Many Peruvians associate mining projects with large scale environmental damage, creating major challenges for mining firms operating in the country

By Daisy Johnson

Last week, on 18 April 2012, Peru’s government released a keenly anticipated independent audit of the original environmental impact assessment (EIA) of the controversial Minas Conga project in Peru’s northern region of Cajamarca, a joint venture of US-based Newmont Mining Corporation and Peruvian partner Buenaventura.

This found that ‘substantive improvements’ were required from these mining organisations before work at the mine could continue, particularly with regard to water management.

Peru’s government hoped that this independent audit of the EIA and its subsequent recommendations would help to quell continuing opposition to the project from local communities. At present, however, it seems that these actions have done little to allay the concerns of local communities regarding the mine’s impact.

For instance, one of the mine’s leading opponents, Marco Arana, responded to the new audit by saying that it was impossible for the project to go ahead without ‘grave social conflict’. Another activist, Wilfredo Saavedra, president of Environmental Defense Front Cajamarca, called for Peru’s President Humala deny a permit for the mine, adding that he thought the government had been ‘manipulated’ and that ‘we no longer believe in the executive.’

Mass protests against the mine began in November 2011 (see our Ethical Insight article) as local communities, supported by Cajamarca’s local government, claimed that plans to construct artificial reservoirs to replace four alpine lakes would significantly impact already scarce water supplies.

Furthermore, protestors argued that the project had inadequate plans for mine tailings disposal, exposing local communities to pollution and contaminated water supplies.

The auditors recommended that the project kept two of the four lakes intact, increase the capacity of artificial reservoirs and reposition tailing dumps. However, representatives of local communities have said these recommendations are inadequate and warned that any pursuit of the project would result in escalating social conflict.

This dispute poses a variety of risks to companies operating in the sector, including heightened security risks associated with the rising propensity for violent conflict, legal and reputational risks and protracted business operations that will significantly increase project costs.

Furthermore, the project has created a rift between central and regional government which could result in a significant destabilisation of the investment climate if unresolved. Prior to the release of the review, president of the Cajamarca government, Gregorio Santos, attempted to block the project on the grounds that it was ‘unviable’ under Ordinance 036. Peru’s Constitutional Tribunal found that preventing the project in such manner was beyond Santos’s mandate. However, Santos’s has since stated his intent to pursue Ordinance 036 with the aid of international bodies.

Despite this local opposition, President Humala is widely expected to continue to pursue investor-friendly extractive policies in order to fund his wide-ranging ‘social inclusion’ programmes. He has, however, maintained that Newmont and Buenaventura must not only comply with environmental recommendations but also establish a fund for social engagement and significantly boost employment rates.

Such measures could ultimately help to ensure improved environmental management in future mining projects, thereby reducing the likelihood of future social conflict over the development of the sector. However, there is also a risk that the resulting increase in operating costs might act as a deterrent to future investment, particularly if the risks associated with social conflict also continue to grow.

The future of the Minas Conga project itself is now dependent on whether the two operating companies choose to comply with the revised EIA recommendations. Newmont has agreed to conduct ‘technical and economic evaluations’ of the proposed measures while the government has committed itself to reducing opposition to the project by addressing local community concerns. The outcome of this process will provide an important litmus test for the future trajectory of Peru’s mining sector and wider investment climate.

Daisy Johnson is a Latin America analyst at Maplecroft.

Maplecroft has just released a Country Risk Report on Peru, outlining the major risks facing foreign business and investors operating in the country. For more information on this, please see here: http://maplecroft.com/about/news/country-reports-april24.html#crr_peru