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Precious Things in Peru: The Search for Gold

Peru is an interesting country in that it has been forged by the Conquistadors, brought into modern times by the Japanese (including a famous Peruvian leader with Japanese DNA) and may fall into the orbit of Mainland China. Peru, like many Latin American countries, can indeed be seen as a natural resource colony for Asia’s emerging power houses.

According to an NGO worker based in Costa Rica, “America is losing power by the day and is no longer able to keep China out of Central and South America, nor Russia for that matter.”

In the wake of these erstwhile geopolitical changes, astute Latin America watchers may well ask what’s going on in Peru? According to Linda Dixon, an American gold entrepreneur now based in Peru, that South American nation ranks high in both silver and gold production. Corporations which may or may not adhere to environmentally-sound mining procedures are assessing the risks in the marketplace in regard to the terms of capital investment, borrowing and the rate of return. Opportunities exist in abundance for the small to medium scale investor.

A lack of solid English-language coverage of the precious metals industry in Latin America, says Dixon, makes the whole assessment process less than perfect. Fifty-plus percent returns are possible on small mining concession in Peru. This is something American and Western investors may well want to consider for their portfolio.

US$ 50 to $60,000 investments might be considered prudent, as a sort of micro-lending on steroids. Dixon might well take note of the fact that roughly 15 million artisanal gold miners are digging for gold right at this very moment to the four corners of the Earth.

Again we must ask “Why all the fuss about gold?” Almost everything in America that can be monetized (from AIG and major bank debt to stay at home mothering vs. day care) has already been monetized. After the housing and IT bubbles burst, there is no new source of wealth creation. America has been systematically de-industrialized. In times of bust and fear gold reigns supreme.

Gold mining in Peru offers low overhead and no shortage of buyers (in Latin America, North America, the West and the world.) On-line, vertically integrated real time data on gold extraction, procurement, spotting, selling, acquisition as well as personal and industrial use is not far off. Analyzing and profiting from extraction, refining and selling of gold directly to buyers with a “premium to spot” is the order of the day for entrepreneurs like Dixon.

Digging Deeper in Latin America

Surely there is a great global hunger for gold – but whom do you listen to and where to you go to follow the process of gold’s “liberation” from the ground? With on-line data becoming available, from A to Z and every stop of the gold process along the way will be as convenient as reading the box scores of Major League Baseball on your laptop during the Fourth of July. And make no mistake – Latin America, especially Peru, Argentina and Chile, will be a part of the 21st Century gold rush. There is more mineral exploration going on in Latin America than any other region in the world. One out of every four mineral exploration dollars these days is being spent in Latin ameirca.

According to Ceri Jones’, Manic mining in Latin America, “In Argentina for instance, 75% of the mining region has not yet been explored. Barrick Gold Cor’s Pascua-Lama, which straddles the border between Argentina and Chile at a pant-inducing altitude of 15,000 feet. Barrick, the world’s third-biggest gold producer, had planned to move glaciers to get at the gold underneath, but the project has been delayed by wrangling with the local community in the Huasco valley who fear that the massive open-pit gold mine, expected to come on stream in 2009, will contaminate their fields and deplete water supplies.” Jones’ article echos Dixon’s concerns about the viability of environmentally friendly and sustainable mining practices.

Concerning the future of mining in Peru, Jones’ article added, “Australia’s BHP Billiton has had to work hard to come to an agreement with residents near its inherited Tintaya mine in southern Peru. Many of the miners operating in the region are global companies such as Barrick, Falconbridge, Newmont, BHP Billiton, and Phelps Dodge. Toronto-based Barrick, which operates 14 mines including projects in Peru, Chile, Argentina and Tanzania, is worth a mention because last year it produced almost 5.5 million ounces of gold, at a cash cost of just $227 per ounce, the lowest cost of all major producers.

“For a pure Peruvian play, Antamina is the country’s leading producer of zinc and the second largest of copper and molybdenum. The company increased its output by over 20% last year. Southern Copper Corporation is a producer of copper, molybdenum, zinc and silver located in Peru and in Mexico. Quoted in New York, the company acquired Minera Mexico last year, and now has a range of operations, including the Toquepala and Cuajone mine complexes in Peru, and both open-pit and underground operations in Mexico which produce zinc, lead, copper, silver, gold and coal.

“One of the most admired miners is Peru’s Buenaventura, a precious metals specialist with a shareholding in Minera Yanacocha. Quoted in Lima and New York, Buenaventura has two growing underground goldmines and the fourth largest silver mine, and a reputation for the best geological information in Peru.

“For instance, Antamina in Peru employs 1,400 workers and is one of the main sources of well-paid work in the country, particularly in Ancash. In five years, per capita income is expected to double in the area. In fact, Peru’s economy grew at its slowest pace for two years in April as fishmeal, natural gas and manufacturing output declined, leaving the economy remaining buoyed only by its $10 billion mining exports and $1.5 billion in natural gas sales.

