Industry Trend Analysis - Peru's Project Pipeline To Power Through Local Opposition, Tax Disputes - DEC 2017

BMI View: Peru ' s mining industry will continue to stand out as a regional outperformer, driven by a strong copper project pipeline, competitive operating costs and rising mineral prices. Nonetheless, bureaucratic red tape, near-term political instability and strong local opposition to mining projects will remain key obstacles for industry growth.

Peru will increasingly attract significant foreign mining investment over the coming quarters as prices, namely copper, continue to rise. We forecast copper prices to average USD6,100/tonne in 2018 and increase thereafter, and gold to average USD1,350/oz in 2018 and increase to 2021. Peru stands out regionally due to competitively low operating costs and pro-investment policies under President Kuczynski. Over the first ten months of 2017, mining investment, merger and acquisition in Peru totalled USD984mn, well above the level of the past two years combined. Notable deals include Glencore's USD956mn planned investment in Peruvian zinc miner Volcan Compania Minera to increase its 7.7% stake to at least 26.7%. As of Q317, Southern Copper reported USD744mn spent on the Toquepala expansion, which will increase production by 100kt to 217kt in 2018 and to 260kt by 2019. Southern Copper also expects to receive a construction license for the USD1.4bn Tia Maria in Q118. On December 20, the Peruvian government will auction off development rights for the USD2.0bn Michiquillay copper project, dropped by Votorantim Metais due to a disagreement over royalties in February and previously by Anglo American due to unfavourable market conditions. Within the wider Peruvian economy, mining continues to outperform, registering 3.6% y-o-y growth in August compared to total GDP growth of 2.3%.

Based on the country's robust project pipeline and rising copper prices, we forecast Peru's copper output to increase from 2.5mnt in 2017 to 3.8mnt by 2026, averaging 5.2% annual growth. Nonetheless, Peru has relatively onerous tax requirements and an overwhelming number of rules and regulations managed by various government departments. This system presents downside risks to mining operations due to occasional uncertainty. In the firm's Q317 report, Freeport McMoran recorded pre-tax charges of USD357mn at the Cerro Verde mine due to a royalty dispute with Peru's national tax authority.

Robust Project Pipeline To Drive Growth
Peru - Mines By Commodity & Phase
Note: Projects may be tallied under more than one commodity. Source: BMI Mines Database

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