Home Insights Dig For Victory: Peru needs mining to escape the fallout from COVID-19

Dig For Victory: Peru needs mining to escape the fallout from COVID-19

Peru’s production of copper, zinc and silver is the second largest in the world and its gold production ranks sixth.

The outbreak of COVID-19 has forced the authorities to impose strict “State of Emergency” measures to contain the virus, but these have also hit formal mining operations hard, many sites have been scaled back or closed since 16th March 2020. Despite the mining sector’s heavily regulated health and safety protocols, the impact of this sanitary crisis will further strain the relationship between the mining companies and important stakeholders, such as the local communities. The lack of a gradual and safe reactivation of large-scale projects demonstrates the government is lacking a long-term view for the sector. The mining sector, being a pillar of the Peruvian economy will play a fundamental role in economic recovery, but it will require a favourable environment to develop and operate mining projects.

Peru is one of the world’s main mining producers thanks to its enormous geological potential. The industry is a large pillar of the Peruvian economy, representing around 15% of its GDP and almost 60% of Peruvian exports.1 While Peru continues to promote greater economic diversification to reduce the dependency on minerals, the current global health and economic crisis has made evident the importance of having an active mining sector that generates strong cashflows for the economy.

The pandemic officially arrived in Peru on 6th March with the first confirmed COVID-19 case in Lima and on 16th March president Martín Vizcarra announced an initial two-week national quarantine (later extended until 30th June) to contain the virus. Unfortunately, the virus spread and led to the collapse of the national health system due to the growing numbers of casualties and confirmed infections.

Vital economic sectors were exempted from lockdown, such as pharmaceuticals, food, water, electricity, fuels, telecommunications, banking and others. And yet, the government remained quiet about mining operations. The following day, large and medium-sized mining companies urgently met at the National Mining Society to take concerted action and warn the government of the consequences of the total closure of mining units. Due to the imminent pressure, the president changed his position and allowed mining operations to be considered critical. Shortly afterwards, a flood of controversial media headlines emerged, such as “Miners with a crown”, “Vizcarra uses coronavirus emergency for mining interests”, “COVID-19 and the mining priority”, ratifying that despite its predominance in the national economy, the mining sector continues to suffer from criticism and disinformation.

In the meantime, while the government was still evaluating which sectors should be considered “essential”, the copper and zinc mine Antamina, managed by BHP, confirmed that a group of its workers tested positive for coronavirus. “When that happened, the government limited mining activity exclusively to critical activity”, recalled the CEO of a gold mining company. Indeed, it was on 25th March when the first Antamina worker tested positive for COVID-19, and by 15th April the cessation of its activities was announced.2 At that point, COVID-19 cases within the mining sector in Peru represented 8.11% of the total cases within the global mining sector.3
When the government took the decision to limit the operations of the mining industry, it did not take into consideration the entire production chain involved in the process. As the representative of an international mining conglomerate recalled, “At first, we had to close our operations [due to the quarantine], then we restarted a couple of days later, but we couldn’t restart fully as half the workers had already left. To make things worse, contractors and unions made their own decisions on how to quarantine despite the fact that the mining sector could continue to run critical activities”.

Clearly there was miscommunication between the authorities and the mining sector and while some mining companies consider that contact with the government has been positive, many others believe their pleas have fallen on deaf ears, “Initially, there were good intentions, but no transcendental decisions have been made, and it is a strategic sector that will end up heavily affected”, highlighted a board member of one of the main zinc producers worldwide. “The government has improvised its response and made several mistakes, like everyone else during the process. Leaving only critical activities running implies a 90% slowdown in mining activity.” The board member added, “They have been fearful and did not dare to implement requests from the sector”.

Adding to the general discontent of how the pandemic has been handled for the sector, there is a perception among miners that the government lacks the “steadiness” to carry out mining projects. According to a former president of the National Society of Mining, Oil and Energy (SNMPE), there is a “historical abandonment” by the government regarding the promotion of mining projects. One case in point is the USD 5 billion Conga mining project in Cajamarca, run by Newmont Mining Corporation and Buenaventura, which was derailed by local protests over land rights and environmental concerns in 2011. Falling gold prices later led the company to decide the mine was not viable. A more recent example is the latest incident between the government and the Tía María mining project in 2019, “The president betrayed the sector: while the president told the mining sector that the project had a green light, he sat down to negotiate with the communities surrounding the area and submitted to their pleas and audio recordings were leaked”, recalled a senior mining executive. The leaked audio was from a meeting between the president, Martín Vizacarra, and the Arequipa authorities, on 24th July 2019, amid an indefinite strike that was taking place in the Tambo Valley. These recordings revealed that the president had decided to suspend the construction license granted to Southern Peru Copper Corporation for the Tía María mining project.

