there
is also "informal" mining, which refers to miners seeking to fully
regularize. The government has worked diligently to eliminate illegal mining
and establish a process whereby all ore is processed by regulated mills.
Progress is being made, but this will take some time.
TGR: Assuming that all or most of artisanal mining was regularized,
how much bigger would the official mining industry become?
RC: We don't know exactly how large artisanal mining is, but it is
big. I'll give you an example. Peru's main gold producer is not a company.
It's a region called Madre de Dios where most of the gold produced comes from
illegal and informal mining.
TGR: Has this new regulatory regime resulted in many companies
processing artisanal ore on a tolling basis?
RC: Toll mining is growing everywhere in the world, not just in
Peru. Mining companies are seeking lower risk, and processing ore presents
lower risks than exploration and mining. Here in Peru, we have five or six
TSX Venture-listed companies in tolling. Dynacor Gold
Mines Inc. (DNG:TSX) has been doing this for a while, and it has been
doing pretty well. The company has a market cap of $77M and processes in the
range of 250–350 tons per day (250-350 tpd). Dynacor has one plant at Huanca
and another on the way at Chala.
TGR: How much bigger will its operations be after Chala goes
online?
RC: Dynacor is seeking to achieve 1,000 tpd and will become a very
important player.
TGR: Dynacor also has a copper-gold exploration project, Tumipampa.
RC: When a tolling company reaches 1,000 tpd, it needs to secure a
consistent supply of ore. This is Dynacor's plan for Tumipampa.
TGR: What are the margins for toll miners in Peru?
RC: It depends on where you are in Peru and what the grade is.
Also, in order to keep the ore coming, toll miners must be fair with small
miners. The industry standard is about 40–50% now, but that will probably
fall over time to 35–40%.
TGR: What can you tell us about the other Peruvian toll miners?
RC: Inca
One Gold Corp. (IO:TSX.V) has a good model and has built a 100 tpd plant.
Equity financing was a problem, so the company elected to go with debentures
and notes. It has $7–8M in debt, which it should be able to restructure in
the near future. Inca One is in the middle now of a $1.5M convertible-loan
financing, which will give it working capital. This is crucial for toll
miners, because in order to build market share with small miners, you need to
pay them quickly.
Standard
Tolling Co. (TON:TSX.V) plans to achieve production in June with a plant
processing 100–150 tpd. The company is fully financed and progressing very
well. This story is similar to Inca One.
Anthem
United Inc. (AFY:TSX.V) plans to begin processing this year. Its plant
will cost around $10M. It's a big project, and the company intends to go
immediately to 350 tpd. Processing above that level requires additional
permitting. Anthem is also financing with debt.
Montan
Mining Corp. (MNY:TSX.V) has an agreement to buy an already producing 150
tpd plant. It's a manageable deal in a nice location. Unlike its rivals, this
company will have the capacity to process copper as well. This could be an
excellent play.
Duran
Ventures Inc. (DRV:TSX.V; DRV:BVL) has a location and basic permits but
needs to invest $1–1.5M to build its plant from scratch. Construction is five
to eight months away.
TGR: Duran has five exploration projects. Are they all on the back
burner?
RC: Duran's long-term plan is to develop these projects, but first
it needs cash flow, which is why it is going into tolling. Once cash flow is
achieved, that money can be leveraged to pay for exploration.
TGR: Which Peruvian zinc producers are your favorites?
RC: There are two. The first is Trevali Mining
Corp. (TV:TSX; TV:BVL; TREVF:OTCQX). It has the producing Santander mine
in Peru and advanced-stage projects, Caribou and Stratmat, in New Brunswick
in Canada. This is the only publicly traded zinc junior.
Caribou will begin production this quarter. Stepout assays from this
project released in April included 5.08% zinc, 1.76% lead, 0.37% copper, 59
grams per ton (59 g/t) silver and 1.63 g/t gold over 50.9 meters. Canada will
reveal Trevali's real value. In Peru, Trevali has an offtake agreement with Glencore
International Plc (GLEN:LSE) but no such obligations in Canada.
TGR: And what is the other Peruvian zinc play you like?
RC: Sierra
Metals Inc. (SMT:TSX) has Yauricocha in Peru, an extremely nice asset
generating good cash flow. The company has two very good prospects in Mexico.
