Earlier this year, my colleagues and I visited the Latin American countries of Peru and Chile in search of investment opportunities. Mining is an important industry in both countries, with gold, silver, copper and zinc among the key metals and minerals extracted. Setting up a visit to a mine high in the mountains of Peru was one of the most difficult arrangements our team has had to make! Negotiations with the company were lengthy, and we were close to giving up. Then a couple of days prior to our planned visit, the company asked us for proof of life insurance and a medical exam, which for older folks like me included an electrocardiogram. We almost gave up at that point, but with determination I ended up on my Lima hotel bed attended by a doctor who stuck suction cup wires on my body for the required electrocardiogram. It was an experience I certainly won’t forget, particularly when she discovered her equipment wasn’t working properly. But she passed me anyway, figuring that I would be able to stand the high altitude! I could understand the company’s concerns about having visitors in a dangerous mining site. In any case, we were on our way after I passed the exam. The terrain at the airport in the coastal city where we landed and all the way to the mine could have been used as a set location for a movie about the moon or a Star Wars feature. No vegetation and just light-brown, hilly, rocky ground. The two-lane highway was excellent, winding around the mountains as we climbed. On the way, we occasionally saw small concrete-block homes with corrugated metal roofs. It took one and a half hours to drive from the Pacific coast all the way up to the mine at 3,400 meters above sea level. Once we arrived at the summit, we found what could be described as a little town in the middle of nowhere, with some 20,000 residents including 1,500 miners, 500 contractors, their support staff and families. Amenities included a church, a golf course carved from the dry land but with a few green patches, a soccer (football) field, hospital, bank branches, schools, etc. The whole visit was an exciting and interesting experience for all of us. We were impressed by the high caliber of people working at the mine. They all seemed to be very motivated and proud of their work, talking constantly of important KPIs (key performance indicators), such as production growth and cost per unit. It was quite remarkable to us that the company could retain and develop talent in such an inhospitable and isolated environment. It was also interesting to see the level of detail in operational and safety processes. The enormous US$4.5 million trucks they were using at the mine were able to haul 400 tons of material in one go. I learned that each tire on those trucks cost US$50,000! Because of their size, the trucks can’t be driven up the mountain, so they are disassembled and shipped to the mine site where they are then reassembled. It takes them two to three months to assemble one truck. Although powered by an enormous diesel engine, they are technically electric vehicles because the diesel engine generates electricity, and it is that electricity that powers the wheels. Donning hard hats and safety vests, we visited the actual open pit mine site, the most impressive part of the visit. The pit was almost three kilometers in diameter and one kilometer deep. The mine design is actually quite technical in nature, taking into account hauling roads, bench angles and heights, and ditches. They had electronic slope monitoring stations across the pit to make sure there were no unwanted movements that could compromise the stability of any of its walls. We were very lucky, because when we reached the top viewing point we got to see them dynamiting a section of the pit. At another part of the site there was a great deal of equipment, including an ore concentrator and a solvent-extraction electrowinning process to purify the ore for final smelting. Copper analysts have expressed concern about demand in view of the slowdown in China’s economy, which has impacted the commodity’s price. Currently, China is the largest consumer of copper, accounting for 45% of global demand.1 Copper is a key component for the housing industry, and despite China’s slowing economic growth, overall consumption of copper has been increasing in China as well as in the United States, Japan and Europe—a trend that is expected to continue.2 While there had been a reduction in production at high-cost mines, more efficient new mines were now coming into the market, which was putting a lid on prices not only for copper but for other natural resources including molybdenum, silver, zinc and gold. Despite these declines, mining companies continued to expand production either because they had already started creating a new mine and had spent so much money it did not make sense not to complete the facility, or they expected prices would eventually recover, thereby justifying the investment. The investment amounts are so large and the time required to start a new mine is normally five or more years, so it’s necessary for companies in this industry to think long term. Of course, there is still near-term concern about weak prices. The largest use for copper is in construction, and it is also used in consumer products, including automobiles, appliances and electronics, and plays a key role in information and communications technologies. Some executives at the mine we visited were optimistic that there would be strong economic recovery in the United States and Europe, and estimated demand growth in China would be about 3% in 2016.3 They expected that copper used in automobile manufacturing and electric grids would increase the demand for copper cables, offsetting the weak housing market demands. A scarcity of scrap copper was another factor they saw limiting the supply and potentially boosting prices. Also, with copper prices low, the incentive for mining companies around the world to start...
Investment Adventures in Emerging Markets - Notes from Mark Mobius
Mark Mobius, Ph.D., executive chairman of Templeton Emerging Markets Group, joined Templeton in 1987. Currently, he directs the Templeton research team based in 15 global emerging markets offices and manages emerging markets portfolios. As he spans the globe in search of investment opportunities, his “Investment Adventures in Emerging Markets” blog gives readers a taste for what he does, when, where, why and how. Dr. Mobius has written several books, including “Trading with China,” “The Investor’s Guide to Emerging Markets,” “Mobius on Emerging Markets,” “Passport to Profits,” “Equities—An Introduction to the Core Concepts,” “Mutual Funds—An Introduction to the Core Concepts,” ”The Little Book of Emerging Markets,” and “Mark Mobius: An Illustrated Biography."
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