There Is No Stopping Buenaventura

Roque Benavides | Photo: Courtesy of Buenaventura

When Roque Benavides, CEO of Compañía Minera Buenaventura, Peru’s largest precious metals miner says, “We are a company on the move”, it’s easy to discern a tinge of pride in his voice.

After all, his company has brought four projects online in the last two years. That’s no easy feat for a mining company in Peru, where simmering social conflicts pose a constant threat to newly proposed projects as well as extraction operations that are already up and running.

A recent spate of disputes between mining companies and local communities include protests over pollution, water shortages and employee benefits and wages.

“Despite this context, Buenaventura is not only advancing projects but also increasing its exploration thanks to its favorable exploratory policies, reserves and relationship with the communities,” said Hector Collantes, mining analyst at Banco de Credito del Peru, the country’s largest bank.

Indeed, Buenaventura— which is engaged in the mining, processing, development and exploration of gold, silver and other metals— has been busy of late. Last year, Buenaventura initiated operations at its gold and silver open-pit mine Coimolache, which is part of the Tantahuatay project, in which Buenaventura holds a 40 percent stake. And in 2010, Buenaventura brought online La Zanja, an open-pit gold and silver mine owned by Buenaventura (53 percent) and U.S.-based Newmont Mining (47 percent), after years of delays.

This year, Buenaventura is scheduled to start operations at its polymetallic project Mallay and its gold and silver mine, Breapampa. Buenaventura currently operates 10 mines in Peru and holds a minority stake of 43 percent in Yanacocha, one of the largest gold mines in Latin America, as well as a 19 percent stake in Cerro Verde, one of Peru’s most important copper producers.  “It’s important to note that mining projects in Peru are getting developed— that there aren’t just confrontations,” says Benavides. “We have been able to launch four projects in the last 18 to 24 months, which goes to show that there are many (investment) opportunities in Peru.”

In addition to new projects, Buenaventura is looking to boost its current operations by preparing for expansions at La Zanja and its polymetallic project El Brocal, and also by building a manganese sulfate plant at Uchucchacua.

Uchucchacua silver mine, in the Peruvian Andes | Photo: Courtesy of Buenaventura

“Buenaventura’s continued investments, the diversification of their investments in projects that prioritize gold and copper, and high commodity prices have generated positive results,” said Pedro Martinez, President of Peru’s National Society of Mining, Petroleum and Energy.

Last year, the company reported revenues of $1.6 billion, a 40 percent jump from the previous year, and 30 percent growth in net income to $860 million. Although external factors like Peru’s growing economy and the increased global demand for gold (due to a weakened U.S. dollar and inflation risk) have lead to greater profitability, Buenaventura’s strong ba-lance sheet— namely its strong cash position and broad portfolio of mining projects— has contributed greatly to its stellar performance, according to industry analysts.

“Buenaventura’s investment in Yanacocha, which is an important player in gold trading worldwide and a big generator of dividends, is one of its main strengths,” said Standard & Poor’s mining analyst Diego Ocampo. And with the price of gold expected to reach $2,000 an ounce by the end of 2012— Buenaventura expects to produce 1.05 million ounces of gold this year— the company’s profitability should remain stable well beyond 2012, he added.

COMMUNITY RELATIONS
Economic factors aside, Benavides says the company’s relations with the communities where Buenaventura operates has been, and continues to be, a primary force behind the company’s enviable track record. Over the past few years, the company has channeled significant resources into infrastructure development, as well as social and environmental programs in the areas where it operates. These include water use, fish farming and the construction of roads and dams.

Despite these investments and the additional revenues that are channeled into regional governments via a 30 percent mining levy, Buenaventura’s projects— and that of other mining companies in the country— continue to encounter resistance from local communities. Illegal miners have also joined the protests, demanding that the government allow them to continue extracting minerals without a license. The most recent brawl involves the stalled Minas Conga gold project. With a price tag of $4.8 billion, it is the largest private sector investment in Peru.

According to Aldo Reggiardo, a partner at the Payet, Rey, Cauvi law firm who specializes in project financing and mining, failure to secure a green light from the government and local communities to move ahead with operations at the mine could have serious implications. “Conga could become a breaking point for the future development of mining projects in general, and mineral projects in particular, in Peru,” he said. “Undoubtedly, if the project is developed, it would erase existing fears regarding mining sector investments”

This is particularly relevant in a country where mining makes up 60 percent of the country’s GDP and where the government is expecting well over $40 billion in mining investments over the next decade or so. Peru is the world’s top producer of silver, the second largest producer of copper and zinc, and the sixth largest producer of gold.

Work at Minas Conga –which is being developed by Yanacocha, where U.S.-based Newmont holds a majority stake– was suspended late last year after villagers protested over concerns the mine would dry up water supplies. In April, the government laid down a series of measures the company must implement before the project can move forward. Recommended by international consultants; they include increasing water capacity, establishing a fund for social programs and providing large-scale employment.

With the slogan, “First the water, then the mine,” the company aims to show the local community its willingness to solve the water-related issues at hand.

“We cannot, and do not want to compete with farmers for the water, but instead work together to improve the current situation,” Benavides said. “We want to show that by bringing together agriculture and mining investments we can generate additional resources to maintain water year round.”

As of print, Yanacocha was studying the consultants’ recommendations. “We hope to come up with a proposal that benefits the community and that is technically viable for us, so that the project remains profitable,” said Benavides. “Indeed, there is a possibility that the project might not proceed.”

LOOKING AHEAD
Despite upcoming challenges like Conga, Benavides said Buenaventura will continue with its organic growth through exploration, improved operations and processes, and by looking at M&A opportunities. “We will continue to invest appropriately in what we know best: precious metals. As they say, a shoemaker should stick to making shoes.”

This strategy includes eyeing investment opportunities in Chile, Mexico and Colombia as a way to diversify the company’s portfolio and spread risk. “Our policy to diversify geographically has been in place for many years,” Benavides said. “Our exposure is still very concentrated in Peru because when we have looked outside for new opportunities, we have found more attractive projects in Peru— it is a country we know well and one that has a favorable investment environment.”

“We will continue to invest with caution,” he added, “searching for growth opportunities that add value to the company, as we are a market-oriented company. Our strong cash position allows us to consider major projects.”

Hopefully these investments will include Minas Conga— for the sake of Buenaventura and for the future of the country’s multi-billion-dollar extractive industry.