And yet, the Quellaveco mine run by Anglo American seems to be “coping” despite the circumstances, for now. This mine represents the largest investment in a project in the country and it could define the sector for the entire country. Therefore, on its arms rests most of the tension, “If there were no projects in the pipeline before the coronavirus, imagine now!”, exclaimed a mining businessman. “I think that the political decision is going to be very important to ensure that the portfolio of projects continues”, highlighted the source, worried by the current status quo. The Quellaveco project is still ahead of schedule, according to company communications, and they intend to stick to plan as long as the guarantees given by the government are met.

A challenging reactivation

Decision makers within the sector are concerned on how exactly they will balance logistics and health and safety measures with a gradual reactivation of the economy, “The greatest concern on labour issues at the moment will be that no worker arrives or ends up infected by the virus, as that would cause general nervousness and panic, potentially triggering litigation issues”, said the General Manager of a multinational mining services provider.

Evidently, a mandatory isolation period to mitigate the risk of contagion4 seems to be the only guarantee for a healthy return to work. This process will be the absolute responsibility of the mining company and it must include medical costs, accommodation and transfers, among others. It will be a logistical and health challenge where more than 4,400 bus trips are required to mobilise staff (assumming 20 passengers per bus with a capacity of 40 people). Similarly, with the mining camps, capacity has been cut in half, so they must implement substitute spaces. “Now I have to rent additional nearby camps or hotels under my supervision and responsibility. What happens if a worker leaves at night and returns infected with the virus?”, a very concerned board member of a gold mining company explained.

Although the mining sector works under very rigorous health and safety protocols, it must also provide personal protective equipment (PPE) to its workers and follow an extremely rigorous protocol that establishes very strict sanitary measures during a mobilisation process. As of 13th May, 17 mining companies presented their plans and protocols for the sanitary emergency to the Peruvian Ministries of Health, Energy and Mines. After their approval, these companies will be able to restart operations in this first phase5 of reactivation. “Peru needs its mining industry to operate at 100% in the shortest possible time, so that it can mitigate the serious economic crisis we are facing at this decisive moment”, exclaimed the president of the National Society of Mining, Petroleum and Energy (SNMPE).6
The backdrop for the sector will be challenging, the country will be in recession and the sector will be under intense public scrutiny and facing a latent resentment that will be exacerbated by the economic downturn.7 It is still necessary to consider the predominance not only of communities but also the localities where the mineral is transferred. “Before, communities used to complain when the mineral travelled nearby, now, as the economic crisis progresses, the issue will be: ‘the mining sector earns money while people are starving’”, a rail executive predicts.

The mining industry understands that a swift step up in its communication levels with its main stakeholders will be necessary as they will be required to reach agreements with the government authorities while involving and listening to local communities. In line with this, the Minister of Energy and Mines has asked the communities with intransigent positions against certain mining projects to reconsider their position, given that the country is experiencing not only a health emergency but also a severe economic downturn.8
From a local point of view, this is a time of change and it is important to bear in mind that relationships with local communities are going to be much more vulnerable, “Recently we had to evacuate 12 workers from a mine who failed to catch a humanitarian bus. People from communities jumped onto the roof of our wagons due to the fear of the disease.” Many of the challenges of the mining industry will revolve around how to integrate the way different stakeholders perceive them, “although mining companies have been behaving better, there is a rather limited understanding of how important reputation is”, he added.

While some communities are seeking help from the miners, some mining companies have witnessed how local communities are jeopardizing their activities, “The regions are not allowing interregional or interprovincial transportation, this also affects any type of transportation of materials or supplies”, an official from one of the most important Peruvian mining projects reported.

Under these circumstances, it will be challenging to approve new protocols not only by the Ministry of Energy and Mines, but by the surrounding communities and localities, “who have always wanted to paralyse the mining companies operating in their area”, acknowledged the manager of a gold mining company. “The government has given them ‘candy’, implicitly they have put them as guardians”. The businessman continued, “We have completely paralysed our operation in the north of the country due to the lack of cooperation from local communities, scared of any potential infected person”. Within what is required to resume operations in this Phase I of reactivation, mining companies must meet criteria such as: having units that process more than 5,000 MT / d; have mining camps and / or have external accommodations that guarantee the health conditions established in the health protocols and have declared production as of December 2019.9
What to expect from the government?
The mining sector is desperately seeking a politically firm position that restores the restart of economic activity. There is a very large gap between virus control and economic activity. Although the government is focused on supporting microenterprises, the rest of the economy needs guidance and predictability to be able to restart planning safely.

