Bonanza in the Andes

Big profits at Yanacocha, South America’s largest and most lucrative gold mine, are fanning gold fever in this formerly quiet corner of the Andes, despite a plunge in gold prices over the last year that has made money-losers of many of the world’s mines.

While local residents of this ancient community complain that they’re not getting much of the action, gold production at Yanacocha, an open-pit mine that is majority-owned by Denver-based Newmont Gold, has shot up by a third so far this year, on top of a similar gain in 1997.

In North America, meanwhile, a dozen mines have closed and 2,000 miners have been laid off, including 500 by Newmont, as lower prices made digging a losing proposition.

Newmont keeps scraping away at these mountains not because the gold is any shinier, nor because the company prefers Cajamarca’s pastoral surroundings to arid Nevada, Newmont’s other base of operations. It is here because favorable geology makes gold extremely cheap to mine: about $112 per ounce, less than half the $245 industry average.

The low cost means Newmont can make lots of money even if prices drop to $279 an ounce, as they did in January, a sharp decline from $370 in early 1997. (It has since rebounded to about $300 an ounce.)

The Yanacocha operation, perched at a rainy 13,000 feet in the mountains north of here, is clearly a bonanza. And its golden halo is no secret.

Yanacocha is economical to run because the ore lies close to the surface and is extremely porous, which allows it to bond easily with the cyanide solution used in the mining process. Since Newmont and partners don’t have to crush the ore before leaching, processing costs are low and recovery rates high. And labor costs are a fraction of what Newmont pays its miners in the United States.

U.S., South African and Canadian companies all have arrived in Peru after a 20-year hiatus, lured by the combination of good economics and Peru’s improving political ambience. About $10 billion in mining projects is planned, several of them in this once-quiet valley that was home to Inca kings.

“South America is the largest destination for mining investment now, and Peru is the most exciting destination of all at the moment,” said John Webster, partner of Price Waterhouse’s Vancouver-based World Mining Group.

The world has known for centuries that the gold was here.

Cajamarca is where Spanish conquistador Francisco Pizarro captured the Inca king Atahualpa in 1533 and held him for ransom, demanding that the Inca’s minions fill a room with gold to save the chief’s life. The room, which is still preserved, was dutifully filled with riches--but Pizarro killed Atahualpa anyway.

In modern times, the obstacles were guerrillas and past Peruvian presidents’ habit of nationalizing foreign companies. Now President Alberto Fujimori has largely subdued the revolutionaries, and his administration has opened its arms to foreign investors.

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The only discordant notes are sounded by residents of Cajamarca, a once-secluded agricultural city 30 miles from the mine. Although it is steeped in Inca and Spanish colonial history, it is rapidly losing its purely rural character and changing into a noisy, bustling mining hub, replete with strip clubs and minibus swarms.

Its residents are finding out firsthand what economists have always said about mining: It doesn’t do much for the locals. Indeed, many Cajamarca businessmen and politicians complain they have been shut out of the mine’s good technical jobs and lucrative service contracts because the mine’s owners use outside contractors, often foreign firms. The preponderance of the mine’s 1,200 jobs held by local residents are menial, they say.

The mine’s general manager, Carlos Santa Cruz, said in an interview that expectations were impossibly high among local residents and that the 1,200 jobs and the $7 million in new roads, schools and other infrastructure paid for by the mine have been good overall for the community.

But residents of Cajamarca (population 180,000) complain that the main impact they see from the mine is a higher cost of living. Prices for housing, schools and staples have skyrocketed to big-city levels because highly paid foreigners can afford to pay more, City Councilman Victor Vargas said. Residents said in interviews that rents have increased tenfold in good parts of the city.

The disappointment among Cajamarcans has fueled reports, apparently unfounded, that pollution from the mine has damaged crops and affected farm animals. Mining critics such as Pablo Zevallos, an agronomy professor at National University of Cajamarca, say there has been no evidence of toxic spills or other pollution from the mine, although he too says the mine has been a huge economic disappointment to Cajamarca.

“This is not the same city it used to be,” Zevallos said. “It was a quiet colonial town that now has dust, crime, prostitution and noise.”

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So it goes. Mining companies have always exploited the earth and then moved on, leaving little behind “except a big hole,” said Alberto Pasco-Font, a Lima-based economics researcher.