Jones salutes Invesco which is a “Perpetual Latin American fund, run by Dean Newman, has performed well, up 36.6% on the year and 194.5% over three years against sector rises of 17.8% and 62.1% respectively. Other specialist trusts include Scottish Widows Latin America fund, and Threadneedle Latin American fund, which have both made around 35.5% over one year and 163% over three years, although the latter has a higher minimum investment at £2,000. The UBS Global Emerging Markets fund has around 18% in Latin America, and Axa Emerging Markets fund and First State Global Emerging markets both have around 16% in the region.”

An Ancient Quest for Gold

During the days of Ancient Rome, a military general and fire department chief named Crassus was worth almost US$ 170 billion in today’s paper denominated world. (As ranked by Forbes). Crassus, seeking to imitate Alexander the Great and conquer India, took his expeditionary legions into Turkey. There he hoped to fight and defeat the Parthians and capture Mesopotamia and Persia. Crassus ignored the advice of his advisors who though he should invade through Armenia and saw his son killed. Crassus himself had liquid molten gold poured down his throat and was decapitated. His head was used in a theatrical play by those who slew him.

Today’s modern English dictionary contains the word “crass” as a reminder to those whose thirst for gold bullion may well be as unquenchable as Crassus’ was. Such a lessen cannot be lost on those readers in tune with the de facto paradigm of the post-American world of oligarch-led finance capitalism. Acting in the face of the conundrum driven by exotic financial instruments like derivatives and the securitization of the so-called sub- prime mortgages, the Fed has printed up Monopoly money out of thin air and bought off/rescued revolving door cronies on Wall St. via their “good old boy” network.

Meanwhile ordinary Americans have no choice but to watch helplessly as American manufacturing, off shoring, 20 million illegal immigrants, legal immigrant visas and other economy destroying phenomena have combined to set up “the perfect storm” of the economic Armageddon we now find ourselves in.

Inflation and the threat of inflation, massive U.S. Dollar devaluation and efforts to resuscitate the economy will be among the factors affecting the price of gold through the rest of 2009. The rigged stock market, regulators who should be wearing orange prison coveralls, low rates of return on U.S. Treasuries, trillions of Dollars of unpayable debt and cronyism do not inspire confidence in the average thinking American.

Therefore look for gold to continue its ascent, despite insider manipulation on the price of gold as organized by Central Banks -- who not only have a monopoly on the creation of paper money, but on the martial violence that money pays for via modern, conquering armies that would make Crassus blush.

Countering the implosion of paper and digital money is the fact that only 160,000+ tons of gold have been mined in all of human history. As such, one gold bar weighing 28 pounds is worth US$ 333,000+. At 1000 per ounce and rising, gold as they say, is still “money in the bank.”

The question remains, where will all of this lead the world in terms of the price and demand of gold? Why the obsession with this metal? Some years ago, the well-known economist Milton Freidman lamented the idea of mankind placing so much value on something you merely dig up from the ground. There isn’t that much gold in the world to begin with. What can you really do with it beyond jewelry and dental work? The answer – plenty.

The people of Burma wear gold medallions around their necks as a hard currency 401 K. Gold sales are up while the American Dollar is down, Brazil just won the right to host the Summer Olympics, a gold-back Dinar may be in the pipeline and a basket of currencies may well be replacing the U.S. Dollar as the major global reserve currency. Digital gold, gold stocks, global gold mining and Latin American gold mining, as well as gold demand in India (which consumed more than 770 tons of gold in 2007) and China (360+ tons in 2007) are key issues which deserve vigilant monitoring.

The world’s thirst for gold is sure to continue. According to writer Siddharth Pani, “ Most of the Central banks, including India’s are holding gold reserves as a hedge against any fiscal crisis. In 1991 the then-Narshima Rao government had taken loan against gold to tide over the Indian fiscal crisis, which ultimately led to the opening up of Indian economy. Unless new gold mines are found in the coming years or some major Central banks sell gold, there will be shortage of Gold. Further, the cost of extracting gold is also rising.

“At this point there is a marginal surplus as far as Gold and supply and demand is concerned. This may change rapidly as more and more investors are diversifying into Gold, particularly in developed nation where gold’s penetration as an investment option is still low. Jewelry demand from countries like India and China is expected to rise over the next few years. Demand pressure will continue to increase while goldmine supplies are expected to remain steady. It is worth noting here that it takes at least a few years for a newly discovered mine to be fully operational. Even if new mines are discovered new gold supplies will take time to materialize.”

