Mining Investment Impact on the

Peruvian Development

Jorge Merino Tafur

Ministry of Energy and Mines of Peru

March 2013

Why invest in Peru?

2

The Peruvian government continues to facilitate

the establishment and operation of businesses

Peru ranks second in the region in the

improvement of business regulations …

… and by 2050, it will be one of the fastest

growing economies in the world

Fastest growing economies

Ranking Country

1 China

2 India

3 Philippines

4 Egypt

5 Malaysia

6 Peru

SOURCE: Doing Business 2013 SOURCE: HSBC estimates / World Bank

3

Peru offers a favorable legal framework to attract

foreign investment

… supported by legal stability agreementsKey economic policy guidelines …

▪ Non-discriminatory treatment: Foreign

investors receive the same treatment as local

investors

▪ Free transfer of capital

▪ Free competition

▪ Guarantee for private property

▪ Freedom to purchase stocks from locals

▪ Freedom to access internal and external credit

▪ Freedom to pay royalties

▪ Network of investments agreements and

member of ICSID1 and MIGA2

▪ Participation in the Investment Committee of

the Organization for Economic Cooperation

and Development (OECD) – it promotes the

implementation of the guidelines for

multinational enterprises

Investors

▪ Stability of the regulations regarding non-

discriminatory treatment

▪ Stability of the income tax regime applicable

to dividends

▪ Stability to use freely the most favorable

exchange rate available in the market

▪ Stability of the free availability and remittance

of foreign currency, dividends and royalties

regime

Receiving companies

▪ Stability of the labor recruitment regimes

▪ Stability of the regimes for the promotion

of exports

▪ Stability of the income tax regime

1 ICSID: “International Centre for Settlement of Investment Disputes”

2 MIGA: "Multinational Investment Guarantee Agency”

Overview of mining in Peru

5

Silver 32

Zinc 31

Tin 31

Lead 41

Gold 61

Mercury 42

Copper 32

Molybdenum 42

Selenium 92

Cadmium 102

Iron ore 175

Phosphate rock 132

Peru is a leader in metallic and non-metallic

minerals

Mineral Production Ranking

Latin America World

SOURCE: MEM; USGS

6

And we are already strong in many areas; for

example, the Lima Stock exchange has attractive

regulations to finance juniors

▪ Currently there

are 39 mining

companies and

17 juniors listed

on the Lima Stock

Exchange (BVL)

▪ The Lima Stock

Exchange is the

only online

market place that

this segment

leading the

private

placement of

shares

7

No se puede mostrar la imagen en este momento.

The mining sector has been the fastest growing

sector and is one of the top GDP contributors

SOURCE: Central Bank of Peru; INEI; IHS; Economy Ministry

1 Cumulative Annual Growth Rate

2 INEI 2007 input matrix (not published yet so no official trend data is available for it) shows that the mining share in the economy is 14,4%

3 Includes refining of non-ferrous metals

5%

63

61%

5%

2001

10%8%

5%

2003

72

60%

12%11%

6%7%

4% 7%

12%12%

2011

181

46%

13%

13%

12%

9%

7%

2009

130

48%

13%

13%

10%

9%

7%

20072

107

47%

14%

13%

12%

9%6%

2005

79

51%

14%

13%

GDP/capita

Thousand

USD

2.9 6.14.53.8

11.8

12.7

13.8

16.2

8.1

CAGR1, %

11.0

2.62.4

GDP nominal prices

Billions USD

22.0

Construction

Transp & Com.

Mining3

Commerce

Manufacturing

Other sectors

The mining sector has grown to more than 20 % OVER THE PAST 12 YEARS, contributing with more than 20 billion Dollars to the GDP in 2011

8

▪ ~30% of economic growth is due to

large investments and increasing

mining production

▪ Additional growth means that the

economy will generate $ 57 billion

GDP more, or in per capita terms,

the mining sector will make the

average Peruvian 10% richer by

20161

Looking forward, mining will continue to be the

growth engine of the economy

Economic growth

6.9

4.7

2016

2.2

2015

6.8

4.6

2.4

4.4

2.2

20142013

6.36.8

4.8

1.5

Explained by other sectors

Explained by mining sector

24 32 32

Share that mining

represents

35

1 $7.800 instead of $7.100

Percentage

SOURCE: Central Bank of Peru; IMF; INEI; Interviews with financial institutions

9

Current mining portfolio investment has reached

its maximum historical values, and represents an

increase from its current production share

+35% CAGR

12,226

2007

24,693

54,610

20122011

53,761

2010

41,951

2009

35,471

2008

Peruvian mining

portfolio/

Worldwide

mining

investment

1.7

+118%

3.7

Peruvian mining

revenue/

Worldwide

mining revenues

Forecast mining portfolio invesment

Evolution ($ Millions)

