The Economist warns of dangers ahead for Zijin in Peru

The Economist warns of dangers ahead for Zijin in Peru

by The Economist

4th June 2007

When China's Zijin Consortium won its bid for UK-based Monterrico Metals and its Rio Blanco copper project in Peru in April, industry insiders regarded the acquisition as a major coup for the Chinese government's ambitious drive to diversify supplies of strategically important resources. The Rio Blanco project, located in the Piura region close to the border with Ecuador, was believed to be the largest copper mine in the world not owned by a major firm. Monterrico has estimated that, when developed, Rio Blanco will rank among the very largest quarries in South America, yielding up to 25m tonnes of copper ore annually.

What added more buzz to China's acquisition was the fact that Zijin's winning bid was far below the expectations of Monterrico's shareholders. China offered to pay US$182.3m for Monterrico, while the company's largest shareholder, Frankfurt-based Wermuth Asset Management's Greater Europe Fund, had insisted its fair value was between US$500m and US$1bn.

But luckily for Zijin, the takeover bid was made amid continued protests against Monterrico's exploration activitiesin Peru. That kept its share price low and ultimately helped push the company into the hands of its new owner. The Chinese consortium is led by Zijin Mining Group- the country's biggest gold miner -Tongling, a copper miner, and Xiamen C&D, a trading and property conglomerate.

Although the Rio Blanco acquisition appears to be a success for China in securing a foothold in copper-rich Piura, it could still turn out to be a rash decision.

Take Monterrico's troubled history in the region. The company, which mainly identifies, explores and designs stages of mineral-project developments, has faced continual uproar during its four years of operations in Piura. Violent clashes between the police and local farmers protesting against the project have occurred in 2004, 2005 and 2006.

A report by UK-based Peru Support Group (PSG) says the use of tear-gas grenades and rocks have resulted in two deaths, several cases of injury and arrests. The conflicts have attracted considerable media attention both inside thecountry and abroad, forcing Peruvian authorities to launch an investigation into the conduct of Minera Majaz, Monterrico's wholly-owned subsidiary responsible for overseeing the Rio Blanco project.

Rio Blanco's concession lies on land belonging to peasant communities, or campesinas, which in Peru possess a degree of authority over how land can be used. Local farmers have alleged that Monterrico did not obtain the proper legal permits for site exploration and hasdisregarded their concerns for the environment. Rio Blanco is near the crest of the Andes, located in a fragile cloud forest where endangered species like the Andean spectacled bear live. If the exploration site is converted into a mineral-development project, its habitat could be affected.

Despite such concerns, Monterrico had envisaged a larger mining district around Rio Blanco that could incorporate other deposits in the region and on the frontier with Ecuador.

Local residents also fear that mining would have an adverse impact on the quality and quantity of their water supplies. Much of the Piura region is a desert or semi-desert, and its agriculture is acutely dependent on the quality of water draining from the highlands where Rio Blanco is located. Local peasants are poor even by national standards, and they have put up a stiff resistance to previous attempts to infringe on their land rights by French and Canadian mining companies.

"For Rio Blanco to be socially viable it has to be the verybest mining project in Peru, one that ensures that mining fosters development," says the PSG. If Zijin wants its investment to pay off, it would be wise to heed the advice.

Otherwise, its bargain purchase could turn into a costly mistake.

In the pits?

© The Economist Intelligence Unit Limited 2007