“Mines don’t create a lot of employment,” he said. “Mining is a capital-intensive activity with an important impact in foreign exchange. But the money is often disconnected with the rest of the economy.”

Concerns of localities like Cajamarca typically are swept aside by central governments’ hunger for foreign investment, Pasco-Font said.

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Indeed, the Peruvian government couldn’t be happier. Precious metals mined by foreigners and shipped overseas behave the same as any export: They create foreign exchange, which the Peruvian government badly needs. Peru’s total gold exports reached $499 million in 1997, compared with a paltry $9.1 million in 1990 before foreign companies rushed in.

The top-level welcome from Peruvian officials is also reflected in an easy permit process, similar to those in other South American nations, that is music to the ears of mining executives accustomed to doing battle with environmentalists in the United States and Canada.

Newmont officials say they meet the same environmental standards in Peru that they do in North America. But they can get permits in Peru in 45 days that would take five years on U.S. turf.

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Moreover, it is all but impossible to open new U.S. or Canadian facilities that employ technologies using toxic chemicals such as cyanide, arsenic and mercury.

As it does at most of its mines, including those at El Centro, Calif., and Carlin, Nev., Newmont uses a “heap leaching” process at Yanacocha whereby a fleet of front loaders, each standing two stories high, scoops up 85-ton loads of ore and deposits them on man-made mini-mountains called leach pads. Multi-terraced and measuring 40 acres, the pads are irrigated with a cyanide solution that binds with gold and silver before the solution drains into catch basins for refining.

Although Newmont insists that all the cyanide is either recaptured or broken down in nature, the system is hardly fail-safe. In fact, Newmont was fined $23,500 by Nevada environmental officials in November for allowing 270,000 gallons of the highly toxic solution to overflow from a leach pad last June. Although most of it was recaptured, about 18,000 gallons escaped into a nearby stream.

From Yanacocha’s uncertain 1992 beginnings amid guerrilla violence and hostility to outsiders, the mine’s performance has jumped every year. Last year’s 1.05 million ounces of gold recovered was double the 1995 level, and proven reserves of 13.9 million ounces as of December were twice the estimate of the previous year.

And the miners keep coming. In November, Barrick Gold of Toronto will open a mine called Pierina near Huaraz in northern Peru that may replace Yanacocha as South America’s most profitable mine. Barrick, which paid $800 million for the site in 1996, says it can produce gold at a cash cost of $50 an ounce, or half what Yanacocha spends.

Cambior and Noranda, both Canada-based, also have new Peruvian gold mines in the works, said Hans von Michaelis, president of Randol International, the Golden, Colo.-based publisher of Mining Opportunity Bulletin, a quarterly newsletter.

Although Yanacocha produces 9% of Newmont’s mining revenue, it supplies more than 25% of its operating profit. Those outsize profits are especially important to Newmont now because the company is struggling with debt.

Newmont’s faith in Yanacocha is demonstrated by its plan to invest an additional $83 million in the mine this year, despite the lack of sparkle in the outlook for gold prices over the next several years. Central banks around the globe are expected to continue to sell off gold reserves, depressing prices.

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One dark cloud: Newmont Gold is embroiled in a legal dispute in the Peruvian courts over ownership of Yanacocha. If Newmont loses, its stake in Yanacocha will fall to 38%, a worst-case scenario that is already reflected in its stock price, said John Bridges, an analyst at Flemings Global Mining investment bankers in New York.

Newmont Gold shares closed Friday at $28.38, down from a 52-week high of $47.50, in New York Stock Exchange trading.

Meanwhile, Peru has become the world’s ninth-largest gold producer, with production hitting 71 metric tons last year, behind world leader South Africa’s 485 tons, according to Gold Fields Mineral Services.

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Peru Gold

A collapse in gold prices has turned mines around the world into money-losing propositions. But not in Peru, where technology and geology make gold profitable even at current prices: The surge in mining activity over the last five years has made Peru the largest gold producer in Latin America and ninth-largest in the world.

GOLD PRICES

World gold prices per ounce, in dollars:

April ‘98: $307.90

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GOLD PRODUCTION

1997 production estimates by country, in metric tons:

South Africa: 485

United States: 340

Australia: 304

Canada: 161

China: 157

Russia: 134

Indonesia: 95

Uzbekistan: 73

Peru: 71

Brazil: 60

Source: Gold Fields Mineral Services, Bloomberg