International share

2011; Percentage

SOURCE: MEM; MEG; Global Mining CapEx Model

35% growth per year

10

6

7

10

10

16

18

22

9China

Switzerland

Japan

Mexico 2

PeruOther

USA

Canada

Australia

Peru receives investors from a very diverse

set of countries

2012

$ Million

China

USA

Canada

Australia

Switzerland

Japan

Mexico

Brazil

South Africa

Peru

UK

Other

12,219

9,800

8,739

5,670

5,200

3,790

3,460

1,638

1,600

1,120

700

744

54,680

SOURCE: MEM

Percentage of total

Investment portfolio by country

The current projects are highly diversified between the various countries.

11

… which will significantly increase Peru’s mining

production

SOURCE: MINEM

Mineral

Production

2016

SilverThousand

fine ounces109,919 130,059

ZincThousand

TMF1,3 1,6

LeadThousand

TMF230 285

GoldThousand

fine ounces5,343 6,347

Production

2011

Copper 1,240 2,768Thousand

TMF

Growth

2011-16

18%

23%

24%

19%

123%

12

10

13

Rest

Iron ore

12

Gold

Copper

64

Copper, gold and iron ore capture 90% of the

investment portfolio, with copper explaining 64%

$ Million

Copper

Gold

Iron ore

Phosphate

Silver

Zinc

Potassium

Polymetallic

34,937

7,302

6,780

1,044

1,026

290

125

3,176

54,680

SOURCE: MEM

Percentage of total

Investment portfolio by mineral

2012

13

0

500

1000

1500

2000

2500

3000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Because of the growth of copper

production in Peru

1991 1994 2003 2012 2016

INVESTMENT PROMOTION

Promotion processes of investment in the mining

sector in the decade of the 90´́́́s has led the

sustainable growth of copper production

TMF x 1000

2 800

Peru mining competitiveness

15

By 2016, Peru will be the second global producer of

copper significantly reducing the gap with Chile

SOURCE: Cochilco; MEM; Project Specific Information

2,8

+100%

0,8

+442%

2016

5,6

2014

5,5

1,6

2011

5,3

1,2

2008

5,3

1,3

2005

5,3

1,0

2002

4,6

ChilePeru

Annual copper production

Million tons

16

Moreover the country is rich in economically

attractive minerals

SOURCE: MEM; USGS; McKinsey Basic Materials Practice

1

1

4

6

8

9

13

23

Tin

Zinc

Lead

Copper

Silver

Phosphate

Iron ore

Gold

1

4

2

3

6

Peruvian Reserves

Global share

Global

rankingCurrent (2012) Expected (2020-2025)

Copper

Gold

Met Coal

Iron ore

Nickel

Silver

Zinc

Uranio

Lead

Potassium

Phosphate

Lithium

Copper

Gold

Met Coal

Nickel

Silver

Zinc

Uranio

Lead

Potassium

Phosphate

Lithium

Iron Ore

Economic

attractivenes

High

Medium

Low

Thermal Coal

Thermal Coal

8Tin

Tin

9

13

17

Currently, more than 90% of copper operations in

Peru are in the first two quartiles of the cost curve

SOURCE: Wood Mackenzie

1 Includes cost to concentrate or cathode, transport, Tc/Rc

NOTE: Normal costing normalized by copper equivalent. Price used USD 362,7 c/lb in 2012

