Document 185041

How to Find the Next Tenbagger in Peru: Maria Belen Vega
and Ricardo Carrion
The Gold Report
Candente Copper Corp.
Minera IRL Ltd.
Newmont Mining Corp.
Panoro Minerals Ltd.
Rio Alto Mining Ltd.
Sulliden Gold Corp.
In a tough market for junior gold shares over the past three years, Peruvian
mining stocks have outperformed the mining indexes. Peru is a booming
economy with well-defined mining laws and a vocal mining protest movement
that could be playing a constructive role to future development. In this
exclusive interview with The Gold Report , Maria Belen Vega and Ricardo
Carrión of Kallpa Securities in Lima, Peru, analyze the protest situation and
clarify the role of mining as one of the leading sectors of the economy. Junior
companies they follow include mine developers, producers and a "pure Peru
play" explorer; some of these companies could repeat the outsized
performance of the last few years and become tenbaggers.
Source: Alec Gimurtu of The Gold Report
Streetwise Reports LLC
101 Second St., Suite 110
Petaluma, CA 94952
Tel.: (707) 981-8999 x311
Fax: (707) 981-8998
[email protected]
The Gold Report: Before we talk about specific companies, let's talk about mining
in Peru. Mining is big business in Peru, but recently there have been a lot of
protests. Newmont Mining Corp. (NEM:NYSE) Conga project gets the most
attention from the U.S. media. Can you give us an update?
Maria Belen Vega: Regarding the importance of mining in our economy, it's
important to highlight that mining is in the interest of government, society and Peru
as a whole. Peru is a mining country. To give you some numbers, approximately
5.5% of gross domestic product comes from the mining industry without accounting
for the supporting industry. Approximately 30% and 60% of total income tax
collection and exports, respectively, come from mining. Also, mining accounts for
around 60% of the Lima Stock Exchange's (LSE) main indexes.
Lima Stock Exchange Composition By Sector
The protests started because activists understand that mining is a lucrative industry
in Peru. Protestors feel that the communities are not getting their fair share of the
profits. To give you an idea, the canon minero regulation establishes that 50% of
the funds from income tax collection derived from the mining industry is required to
return to the region in which the mine operates. If you take a look, most protests
originated in the regions that should have received funds from the canon minero.
While some local administrators live very well off these incomes, the investment
made from these funds was either not yet executed or not profitable. So it makes
sense that the communities want to receive some benefit from mining.
Gold Production in Peru
Another important issue regarding mining in Peru is water. This is one of the main
issues at Conga as well as Southern Copper Corp.'s (SCCO:NYSE) Tia Maria
TGR: So that's freshwater supply?
MBV: Yes, water supply is an important issue. Most mining projects in Peru are
located in the upper part of the Cordillera de Los Andes, which has a shortage of
water. Mines can consume large amounts of water, which often comes from rivers or
underground aquifers. The communities are concerned that mining could use too
much of a scarce resource because their main activities are livestock and
It is interesting to note that the mining
protestors don't discuss pollution. Big mines
in Peru are strongly regulated and some of
them are listed on at least one international
exchange. Companies like Southern
Copper, Barrick Gold Corp. (ABX:NYSE) or
Compañía de Minas Buenaventura
(BVN:NYSE; BUE:BVL) have strong
corporate governance policies. Artisanal
miners are mine polluters. There is even a
contagion effect where big projects become
surrounded by informal miners who create
serious pollution problems.
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TGR: It sounds as if the opposition to mining is more about political issues and
wealth sharing and not so much because of environmental issues.
MBV: Exactly. In Peru, the mining industry has done some of the work in
infrastructure and healthcare that should have been done by the government
(roads, hospitals, bridges, etc.) in the first place. Therefore, communities are not
against the mining industry as a whole, they just want to have a bigger piece of the
Ricardo Carrión: A good example of Peruvian mining politics is what just
happened to Xstrata Plc's (XTA:AIM) Antapaccay project in southern Peru.
Communities have a long list of requirements in order to reach mining agreements.
The most important change to the Xstrata agreement was in the project ownership.
The negotiated share was 3%, but the community wanted its share upped to 50%.
That gives you an example of the political environment the miners face.
Geographic Distribution of Main Mining Projects in Peru
TGR: It sounds as if the central government is pro-mining. So are the local citizens,
but they want more of the benefits. Where do the foreign investors fit into the
picture? Investors need to get a fair return for the risk of investing in a mining
RC: Taxes paid by mining companies are one of the largest sources of income for
the government. As stated before, 30% of income tax collection derives from mining.
The government can't afford to lose that income and it's fully committed to
supporting investment in mining. Peru has approximately $50 billion (B) of
investments in the mining sector, which is one of the drivers for the country's growth.
