The mineral prices will continue to go down in the coming years mainly due to the fears of a further slowdown in the Chinese economy. But even in that context, Peruvian copper mines will remain profitable. That was the conclusion of the panel "Peru: commodities and macro environment" in the Forecast Summit 2015, organized by SEMANAeconómica and Universidad del Pacífico. How was this conclusion reached?
Not so depressed prices
The first argument is that the floor the mineral prices would reach will still be high compared to historical levels, according to Patricia Mohr, commodities expert at Scotiabank-Canada. Jose Carlos del Valle, CFO of Antamina, has the same opinion: "This is not the end of the world: perhaps we are in the lowest part of the highest cycle."
Copper, which is about US$ 2.40 a pound, would drop further next year. Mohr said that this trend will continue in the coming years until the end of the expansion of mining production, after which the price of the red metal will rise. Del Valle estimated that 2015, 2016 and 2017 will not be good for copper prices: "Only between 2017 and 2018 will we begin to see a balance between supply and demand, and that should make the copper price rise".
Low level of cash cost
The second argument is that the cash cost of the Peruvian mines is quite low compared to other countries although costs have increased in recent years. In the case of copper, which is at the level of US$ 1.15 per pound -according to Mohr-, only if the copper price falls below US$ 2 a pound will Peruvian mines have problems, a situation that seems unlikely.
"We are fortunate to have interesting cost-effective copper mines. With the current copper prices, margins may not be as wonderful as before, but from the point of view of a shareholder, it makes sense to carry out the projects because they are worthwhile", said Vicente Leon, Vice Dean of Finance at Universidad del Pacífico. While financial institutions will be more cautious to bet on large projects, he added, this does not mean that there will be no funding.
Mohr and Del Valle agreed that the success of a project will depend on its progress. If it is almost completed, it will continue due to the large investment of the company. But if it is in the early stages, when funding is sought, it is likely to be postponed. In this stage, the issue of social conflicts is definitely to be considered. For this reason, Del Valle said that Conga and Tia Maria would have been an important contribution to the country and also important to compensate for reduced prices.
Protection with derivatives
Once the rules were clear, Leon opened the debate on how relevant it is that mining companies protect themselves against the fall in mineral prices with financial derivatives. "As for the mining companies I have talked with, many of them have not internalized the benefits of hedging", said the Vice Dean of Finance from Universidad del Pacífico.
According to Mohr, mining companies do not like to use derivatives because their investors are not in favor of them: "It is fine if hedging turns out well, but if not, it will have very negative consequences for the price (of minerals)." The expert from Scotiabank said she encourages her clients to take advantage of hedging, but that "it requires a lot of courage to do so." Del Valle, for example, confessed that Antamina does not use financial derivatives: "In the case of Antamina, the shares are listed companies in different parts of the world: we agreed not to do any hedging."
Ideally, mining should assume a greater commitment to increase productivity through research and development, and engineering skills, said Mohr. Only in this way could they be prepared for down cycles, as Del Valle says: "mining companies will try to focus increasingly on productivity"
