Industry Trend Analysis - Peru's Copper Sector Boosted By Low-Cost Production - DEC 2016

BMI View: Peru ' s significant copper production growth will be driven by a strong project pipeline and competitive operating costs over the coming years, in contrast to decelerating copper production growth in top producer Chile.

Our long-held view that Peru will emerge as a copper outperformer continues to play out, with the country's output increasing by 47.8% y-o-y over the first seven months of 2016 ( see 'Copper: Accelerating Output, But Risks To Downside', March 24 2015). Peru's copper production growth will be supported by a number of large-scale projects coming online over the coming years. In comparison, Chile's copper sector will contend with declining ore grades and limited greenfield investment. While Chile will remain the largest global producer of copper by a significant margin, the country's growth outlook will lag. Indeed, we forecast Peru's copper production growth to average 9.5% over 2017-2020, producing an additional 629 thousand tonnes (kt), while Chile's copper production stagnates, averaging 1.5% annual growth over this period and producing an additional 290kt.

Chile Stalls While Peru Gains
Select Countries - Copper Mine Production, Monthly ('000 tonnes)
Source: Bloomberg

Low Operating Costs Key To Success

Competitively low operating costs and high grade reserves will underpin Peru's copper production outperformance as copper prices remain subdued by historical standards. For instance, Chinese firm MMG expects the Las Bambas mine, which began commercial production in Q216, to average C1 cash costs of USD1.0-1.1/lb in H216 and reach the bottom quartile of the cost curve within 6 months, targeting C1 costs of USD0.8-0.9/lb. Similarly, in H116, Hudbay Minerals reported cash cost before by-product credits (meaning precious metals, molydenum, etc mined as a by-product) at the Constancia mine in Peru of USD1.16/lb, down from USD1.24/lb in H115.

Miners in Chile, in comparison, continue to pare down costs, however face challenges from water and power shortages. State-owned copper mine Codelco estimates the firm's C1 cash costs in 2016 to average USD1.3/lb, and estimates average C1 cash costs in Chile excluding Codelco to even higher at USD1.4/lb. In Q316, Chile-based copper miner Antofagasta reported average cash costs before by-product credits over the first three quarters of 2016 of USD1.6/lb, down from USD1.8/lb in the same period of 2015, although still elevated compared to peers.

Regional Leader
Select Countries - Copper Production Growth (% y-o-y)
e/f = BMI estimate/forecast. Source: USGS, BMI
Peru - Key Copper Projects
Company Mine Capex (USDmn) Notes
Source: BMI Mines Database, Company announcements
Minerals and Metals Group (62.5%) Las Bambas 7,400 Production began Q116 and will ramp up to 400kt/yr by 2017
Freeport McMoRan (53.7%), Buenaventura (19.9%) Cerro Verde 4,600 Reached full capacity in Q116; 2016 production guidance 500-550kt
Southern Copper Toquepala 1,200 Increase annual production capacity to 235kt by 2018
Chinalco Toromocho 1,320 Completion expected Q216
HudBay Minerals Constancia 1,700 Production 82kt/yr; reached commercial production Q215
Southern Copper Tia Maria 1,400 Estimated production 120kt/yr; expected 2018
Milpo Michiquillay 4,800 Estimated production 100-200kt/yr
Minerals and Metals Group Galeno 2,500 Production expected 144kt/yr
Anglo American (81.9%) Mitsubishi Corporation (18.1%) Quellaveco 6,000 Reserves: 951mnt
AQM Copper Zafranal 1,500 Estimated production 103kt/yr; expected 2018
Zijin Mining Rio Blanco 1,500 Estimated production 200kt/yr; expected 2019
Metminco Los Calatos 665 Exploration stage
Southern Copper Cuajone 166 Installing primary crusher with 43.8mntpa processing capacity with conveyor system; Completion expected Q117
Junefield Resources Don Javier 600 Resources: 430mnt