The $4.8B Conga project is an example. The government has supported Newmont
while working to improve the project from a social point of view. That is a win-win
situation. The result is a better project overall. The government is mediating
between companies and communities in a way that supports investment, growth
and sustainability.
TGR: That was an example of a large company. Does the government also support
smaller mining companies?
RC: Yes, the government understands that without junior explorers, there won't be
big mines. It's not that they are pushing exploration companies to make a discovery.
We have clear exploration regulations that are friendly for foreign investors. Last
year, Peru implemented new regulations aimed at junior companies. The new
regulation is called "Prior Consultation." The regulation requires having an
agreement with the community before starting exploration. This is not a big change
because that is the way most companies have been doing business for the last
decade, but now it is formally part of the Peruvian regulation. As before, without a
"Prior Consultation" you can't do anything on the ground.
TGR: Let's discuss some specific companies that you cover. Candente Copper
Corp. (DNT:TSX; DNT:BVL) has a potentially large project with approximately
$1.5B in capital expenditures (capex). How is a junior going to finance a project that
MBV: Candente's main goal is to develop a world-class deposit in order to be
saleable while evaluating going into production. Currently, the Cañariaco project is
in the prefeasibility stage and Candente has just received approval by the
government and communities (surface rights agreements) to start drilling. It has
been working on those permits since 2010 and has $20 million (M) in cash to start
the next drilling campaign to get the project into feasibility.
Copper Production in Peru
One of the main questions is how a $70M market-cap company can finance a $1.5B
capex. If the feasibility study is positive and Candente proceeds to IAS approval, I
believe that the share price will likely go up. That scenario should increase the
market cap to at least $100M. From there, financing options include a joint venture
with a major copper company or offtake agreements because the resource is
approximately 70% copper, 20% gold and 10% silver. The company is evaluating
corporate sources of financing that might include banks.
TGR: Candente faces several challenges including infrastructure. What does it look
like onsite?
MBV: I visited the project late last year. Most projects in Peru are at high altitude,
but at 3,000 meters (m), Candente is relatively low. The project is literally a
greenfield—there is a lot of vegetation there. It takes six hours to get to the project
from Chiclayo, which is the capital of the Lambayeque region. Half the distance is
on paved roads.
Besides access, metallurgy may be a challenge. The ore at Cañariaco has a
moderate arsenic content, which may result in smelting penalties. The prefeasibility
study included a roasting processing unit to reduce the arsenic content yet achieve
high recoveries of the metal. Based on what is known today, the problem has been
solved and investors are not punishing the stock price for that reason but mainly for
the delay in getting the permits to start drilling.
Currently, Candente is valued at less than $0.01/lb copper; it has 10 billion pounds
(Blb) copper in equivalent resources. This valuation is much less than other
companies like Panoro Minerals Ltd. (PML:TSX.V: PZN:FSE; PML:BVL), which has
a 4 Blb copper project valued at $0.03/lb, which is still less than latest copper
acquisitions in Peru in the range of $0.05-0.07/lb. Based on that metric, it is one of
the most undervalued companies listed on the LSE's Venture Exchange.
TGR: Another small miner you cover is Rio Alto Mining Ltd. (RIO:TSX.V; RIO:BVL).
Compared to Candente, Rio Alto has a different and much smaller deposit. It is a
gold oxide deposit, which lends itself to much lower capex and quicker startup.
Since you have covered it, it has done really well. It is more than a tenbagger from
your first research report. Do you have an update and where you think it's going?
MBV: Rio Alto is one of the biggest success stories on the Lima Stock Exchange. It
listed in November 2009 at $0.33/share and now, quotes at $4.20/share. Rio Alto
has a two-stage project. The first is the gold oxide deposit, which is now in
production. The second one is the copper-gold sulphide project, which is moving
toward development. Originally, management bought a deposit that was
undervalued (in prefeasibility) but that was able to start production rapidly. It took
the company less than two years—very fast. Now Rio Alto ranks 8th among
Peruvian gold producers. It is a success story in both Peru and Canada.
Production started in May of last year and met management's target of 50,000
ounces (500 Koz)/year. The target for 2012 is producing between 150–160 Koz
gold @ $550–600/ounce cash cost. As of H1/12, they have produced more than
100 Koz. Currently, mine capacity is being increased from 24,000 tons (24Kt)/day to
36 Kt/day, financed by a prepayment facility with Red Kite Explorer Trust. One of
the management's goals is to finance all expansion without shareholder dilution.
This expansion will allow it to produce above 200 Koz/year by 2014.
