Scaling the Heights with Peruvian Miners: Ricardo Carrión


Ricardo Carrión The Peruvian mining sector has lots of promising developers and producers, but don't ignore the smaller companies—2013 may surprise to the upside in Peru. In this interview with The Gold Report, Ricardo Carrión, managing director for capital markets and corporate finance for Kallpa Securities in Lima, Peru, says it is fine to ride the wave with the rest of the market as lower-risk projects advance toward production in Peru. However, smart investors should balance a mining portfolio with smaller and earlier-stage companies that are selling at compelling valuations. Get there before the majors go on a New Year's shopping spree.

The Gold Report: How's the mining investment climate looking in Peru for 2013, especially compared to 2012? What are the main trends and what are people looking forward to in 2013?

Ricardo Carrión: Our outlook for 2013 is generally pretty good. That was our assessment at the beginning of last year for 2012 and it has turned out to be a good year. Mining in Peru is set up to have another positive year. There are a lot of projects in the pipeline and the macro situation is strongly positive for the sector. However, in 2013 as projects advance, we are more actively watching project specific factors that control the advancement of individual projects including the environmental impact assessment (EIA) approvals. In addition, we are keeping an eye on the resolution of social situations on the more advanced projects.

"Mining in Peru is set up to have another positive year."

One key project everyone is watching is the Conga project in the north of Peru, a joint venture between Newmont Mining Corp. (NEM:NYSE) and Compania de Minas Buenaventura (BVN:NYSE; BVN:BVL). That project has been delayed a couple of years and has caught a lot of media attention. Many other projects are quietly making progress in addressing social, environmental and community issues. We are watching these factors on a project by project basis for 2013. Overall, the project pipeline is very strong and in most locations communities are working with companies to explore and develop new mines.

TGR: Is the EIA process new or has it been recently revised?

RC: The EIA process has been stable for some time. The Conga example is a case where investors are concerned about the implementation of the EIA process—specifically, the revision of a previously approved EIA. In that case, the EIA was originally approved by the government, but was then revised after local social activists demanded changes. One result was uncertainty for investors.

TGR: Are EIA approvals at the regional or the national level?

RC: It starts at a regional level and ends at the national government level. In the case of Conga, social movements within the communities near the project resulted in the national government revising the EIA. There are other examples of how the EIA process works. We have three projects that have already submitted EIAs—one by Bear Creek Mining Corp. (BCM:TSX.V; BCM:BVL) for the Corani project , one by Minera IRL Ltd. (IRL:TSX; MIRL:LSE; MIRL:BVL) for the Ollachea project and also Sulliden Gold Corp. (SUE:TSX; SDDDF:OTCQX; SUE:BVL). That process will take up to eight months and will be followed by investors closely.

TGR: In the meantime, while companies await EIA approval, there is no shortage of things they can do including drilling, resource definition, securing financing and so on, correct?

RC: Exactly. In many cases, the EIA process does not slow down the overall project because there is a lot to do to build a mine.

TGR: For those two projects in particular, Bear Creek's Corani and Minera IRL's Ollachea, is there strong opposition? Both of those projects are in the south of the country, far away from Conga.

RC: Both projects are in the southern province of Puno. In the past, there have been some social issues with mine development in Puno. In fact, Bear Creek had the Santana project that faced such a problem two years ago. To make a long story short, the government decided to revoke the license to operate the Santana project because of unresolved social and community issues. The Corani project is completely different. For starters, it is located north of Puno. It's very close to Ollachea, which has good community relations.

"In Peru, the project pipeline is very strong and in most locations communities are working with companies to explore and develop new mines."

In the case of Minera IRL, building organic community support is a core competency, so we are confident that Corani can follow its example in that area. Minera IRL has set a good example benchmarking local mining projects and we believe that the companies and the communities will win from that investment. At Ollachea, the local community owns 5% of the project and has a clear financial, as well as social, interest in that project succeeding. We believe Corani will follow in those footsteps.

TGR: Bear Creek is listed in Canada and Peru. Are there new dual listings coming out?

