Industry Trend Analysis - Uncovering Growth In Peru's Gold Sector - NOV 2015

BMI View: Peru's gold production growth will be supported by declining operating costs on the back of US dollar strength and low fuel prices over the coming years.

Peru's gold output growth will be driven by both lower production costs, primarily due to low fuel and labour costs, and a strong project pipeline over the coming years. In our view, Peru's gold sector will fare significantly better than high-cost gold producing countries, including the US and Canada. Peru's inexpensive labour and energy will support steady growth from miners. Further, the country's favourable regulatory environment will encourage investment ( see: 'Legislation Shift Won't Affect Sector's Growth', September 29 2015).

We have revised Peru's gold production growth forecast from -1.0% to 4.0% and -0.5% to 2.5% for 2015 and 2016, respectively. We expect Peru's gold production will increase from 5.5 million ounces (moz) in 2015 to 6.0moz in 2019. This would represent an average annual growth of 2.7% over 2015-2019, significantly higher than averaging -1.9% over 2010-2014.

Although gold prices will continue to suffer against a strong US dollar, Peru's lower energy and labour costs will allow miners operating within the country to remain profitable. Firstly, lower input costs, due to US dollar strength, low wages and weak fuel prices will increase the sector's competiveness and incentivise gold production. The Peruvian sol's local depreciation against the US dollar will benefit miners, as it will lower input costs, while at the same time increasing output value, as gold is priced in US dollars. We forecast the Peruvian sol will average 3.2 against the dollar. Following on this, Peru's low mining wages will increase the sector's cost competitiveness over the coming quarters. The average annual mining wage in Peru in 2013 was USD17,581 compared to USD34,226 in Chile and USD97,044 in the US, a top gold producer. In addition, persistently low oil prices, forecasted to average USD56.0/bbl in 2016, will help lower production costs ( see: Persistent Market Imbalance Supports Bearish Price Forecast, September 3 2015). These factors have already contributed to lowering production costs. For instance, Hochschild Mining, a dominant precious metals producer in Peru, reported 2014 gold cash costs of USD864/oz, well below our expected price for gold of USD1,175/oz in 2015. Minas Buenaventura cited lower diesel cost as a main factor for lower Q215 cost applicable to sales at its Orcopampa mine, down to USD695/oz from USD756/oz in the same period the prior year. Yanacocha, jointly owned by Buenaventura and Newmont Mining, produced 215.9 thousand ounces of gold in Q215, which indicates a 13.0% increase from Q214.

Gold Production To Climb
Peru - Gold Production, moz (LHS) & Growth y-o-y, % (RHS)
f= BMI forecast. Source: National Sources, BMI

Secondly, the sector's strong project pipeline will support the sector's long term growth outlook. For instance, Buenaventura's USD250mn Tambomayo gold mine will come online in Q316 and produce 120-150koz per annum at capacity. Hochschild's Inmaculada mine began production in Q315 and has produced 25koz of gold by Q415. Lupaka Gold began operations at its Invicta Gold Project in August 2015. Peru's gold production growth will help drive industry value, with the country's expected mining industry value at USD21.2bn in 2016 and USD25.2bn in 2019.

Local unrest and violent protests will continue to present a major challenge to the country's gold sector. For instance, Minera IRL restarted operations at its Corihuarmi gold mine in September 2015, after local disruption forced the mine to shut down temporarily. and In light of the unrest, Minera agreed to demands to continue funding community development projects.