Rio Alto's next step will be the completion of the feasibility study for the sulfide
project. The size of the resource is over 4 Blb copper plus 5.6 million ounces (Moz)
gold and there is ongoing drilling. The target is to begin production by 2016.
TGR: How can an investor find the next company like Rio Alto? Which companies
on the Lima Stock Exchange resemble the Rio Alto of three years ago?
MBV: There are many companies on the Lima Stock Exchange with potential. One
of the more advanced juniors is Sulliden Gold Corp. (SUE:TSX; SDDDF:OTCQX;
SUE:BVL). Sulliden is a Canadian company whose main project is Shahuindo, a
gold project located in the Cajamarca region. Shahuindo could become a worldclass gold deposit because of its medium-to-high grade and potential to build a lowcost deposit with a potential increasing resource. Currently, it has 2 Moz in
Indicated resource and an additional 2 Moz Inferred. In 2011, Sulliden developed a
70,000m drilling campaign to increase the resource size and improve its
classification in order to achieve feasibility.
TGR: That 4 Moz was from the June resource that was just released?
MBV: Yes. The 4 Moz is information from 2011's resource estimation prepared
according to Canadian NI 43-101 requirements. Because all of the companies
listed at LSE's Venture are dual listed in Toronto, everything reported must meet
Canadian standards. Pending is the new resource estimation from the latest
70,000m campaign that should increase the actual resource significantly.
TGR: Sulliden's Shahuindo project is located in Cajamarca. Isn't that home to
Peru's mining protest movement?
MBV: Yes. Cajamarca is a region located in northern Peru. But besides being
known for mining protests, the region is home to many world-class mines including
Newmont's Yanacocha & Conga, Barrrick Gold's Lagunas Norte and Rio Alto's La
Arena (the last two are located 30km south from Shahuindo).
TGR: So there should be lots of good mining infrastructure and good technical
MBV: I visited Shahuindo three months ago and it has some of the best
infrastructure in Peru. It is not located at high altitude: 2,800–3,000m above sea
level. It's a three-hour drive from Cajamarca city with half on a paved road. It has a
3km power line on the project. Additional infrastructure for the transmission line is
being built up to supply energy to the community.
One important consideration is that Sulliden deals directly with landowners at the
property. Currently, Sulliden owns 85% of the surface rights for constructing the
open-pit mine. This situation is different from many juniors that still need to
negotiate and purchase surface rights. Besides, dealing with landowners tends to
be much easier than with communities.
The most interesting feature of Shahuindo is the deposit. Sulliden has identified
three main mineralized zones; only one has been strongly drilled and included in
the current resource estimation. And that's from the oxides only. The sulphides are
another potential deposit that has not yet been drilled. As mentioned before, a
resource estimate is planned for this month. Another catalyst for share price growth
would be the IAS approval after achieving feasibility. Located in Cajamarca, the
same region of Newmont's Conga project, there is some risk attached such as
delay in the environmental impact study approval/startup of the project. Despite
Shahuindo being located 80km from Conga in Cajamarca and subject to the same
regional authorities as Conga, Sulliden is following the process and will submit the
IAS study to the ministry this year to advance and construct the mine.
TGR: What other challenges will Sulliden need to address?
MBV: The management is confident that it will have no problems developing a
mine, but the project has risks due to the social and political situation in Cajamarca.
I believe that's one of the main reasons why the company is undervalued right now.
Even though there are high expectations with the new resource estimation, the
stock is undervalued because of the junior mining market and the social risk tied to
Shahuindo being located in Cajamarca.
TGR: Maybe it can benefit from Newmont investing in social capital there.
MBV: Yes. One of the other advantages of Sulliden compared to other juniors is
that Sulliden has $50M in cash. It doesn't have a cash requirement for at least one
and a half years. That is a big plus.
TGR: What other companies do you follow that the readers might not know about?
MBV: Minera IRL Ltd. (IRL:TSX; MIRL:LSE; MIRL:BVL) is one of them. Minera IRL
has three main assets. It owns the producing Corihuarmi gold mine near Lima and
the soon-to-start-up project Don Nicolas in Patagonia in Argentina. The third asset
is the Ollachea gold project located in the Puno region of southern Peru.
Minera IRL was a company listed first on the Alternative Investment Market (AIM) in
London. Initially, it was listed on the Venture segment in Peru and after Corihuarmi
started production, it migrated to the main board. It was a success case for the Lima
Stock Exchange. Corihuarmi is a small mine with a remaining three-year life of
mine at approximately 30 Koz gold/year. After closure, in 2015, Don Nicolas will
start production. As of today, Don Nicolas is a small project of about a 360 Koz gold
resource that now is subject to higher costs due to Argentina's economic outlook
and risks, mainly exchange rate policies. Start up at Don Nicolas will give Minera
IRL continuity in the gold production. Don Nicolas will run for three years, in time for
Ollachea to start production.