… More About Peru for Investors to Consider …

Your browser may not support display of this image. In 2006, Peru occupied a leading position in the global production of the following mineral commodities: arsenic trioxide (fourth after China, Chile, and Morocco), bismuth (third after China and Mexico), copper (third after Chile and the United States), gold (fifth after South Africa, Australia, the United States, and China), lead (fourth after China, Australia, and the United States), molybdenum (fourth after the United States, China, and Chile), rhenium (fourth after Chile, Kazakhstan, and the United States), silver (first followed by Mexico and China), tin (third after China and Indonesia), and zinc (third after China and Australia).

In Latin America, Peru was the first ranked producer of, in order of value, gold, silver, zinc, lead, tin, and tellurium and the second ranked producer of copper and molybdenum (after Chile), and bismuth (after Mexico).

In 2006, Peru’s economy benefited from high prices for mineral commodities. To date, the Government has privatized 220 state-owned firms via joint ventures and consortia in the mining and fuels industries. The firms have generated $9.2 billion, with an additional committed capital flow of about $11.4 billion, representing 17% and 21% of Peru’s GDP, respectively. Privatizations and concessions generated a committed investment of $6.9 billion (2006-2010) by mining companies such as Perú Copper Inc. for Toromocho copper project ($2.5 billion), Xstrata plc. for Las Bambas ($1 billion), Phelps Dodge Corp. for expansion of Cerro Verde copper mine ($850 million), Monterrico Metals Inc. for Rio Blanco base metals project ($800 million), Rio Tinto Limited for La Granja copper project ($700 million), Southern Copper Corporation for expansion of Ilo smelter ($400 million), Goldfields Ltd. for Cerro Corona copper-gold project ($350 million), and Companhia Vale do Rio Doce for the Bayovar phosphate project ($300 million). The Ministerio de Energía y Minas reported that of the committed investment in 2006, Peru received $1 billion for gas and $200 million for petroleum.

Petróleos del Perú (PETROPERU S.A.) was created on July 24, 1969 (law No.17753) as a state-owned entity, dedicated sequentially to transportation, refining, and commercialization of refined products and other derivatives of petroleum. The Peruvian Congress on June 2, 2004 (law No.28244) excluded PETROPERU S.A. from the privatization process and authorized its participation in the exploration and production of hydrocarbons. The state agency Perupetro S.A. was created on November 18, 1993 (law No. 26221) to be responsible for promoting investments for hydrocarbon exploration and production in the country. Perupetro negotiates, signs, and administers hydrocarbon contracts, for which PETROPERU must compete with private firms as well. In 2006, PETROPERU invested $4.5 billion in the hydrocarbon sector.

Production

In 2006, the value of Peruvian minerals (metals, industrial minerals, and fuels) production amounted to $6.5 billion, compared with $5.1 billion in 2005. Mining and fuel production increased by 8.1% as a result of larger values of metals (7%) and fuel output (23%). The increase of mineral outputs (content) was mainly led by natural gas (77%), molybdenum (22%), gold (20%), crude oil (18%), and iron (8%), and to a lesser extent by silver and lead (4% each) compared with 2005 outputs. In 2006, metal prices were also driven upwards because of the higher consumption associated with increased world economic activity, such as in China, the United States, and other countries.

Metal production growth was mainly led by an increase in copper, iron, silver, and lead, which offset the decreased output of gold, molybdenum, and zinc. The hydrocarbon sector’s output also increased owing to the increased extraction of natural gas at Aguaytia and Camisea. Crude oil output was expected to increase as the result of the 16 new oil exploration and production contracts signed in 2006.

Mineral Trade

Peru’s mining industry, which has consistently been the country’s major foreign exchange generator since 1997, accounted for almost 61.8% ($14.7 billion) of total export revenues of more than $23.8 billion in 2006 compared with 56.3% ($9.8 billion) of total export revenues of about $17.4 billion in 2005. In 2006, Peru’s total trade balance recorded a surplus of about $8.9 billion compared with $5.3 billion in 2005, which increased by almost 68% compared with 6.6% in 2005. Peru’s minerals sector had a trade surplus of $16.2 billion compared with $11 billion in 2005.

In 2006, mining was the main exporting sector of the country. Price increases for zinc (136.5%), copper (82.6%), and gold (36%) played an essential role in the Peruvian trade balance. Almost 82% of the total minerals exported ($14.7 billion) were copper ($6 billion), gold ($4 billion), and zinc ($2 billion). Peru’s other mineral exports were molybdenum ($838 million), lead ($713 million), silver ($479 million), tin ($332 million), and iron ($256 million).