RC: Yes, there are several. Last year was a good year for the Peruvian market. For example, three months ago we listed a company named Andean Gold Inc. (AAU:TSX.V; AAU:BVL), which has a small silver project in the north of Peru. Then we had the listing of Duran Ventures Inc. (DRV:TSX.V; DRV:BVL), which is a copper project located in the center of Peru. And now, we are also in the process of getting the listing done for Lupaka Gold Corp. (LPK:TSX), which is also located in the south of Peru. Also, just recently we received the final approval for another dual listed company, Southern Legacy Minerals Inc. (LCY:TSX.V; LCY:BVL). It has a very interesting copper-gold project located in the north of Peru.

TGR: What size market cap do these new listings have?

RC: The new listings in Peru have a variety of market cap sizes. We have small companies the size of Andean Gold with a $5 million (M) market cap all the way to large companies like Rio Alto Mining Ltd. (RIO:TSX.V; RIO:BVL), which has a market cap over $900M. There is an extensive range of sizes of companies here in Peru.

TGR: We talked about developers and producers. What about earlier in the mining life cycle—are there many companies active in exploration in Peru?

RC: For public companies, there is always interest in all the stages of mining from exploration to production. Notably, the current investment market has undergone a structural change toward later-stage projects that have less risk. Because of current market conditions in the smaller stocks, many advanced projects are very, very cheap. Investors should be migrating to these projects, but in many cases it hasn't happened yet. By an advanced project, I mean those projects that already have a feasibility or prefeasibility study or are under construction or in development. A good example is Panoro Minerals Ltd. (PML:TSX.V: PZN:FSE; PML:BVL), which has a copper-gold project under development in the south of Peru. It expects to have a prefeasibility study by the end of this year. For a junior company, Panoro is one of the more liquid companies in Peru. Another company that is very interesting is Sulliden Gold. Sulliden just announced that it is fully financed to develop and construct a gold project named Shahuindo.

TGR: We discussed Sulliden six months ago and it was interesting at that time. How much financing did it need to build out?

RC: Sulliden needed approximately $150M and is fully funded. Here again, the company requires approval of the EIA before it can start construction. We expect it will be approved within the next eight months, then mine construction begins.

TGR: The last time we talked, you were looking for some short-term catalysts to potentially start the stock moving upward. Specifically, you were anticipating a revised reserve and the financing. It looks as if Sulliden delivered on both and the stock responded—and then gave up the gains. Is that the general mining equity market conditions or something else?

RC: In the case of Sulliden, there are two things to consider. First are the general market conditions—Sulliden is in the same boat as all the other junior mining companies. The junior mining indexes have been trending down for the past six months and Sulliden was caught in that downdraft. Another consideration with Sulliden was that it defined the Shahuindo feasibility study project as a smaller project than in the prefeasibility study. That conservative approach may have caught investors by surprise. As analysts, we understood the strategy of the company: start small and then ramp up. That is how Rio Alto did it. Soon, Rio Alto will be nearing 36,000 tons per day. In the case of Sulliden, it is also a good strategy. We see it as an undervalued company. The main event that everybody is waiting for is the EIA approval. After that, it will inevitably become a mine.

TGR: For North American investors, we are just finishing up the U.S. presidential election cycle and lots of national budget debate. What is the government situation in Peru? Is the president and legislature stable? Is the government providing a good environment for the companies to build mines and invest in Peru?

RC: The current situation can be summed up "so far so good." The government of Peru has proven itself to be stable. Not everything is perfect; if you look for problems, you can find them. In the mining industry, you can find community issues that we discussed. But apart from that, much of the rest of the government and political situation has been very stable. The economy is growing at a very decent level considering the global market conditions. Probably we will finish this year with a GDP growth of around 6.3%. That is a reflection of the strategy of the government, which is generally a market friendly government.

TGR: Are there other companies or projects you'd like to mention that are interesting and investors should keep an eye on?

RC: One interesting project from a social and community point of view is Candente Copper Corp. (DNT:TSX; DNT:BVL). Candente is peculiar because it is close to completing final feasibility. However, the company is dealing with social issues that have gotten a lot of attention from local media and some investors. If the company can address the situation, it will have a 9+ billion pound copper project with only a $40M market cap company. That is quite a disconnect and is a project worth watching because of the potential upside.

Last week Candente announced that the government granted the water permits needed for drilling and also announced the commencement of the drilling program. This will allow the company to complete the final feasibility study. Although the social environment hasn't been solved 100%, we see this as a good sign. Over the last week the share price gained almost 65%.

