Is the Peruvian government becoming more mining friendly?
With a credit rating higher than Mexico and Brazil, Peru should be high on the list of mining investors, but confidence has been shaken over the last few years when the government revoked some high-profile mining licenses.
According to Lima-based Kallpa Securities Managing Director Ricardo Carrión and President Alberto Arispe, recent government actions might signal a reset, with the government even acting as a mediator between mining companies and the local communities. In this interview with The Gold Report, Carrión and Arispe detail the state of mining exploration in Peru and discuss companies actively exploring, including one that just received its long-awaited environmental approval.
The Gold Report: Ricardo, in June 2011 investors were surprised to learn that Bear Creek Mining Corp.'s (BCM:TSX.V) license had been revoked for its wholly owned Santa Ana silver project. The Santa Ana licensing incident and other moves happened shortly after Ollanta Humala was elected Peru's president and tarnished the country's reputation as a destination for mining investment. That was then. Please tell us about what's happening now.
Ricardo Carrión: The government of Alan García revoked the license for the Santa Ana project, so Humala inherited that situation. Newmont Mining Corp. (NEM:NYSE) suspended the Minas Conga project, which was a flagship mining project of the Peruvian government, because of social and political issues.
The Peruvian government realizes that mining is a very important item on the agenda and is a cash cow. It has been upgrading the regulatory framework in Peru and simplifying the process.
The government has developed a new strategy to avoid another Minas Conga situation. We can see that strategy with Minera IRL Ltd. (IRL:TSX; MIRL:LSE; MIRL:BVL), Sulliden Gold Corp. (SUE:TSX; SDDDF:OTCQX; SUE:BVL) and Bear Creek's Corani project. The government has been supporting the Corani project by working with the mining group in structuring the environmental impact assessment (EIA). That doesn't mean that the government will immediately approve the project, but it wants to bring to the community a fair project.
TGR: Do you think Minas Conga will ever reach production?
RC: It all depends on Newmont and Compania de Minas Buenaventura (BVN:NYSE; BUE:BVL), but we expect Conga to move forward in the next two or three years.
TGR: Standard & Poor's just gave Peru a new credit rating of BBB+ and that's higher than either Mexico or Brazil. However, many investors would prefer to put their mining investment dollars elsewhere. Why doesn't the perception match the reality in Peru?
Alberto Arispe: Peru is a smaller country than Mexico and Brazil, so it's not as much on the radar of investors. Also, most of the mining in Peru is in the highlands, the poorest area of the country. The risk of mining is higher in these areas than around Lima. There is a lot of inequality in the highlands, which leads to cultural clashes. That's why some of these companies have problems with local communities in the highlands.
Some companies have no problems, others have minor problems and others have a lot of problems. For example, Bear Creek is now working with the government of the local community with a lot of success in Corani, but it did a relatively poor job with the government in Santa Ana. Newmont did a pretty poor job in dealing with the locals in Cajamarca, but Freeport McMoRan Copper & Gold Inc.'s (FCX:NYSE) Cerro Verde has a very good relationship in Arequipa. There are projects that are going ahead with good community relations and there are projects that are not going ahead because they have done a bad job in dealing with the local communities.
TGR: So is it really about a lack of community engagement on behalf of the companies in most cases?
AA: I think so. It depends a lot on the company.
TGR: There is lots of good news too. Peru's central bank says it expects to see more than $40 billion ($40B) in private investment between 2013 and 2015 as some of the world's largest copper mines are built there. Tell us about some of the success stories of mining in Peru.
RC: Some of the most important ones are Las Bambas, which is in the hands of GlencoreXstrata (GLEN:LSE). It has spent about $4B. There is Freeport's Cerro Verde mine, which is expanding at a cost of another $4B. Newmont's Minas Conga is on the waiting list for now, but that is a $5B investment. Then you have "smaller" projects such as Toromocho, which is run by Aluminum Corporation of China (Chinalco), and Anglo American Plc's (AAUK:NASDAQ; AAL:LSE) $3B Quellaveco.
TGR: Do you think that the Peruvian government has learned from the Bear Creek and Minas Conga issues and has taken measures to make sure that those types of problems don't happen as frequently in the future?
RC: On the approval of the three EIAs, I know that the government has been trying to work closely with the companies and the communities, trying to be the mediator.
There was a situation a few months ago with Candente Copper Corp.'s (DNT:TSX; DNT:BVL) Cañariaco project. The government took a leadership position to solve that problem. It committed to invest 140 million soles (US$50 million) in the community.
