Monday, Oct 23, 2017
Energy | Mining | South America | Peru

Vast mining potential

$65bn mining portfolio still to be developed in Peru


2 years ago

Carlos Gálvez Pinillos, President of Peru’s National Society of Mining, Petroleum and Energy
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Carlos Gálvez Pinillos

President of Peru’s National Society of Mining, Petroleum and Energy

Despite mining activities currently only being in 1.38% of the country, Peru is the world's third-largest copper producer and sixth-largest gold producer. Carlos Gálvez Pinillos, President of Peru’s National Society of Mining, Petroleum and Energy, explains just how vital the mining sector is to the country’s future, the education of its youth, and the expansion of a new emerging middle class.  

Christine Lagarde has described the Peruvian economy as one of the most dynamic in the world. The result of this is that next October Lima will host the Summit of the World Bank and the IMF, which for 50 years was not carried out in South America. We cannot analyze the economic growth of Peru without looking at its mining sector and its energy mix. How do you believe this sector has contributed to this performance of sustained economic growth of the last decade?

The mining sector in Peru has been the engine of growth, and this takes me to a recent reflection, which is that the growth of the mining sector has been able to have such a positive impact on the rest of the Peruvian economy thanks to the structural reforms that were made in the early ‘90s. That has allowed a fertile ground for Peru to grow the way it has, and reduce the poverty levels of 50% we had in 2000 to the 23% we achieved one to two years ago. That is a fundamental element. Furthermore, if the same price cycle had occurred in the early ‘80s, Peru would have not been able to grow and to transmit that benefit to the rest of the population; nor would this important poverty reduction have taken place.

The same thing I have to say about the energy sector. Peru is a country with two major energy sources: hydroelectric, and that generated by the hydrocarbons sector. With this we have changed our energy matrix. Today 98% of it is divided half and half between hydroelectric, gas and liquid gas. From there I have to point out two things. First the country has hydropower potential of around 70,000MW and has so far developed only 3,500MW (only 5% of our potential). It is true that we are developing projects that will allow us to increase the installed hydropower capacity by about 2,000MW. In fact, today Peru is a country that can think about having the objective to be an exporter of energy, and that is why electric transmission infrastructure has also undergone a major improvement. We have gone from having 9,000km to 21,000km of transmission line, with the integration of two systems that were isolated, the center-north and the south, which today are already integrated. In addition, the growth of transmission lines has been achieved basically in 220kV lines and 500kV; that gives us a very robust transmission structure, minimizing losses and optimizing the chances of benefits, and not many countries in Latin America have the solvency in power generation, with competitive prices and such a robust transmission infrastructure. That is a fundamental point of support, as nearly 50% of the electric power in Peru is required by this mining industry that is so powerful and has so much potential.

When we look at Peru have two very important things to highlight. Only 1.38% of the country has mining activities (between exploitation and exploration), so we have to dispel a myth: although we are the leading producers of different metals (since the mountain range offers lead, zinc, copper, gold, etc.) only less than 1% is in production, so there is still much to be developed. With that, the mining and energy sector accounts for 51% of the revenue from income; if we think strictly about mining, it contributes about 35% or 40% of what comes from the income: income taxes, extraordinary taxes and royalties.

We have a portfolio of about S65 billion to date still to be developed. In this interesting context we have a bottleneck, because we have to be aligned to properly communicate and get the social acceptance that will allow us to go ahead with the projects. We have to be able to properly inform the population that these outstanding projects are the fulcrum for us to continue to grow and reduce poverty. If we could reduce more than half of the poverty over a period of 10 or 15 years, by implementing these projects we will be able to reduce the other half in the next decade.

In addition, we encourage people to take benefits from these operations, not because they are going to get gifts, but because we have the market needed to be able to generate economic growth from mining. Hand in hand with this activity two other important activities have grown: construction (which is what we mean when we say investment in mining), plus urban development, which occurs when this economic growth translates into money in your pocket.

Many have come to Lima without jobs and have managed to create their own business or company with great sacrifice. But they have succeeded because they had the fertile ground of a growing economy, and they have gone from a lower class to a middle class that has to keep growing. Here we all have an obligation and responsibility to create conditions to make this middle class grow. It was destroyed in Peru three decades ago and it is returning now thanks to its own efforts. This middle class is different from the one that existed before, which was that of the bureaucrat, or public employee, who depended on a state job. Today the middle class we are having is a businessman who, as a result of his effort, with all its risks and sacrifices, being able to learn from every failure, has made this force that I am referring to, and that allows the development of education, business, etc.

The other activity that has benefited greatly in Peru is industrial metalworking, which has settled around the opportunities provided by the mining and energy sector, and they have learned together with us from these needs. They have made their development of engineering and construction equipment, and have become competitive exporters of such equipment to the world. This is a remarkable example of what can be done and is done in Peru.

50% of the investment in mining exploration worldwide has fallen. Peru needs to continue feeding the mining sector to continue growing. Don’t you think that it is a bit of a paradox that mining has not become a state policy?

It is indeed a paradox that it has not become a state policy. Actually these sectors have continued growing from a private entrepreneurial enthusiasm and this is how it should be; there has to be a stable regulatory framework that allows economic agents to do our job, together with the state fulfilling its fundamental role which is the redistribution of wealth, and that is something we complain about to the state. Now, this redistribution of wealth should lead to improvements in living conditions for all populations that have historically been neglected, receiving investment in water, sewage, electricity, communications, education, health, justice and security. These are the roles that the state must fulfill duly accompanied by the business sector. If these conditions are not met it will be very difficult for us to continue to prosper.

Do you think that the decision to elect you president of this society is random or is it due to circumstances that are occurring in the mining and energy sector in Peru? Energy mining projects have lifetimes of 50 years on average and they require an investment that is sure about where it is investing. How do you think an image of credibility in this regard could be projected?

We have invited government officials to work together with us on a national strategy that would become a state policy. When we choose a government we are actually choosing the temporary managers of that strategy of the state, which will be measured in terms of its efficient implementation. I always claim that we should not have the Adam complex, that countries are not born with a government and die with it, but we must have continuity. We do not seek a king, but a manager who can lead that task efficiently.

In the U.S. the most widely known place in Peru is Machu Picchu, and now Tía María. How can it be that these major projects, these sources of investment, where international companies and shareholders are involved, are not used the way they should to reflect an image to the world where the most important thing in Peru is legal certainty and stability in the regulations?

In my life I have learned that there’s plenty of money in the world; what are missing are good projects and good managers, and if there is a good project and a good manager the money will be there. I have no doubt that we have made many mistakes and we will continue making them; our task and our challenge is to minimize those mistakes and, as Don Quixote said, “to right wrongs.” What we have to do is to amend, and as you’ve mentioned the case of Tía María, we must complete the task which was not done properly. With all the patience, and the simplest possible language, which has earned me criticism on social networks, we must reach people, explain things that are usually explicit in technical language for engineers and biologists, but explain to the population what is being done, the risks involved, the threats involved, and also the opportunities. Showing the great differences between environmental standards from half a century ago and those we have today, as well as those between mining practices from half a century ago – when there was not much attention to the environment, because environmental protection “was not in the DNA of human beings” – and those we have today.

The sins from before do not make us saints today, but we can say that the measures we have today allow us a different future, and that is precisely the task that we must undertake. This is why we must explain, and we need not only the miners to be always questioned, so that those who have a clean and fresh mind can convey their vision of what they see in the present situation and what can be done the future that awaits us. I think it is not just about developing energy mining, but this should also happen in construction and industry, and those two or three pillars should be the fulcrum to educate and come together, competitively, to an economy of knowledge. That is the path all the countries in the world have taken; in Europe it happened that way. In Asturias there are mines that today no one thinks about looking at, but these mines were useful to improve or promote industrial activity, and today the industrial activity still continues but thinking about communication and technology. Now, for that, an educated population is needed, children need to understand what they read, understand arithmetic operations, and they must be able to solve a logical mathematical problem. That’s where we have to work, in education.

Obviously with the advent of the free trade agreement with the United States exports have increased and this has also served to open the Peruvian economy to the world. Mining products are the most exported in the world. There are even American companies like Newmont, Southern Copper or Freeport that are in Peru. How do you think that relations that already exist between the Peruvian and the U.S. energy and mining sectors could be enhanced?

Definitely since we opened the Peruvian economy to the world the leading mining companies came here. The first to arrive was Newmont and this resulted in the Yanacocha project and growth. This was an opening to the world after 24 years of being not only locked, but we also came out of a very important period of terrorism in the world, that cost Peru blood, sweat and tears. We made mistakes and we have been careless, as usually happens under those circumstances, but from that meant that Newmont, Barrick, Rio Tinto, etc. came, which are the main companies that are exploring and exploiting in Peru, which is one of the most important destinations from a geological point of view because of the potential the mountain ranges offer.

Consequently this has also brought the industrial concatenation we must continue to promote. Looking ahead, we must first export what we have, then generate the critical mass that will allow us to continue growing. In northern Peru we have a very important mining district, which has copper as well as gold. This and other copper projects are enabling us to compete favorably with the world’s largest producer (Chile), which is near but does not have the facility that we do to have energy sources. In addition, mining activity in Peru needs 1% of the 1% of water available to us. 80% of that 1% is needed by agriculture, and 12% for the population, just over 6% for industry and 1% for the mining industry; not because we are saints but because of economic interest. It is cheaper for us to reprocess the water we use, to make use of industrial-grade water that we need in our processes, rather than take it to the level of extreme purity required for human consumption. If possible, we are trying to get to zero effluent, to avoid having to get to that level of purity that would raise costs.

Considered to be one of the leading mining and business innovators in Peru’s recent history, Alberto Benavides said, “Do not tell me how much it costs, but when you will have it ready because I have no time.” When will Peru be ready to bring all this investment from Toronto, the U.S., London, and elsewhere in the world?

Mr. Benavides, our founding president, was quite right, and he said that when he was approaching his 90s. We have an educational process to meet that unfortunately is not so brief. What we have to work on precisely is education, so we want to enforce all the means at our disposal, including the support you give us, to reach the minds and hearts of the people, which seems difficult when passions are rather on the other side. I learned from an early age that the sale begins when the customer says no, and that’s what we have to do. What we are already doing is getting to the youth, going to universities, to explain what happened and what will happen. What were the conditions of the past and what is happening today. What we have as a resource that should serve us as a fulcrum to realize the full potential of Peru, from a responsible activity that must have the participation of capital worldwide. Again, if there’s plenty of something in the world, that is money; what are missing are good projects and good managers.


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