Key Risks for Mining Firms to be aware of in Peru

01 April 2019

Key Risks for Mining Firms to be aware of in Peru Projects in the mining or hydrocarbons industries will face an elevated risk of disruption as local communities protest against their environmental impact. Peru’s stable economy and robust operating environment will encourage private investment, although infrastructure projects are likely to face scrutiny in Congress.

Security Environment

Mining and hydrocarbons projects will face an elevated risk of protests, as projects generate conflicts with local communities over access to water resources or environmental damage.

In October 2018, the North-Peruvian pipeline was damaged during a protest by the Mayuriaga indigenous group against hydrocarbons projects in the region.

Whilst normal operations on parts of the pipeline resumed, the damage caused a leak of 8,000 barrels of oil. As of February 2019, the northern section of the pipeline remained out of use.

Key Risks for Mining Firms to be aware of in Peru

In the same month, the National Mining, Petroleum and Energy Association indicated that the disruption was generating daily losses of USD 1 million.

State-owned oil firm, Petroperú, has repeatedly been prevented from accessing the site to carry out repairs by blockades.

In a similar incident in February 2019, MMG, the Chinese operator of Las Bambas mine stated that it had been unable to transport copper from the mine due to a roadblock in Colquemarca.

Further protests targeting mining and hydrocarbon projects are likely in the 12-month outlook. Incidents may result in property damage and are likely to elevate death and injury risks in the vicinity of affected projects.

The insurgent group Sendero Luminoso (SL) no longer poses a significant threat to firms operating in Peru.

Its activities are limited to the Valley of the Apurímac, Ene, and Mantaro rivers and is increasingly involved in drug trafficking and organised crime.

The group’s ability to carry out attacks on infrastructure projects has been reduced. The most significant activity in recent years was in April 2016, when an attack in Junín killed 10 people.

Trading Environment

In 2019, Peru’s economic performance will be supported by rising business confidence, amid a more stable political environment than in 2018.

An anticipated rise in global copper prices will also be supportive, with prices expected to average USD 6,900/tonne, up from USD 6,319/tonne in 2018.

Copper price trends will underpin rising investment in Peru’s mining sector. For example, Southern Copper Corporation is expected to introduce a USD 1.3 billion investment at the Toquepala mine in 2019, supporting real GDP growth of 3.9% y-o-y in 2019.

Robust exports of copper will support Peru’s foreign exchange reserves, which are currently equivalent to 14 months of import cover, mitigating currency inconvertibility and transfer risks for investors.

Peru’s fiscal position outperformed in 2018, after the country achieved stronger than forecasted revenue growth. The nonfinancial public sector deficit was 2.5% of GDP, below the target of 3.5%.

The budget deficit is expected narrow further in 2019 to 2.0% of GDP.

This will allow Peru to gradually reduce its public debt stock, albeit from a relatively low level of 28.5% of GDP at the end of 2018. Along with moderate servicing costs, this will ensure that sovereign credit risks remain low and manageable in the coming years.

Investment Environment

Pricing outlook PeruPeru offers a broadly supportive operating environment for foreign investors, and continues to pursue free-trade agreements with its partners.

Expropriation risks are low in Peru as the government is keen to encourage private investment.

President Martin Vizcarra is particularly keen to encourage investment in infrastructure and extractives sectors. There have been no attempts to nationalise assets since the 1970s.

However, there remains a risk of contract alterations or cancellations under the current administration.

In May 2017, the government cancelled a USD 525 million contract for the Chinchero International Airport, after it failed to receive sufficient support for the funding scheme.

Similarly in January 2017, the USD 7.3 billion Southern Peruvian Pipeline was cancelled after the consortium responsible for the project failed to secure USD 4.1 billion.

This was largely the result of reduced investor interest in the wake of the corruption scandal surrounding Brazilian firm Odebrecht.

Major infrastructure projects are likely to face significant scrutiny in the opposition-controlled Congress, given deteriorating relations between Vizcarra and the Popular Force party. The risk of further cancellations is limited, but such scrutiny may lead to project delays.

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

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5 Key Takeaways

  • Projects in the mining and hydrocarbon industries will face protests from environmental groups in 2019
  • The insurgent group Sendero Luminoso (SL) no longer poses a significant threat to firms operating in Peru
  • Peru offers a broadly supportive operating environment for foreign investors
  • Peru’s economic performance in 2019 will be underpinned by strong growth in global copper prices
  • There is a moderate risk of contract alteration and cancellation under the current administration.

A number of the countries in this month’s Risk Outlook are the recipient of elevated Chinese investment, with some participating in the Belt and Road Initiative (BRI). Increasingly, our focus is on the implications of BRI for the risk environment within emerging markets.

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Djibouti, Myanmar, Senegal and Guinea all of which have been the subject of recent enquiries from our client base.

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If you would like to talk about any of the issues raised in this article, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0) 121 514 8307.