TGR: Is Kallpa itself seeing a greater interest from institutional and even retail investors in mining securities?
RC: Obviously we are not isolated from the problems around the world. The TSX Venture has had low liquidities for the last few months and investors are afraid of mining ventures. My impression is that we probably will be out of this problem in the next 6 to 12 months. I think the worst is over.
TGR: I think that's the general consensus out there. You've mentioned some producing companies. What are some names of companies with operations in Peru?
RC: In the lowest risk group—near-term producers or companies that recently switched to producing—we have Trevali Mining Corp. (TV:TSX; TREVF:OTCQX; TV:BVL), which has the Santander mine (a zinc asset in Peru). Last month the company announced the commencement of operations, which was a good catalyst for the market.
TGR: Trevali is producing zinc and a lead-silver concentrate at the Santander mine in Peru. How important is it that the company is about to start producing zinc just as the market is expected to strengthen?
RC: Analysts are predicting a deficit on the zinc supply side. Having a project up and running in this down cycle is a good thing for the company because the expectations are that it will get all the upside in the upcoming years. It's a very important project for Trevali, one that it has just started. The other project is located in Canada and is supposed to be in operation by the end of next year. If you want to get exposure to zinc, Trevali is one of the best choices.
TGR: Doesn't Trevali's board have a couple of members who used to be with Ivanhoe and have a fair bit of operational experience as well?
RC: Yes, Trevali has a very strong board. Also, GlencoreXstrata has a good stake in the project. It has an offtake agreement on Santander. One of the positives of Trevali is that it has the support of a major.
TGR: What other companies would you like to talk about?
RC: Luna Gold Corp. (LGC:TSX; LGC:BVL) has been in operation for several years, but is now gaining the interest of investors. The company's projects are in Brazil. It's quite an interesting asset and the company is running very well. The only issue is the correlation with the gold price. Gold prices, as you know, are well off their peak.
TGR: Is Luna listed on the Lima Stock Exchange?
RC: Luna Gold is a very peculiar case because its asset is in Brazil, but it's listed here in Peru. The project was originally created by Luis Baertl, who is Peruvian, and he was also involved in the Toromocho story, which was one of the most successful transactions that we have seen here in the public market. He has connections with several Peruvian shareholders. That has brought to the company good liquidity in the Peruvian market.
Another company on the radar of many Peruvian and Canadian investors is Rio Alto Mining Ltd. (RIO:TSX.V; RIO:BVL), mainly because it has a good combination of exposure to a producing asset and exposure to a development asset. The company started production in 2011 and performed better than expected. Now Rio Alto is in the process of starting the second phase, a copper project. It is doing all the engineering to bring to the table a low capital expenditure (capex) project that can be easily financed, which can be the best strategy for that type of project. Rio Alto is advancing very well and it doesn't have financing needs for now, so it's a very interesting company where you have a good combination of risks.
TGR: Rio Alto is producing more gold from La Arena than it had issued under its guidance for 2013. How long can that continue?
RC: Rio Alto has had excellent production during the first and second years because in the first year it had the benefit of having higher grades than expected. In the second year it was mainly because Rio Alto began an expansion, so even though the grades were lower, the company was able to put more ore in the plant. For this year, Rio Alto is estimated to have basically the same level of production, around 200,000 ounces (200 Koz) gold. This will become harder to maintain in subsequent years. That's why the second project is so relevant; in the mid-term that second project will have the capacity to offset the decrease in gold production.
TGR: Does that mean that Rio Alto will need less financing to develop its copper asset?
RC: Rio Alto will need to access several types of funding sources for the project. The project is estimated to cost $250–300 million ($350–300M). In the copper environment we typically hear higher numbers for capex, so the initial investment for this second phase is extremely reasonable. In terms of cash position and according to our estimates, the company will probably have around $100M by that time. To complete the financing it can use several mechanisms, such as streaming, offtake agreements, joint ventures. Because Rio Alto has a good balance sheet from the first project, that will allow it to come up with a good deal.
TGR: The first part of La Arena is gold and the second phase will be copper-gold, correct?
RC: Yes, although it is a copper project, the gold content is three times what is in the first project. It's around 3 million ounces (3 Moz) of gold.
TGR: What are some of the promising developers in Peru?
RC: We have three companies on the radar of investors, companies in the process of getting final EIA approvals. Sulliden has just received the approval on its very solid gold project, Shahuindo; Bear Creek has Corani, a large-scale silver-lead project; and Minera IRL is also in the process of getting the EIA approval for its Ollachea gold-project.
