The mining sector is experiencing significant and fundamental changes as a result of the pronged and severe downturn in commodity prices. Unlike previous downturns, which were of a cyclical nature and primary resulted in belt-tightening within the Junior and Mid-Cap sectors, this downturn is far more widespread and is also affecting even the largest companies within the sector. No better example exists than mining giant Anglo American, which has recently outlined severe cuts, that would see the company reduce its number of mining operations from (45) to (16), with the aim to raise (USD$3 to $4 Billion). The urgency is clearly evident with Moody cutting the mining giant’s credit rating to junk status.
Peru – Growth in the Mining Sector Despite Downturn
With these changes underway, it would be logical to expect that there would be widespread cost cutting, a drive for greater efficiency and mine closures, which have all occurred in part, but correspondingly and more interestingly there remains and will continue to be a large number of new mines opening. The downturn has not discouraged foreign investment in the mining sector. For example, the (USD$7.4 Billion) Las Bambas project in Peru, the Cerrejon Coal Expansion in Colombia, the Grupo Mexico´s various mine expansions in Sonora, Mexico, or the fact that there are over (20) major coal mining projects underway in Australia, including the Carmichael project – the biggest new coal mine in the world. These new projects will only exacerbate the problem within the industry and will add supply, to an already over-supplied market.
The reason for this, just like infrastructure projects, in order to advance a project through to feasibility study can cost millions and millions of dollars and often at a micro scale, many companies have no option but to continue to progress there projects; in many cases unprofitably or marginally profitably.
What’s Ahead for the Mining Sector?
With time, these mining projects will either be stopped or progress through to full-scale development, with the only positive sign for the sector being that many early stage and/or concept projects are not progressing. Nevertheless, there will be many years ahead of commodity oversupply, resulting in continued pain for the sector as a whole. Although many low costs producers, such as Rio Tinto or Vale, with their Iron Ore operations in Australia and Brazil, will continue to be profitable even at these very low prices; it will result in longer term detriment to the sector as a whole.
So for the foreseeable future, we are likely to continue to see, staff reductions, ever increasing drives for efficiency, reduced EXPAT assignments, further reducing exploration budgets, increased sector rationalisation, mine sales and increased Government assistance/ tax reductions.
Biz Latin Hub can help you doing business in Peru
Many mining investors are choosing to reduce costs and increase efficiency through the outsourcing of back office services to professional local companies. These back office services can include legal services, visa processing, financial reporting or assistance in obtaining mining permits. If you have any questions regarding the Peruvian mining sector, get in contact with Biz Latin Hub.
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