BAKU, Azerbaijan () -- There are few countries where mining and mineral resources have played as large and significant a role in economic and cultural development as in Peru. Peru today is the world's largest silver producer, its second-largest copper producer and its fifth-largest producer of gold.
Looking to build on the success Canadian mining companies have had in Peru, private investment bank Intercapital is looking to attract Canadian miners to list on Bolsa de Valores de Lima, the Lima Stock Exchange. This month, it opened what is the first Canadian representative office for a Peruvian investment bank in Vancouver, from which - in addition to BVL listings - can provide Canadian mining companies private equity, corporate finance and acquisition services.
Resource Investor spoke with Intercapital Canada managing partner Luis Zapata to gain further insight into the investment bank's activities in Canada, as well as developments in Peru's mining and mineral resources sector.
A Little Background
Peru has become something of a haven in a storm for mining companies in South America. As newly elected governments in neighbouring Andean nations such as Ecuador, Bolivia and Venezuela are re-writing the rule book and instituting higher royalty rates and windfall taxes in light of high metal and mineral prices, the administration of Pres. Alan Garcia has taken a more cautious, private sector and market-driven approach as it seeks to strike a balance between economic, social and community development and protecting the environment.
Peru's investment attractiveness has increased substantially when it comes to competitiveness in the global mining industry, as a result of increased confidence in the country's political stability and taxation policies, according the Fraser Institute's Survey of Mining Companies 2007/2008. Peru moved up from 52nd to the 28th position, jumping in front of Argentina, Bolivia, Brazil, Russia and South Africa, according to the Fraser Institute's report, which is based on a survey of 372 mining company executives.
Challenges and problems remain, however, particularly when it comes to labour and community conflicts and the ability of and degree to which local communities have shared in and benefited from growing markets and increased mining investment.
The cost of environmental degradation in Peru amounts to 3.9% of gross domestic product (GDP), while the government invests only 0.3% of GDP in preventing or remedying environmental damages, according to a 2006 World Bank report.
Pres. Garcia has been criticized for going back on a campaign promise and not re-negotiating legal stability contracts with mining companies established during former Pres. Fujimori's tenure. Twenty-five of 27 large mining companies continue to be exempt from royalties. The Garcia administration instead negotiated a voluntary payments system that calls for mining companies to contribute $172.4 million per year to the Equality Fund for poverty alleviation during his five-year term.
While central government approved mining projects increased 77% between 2002 and May 2007 while environmental conflicts increased 40%, according to Cooper Acci'on and the government ombudsman's office, Defensoria del Pueblo.
The Peruvian government has been benefiting, along with the mining companies, from the boom in mineral resource markets. Mining and energy companies invested US$24.15 billion dollars in the country and paid US$3 billion in income taxes in 2006 and more than US$3.5 billion in 2007, according to government figures.
"If mineral prices have soared, the companies are paying more taxes as a result, and there are more resources to be distributed among the villages," Prime Minister del Castillo said.
Intercapital Canada's Luis Zapata
The BVL has posted some stellar results in recent years. The exchange's main index rose 286.1% between December 2004 and December 2007. The BVL Mining Index, which makes up more than 50% of the market's capitalization, rose 367% over the past three years. The BVL junior sector is also growing. Total market capitalization has grown from US$13.9 million to more than US$450 million between January 2005 and January 2008.
One of three chartered sponsors for Lima Stock Exchange (BVL) listings, Intercapital Canada's parent company, Intercapital SAB S.A. is headed by former Lima Stock Exchange director Ernesto Higueras.
Through its newly established office in Vancouver, the company aims "to provide our clients with an all-inclusive listing service, and have experience and the capacity to facilitate financings and project acquisitions," according to managing partner Luis Zapata, who spoke with RI about conditions in Peru's mining sector and the Canadian office's plans and expectations.
Interview
RESOURCE INVESTOR: Please briefly explain the key benefits listing on the BVL provide Canadian and North American mining companies? Junior miners in particular?
LUIS ZAPATA: Listing on the BVL provides mining companies with access to a rapidly growing and liquid capital market with an appetite for commodities investment. Investors in Peru and the Andean region are comfortable investing in exploration and near-term mining plays, and are knowledgeable about the processes that need to happen between going public and actually mining.
A BVL listing provides access to a very liquid market. Companies like Vena and Candente sometimes see higher trading volumes in Lima than on the TSX. A BVL listing also hedges against North American capital markets conditions and economic cycles, and facilitates local retail and institutional investors becoming long term shareholders.
The BVL venture exchange started with one company (Vena, which we sponsored in 2005), and there are now five listed companies with more to come.
BVL has embraced juniors in particular and in 2005 created a 'venture' section of the exchange solely for foreign juniors to be listed. The financial community in Lima and neighboring Andean nations received this development with open arms, and the BVL junior index which began with a capitalization of US$13.9 million, is now capitalized at close to half a billion dollars.
RESOURCE INVESTOR: Please walk us through the listing process? How would you compare it to other exchange listing processes, the TSX or the bolsas in Chile or Brazil say?
