Role of Heterodox Microeconomics in Heterodox Economics session at 12th International Conference

1. MINING THE DATA:
INVESTMENT DYNAMICS
IN THE PERUVIAN
MINING INDUSTRY 1992-
2010.
Alejandro Garay
University of Missouri – Kansas City

2. 1. Introduction
 After the neoliberal reforms of the early 1990s.
Complete deregulation of the economy and the
opening for foreign direct investment (FDI)
especially in the extractive sector.
Urban areas of the country are experienced a
significant economic growth.
Rural economies have become economically and
environmentally unsustainable

3. 1. Introduction
 Mainstream economists and international
financial institutions have promoted a “model
for investment”, which main aims are
deregulation, tax exemptions, and “social-political”
stability
 The aim of this paper is to describe and
explain the investment process for the mining
industry.
The period of analysis comprises the post
neoliberal reforms of the early 1990’s until 2010

4. 2. Methodological issues
 Following the principles of grounded theory I use an
open non-deductive method (Lawson, 2003; Lee, 1998;
Downward, 1999, 2007; Downward and Mearman, 2007;
Finch, 2002; Scheibl and Wood, 2005; Laramie, Mair, &
Miller, 2007).
Quantitative data: Economic Commission for Latin
American and Caribbean (ECLAC), Central Bank of Peru
(BCRP), Ministry of Energy and Mining of Peru (MINAM),
United Nations Conference for Trade and Development
(UNCTAD), Metal Economic Group (MEG).
Qualitative data: surveys, interviews, which were taken
from previous studies published mainly in academic
journals and/or public and private reports.
 The method allows us to identify emerging analytical
categories and their causal explanations. which in turn
become the main sources for developing an analytical
narrative of the investment process in mining industry
from a heterodox perspective

5. 3. Some findings
A. Qualitative and quantitative analysis
 The period of analysis comprises the post neoliberal reforms
of the early 1990’s until 2010.
Transformation in the mining industry: from both small but
numerous privately owned companies and few large state-owned
firms to a highly concentrated industry with few large
transnational companies playing the major roles.
Between 1976 and early 1990's FDI (mining sector) was almost
inexistent
Between 2001 and 2003 more than 246 estimated projects
Mineral exports accounted for more than 50% of total export
eleven of the world’s top twenty mining corporations now have
operations in Peru
the social context in which the mining sector is operating is
plagued by high levels of poverty

6. 3. Some findings
A. Qualitative and quantitative analysis
 The mining industry in the developing
countries is characterized by its high
concentration of capital (plants) among large
transnational corporations.
 The post neoliberal reforms allowed a greater
concentration in the mining industry.
 Level of concentration is also explained by the
dynamic process of acquisitions, mergers and
expansions within this industry.

7. (1) The percents were calculated from production in metric tons of fine content.
(2) The percents were calculated from production in kilograms of fine content.
Source: Mining Yearbook 2001, 2004, 2006, 2007, 2008, 2010. Minister of Energy and Mine,

8. 3. Some findings
Copper sub-industry is one of the most
concentrated within the industry.
From the early 1990s to 2010 the Peruvian
production of copper (2nd largest worldwide
production) was dominated by the combination of
two large-sized firms for the first decade -
Southern Peru Copper Corporation and BHP
Billiton-Tintaya (merger then with Xstrata) -, and
the combination of two large-sized-firms for the
last decade (Southern and Antamina).
During the whole period of analysis these firms
have controlled more than 80% of the overall
production, which is equivalent to the 6% of the
worldwide market demand (Minem, 2011).

9. 3. Some findings
 The production of zinc shows clearly a similar trend
Early 1990s, 87% percent of the market demand has been
shared by 10 companies with the state-owned firm as the
only major player
From 2002 to 2010 the market has been controlled by two
major players Volcan and Antamina.
 The production of lead and silver shows a slightly
different pattern.
four large-sized companies have been controlling roughly
40% of the overall production and sales.
 The gold sub-industry is perhaps the least
concentrated within the industry measured in terms of
its share of the overall production
large and medium-sized firms controls 75% of production
and sales. However, it has become more concentrated in
the last year.

10. 3. Some findings
 There is also a concentration across these sub-industries.
Antamina, Volcan and Milpo operate in three of these sub-industries
–zinc, lead, and silver.
Antamina is by far the most important firm in the industry.
B. Investment behavior in the mining industry
 Even though the investment decision and its intensity
vary across every particular firms (Scheibl & Wood,
2005), mining firms tend to share two common
investment objectives/strategies:
a) increase their productivity through the acquisition of new
equipment, infrastructure, and equipment for the
processing plants.
B) increase their market share through a portfolio
investment in exploration projects, the acquisition of
medium and small-sized firms, and/or merging with large-size
firms.