There is a general perception within the sector that the government is taking a long time to approve the protocols for COVID-19. “A company can only be activated when the Ministry of Energy and Mines approves the sanitary protocol. As long as this is not approved, no action can be taken”, said a manager in the mining sector. A long-term view is mandatory to implement drastic improvements in processes “to eliminate, simplify, truly and courageously, all the bureaucratic procedures created around projects”, explained the CEO of a renowned mining company in Peru. This implies eliminating cumbersome procedures not only in new and large-scale projects but also in small facilities or additions to existing projects to make Peru a more attractive country for mining investment.

Light at the end of the tunnel?

The future of the mining sector seems positive due to a large number of reserves and projects, however, there is an imminent need for policy to promote the industry, not necessarily through tax exemptions, but a recognition that these are moments where Peru has to be more competitive as a country. Currently, there is a lot of competition in exploration: Peru competes with Canada, Australia, Africa and Chile. Even countries that were not previously on the radar as competitors, such as Ecuador, which recently found an underground mine with great potential for the exploitation of gold, copper and silver that, due to its size, would be included among the largest in the world, Guatemala with silver and Colombia should not be lost sight of.

Mining is a fundamental pillar of the economy and its reactivation will require a favourable environment for the development of mining projects. A key issue will be to eliminate and simplify the bureaucratic procedures applied to new and ongoing projects, otherwise, Peru would become an unattractive country for mining investment. Additionally, the key to success lies in enabling exploration, geographic potential cannot be translated into profits without exploitation and this stage is not working in Peru at the moment. It is time to quickly agree on a sustainable strategy for mining that contributes to the reactivation of the economy and that will become an engine of long-term growth.

 

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[1] Peru Central Bank (2020) https://estadisticas.bcrp.gob.pe/estadisticas/series/anuales/resultados/PM04991AA/html (Accessed on 1 June 2020).
[2] 7 workers confirmed positive results and on April 27th, the mining company Antamina reported that 210 of its workers have tested positive for coronavirus, from of which 87% are asymptomatic https://www.reuters.com/article/peru-copper/peruvian-copper-mine-antamina-reports-210-positive-coronavirus-cases-idUSL2N2CF10E (Accessed on 27 April 2020).
[3] According to LQG Intelligence Mining Report – In addition, in the Peruvian case, 70% of employees in this sector are in the 26-45 age range with a probability of death of less than 1%, with only 3% over 60 years of age. Mining Employment Report – MINEM http://www.minem.gob.pe/archivos/INFO_informe_Minero_FINAL_HD-zjr2599d.pdf (Accessed on 1 June 2020).
[4] This is estimated at no less than 7 days and implies an extra cost and the staff must be paid for those days.
[5] This first phase started on 15 May 2020, the second phase should start in June and plans to include medium mining companies https://andina.pe/agencia/noticia-sector-minero-peru-inicia-reactivacion-segunda-quincena-mayo-797699.aspx (Accessed on 17 May 2020).
[6] Diario Gestión (2020) https://gestion.pe/economia/17-empresas-mineras-ya-presentaron-sus-protocolos-sanitarios-para-empezar-a-operar-noticia (Accessed on 13 May 2020).
[7] As of May 15, COVID-19 has cost Peru over 109 billion soles, equivalent to 14.4% of GDP, and both the World Bank and the Central Reserve Bank expect a 4.7% drop in GDP in 2020. https://larepublica.pe/economia/2020/05/15/coronavirus-en-peru-covid-19-le-cuesta-al-peru-109-mil-millones-de-soles (Accessed on 15 May 2020).
[8] Diario Gestión (2020) https://gestion.pe/economia/coronavirus-peru-reactivacion-de-proyectos-conga-y-tia-maria-tienen-que-darse-en-algun-momento-sostiene-titular-del-minem-covid-19-nndc-noticia/?ref=gesr (Accessed on 17 May 2020).
[9] Peru implements measures to reactivate mining activity https://mineriaenlinea.com/2020/05/minem-peru-implementa-medidas-para-la-reactivacion-de-la-actividad-minera (Accessed on 11 May 2020).
Photo Credit: Cerro de Pasco, Peru – 14th July 2017: Miner in the mine. Juan Jose Napuri, Shutter Stock.

About the Author

Cecilia De Orbegoso
Cecilia De Orbegoso leads business development in South America, co-ordinates our commercial activities and is responsible for establishing and maintaining client relationships. Cecilia has significant experience as an Equity and Treasury Analyst and as an investment specialist for the Peru Trade and Investment Office.

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