Mining the Future: Chinese Investment in South American Extractive Industries

1. Mining the Future: Chinese Investment in South American Extractive Industries Dr. Cynthia A. Sanborn Universidad del Pacífico Lima, Peru

2. Context . • Global demand and competition; all MNCs and SOEs seeking LA commodities. • Renewed development concerns. Can we diversify, escape “resource curse”? • Rethinking role of State, public institutions • Democracy, diversity of actors & issues • Rights, environment, revenue distribution • Higher global standards for industry, CSR

3. Questions • In this context…. • What are the development implications of expanded investment by Chinese SOE? • Do Chinese firms – and government -- behave differently than others in this region? • Do governments behave differently with them? • What can we learn from recent cases? • What more do we need to know?

4. General Comments • Chinese interest primarily oil & minerals, but also relative social stability, local capacity (vs. Africa) • Actively recruited by governments, partners • Primarily SOE, but also firm diversity • What do Chinese offer? • Broad government-government agreements • “Accomodationist” position vis governments, local elites, changing rules (Gonzalez V.) • More money on the table, access to finance • Access to China market • Increasing Chinese government concern about firms´ behavior, at home and overseas

5. However… • Goverment directives hard to implement afar & on the ground. • When host governments not strong • When firms not “national champion”, central government linked • Limited experience with community relations, multi-stakeholders • Tend to assume governments will resolve social problems • Limited vocation for dialogue, media • Lack of transparency. Part culture, part distance and language • Do not participate in EITI, local counterparts • Delisting acquisitions (Toronto, London) • Few effective channels for communication • Limited local staff with main office authority • Shareholder contacts, activism unlikely

6. Perucase

7. Peru: Minerals 62% of exports 25% tax revenues, 20% FDI 6% GDP, 20-50% regions 26% Chinese world mineral M&A 34% M&A in Peru from China First projects 1992-93 Second wave 2007+ 8 major firms China #2 trade partner FTA with China 2009

8. Peru context • Since early 1990s, governments promote foreign investment with favorable tax, legal measures. • Since 2006, renewed courting of China - FTA framework • Relatively weak State capacity/will to regulate firms • Challenges: property rights (private, community), water rights, environmental impacts, labor, indigenous – even Church. • Increasing “socio-environmental” conflict. Communities vs firms, with State on sidelines. • Chinese investing in conflictive situations

9. Major mineral investments • 1992, Shougang – buys government-owned property • 2007-2010, Chinese acquire private juniors • Zijin Consortium, Rio Blanco copper, 186m • Chinalco, Toromocho copper, 792m • Minmetals/Jiangxi, Galeno copper/gold, 432m • Nanjinzhao, Pampa de Pongo iron, 100m • China Sci Tech, Mina Justa copper, 240m • Total announced mining investment in next five years $6.8 billion • Also oil since 1993, CNPC - today 40% of total oil production in Peru. Amazon and coast.

10. Case 1: Shougang Corporation • Fourth largest steel company in China, 90 year history • 1992 – buys Hierro Peru (Marcona) for US $188 million ($311 bid) • First privatization for Peru mining sector • Largest foreign investment for China in LA • Labor conflicts: 350 Chinese staff, fire locals, resist union • Local government conflict over water, electricity • Environmental impact: outdated facilities, fines for non-compliance • Initial investment commitment not honored, govt assumes $266 debt • Three anti-corruption investigations since 2002, shelved due to perceived threat to expansion, other Chinese investments • What learning here?

11. Case 2: Zijin Consortium • Copper project on Northern border with Ecuador, UK junior firm • Inherited troubles: non-mining area, fragile environment, land rights disputed, strong opposition from local communities, violence • Three Chinese investors (Zijin, Tongling, Xiamen C&D) - mixed • 2007: Only bidder, recruited by diplomats-turned-directors • Chinese CEO, little change in community relations, conflicts persist • 2008: President Garcia visits China, meets CEOs, promises help • Project declared National Priority, protesters charged as “terrorists” • Fined in Peru for safey violations, EIA not approved, expanded concessions • 2009: more violence, project stand-off

12. Case 3: Chinalco • Large new copper project in Junin, Canadian junior • Requires relocation of entire town (5,000) • 2007 bought by Chinalco, “national champion” SOE • Non-Chinese (expat) CEO, former head of world-class Antamina copper mine • Staff 99% non-Chinese, local experience • Extensive investment in environmental programs, cleanup old Acid Water Treatment Plant • Greater engagement with local community, authorities, social investment – residents approve move.

13. Most likely to succeed?

14. Conclusions • Chinese investment a major opportunity for commodity producers, but development impacts mixed • National level: ability to “harvest” these resources for sustainable development, depends more on will and capacity of national policymakers - and vigilance of civil societies. • Chinese more positive force, when local states are (Chile, Brazil) • High potential for conflict when not the case (Peru) • Local level: reducing negative impacts still relies heavily on voluntary action of firms • Chinese less experienced with stakeholders, unions, media • Lack of transparency, accountability • How fast can they learn? • Latin Americans also need to learn more about China, its firmst and government institutions – urgently.

15. Fin