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Peru as a mining opportunity.

The following is the closing speech made by Felipe de Lucio, a consultant with Lima-based DE Ingenieros, at the XXI Convention of Mining Engineers held in Ica, Peru, late last November. Mr de Lucio was president of the Instituto de Ingenieros de Minas del Peru, the organiser of the biennial mining convention, in 1984-85.

"Perhaps the most significant message from this meeting is the shared feeling that Peruvian mining has come out of a long period of stagnation and is at present in clear resurgence. It is true that we miners are inborn optimists, otherwise we would not be miners, but we cannot avoid explaining why our mining industry stalled as it did, because our foreign friends here would carry away an incomplete picture of our present enthusiasm.

"The world mining industry enjoyed expansion from 1973. That lasted, with ups and downs, until the 1981-83 slump, which dragged the mining industry the world over into a contraction cycle that lasted until mid 1987. As of then there was a remarkable expansion, raising production and prices to high and sustained levels for non-ferrous metals like copper, lead and zinc, of which Peru is a major producer. In early 1992 a decline started which continues until now.

"The 87-92 boom was the greatest in a century for Chile's copper and gold, which account for 80% of its output. In Brazil, iron ore, gold, tin and aluminium burgeoned. In the U.S., Australia, Zimbabwe and Mexico, mining companies enjoyed fat profits.

"Peruvian mining kept pace with world cycles but missed the 87-92 expansion, making the downtrend last for us from 1982 until the present. Why is it that Peruvian mining companies, who sell the same products, to the same markets, at the same price, did so poorly while everybody else was booming? Why, in five years, mines all over the world did well, while Peru's did not?

"Peru fought a 12-year guerrilla war against the Maoist sect led by Shining Path, a fight that was roughest in the Andes where most Peruvian mines are and where protection was difficult and expensive for anybody to provide; but for the mines it was far more complex and for many impossible to undertake properly. Because the mines are located in remote areas, because the guerrillas knew of their strategic position in the economy and because mines had the explosives they needed are why the mining industry got battered worse.

"Damage inflicted on mining installations, measured both by replacement costs and by lost production, added up to U.S.$1,000 million from 1980 to 1991.

"But material damage was not the worst part of it. Terror and anguish dominated everyday life in mining camps, affecting behaviour and output of personnel at all levels.

"It might not be practical to predict how much more Peru's mines would have produced had it not been for the subversion. But it is not too daring to say that at least one-tenth more would have been produced in those 12 years, about $2,000 million more.

"In 1988, the Peruvian Federation of Mining Unions struck and halted all production for a month. After a while it struck again, but then for two full months. That year, strikes cut 400 million from mining output.

"Man-hours lost by labour unrest in the 1980-91 period added up to one full year, meaning that Peruvian miners worked only nine years instead of ten. Had it not been for these strikes, Peru would have produced $1,500 million more.

"Hard currency from mineral exports between 1980 and 1990 was kept by Peru's Central Bank, converted into local currency at a rate fixed by the same bank and was then given to the producer. Because Peru is a net food importer, and an importer of most materials for its industry, governments kept exchange rates low in order to keep food and wholesale prices down. Thus, mining's restricted revenues in local currency made for cheap imported consumer goods.

"In 1990, local currency producers received for each dollar could buy but half of what it bought in 1980. Funds transferred from mining to consumption on this basis amounted to 3,000 million during the decade.

"Seven years ago, a Peruvian miner got 14 Soles for every dollar he exported. A local manufacturer bought his metal at that rate, turned it into wire, and when exporting it got 17 Soles to the dollar. The 21% margin was a subsidy from mining to manufacturing. Times were when the margin went up to 100%. In five years, mining subsidised primitive manufacturing plants with $500 million.

"This transfer of funds hurt not only the mining industry but the economy as a whole. Shifting funds from mining, which has almost unlimited investment opportunities, to small outfits with negligible capacity to receive investments shifted money from investors to consumers.

"From 1980 to 1991, more than 7,000 million were removed from normal Peruvian mining revenue. If those funds had been kept within the industry, several benefits would have been achieved.

"First of all, exploration would have been intensive in a territory where good strikes are made with moderate field work. Secondly, they would have gone for plant and equipment renewal, making Peruvian producers more efficient and competitive. Thirdly, production capacity would have been increased in existing operations, and since investing in an expansion is smaller, in time and money, than investing in a new plant, production would have been boosted in a short time and with marginal requirements. And finally, a country with vast, rich and well-known mineral resources would have seen the opening of new mines and metallurgical facilities.

"Perhaps the best way to illustrate Peruvian mining's past troubles is by projecting results based on Peru's historical experience with mining investment. If those $7,000 million had not been removed and were invested in the mining industry itself, annual mineral output would be worth $3,500 million on top of the present $1,500 million.

"The Peruvian case should be an illustration to those developing countries inclined to suck funds from flourishing natural resource industries, that the result is to dry them up with nothing in exchange left.

Starting by the end of 1990, this country engaged in a frontal attack on its major ills; and in two years it has defeated insurrection and terrorism, has good relations between industry and unions with scarce strikes, an open economy free of subsidies and in addition market regulation for currency exchange.

"Peru, once again, offers a mining opportunity. There are in the world five major concentrations of metal wealth and one of them is in the southern Andes in a region encompassed by Peru, Bolivia and Peru. The five are the south of Africa, the west of North America, the south-west of South America, central Russia and central Western Australia.

"The ten metals with higher present and future demand for the coming 25 years are iron, aluminium, copper, nickel, gold, zinc, silver, tin lead and manganese. Five of these metals are more concentrated in the south-western part of South America than anywhere else. These are copper, zinc, silver, tin and lead; and perhaps gold.

"Due to its geological formation, to its geographical location and to its mining expertise, Peruvian mineral deposits of these metals have an economic value that places them within the first tercile of the world. Its geological value is accounted for by its location in the Andes Cordillera where, due to its intense and recent orogenesis, deposits with large reserves, better grades and attractive paragenesis are found.

"Peruvian mines are close to the Pacific Ocean facing the Asian market, with the highest growth in metal consumption, with major shipping routes, good ports on a coast permitting future mega-ports and mild weather permitting all year round shipping.

The workforce is hard working and widely experienced as is witnessed in Peruvian workers from Johannesburg to Perth. A century and a half of mining education has produced many engineers with world level recognition.

"The above mentioned is what economists call a comparative advantage. It is the mission of our community and the task of us as engineers to make this comparative advantage of our deposits turn into a competitive advantage of our producers.

The competitive advantage should rest on two pillars. One is the rational and efficient utilisation of the geological, geographical and human components that favour our mines, the other is the competitive treatment that our legislation should give our producers.

The mining tax, financial and corporate regulations in countries like Australia and Chile, that produce similar products that sell to the same markets, still assign a better economic structure to their producers than we do. We frequently hear that these differences are what attract or displace investments, but it is rarely mentioned that they make more or less competitive the operators that are already established. It will be those more efficient producers that will take a growing slice of world markets and they will do so at the expense of less competitive ones.

"In this respect it is recommended to make a detailed comparison between our legislation and regulations with those countries that compete with Peru in mining production and mining investment. This matter is of utmost importance if we want to see our country continue with the remarkable resurgence of its mining industry."
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Publication:Mining Magazine
Date:May 1, 1994
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