TGR: Sulliden's 2012 feasibility study said that it would be producing 90 Koz gold equivalent over 10 years starting in mid-2015 at Shahuindo. Could that happen any faster?
RC: I don't know if it will happen faster, but Sulliden is on track to be in production within the estimated timeframe (early 2015). It is doing pretty well. One of the main concerns of investors in the case of Sulliden was its proximity to the Conga project. Sulliden did a fantastic job with agreements with the community.
Sulliden just received the EIA approval. This is a big milestone for the company and also a good message for the local mining industry. The approval will allow Sulliden to derisk the Shahuindo project from the social standpoint, which was one of the main concerns of investors. This approval is even more relevant considering its proximity to the Conga project. Next step for Sulliden will be the construction permit.
Out of those three companies, Sulliden is the only one that has already financed the project. It has an arrangement with Barclays and Credit Suisse to provide about 90% of the capital required for the construction. Early this year Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) took a 10% stake in the company for $27M, thus covering the remaining 10% of the capex. It shouldn't be a problem for Sulliden to ramp up the project very quickly.
TGR: How far away are the EIAs for Bear Creek and Minera IRL?
RC: Bear Creek and Minera IRL also submitted documents in December. We expect to see similar results by the end of this month or maybe next month.
TGR: What's the situation with Bear Creek's Santa Ana and Corani projects?
RC: Bear Creek is in discussion with the government on Santa Ana. I think there's good will on the part of the government to solve the situation, but it will take time. In my opinion, one option can be to sell the project because the government revoked the license to operate in a border zone. That license solely applies to foreign investment. If a Peruvian group were to acquire Santa Ana, it would not need that special license and could put the asset in production very quickly.
Corani is a huge project with a capital expenditure probably around $600–700M. It's a big deal for the company. When the time comes, Bear Creek will probably need to make an agreement with a major group to develop the project. For now it seems comfortable with the progress on Corani. It has cash, which is very important. Bear Creek raised around $100M around November 2010 that was supposed to be invested in Santa Ana. Bear Creek should have $70–80M left, so for now funding is not an issue.
TGR: Minera IRL just secured the financing to fully develop Don Nicolas in Argentina. What are your thoughts on Minera IRL?
RM: Minera IRL delivered what it promised, which is a plus for the company because Argentina has been an overhang. Minera IRL provided a message to the market early this year that it was going to try to isolate the Argentina asset. The company devised a clever solution, which was to find an Argentinean group that would be willing to finance the construction and it succeeded in doing so. It's a group called CIMINAS and it came out with an $80M deal in January. Now most analysts are including Don Nicolas in their projections because that project is fully funded and probably will enter production sometime next year. I think that deal was very good for the company.
TGR: And at the bottom of the food chain are the explorers. What are some explorers that you deal with in Peru?
RC: With explorers there is also a wide range of risks. On one side are all those companies that have been drilling for a couple of years, have come up with a bigger resource and are entering the stage of developing the first economic studies, like preliminary economic assessments and prefeasibility studies.
On that low-risk side of explorers we have two companies investors are paying attention to. One is Candente Copper, which has a very good asset in northern Peru, Cañariaco Norte. The company released a prefeasibility study last year and is now preparing the final feasibility study. The only issue has been with dealing with community. In that process the government has been very supportive of the company.
It's a very big project with 10 billion pounds of copper. It's one of the largest copper projects that is in the hands of a junior group. It's undervalued. It's great that it's almost ready to go. For a major that wants to get an asset that is very close to production, Candente is an option.
TGR: And the other explorer?
RC: The other company is Panoro Minerals Ltd. (PML:TSX.V: PZN:FSE; PML:BVL), which is a very peculiar company. It has around $18–20M in cash right now and has been extremely successful in drilling the Cotambambas project (one of 12 projects). Panoro provided the market with a resource update last year and came up with a 400-million-ton project with a good grade. Everyone is expecting another resource update by the end of this month. The main deposit, the Cotabambas project, continues to grow.
Cotabambas is located next to the GlencoreXstrata's project, Las Bambas, which is the largest copper project in Peru (1.1 billion tons) and is under construction right now. I think the future of Las Bambas can potentially impact Panoro. We have to remember that GlencoreXstrata needs to sell a copper asset to fulfill the requirements of the Chinese government in the merger process. I foresee several scenarios. If GlencoreXstrata decides to sell Las Bambas, it would make sense for the buyer to add another project and take advantage of the economies of scale. Cotabambas is right next to Las Bambas and has the same mineral (plus gold content), same infrastructure, good community relations and is a decent size. My impression is that any party willing to pay $5B for Las Bambas should take a look at Cotabambas. On the other side, the seller will have some pressure to invest the funds received for Las Bambas and what better option than Panoro's flagship project. So both the potential buyer and seller of Las Bambas might be interested in the Cotabambas project.