Copper cost curve 2012

600

700

Direct1, indirect cost and taxesc/lb

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 Productionkt

0

100

200

300

400

500

Peru

Rest of world

40 52 2 6

x Peruvian production per

quartile

COPPER EXAMPLE

92% of Peruvian assets are in the first two quartiles of costs

18

300

200

100

0

Productionkt

15,00010,0005,0000

Direct1, indirect cost and taxesc/lb

700

600

500

400

100

200

0

300

400

500

600

700

Direct1, indirect cost and taxesc/lb

5,000 10,000 15,000

Productionkt

0

Moreover, by 2025 the country will continue to

have a competitive position on the cost curve

… while Chile will face higher costs

Peru will have 70% of its expected production in the

first two quartiles of the cost curve …

PeruRest of World

x Percentage of Peruvian

production in each quartile

20 30 24 26

ChileRest of World

1 Includes cost to concentrate or cathode, transport, Tc/Rc

NOTE: Normal costing normalized by copper equivalent. Price used USD 300 c/lb in 2025

SOURCE: Wood Mackenzie

1282447

2025 2025

COPPER EXAMPLE

Chile will have the half

19

Specifically, in energy Peru is competitive and no

bottlenecks are foreseen in the near future

SOURCE: Wood Mackenzie; MEM; BBVA; COES; SNMPE

NOTE: Supply takes into consideration only new supply from hydroelectric and thermic stations, not solar nor eolic ones. Demand includes all new announced mining

projects

1 Difference between total installed capacity and maximum instant energy supply is due to potential losses related with lack of inputs (e.g., water), and transmission

losses

11.0

8.3

2015

9.4

7.0

2013

8.4

6.3

2017

Instant supply

Total Installed Capacity1

Demand

Energy supply and demand

GW

ENERGY EXAMPLE

Energy cost 2012

c/kWh

6.4

EEUU

Ø 10

Zambia

Peru 8.1

Canada 8.2

China 8.3

Mongolia 9.0

Argentina 10.4

Australia 12.7

Polonia 12.9

Chile 15.2

6.6

20

4.9 times the annual budget

More than 5.100 Km of roads

17.1 times the annual budget

Annual Education budget could

be increased in 36%

Construction of 74 hospitals

11.6 times the annual budget

US$ 2,000Million in additional

fiscal revenue1

1 Average price of copper 2013 of the main Investment Banks – Bloomberg assumed: $ 8,000 /ton

And mining brings a virtuous development

cycle resulting in social inclusion

1.5 million additional

yearly production of TM

Copper by 2016

or

or

or

or

or

Country development based on rational use of natural resources

22

The mining industry in Peru is generating an emergingindustry through an associative model with a high gradedevelopment in training and technological innovation at acompetitive level.

Mining is not just an extractive industry; the 12 percent ofthe Peru’s GDP in 2011 gives proof to this. It is the thrivingforce that will pull us along with the oil and gas industryenvisioning the development for the following decades.

Peru has achieved a great wealth through the miningindustry with rationalized exploitation and plans to establishthree geographic zones for additional industry development.

Let`s strengthen the following aspects:

