--Increased mining costs have hurt earnings, raised doubts about
profitability of some projects
--Higher costs are due to more expensive supplies, labor and
appreciation of Peru's currency
--SNMPE president also urges caution with new consultation
law
By Ryan Dube
LIMA, Peru--Peru's mining sector will likely continue to see
rising costs, making it more expensive for companies to develop
projects in the Andean country, the National Mining, Oil and Energy
Society, or SNMPE, said Thursday.
Mining costs in Peru have increased steadily in recent years,
which has recently affected the earnings of local companies and
boosted the capital expenditures for some large-scale projects.
SNMPE President Eva Arias said in an interview that Peru's
mining sector will need to become more efficient to cushion the
impact of higher costs and to remain competitive compared with
other mining districts. Peru is a major global producer of copper,
gold, silver and other minerals.
The higher costs in the sector have been driven by more
expensive supplies and labor, as well as the steady appreciation of
Peru's currency against the U.S. dollar during the past decade.
Many of Peru's biggest mining companies saw their net profits
decline last year partially due to increased costs, while others
have had to rethink their investment plans for large-scale
projects.
Mining companies have lined up a pipeline of projects that will
require investments worth some $53 billion this decade, according
to industry and government figures. The government is counting on
these projects in order to boost Peru's mineral production, which
would increase tax collection, create more jobs and support
economic growth.
But rising costs have already put into question the feasibility
of some projects. In November last year, Gold Fields Ltd. (GFI,
GFI.JO) and Compania de Minas Buenaventura SAA (BVN, BUENAVC1.VL)
said the initial feasibility study to develop their Chucapaca gold
deposit showed that the project wasn't viable due to high capital
and operating costs. The companies are advancing a new feasibility
study that could be completed by the end of this year.
Other companies have had to change their investment plans. In
August, Xstrata PLC (XTA.LN) increased the capital expenditure on
its Las Bambas copper project by 7% to $5.2 billion, while this
year Chinese-owned Minera Chinalco Peru boosted its investment plan
for the Toromocho project by 60% to $3.5 billion.
Ms. Arias said that investments for many other projects could
also rise. "We have to try and be more efficient to reduce these
costs and not lose our competitiveness," said Ms. Arias, a mining
executive that was elected in February to lead the SNMPE until
2015.
Another major challenge for Peru's mining sector is opposition
from rural communities that are worried about the environmental
impact of new projects.
Ms. Arias said the government and industry need to do a better
job of informing residents about the benefits of projects, while
also implementing development works in remote communities that have
high rates of poverty.
"I think this will help a lot to ease the social conflicts," she
said.
The government has looked at several options to reduce
disagreements. In 2011, President Ollanta approved legislation to
ensure consultation with indigenous communities before the
development of natural resource and infrastructure projects. At the
time, the prior consultation law was seen as an important tool to
resolve disputes by improving dialogue.
But many analysts now believe it could add more tension due to
uncertainties over its implementation, including who should be
consulted. Ms. Arias cautioned that the law could "paralyze"
investments if it isn't properly implemented.
"If it isn't used well, it could be politicized and it could
paralyze investments," Ms. Arias said. "We have to be very
careful."
Write to Ryan Dube at ryan.dube@dowjones.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires