Peru appears ready to change the impression that all of South America is inhospitable to mining by greenlighting stalled gold and copper projects worth nearly $6 billion. But I wouldn't count on any substantive improvements in the situation there.
Opposition among the indigenous population remains high, and though the government might be starving for the tax revenues the Conga and Tia Maria mines would bring in, changing local minds is a hurdle too high to surmount.
The country is the third largest copper producer and Southern Copper (SCCO +3.42%) is the world's second biggest copper miner behind Freeport-McMoRan. Southern Copper's proposed $1 billion Tia Maria project in Arequipa was originally expected to begin production last year, but was brought to a halt in 2011 after locals and the police met in a violent clash that left three dead. In the aftermath, the mining company was required to submit an environmental impact statement, which took longer than anticipated to complete. Now that it has been tendered, Peru's minister of energy and mines recently said it could be starting up again soon.
But opponents haven't changed their stance, still fearing it will result in severe environmental contamination and the diversion of agricultural water resources. The probability that new clashes will erupt should the project advance remains high.
Similarly, the $4.8 billion Conga gold mine that Newmont Mining (NEM +5.12%) was forced to shut down in 2012 is also slated to restart operations, though opposition remains just as staunch as it did back then, with the locals believing as those at Tia Maria do that the project will create environmental havoc.
Mining has become key to the Peruvian economy, generating some $7.6 billion annually in tax revenue, according to a mining trade group, a figure that could rise by 57% to $12 billion by 2024 if projects like Tia Maria and Conga get the go-ahead.
With GDP growth for 2013 being cut to 5.7% from 6.3% due to weakening exports and weaker investment inflows, it's understandable why the government wants these projects getting under way, popular opinion notwithstanding. A third of the country's people are tied to the mining industry and Peru reported a $1.2 billion trade deficit through July compared to a trade surplus of $2.9 billion last year.
So, if the miners can't start producing from them, they're going to look elsewhere to do so. Southern Copper, which has spent $480 million so far on Tia Maria, said it's willing to spend as much as $250 million a year on the project, but has already redeployed elsewhere some of the equipment associated with the project; should the government fail in its efforts to jump-start the mine, it will deploy the rest to Mexico or other projects it has in Peru. Newmont has also expressed an interest in spending more on its gold mine, anticipating $150 million would be spent this year.
By and large, mining has driven economic growth in South America. But disagreement over the environmental impact the projects cause along with how much the governments can extract from the miners has caused the continent to put up a "no-go" sign. Barrick Gold (ABX +3.48%) continues to battle the Chilean government over its Pascua-Lama mine and Kinross Gold (KGC +4.80%) was forced to walk away from a lucrative mine at Fruta del Norte in Ecuador because of a usurious windfall profits tax.
Despite the happy talk the government is signaling, opponents remain dug in. To think the road forward is being smoothed out seems to be little more than wishful thinking.