23Source: PROINVERSION

ECUADOR

COLOMBIA

BRAZIL

NORTHERN MACRO-REGIONTERRITORY DEVELOPMENT

BAYOVAR

PORT

Copper Projects

Silver ProjectsGold Projects

Iron Projects

Hydropower StationPACIFIC OCEAN

NORTHERN IIRSA

CAJAMARCA -PIURA TRAIN

C.H. RENTEMA

1525 MW

C.H. CUMBA 4

825 MW

C.H. MANSERICHE

7550 MW

C.H. CHADIN 2

600 MW

C.H. BALSAS

915 MW

BAYOVAR PROJECT

• FOSFATOS

• DIATOMITAS

• SALMUERAS

• CALCAREOS

Railroad

COPPER-GOLD PROJECTS

FOR US$ 20 000 Millon

24

CENTRAL MACRO-REGIONTERRITORY DEVELOPMENT

Copper Projects

Silver Projects

Gold Projects

Iron ProjectsLIQUEFACTION PLANT

LA OROYA

METALLURGICAL

COMPLEX

CENTRAL IIRSA

PERU- BRAZIL

TRANSCONTINENTAL RAILROAD

BRAZIL

Source: PROINVERSION

CALLAO PORT

LA OROYA

25Source: PROINVERSION

Copper Projects

Silver Projects

Gold Projects

Iron Projects

SOUTHERN MACRO-REGIONTERRITORY DEVELOPMENT

FRACTIONATION

PLANT

BOLIVIA

CHILE

PACIFIC OCEAN

BRAZIL

INTER-OCEANIC

HIGHWAY

CAMISEA

MATARANI PORT

MARCONA PORT

GAS PIPELINE

Gas pipeline

Camisea Gas pipeline

Social Impact

27

INVESTOR

COMMUNITY STATEMINING

SUSTAINABLE DEVELOPMENT

PROJECT Sustainable

Development

The State accompanies

the process from the

begining

NEW MINING RELATIONSHIP POLICY

PRIORITY WATER

28

• TRUST

• SOCIAL FUND

• SOCIAL PEACE

• WHILE OPERATING

PROFIT

• INFRASTRUCTURE

• EMPLOYMENT

• TRAINING

COMMUNICATION AND CONTINUOUS PRESENCE IN THE AREA OF INFLUENCE OF PROJECTS

EXISTENCE AND

INTEGRATION

INTO COMMUNITYHarmonious and

balanced

Participating

communities, local

governments and the

State

COMMUNITY

STATE

Social responsibility strategy before mining exploitation

Awareness

Social climate for investment

DEVELOPMENT

ROUNDTABLE

SUSTAINABLE

DEVELOPMENT

29

The National government is working on the most critical

regulatory aspects today

▪ Regulating the 2011 Prior Consultation Law to eliminate

uncertainty and guarantee smooth implementation of

projects

▪ Securing the right economic and technical resources for

SENACE, the new agency that will process environmental

studies of detail.

▪We would like to strengthen the ecological and economic

zoning to convert it into a growth opportunity

While we recognize the recent decline in international

institutional rankings, we are taking concrete actions to

strengthen our position

30

Peruvian Mining contributes to sustainable development of all regions of Peru

SUSTAINABLE MINING IN PERU

Private investment opportunities

in Energy

32

Portfolio of hydrocarbon concession projects

for 2013

Southern region gas pipeline Called 2,431 3Q 2013

Southern region energy node To be called 1,200 2013

Supply System of LPG

for Lima and CallaoCalled 260 3Q 2013

Supply system of LNG

for domestic marketCalled 252 4Q 2013

Mass use of natural

gas nationwideCalled 180 3Q 2013

4,323Total

1

2

3

4

5

Project Current statusEstimated

investment

($ Million)

Planned

award date

33

Southern region gas pipeline1

CALLED

▪ Location: Cusco, Arequipa and

Moquegua

▪ Description: Concession to

design, finance, build, operate

and maintain a natural gas

distribution system

▪ Estimated Investment: US$

2431 M + IGV

▪ Type of concession: Self-

sustained

▪ Estimated award date: 3Q

2013

34

Southern region energy node2 TO BE CALLED

▪ Location: Moquegua

▪ Description: Concession to design,

finance, build, operate and maintain

thermal plants using natural gas

from Camisea to generate electricity

(900MW) for regional users and

export purposes (1,200 MW)

▪ Estimated Investment: US$ 1200 M

▪ Type of concession: Self-sustained

▪ Current status: Promotion plan was

approved

▪ Estimated award date: 2013

TO BE CALLED

35

Supply system of LPG for Lima and El Callao3 CALLED

▪ Location: Runs from Ica region to El

Callao (Lima) port

▪ Description: Concession to design,

finance, build, operate, and maintain

an LPG transport system from the

producer facilities (Pisco) to El Callao

(Lima)port

▪ Estimated investment: US$ 260 M

▪ Type of concession: Self- sustained

▪ Competition factor: Lowest cost of

transport

▪ Concession term: 20 years plus

construction period (28 months)

▪ Current status: Second version of

contract under elaboration

▪ Estimated award date: 3Q 2013

CALLED

36

Mass use of natural gas 5 CALLED

▪▪ Location: 11 cities to be supplied under

two concessions;

– Southern region - Arequipa,

Moquegua, Ilo and Tacna

– Northern region - Chimbote, Trujillo,

Huaraz, Cajamarca, Chiclayo,

Lambayeque and Pacasmayo

▪ Description: Distribution system of

natural gas (transport, regasification at

each city, supply to final users)

▪ Estimated investment: US$ 180 M

▪ Type of concession: Self-sustained

▪ Competition factor: Largest number of

users connected

▪ Concession term: 20 years

▪ Current status: Second contract version

to be published in March 2013

▪ Estimated award date: 3Q 2013

CALLED

37

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