Panoro's other project, the Antilla project, is well advanced. Antilla had a prefeasibility study some time ago, which needs to be updated. The project is of interest to several Peruvian and foreign groups. Panoro has plenty of cash for the upcoming years and has an extensive portfolio of projects. Cotabambas and Antilla are the main ones, but it has another 10 projects.
TGR: You once did an interview with The Gold Report where you talked about "tenbaggers," equities that could increase by 10 times their current value. Are there any companies that have that kind of potential?
RC: Panoro and Candente are two companies that can be included on that list. If you do the calculations, in both cases you see projects that can easily supersede $500M. Panoro and Candente are on the low-risk side of explorers where substantial appreciation in the share price is possible if there is production. In addition, those are companies with an interesting liquidity in the market.
It's very hard to say which one will be the next tenbagger, but companies like Duran Ventures Inc. (DRV:TSX.V; DRV:BVL) and AndeanGold Ltd. (AAU:TSX.V; AAU:BVL) come to mind. AndeanGold is a very low market-cap (US$3M) company with an interesting silver project in northern Peru. The resource calculation as of today is around 15 Moz silver with the potential to continue growing. This project can be of interest to some local groups.
Another possibility is Lupaka Gold Corp. (LPK:TSX.V; LPK:BVL), which has two main assets. The Invicta project is a well-advanced asset that can be subject to a transaction, and on the exploration side the Crucero project is another good asset. Again, those are companies that are floating at very low levels (but on the other side are also facing low liquidity). Some of those probably could become the next tenbaggers.
TGR: Do you have any parting thoughts on the mining equity space in Peru and investing in mining equities in general at this stage?
RC: One of the main issues that we have now is liquidity in the markets. We have been seeing low volumes in our local exchange, the same as on the TSX and TSX Venture exchanges, but it's improving. Even though we have had some very bad months, in the last few weeks we have seen a little change. We need to see an improvement in liquidity. Then we need to see stable metals prices. The rapid drop in the gold price in April was a shock for investors and some are still concerned about the gold price. If we have stable metal prices and liquidity coming back to the market, we will see more activity.
The best catalyst for our local market, at least on the mining side, is to see transactions. The junior market is based on confidence and confidence relies on the ability of the junior miners to set up a deal and sell the project. Good transactions can really boost the interest on equities.
TGR: What do you think is going to bring about that kind of confidence? New discoveries? A couple of breakthrough stocks?
RC: The best catalyst for confidence is to see a junior company getting a good deal with a major. We saw such a transaction a month ago. A company named AQM Copper Inc. (AQM:TSX.V; AQM:BVL) sold a portion of its project to a Japanese group at a high valuation. The Asian group wasn't looking at the share price; it was looking at the intrinsic value of the project. We need to see more transactions at high valuations to bring companies back to the market.
TGR: Thanks for your insights.
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 a specialization in finance and capital markets.
Alberto Arispe is CEO of Kallpa Securities SAB, a Peruvian brokerage and boutique investment house. Previously, he was a vice president of emerging markets institutional equity sales at Fox-Pitt Kelton. Arispe has more than 18 years of experience in capital markets. He has a Master of Business Administration from the Stern School of Business at New York University and a bachelor's degree in economics from the Universidad Catolica del Peru. He is a professor of finance at Universidad de Lima.
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1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: Sulliden Gold Corp. and Trevali Mining Corp.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Sulliden Gold Corp. and Trevali Mining Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Ricardo Carrión: I or my family own shares of the following companies mentioned in this interview: Rio Alto Mining Ltd., Candente Copper Corp., AndeanGold Ltd. and Panoro Ventures Ltd. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Rio Alto Mining Ltd., Sulliden Gold Corp., Trevali Mining Corp., Minera IRL Ltd., AndeanGold Ltd., Duran Ventures Inc., Panoro Ventures Ltd. and Lupaka Gold Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Alberto Arispe: I or my family own shares of the following companies mentioned in this interview: Duran Ventures Inc., Minera IRL Ltd., Rio Alto Mining Ltd., Panoro Ventures Ltd. and Trevali Mining Corp. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Rio Alto Mining Ltd., Sulliden Gold Corp., Trevali Mining Corp., Minera IRL Ltd., AndeanGold Ltd., Duran Ventures Inc., Panoro Ventures Ltd. and Lupaka Gold Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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