LUIS ZAPATA: The BVL listing process is fairly straightforward. First, an interested junior requires an 'Agent of the Stock Exchange' to sponsor them. This sponsor will act as the junior's guide through the listing process. There are only three chartered sponsors, and Intercapital is the only private one.
From there, the process is similar to going the TSX route. A prospectus and project report is filed with the exchange, and a representative is appointed in Lima (usually a lawyer). The exchange will look over the merit of the project and management's experience, and a decision is made as to whether or not a company is suitable for listing. In our experience, any TSX-listed junior has the potential for a Lima listing.
The main difference between a BVL and TSX listing is time and cost. The process for listing juniors has been streamlined to take no more than a couple months. Of course, there are sometimes outside issues which may delay a companies listing. The cost of a BVL listing is about one quarter of a TSX listing all-inclusive.
RESOURCE INVESTOR: You mentioned that Intercapital sponsored Vena's BVL listing. Any others? And what other types of business is Intercapital Canada aiming to do?
LUIS ZAPATA: Intercapital has successfully sponsored Vena and Panoro. Currently, we are in the process of listing a few other juniors and a non-mining TSX-listed company.
Apart from listings, Intercapital has brokered project acquisition deals, and participated as co-agents for private placements. Last year, we raised over US$6 million dollars for private placement allocations. This year, having opened our Vancouver office and in light of the poor market conditions for private placements in North America and Europe, we are aiming to do US$50 million plus.
Due to our reputation and connection in the Peruvian market, various private Peruvian mining operations come to us for guidance on vesting projects into foreign miners. This gives us the capacity to vest otherwise unreachable project into our client companies. We currently have exclusive contracts with privately owned Peruvian enterprises to vest everything from very prospective claim blocks to fully operating mines into our client juniors.
RESOURCE INVESTOR: Please briefly describe the reporting requirements and regulatory regime companies who list successfully will be subject to? Again, how would you compare/contrast it with other exchanges such as the TSX?
LUIS ZAPATA: The BVL requires all filings made with foreign exchanges where a BVL-listed company is co-listed (such as the TSX) to be simultaneously filed with the BVL. This requirement assures local investors of a first class regulatory regime.
RESOURCE INVESTOR: I read that Peru's investment companies are by law restricted from investing more than nine or 10% of their funds overseas. Is this true? What does it mean for foreign companies who list their shares on the BVL? And is this likely to change?
LUIS ZAPATA: Peruvian pension funds (which make up the bulk of investment companies in Peru) are restricted to 20% overseas investment. This was recently amended from 17.5% a few weeks ago.
At this moment, Peruvian pension funds are exploring the possibility of investing a small but significant portion of their assets under management in BVL listed junior companies of merit.
This is an exciting possibility for juniors either listed or thinking of listing in Lima, as it will open up a completely new source of capital for them.
RESOURCE INVESTOR: Please describe how the equity capital raised can be used, and where, once a listing is made, i.e. are foreign companies free to move and use the capital in any country any time they need to?
LUIS ZAPATA: There is no restriction on the use and/or movement of capital raised for juniors through the Peruvian capital market. In fact, we are currently working on the listing of companies which do not have operations in Peru.
The freedom that the financial regulatory authorities in Peru have provided in this regard has been truly visionary. It is our opinion that Peru's longstanding reputation as a premier mining destination will soon be complemented by an international reach for its capital markets.
It is my hope that the BVL develops into a Frankfurt or TSX Venture-like exchange, where all regional investment into junior and other commodities plays are funnelled into. This year will be an exciting year for the BVL, and we see a lot of the infrastructure for this to happen as already having been put in place. The management of the BVL should really be applauded for their efforts, as all Peruvians stand to benefit.
RESOURCE INVESTOR: Please comment on the stability/reliability of the new sol's foreign exchange value, the central bank's policies of maintaining it along with domestic macroeconomic conditions, i.e. inflation, employment.
LUIS ZAPATA: The recent increase of the Nuevo Sol's value versus the [US] Dollar has been of some concern for Lima, but we feel that the central bank is doing what it can. The combination of a weak US economy along with an extended commodities bull market has made an increase in the Sol's value all but inevitable.
In terms of macroeconomic conditions, Peru continues to enjoy high GDP growth, and the trickle down effect which some analysts saw as lacking during the Fujimori regime is now occurring. The continuing support of the Garcia government for liberal economic policies has helped a large percentage of the population rise out of extreme poverty, and has expanded the middle class.
We see this growth continuing for the next two years, and hope there will be no political uncertainty at the end of Garcia's term.
RESOURCE INVESTOR: Can a listing help mining companies in terms of their need to help address community relations and development problems? How so or how not?
LUIS ZAPATA: This is great question, and a key part really of what the BVL Venture Exchange is all about. By listing in Lima, companies are showing their commitment to Peru and their support for local investors who for so long were denied the opportunity to profit from mining projects in their own backyard.
I think you will see companies that list in Lima being rewarded for their efforts not only in terms of increased liquidity and access to capital, but with higher levels of cooperation from local government and private authorities.