"All portfolios need diversification, not only focusing on well-developed stories that protect from downside, but also remembering to own some smaller assets that will potentially dramatically outperform if the market surprises in a positive way."

TGR: Is Rio Alto's current production sufficient to fund expansion, or does it need additional financing?

RC: It will depend on the results of the studies. The capital expenditure requirements will determine the strategy needed to finance the project. But the current production will greatly assist in raising whatever funds it needs. The cash flow from the oxide gold project will be more than enough to finance the secondary sulfide. On the other hand, from a financial point of view, it's good to diversify and to find an additional source of financing as well.

TGR: We have been talking a lot about gold. What do Peruvians think of gold or silver as assets? Is there a domestic market for bullion, gold-related financial products or mining equities in Peru?

RC: Domestically, there is not yet a large market for gold investment, but it is growing from a small base. Investors are starting to get interested in securities related to gold, for example gold exchange-traded funds (ETFs). In Peru, we haven't reached the point where there's a high demand for physical gold. But things are changing. The domestic gold market is growing. Regarding the mining equities, Peru's stock market is underdeveloped. The stock market volume traded compared to GDP is around 5%, which is much lower than other Latin American countries such as Chile and Columbia. A mirror of that situation is that Peruvians are starting to be more financially sophisticated. As a country, we are starting to buy ETFs. There is a lot of potential upside for Peruvian financial assets.

TGR: Are there any other special situations that investors in the Peru mining sector should be watching for?

RC: Yes. There is a trend in the North American and European markets away from risk. Investors should be ready for a time when the confidence comes back into the market. Confidence in the market is needed for mergers, and in the past, mergers have rewarded careful risk takers. The last time this happened was 2010 when there were some very interesting stories that alert investors could profit from. In 2010, we had two very good acquisitions with First Quantum Minerals Ltd. (FM:TSX; RQM:LSE) acquiring Antares Minerals Inc. (ANM:TSX.V) and HudBay Minerals Inc. (HBM:TSX; HBM:NYSE) acquiring the Constancia project from Norsemont Mining Inc. (NOM:TSX, NOMFF:OTCBB, N8SA0:FSE).

Those two acquisitions were catalysts for the junior mining sector in general. We did not see anything similar in 2012. Investors with foresight should be positioning themselves for the next acquisitions that take place in 2013 and beyond.

I have been reviewing a lot of analysts' comments on Peruvian projects that could be targets for acquisitions. There are a couple that are very interesting. One is Panoro Minerals, a copper-gold company that has released a good resource and is continuing to grow that resource over the next six months. Many majors are interested in that project. Another potential target is Trevali Mining Corp. (TV:TSX; TREVF:OTCQX; TV:BVL), which is starting production at its Peruvian asset named Santander. Trevali also produces from a Canadian asset and has become a success story in the zinc environment, which is a tough market to be profitable in. There is a lot of news about zinc mines closing, yet Trevali is starting up. Both Panoro and Trevali look like candidates for a buyout transaction next year.

TGR: Do you have any final comments about what smart investors should look for in 2013?

RC: It is understandable that investors are focusing on risk aversion and more developed stories in the mining sector. Everybody needs to remember that if 2013 becomes an excellent year, as we feel that it might, smart investors should be positioned to capture some of that upside with a portion of their portfolio in early-stage projects as well as in the lower-risk development stories.

All portfolios need diversification, not only focusing on well-developed stories that protect from downside, but also remembering to own some smaller assets that will potentially dramatically outperform if the market surprises in a positive way. That's the message I tell investors, go with the trend and ride the wave. But if the market is saying "go to the safer assets," it doesn't mean you have to allocate 100% to the safer assets. Positioning some of your investable assets in higher-risk, less-developed projects should provide higher overall return.

TGR: Thank you. It has been great to talk to you again.

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 a specialization in finance and capital markets.

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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: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Minera IRL Ltd. and Sulliden Gold Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Ricardo Carrión: I personally and/or my family own shares of the following companies mentioned in this interview: Rio Alto Mining Ltd., Trevali Mining Corp., Panoro Minerals Ltd. and Southern Legacy Minerals Inc. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.

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