11. 3. Some findings
 It seems to be that in general, the first
objective/strategy was dominant.
Firms sough to “increase productivity” through the
acquisition of new equipment, infrastructure, and
equipment for the processing plants.
This accounts approximately 55% of the overall
investment during the period
Large-sized companies invested mainly in
infrastructure and equipment (Antamina,
Southern, Xstrata)
Small and medium-sized firms invested
predominantly in exploration.

12. 3. Some findings
 However, the process is quite complex and usually each
company implemented a combination of both
objectives/strategies. Therefore, there does not appear to
be a general pattern for investment decisions.
 The heterogeneity of the firm plays a major role in this
process.
 Moreover, the investment opportunities available to each
firm are unique and vary according to multiple criteria
Financial/organizational structure
The role of the CEOs
Relations with the neighboring communities
Expectations about future prices. etc.
 Even within the mining industry where firms produce
homogeneous commodities there is considerable variation
across firms regarding the investment decision.

13. 3. Some findings
Table 03: Mining investment by investment strategies (in millions of US$)
Year
Equipments for
the processing
plants
Equipments
for production
Exploration Infrastructure Others Total 1/
2005 $30.46 $161.21 $83.71 $252.96 $306.90 $835.24
2006 $63.54 $124.09 $102.39 $640.63 $338.30 $1,268.94
2007 $63.77 $125.55 $136.59 $336.79 $248.10 $910.80
2008 $141.04 $176.69 $167.84 $321.48 $460.76 $1,267.81
2009 $319.75 $499.66 $393.14 $376.38 $700.78 $2,289.71
2010 $413.57 $517.03 $614.56 $809.24 $934.16 $3,288.57
Total $1,032.13 $1,604.23 $1,498.23 $2,737.48 $2,989.00
(1) The overall investment does not match with the figures of Table 04 because the "investment on exploitation was
excluded for being technically "working capital"
Source: Mining yearbook, 2008, 2009, 2010. Ministry of energy and mining - Minem, Peru

14. 3. Some findings
 The mining industry has enjoyed large profits in
the last decade as a consequence of drastic
increases in the international prices of mineral
commodities.
This period of prosperity generated an increase in the
level of investment.
Investments and profits exhibit a pro-cyclical
Kaleckian pattern.
There is also a pro-cyclical pattern for investment
expenditures and expected prices. Expectations of
future price increases cause the overall level of
investment expenditure to rise.
For the period of analysis both investment
expenditures and expected prices have similar trends
for all of commodities.

15. 3. Some findings

16. 3. Some findings

17. 3. Some findings

18. 3. Some findings

19. 3. Some findings
 The mining industry is characterized by a relatively
“low average labor intensity”, which is even more
pronounced in the exploration process.
 Our findings show that most if not all investment
expenditure in exploration is financed externally (Ees,
Kuper, and Sterken 1997 find same results for
chemical and rubber industries)
The main reason seems to be the higher risk associated
with exploration.
However, since the financial crisis external funds are more
difficult to acquire especially for risky investments.
Corbert and Jenkinson (1997) find a similar pattern for the
United Kingdom since 1980. They found a countercyclical
trend between the level of internally generated investment
expenditure and the business cycle. Mayer (1990) obtains
similar results for 9 countries for 1970 to 1985.

20. 3. Some findings
 Managers are aware of the importance of having different
sources of financing.
Profits as a source of finance for investment during periods of
recession or crisis.
“The global financial crisis will severely impact on the mining
industry’s ability to finance its ongoing operations…” “…The
industry should prepare itself for a “paradigm shift” in how
exploration is funded”. (McMahon & Cervantes, 2009) (Fraser
Institute Survey)
 The results of interviews conducted by Lall (1986) showed
that a major determinant of investing abroad were the
“constrained effect of government policy”. However, in
recent years these motivations have become more
complex and firm-specific (Athukorala, 2009).
 Among capital intensive firms (as in the mining industry)
the “market-seeking motivation” is the dominant motivation
(Sung Kwak, 2007).

21. 4. Concluding remarks
 Heterogeneity is a structural feature of the mining firms,
which defines the particular investment behavior of the
firm. Even though mining firms produce homogeneous
commodities, the way of how investment decision is
done vary among every particular firm.
 The post neoliberal reforms allowed a greater
concentration in the mining industry. This concentration
is reflected by the emergence of dominant companies in
both the sub-industries and across them during the
period of study.
 There is a positive correlation between investment and
profits, and investment and expected prices
(quotations). In both cases the trend was upward, with
some fluctuations during the period, but an overall

22. "Mineral expansion opens up
theoretically urgent questions
about neoliberalization,
democracy and the state as well
as the relationships between
social movements and political
economy.“ (Bebbington, 2008,
pp. 889)
Alejandro Garay
University of Missouri – Kansas City