Peru’s fourth major traditional export, petroleum and derivatives, amounted to $1.6 billion in 2006 compared with $1.5 million in 2005. Peru’s total mineral exports, which included petroleum and derivatives, amounted to more than 68% of its total exports in 2006. Total mineral imports, which were mostly petroleum and derivatives, however, increased by about 34.8% to $3.1 billion compared with $2.3 billion in 2005. Total imports increased by about 21.5% to $14.7 billion compared with $12.1 billion in 2005 and generated a surplus of $2.6 billion compared with $5.3 billion in 2005. In 2006, the United States (34%), China (11%), Chile (7%), Canada (6%), and Japan (5%) were Peru’s leading mineral consumers. The United States, China, and Chile were the main importers of gold, copper, and molybdenum, respectively. Peru sold about 6% of its exports to other members of the Mercado Común Andino (ANCOM), whose members were Bolivia, Colombia, Ecuador, Peru, and Venezuela; about 3% was sold to the Mercado Común del Cono Sur (MERCOSUR) countries of Argentina, Brazil, Paraguay, and Uruguay, and associate members Bolivia and Chile; and 15% was sold to other Latin American countries. Peruvian mineral exports could increase if the negotiations between ANCOM and MERCOSUR lead to a South American free trade agreement and owing to the free trade agreement signed recently (2006) between the United States and Peru.

Metals

Copper

Peru’s copper output (Cu content) in 2006 was about 1.05 million metric tons (Mt) compared with almost 1.01 Mt in 2005, an increase of almost 4%. The country’s copper metal exports in 2006 totaled about 986,600 metric tons (t) valued at $6 billion, compared with 984,200 t valued at $3.4 billion in 2005; this value was 76.5% higher than that of 2005 as a result of the copper price increase to $2.829 per pound of copper in 2006 from $1.549 per pound in 2005.

Gold

In 2006, gold output was 202.8 t compared with 208 t in 2005, a decrease of 2.5%. MyS produced 81.2 t compared with 103.2 t in 2005. Other leading gold producers were Minera Barrick Misquichilca S.A. (51.9 t), Madre de Dios S.A (15.8 t), Compañía de Minas Buenaventura S.A.A. (7.9 t), and Aruntani S.A.C. (6.5 t). Gold exports in 2006 totaled about 6,702.1 ounces valued at $4 billion compared with 7,036.8 ounces valued at $3.2 billion in 2005; this value was 25% higher than that of 2005 as a result of the gold price increase to $605 per troy ounce in 2006 from $445 per troy ounce in 2005.

Silver

The country’s total silver content output increased to more than 3,471 t compared with 3,206 t in 2005. Peru, for the third time, surpassed Mexico’s silver output of 3,000 t in 2006. In silver output, companies, such as Aruntani, El Brocal, Compañía de Minas Buenaventura S.A.A., and Volcan Compañía Minera S.A.A. were more active, and silver production was higher than last year because Minera yanacocha S.R.L. and medium-sized gold-silver mines exceeded their initial production goals. yanacocha increased its output mainly as a result of technological innovations in its gold-silver recovery process. Higher international prices allowed medium-sized mines and small producers to mine lower grade ores. Peru produced more than 313,300 t of lead in concentrates compared with about 319,400 t in 2005. Exports of silver were valued at about $479 million, respectively, compared with $281 million in 2005, respectively.

Mineral Fuels

Coal

Peru’s largest coal deposits were at Alto Chicama located in La Libertad Region. Other coal deposits occur in the Cuenca del Santa in the Marañón Region and the coal basins of Goyllarisquizga and Hatun Huasi in the Cáceres Region of central Peru. In 2006, , Peru’s recoverable coal reserves were estimated to be 1.1 billion metric tons, and coal production was relatively small (about 29,535 t) compared with an estimated consumption of more than 1.3 Mt/yr.

Natural Gas and Petroleum

In 2006, Peru’s recoverable (proven and probable) and possible crude oil, liquefied natural gas (LNG), and natural gas resources were estimated to be 6,239.1 million barrels (Mbbl); LNG 1,373.8 Mbbl; and natural gas 859 billion cubic meters (30.4 trillion cubic feet), respectively. The leading gasfields were the Aguaytia, which is located about 41 km west-northwest of Pucallpa and had proven reserves of 8.5 billion cubic meters (301 billion cubic feet) of gas and 9 Mbbl of natural gas liquids (NGL) and the Camisea gasfields in the Ucayali Basin with 250 billion cubic meters (8.7 trillion cubic feet), which included 600 Mbbl of NGL. Natural gas production increased to 1,775 million cubic meters from 1,517 million cubic meters in 2005 and was produced by Pluspetrol S.A. (59%), Aguaytia S.A. (22%), Petrotech del Perú S.A. (8%), Petróleo Brasileiro S.A. (Petrobrás) (6%), and others (5%). Petrobrás through Petrobrás Energía S.A. acquired exploration and production rights for natural gas and petroleum in Lots 57 and X, respectively.

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