The Ollachea gold deposit is Minera IRL's main project with 2.6 Moz in resources.
Ollachea accounts for more than half of Minera IRL's value. The Ollachea project is
in the feasibility stage and is planned to be an underground mine with a nine-year
life of mine producing approximately 120 Koz/year. Compared to its first projects,
Ollachea is big. The strategy of Minera IRL is continuity in production and
demonstration of growth.
TGR: Panoro Minerals is another one that you cover. Could you briefly give us an
MBV: Panoro Minerals is a copper pure play. Panoro's portfolio is composed of 14
projects located in the well-known Andahuaylas-Yauri copper district, home of
Xtrata's Las Bambas, Hudbay Minerals Inc.'s (HBM:TSX; HBM:NYSE) Constancia
and First Quantum Minerals Ltd.'s (FM:TSX) Haquira. Bottom line, it's a well-known
copper district in Peru.
Within its portfolio, Panoro has two development properties, one of which is the
Cotabambas project with 2.4 Blb copper. The project has a lot of geological
potential having defined a resource with copper grades above 0.7% and gold
content above 1 gram/ton. Also, the deposit has no major contaminants.
In 2011, Panoro drilled 30,000 additional meters to increase the resource; the
estimate is expected by mid-August. HudBay Minerals has a 6% stake on Panoro
and there is a lot of speculation in what HudBay's interest is in Panoro's project.
Panoro's strategy is to use its expertise in Peruvian regional copper exploration and
development to find saleable deposits that can be bought by major copper players.
TGR: Are most or all of those projects in Peru?
MBV: Panoro's assets are all in Peru.
TGR: So that's an exploration pure-play in Peru?
MBV: Exactly. Panoro is a strategically located copper exploration and
development company. It has a quality and well-known board and a lot of potential
to bring its assets into world-class copper deposits. Panoro and the other
companies mentioned should be on an investor's watch list.
TGR: To wrap things up, can you summarize the mining investment situation in
Peru? There are protests, but also positive developments that aren't widely reported
in the North American investment markets. Maybe investors need to look past the
sensational news, as there may be opportunities.
MBV: Mining is an important industry for Peru—the government and the people
understand this. However, of the $53B in mining investments in Peru, only 3% is
local. The other 97% comes mainly from China, U.S., Canada, Australia and
Switzerland. Peru has a capital deficit for mining investment. That's why the
Peruvian government is committed to mining and foreign investment. In time, the
protests will be resolved between the companies, government and communities so
that everybody will benefit from the industry. Everyone is aware that we need this
capital, investment, jobs and development. Of course, foreign investors will also
benefit from playing a part in the mining industry in Peru.
TGR: Thank you for your time.
Maria Belen Vega currently serves as an investment analyst of corporate finance
for Kallpa Securities in Lima, Peru. Through pre-professional training, she
developed expertise in the area of Peruvian securitization, its structure and risks.
She later served as an analyst of transfer pricing at KPMG and provided support
to the investment risk unit of AFP Profuturo. She has a Bachelor of Economics
degree from Universidad del Pacifico.
Ricardo Carrión is the managing director for capital markets and corporate finance
for Kallpa Securities in Lima, Peru. He served as a senior analyst of Banco de
Credito in the areas of corporate banking, corporate finance and capital markets
and was an adviser to Lima's Stock Exchange. Carrion holds a bachelor's degree
in business administration from Universidad de Lima with specialization in finance
and capital markets.
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Interviews page.
1) Alec Gimurtu of The Gold Report conducted this interview. He personally and/or
his family own shares of the following companies mentioned in this interview:
Southern Copper Corp.
2) The following companies mentioned in the interview are sponsors of The Gold
Report: Sulliden Gold Corp. and Minera IRL Ltd. Streetwise Reports does not
accept stock in exchange for services. Interviews are edited for clarity.
3) Maria Belen Vega: I personally and/or my family own shares of the following
companies mentioned in this interview: Rio Alto Mining Ltd. and Sulliden Gold
Corp. I personally and/or my family am paid by the following companies mentioned
in this interview: Rio Alto Mining Ltd., Candente Copper Corp. and Panoro Minerals
Ltd. I was not paid by Streetwise Reports for participating in this story.
4) Ricardo Carrión: I personally and/or my family own shares of the following
companies mentioned in this interview: Rio Alto Mining Ltd. and Panoro Minerals
Ltd. I personally and/or my family am paid by the following companies mentioned in
this interview: Rio Alto Mining Ltd., Candente Copper Corp. and Panoro Minerals
Ltd. I was not paid by Streetwise Reports for participating in this interview.
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