The 101 on Peruvian mining

Peru has become the third preferred destination for mining exploration investment in the world and the leading destination in Latin America. The dynamic environment surrounding the mining industry in Peru is currently driven by the transition to a new central government, changes in mining taxes, and an increased focus on the social and environmental impacts. With these different measures to consider, mining companies are asking what’s expected from the Peruvian mining industry.

In January, PwC hosted a mining event in an attempt to respond to questions related to the Peruvian mining sector. The event included commentary from mining experts from PwC Canada and Peru, Hudbay Minerals Inc., Peru’s National Society of Mining, Oil and Energy, and the Peruvian Canadian Chamber of Commerce.

Mining at the centre of Peru

Peru has a long mining tradition. The country’s coast, the Andes and forest regions are home to some of Peru’s top metals – copper, gold, silver, zinc, tin and lead. Benefitting from improved international economic conditions, mining investments continue to prosper in the country. It’s estimated that mining investments in Peru were up 50% in 2011 compared to the previous year. The country has experienced sustained growth (averaging 5.4% in the past decade) from a macroeconomic stability standpoint. Peru expects that in the next 10 year the mining sector will receive more than US$50 billion in investment to develop new reserves and mining infrastructure.

Political matters

Since the early 1990s, Peru has undergone a process of substantial structural economic reforms. It remains one of the best managed economies in the region, but political risks remain high. For mining companies, there are two types of political risks – macro and micro.

On a macro level, this refers to policy reversal and a move towards populism and resource nationalism. Current Peruvian president, Ollanta Humala, has illustrated his commitment to mining policy stability with recent Cabinet changes to reinforce this view. The protection of mining investments is a main priority for the government, but political risks may escalate with next electoral cycle in 2016 and whether the Humala’s popularity declines further.

On a micro level, risks are related to social protests, which are quite prevalent in Peru. There are currently 223 social conflicts. Most of the protests will remain unresolved, but it’s unlikely the protests will develop into a major national movement against the government or foreign investors. While the Humala government has taken a “tough” stance against protestors, planned investment delays are at times unavoidable.

Mining taxes and regulations

In Peru, taxes are paid quarterly versus annually, which allows the government to capitalize on rising metal prices. When it comes to royalties, The Mining Royalty, the Special Mining Tax (SMT) and the Special Mining Contribution (SMC) are economic considerations paid to the Peruvian Government for the exploitation of mineral resources. The SMC is only applicable to mining companies with projects with Tax Stability Agreements in force. These companies will voluntarily enter into agreements with the Peruvian Government for the purpose for pay this contribution. The new royalty and tax regime was developed through a joint task force of Government, industry association and mining companies.

Centring on community relations

A majority of mining happens in the Andes in Peru. The area has a strong history of individuals dedicating their lives there, which make community relations a pivotal aspect for mining companies investing in Peru.

To avoid potential negative impacts, it’s necessary to talk to the community regarding the use of land in advance of setting up operations in the region. It’s important to evaluate the future productive viability of the land that is left available for each affected family or community.

Mining activity also has the potential for negative environmental impacts, especially for water and soils, if it is not made in a suitable way. Companies may want to consider an elaboration of environmental handling and impact plans in participative form.

Lastly, with close to 400 prospects and exploration projects in Peru, it’s essential to assure that the investment creates collective and sustainable benefits for all involved in order to avoid full dependency towards the mining activity.

Labour shortage

On a global scale, a severe skill shortage is occurring within the mining industry. In Peru, The National Mining, Oil and Energy Society estimates the mining sector will need an additional 40,000 employees this decade – 30,000 new positions, 10,000 of whom will replace retirees. Projects are being cancelled or deferred due to the shortage of staff for construction and operations, which simultaneously slows down productivity.

To address this challenge, mining companies must look at the different issues causing this scarcity. Some of the issues include: lack of career or general public awareness; underrepresentation of key talent groups such as women, new immigrants and young adults; candidates’ lack of field experience; the seasonal nature of work; knowledge gap; and lack of global awareness of employment opportunities.

For more information, please visit PwC’s mining site at: www.pwc.com/ca/mining.