Double Handshake

How bad is the economic crisis hurting mining concerns in Peru? It depends on who you’re asking.

Chris Kraul at the LA Times has the latest on Chinalco’s US$2 billion copper mine project at Toromocho, including an interview with the Chinalco Mining Peru’s president Gerry Wolfe. The gist: China is still cash-flush despite the global crisis and hungrier than ever for natural resources like copper. Wolfe is optimistic:

“They (China) went through the last 10 years selling things and piling up billions of dollars in surplus reserves, which they are now using to finance an expansion into the world.”

And, as for the issue of falling demand for commodities like copper, he takes the long view.

“They (Chinese people) want to become similar to the U.S. or Europe,” Wolfe said. “They have a long way to go, but it cannot be done without metals and other natural resources. Domestically, there are 1.3 billion Chinese, and all of them want cellphones, cars, appliances — just like you and me. And that takes copper, lots of it.”

Contrast this with another news story that broke late last week: Doe Run Peru, subsidiary of US-based metals producer Doe Run, halted all non-copper production at its giant smelter at La Oroya, Peru. The La Oroya smelter processses copper, zinc, lead, silver and gold, and is the country’s fourth-largest exporter. The company’s finances have been hit hard by a drastic drop in demand.

“The company doesn’t have any working capital despite making money over the past four years,” Castillo said. “We will meet with Energy & Mines Ministry officials to find out if the company can be saved.” Belaunde, the Doe Run Peru spokesman, said the company is working on a solution with banks and declined to comment further.

The company is not alone. Prices of copper, zinc, lead and silver have fallen at least 24% since last July. According to Bloomberg, the crisis has shuttered about 30 other mining companies across the Peruvian Andes. At Oroya, thousands of jobs have been cut, and confusion abounds.

“Everything’s apparently on hold pending a government bailout,” Roiberto Guzman, a Doe Run Peru metallurgical union spokesman, said by telephone from La Oroya, Peru. “The union has requested an interview with Doe Run management, as we can’t go on with this suspense.”

Another headache for Chinese mining giant Chinalco and its US$2.2 billion copper mining project in Toromocho, Peru surfaced last week. In January, you may recall, the company was struggling to find common ground with local residents over resettlement packages. Last week, chief executive of Minera Chinalco – the Peruvian arm of Chinalco – Gerald Wolfe told El Comercio that the opening of its Toromocho mine is at risk of delay or worse because of inadequate facilities at Callao Port, the country’s main exit point.

Wolfe described conditions at Callao Port as unchanged from 30 years ago and called for at least US$70 million worth of upgrades before 2012, when the Toromocho mine is to be up and running. Toromocho, to be Peru’s largest copper mine, will boost Chinalco’s annual tonnage in Peru by 35% to about one million tons.

Wolfe and a consortium of other mining interests are asking for a new terminal at Callao Port dedicated solely for metals. Renovations for Callao Port have been in the works for years – and must have been talking point when the Toromocho deal was brokered in 2007 – but Wolfe said the government has not provided any details or answered any questions concerning the upgrade to date. Peru’s minister of transportation and communication said there are four studies underway to assess how to modernize Callao Port, but no deadlines have been set.

With so much of Peru’s economic growth pinned to its attractiveness as a metals source for China and other nations, I’m sure Callao Port will eventually get the facelift it needs. It’s just a question of when. At present, though, no one seems very confident that the needed work will be completed by the beginning of 2012.

Image: David Baggins

An interesting story was published over at the Inter Press Service (IPS) yesterday. The piece is about Morococha, a tiny copper mining village in the Peruvian Andes, and its dealings with Chinalco (Aluminum Corp of China), one of the Asian country’s state-owned mining giants.

Chinalco obtained the Toromocho mine, a project in the district of Morococha, from Canada-based Peru Copper in 2007. In mid-2008, Chinalco upped its investment to US$3 billion and said it expected to produce 210,000 metric tons of copper annually by 2012. Toromocho stands to become Peru’s largest copper mining project. In June 2008, the BBC did a piece on Toromocho, saying that Chinalco stood to make a 2,000% profit on the investment, as copper prices soared at the time. Click here for a good BBC video of Toromocho and the issues at hand.

Things are now, ahem, a little more complicated for Chinalco. First, copper prices have plunged more than 50% from a year ago on weakened demand. In October 2008, a Chinalo rep in Peru said the company had yet to line up “definitive” financing for the Toromocho project. Second, Chinalco is now about to go to the negotiation table with some Morococha residents over their resettlement packages.

Chinalco has to resettle more than 1,300 families before it builds its three-square-kilometer open-pit mine. The company has already purchased 72% of the housing units in question and said it will spend US$40 million to build new houses for villagers.

But, there are some villagers holding out for a better deal, and negotiations are underway. From IPS:

The president of the association of property owners, Johnny Frías, said “it is not a question of handing over our land at just any price. Just as the state puts a value on the natural resources that are underground, they should put a price on our houses. The town should not agree to move unless better conditions are obtained.”

According to Frías, the company aims to pay just three dollars per square metre, when a fair price would be closer to 3,000 dollars per square metre.

In response to a question from IPS as to whether that was a very high price, even higher than what is found in any residential area in Lima, he said “At least it would serve as a starting-point for negotiations.”

Chinalco pays between three and nine dollars per square metre of land and between 51 and 129 dollars per square metre of construction, said the company’s public relations manager, Francisco Sarmiento.

You gotta love those starting prices…

“We’re asking for 3,000 dollars per sqm.”
“We’ll give you three dollars.”

It will be interesting to see how Chinalco handles the inevitable handful of I’ll-never-move! Morococha hold-outs. Although the company has the support of Peru’s government, it’s unclear to me what kind of legal leverage Chinalco has to resettle Peruvians. Within China, forcible demolitions and relocations are nothing new, but in a foreign country, it may take intervention from Lima before the drills actually start whirring.

Image: Getty Images