Sierra has been flying under the radar because of liquidity problems, but I'm
pretty sure the company will solve those problems. It published Mexico silver
assays over 300 g/t in December, but few investors noticed that. It's hard to
buy Sierra Metal shares, but it has good properties and also pays a divided.
TGR: Let's talk about other junior gold producers in the region.
RC: Luna
Gold Corp. (LGC:TSX; LGC:BVL) has its asset in Brazil, but has many
Peruvian investors. It was forced to suspend its Aurizona gold mine in Brazil
because it was running out of mixed soft and hard saprolite ore. On May 8,
the company announced a $30M financing with a fund called Pacific Road
Resources, $20M debt, $10M equity. Luna also renegotiated its contract with
Sandstorm Gold Ltd. (SSL:TSX.V), which previously held a streaming contract for
the life of the mine: 17% of production at $400 per ounce ($400/oz). This has
been replaced with a 3–5% net smelter royalty (NSR).
This is an excellent deal for the company as this will trigger more
exploration work to improve the reserve calculation and restart the plant.
There's still a big challenge to finance the expansion of the plant, but it
is important to understand that there is already a sunk cost and it is only a
matter of finding the necessary funding to have Luna up and running
again—under a much better financial structure: the new deal with Sandstorm, a
solid equity position and a debt with a better structure.
TGR: Which near-term junior gold producer do you follow?
RC: Lupaka
Gold Corp. (LPK:TSX.V; LPK:BVL). It has the Invicta project, which is
ready to produce gold at 10–15 g/t. This is a well-known asset in an
excellent location near Lima. Lupaka does need a mill, however. It makes
sense for it to get an agreement with an existing plant to process its ore
while evaluating the construction of its own plant.
TGR: Let's discuss some other companies you follow.
RC: Minera
IRL Ltd. (IRL:TSX; MIRL:LSE) invested over $40M in a project in
Argentina. The company sold it for $10M, but given the conditions in
Argentina, this was the best of a bad deal. In Peru, it has the 1 Moz
Ollachea project. It's ready, but the capex is $164.7M, and that will be
tough to raise for a company with a market cap of $20M. Doing it with equity
would result in a tremendous dilution. Several financial institutions have
told me they like Ollachea, so perhaps it will go ahead with a combination of
equity, plus debt, plus a JV.
Panoro Minerals released a preliminary economic assessment (PEA) for its
Cotabambas project last month. It forecasts annual production over 19 years
of 143 Mlb copper, 88,000 oz (88 Koz) gold and 967 Koz silver at a cost of
$1.26/lb copper, with credits. The after-tax NPV is $627.5M, and the initial
capex is $1.38B. What is interesting about this is that there are nine
targets, but the PEA focused on only one. I think this was a wise decision.
From here on in, Cotabambas can only look better. But this is another company
with a small market cap: $34M. This project needs about $40–50M to get to
bankable feasibility.
TGR: Does it make sense for Panoro to bring on a JV partner or
partners?
RC: It's a matter of valuation. It makes sense to bring in a JV
partner based on the value of Cotabambas, not on Panoro's current market cap.
It also matters who the JV partner is. If it's a well-known company with
sufficient funding to develop a $1.38B project, that would be good.
TGR: What's the final company you wanted to discuss?
RC: Candente
Copper Corp. (DNT:TSX; DNT:BVL) has the Cañariaco Norte deposit. This is
another example of a company that is fighting with the market. Cañariaco is
one of the most advanced junior copper projects in Peru. It's a big project,
with a capex of $1.6B. Candente ran out of cash a year ago and is stuck in
the middle of the feasibility study. The challenge for it is to go to the
market to get $10M to complete it. I think the best way forward is to find a
JV partner or sign a streaming contract. This project has faced social
problems in the past, but we know that this region is not as difficult as it
once was. Cañariaco is a nice project.
TGR: Despite the current financing problems for juniors, are you
optimistic about their prospects in Peru for the rest of the decade?
RC: Absolutely. We are near the end of a cycle. I believe we will
see a real recovery in the market starting in 2016.
TGR: Ricardo and Alberto, thank you for your time and your
insights.