mining intelligence series

7/31/2019 Mining Intelligence Series

1/19

www.BNamericas.com March 2012

High and dry: Waterissues in Chile and Perus

mining industries

BNamericas Content

2

24

56

78

1111

1415

17

Introduction

Situation in ChileFigure 1 - Freshwater extraction in copper mining

by region 2006 vs 2010

Seeking efciency

Figure 2 - Consumption of freshwaterby process

DiversifcationFigure 3 - Freshwater extraction versus

production in Chilean copper mining by region

Policy and working togetherFigure 4 - Total freshwater extraction in copper

mining by usage, 2010

PeruFigure 5 - Water prices for mining in Peru

Conclusion


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Water and Mining in Chile and Peru March 2012

www.BNamericas.com2BNamericas Content

Introduction

There is no way around it: mines need water. In one o the most importantcenters o current and uture copper production on the planet, this

vital resource is not so easy to come by. Te north o Chile and into Peruis a contiguous strip o earth with a similarly contiguous water and energybottleneck. Despite sharing the shortage, mining companies operating indierent parts o this region oten have dierent reasons or eeling the threatrom the lack o water.

In northern Chile there is intense competition or water, but at the end o theday all o the big mines have water rights, meaning that, at least on paper, theyare entitled to a certain volume o the liquid. But scarcity is acute and the daywhen rivers and aquiers, which are not well dened, could dry up is nigh.

In Peru, certain areas are drier than others, like the southern coastal desert, whileothers have somewhat more abundant water. But water conicts o a socialnature plague miners in both cases, as communities and armers are invariablyconcerned about quantity, quality and oten just the concept o a miningcompany using their water. In both nations, climate change patterns threatencontinually reduced supply as well.

In other parts o Latin America, the most common water situation is o cyclicalrainy seasons o excess water and dry seasons that can create scarcity, requiring

special management to ensure a steady ow year-round.

But in the copper belt o Chile and Peru which also hosts signicantquantities o gold, silver, iron ore and other minerals but these generally requireless water to process than copper issues surrounding water supply are rontand center on miners risk radars and present major operational and economicconsiderations.

Situation in Chile

Te northernmost regions o Chile are naturally arid, being largely coveredby the Atacama desert, and are also home to the bulk o the countrys miningactivity. Major growth in mining production in recent years coupled withurther projected expansion mean that access to water is a critical challenge orthe industry, particularly because miners are not the only ones who need it.

Freshwater extraction or copper mining grew 10.7% in 2006-2010 rom 11.2cubic meters per second (m3/s) to 12.4 m3/s, according to Chilean coppercommission Cochilco. Te highest-consuming region is naturally region II,which produces 55% o Chiles ne copper and registered a rate o 5.41 m3/s


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in 2010. In second place was region VI with 1.84 m3/s, ollowed by region III

(1.41 m3/s) and region I (1.38 m3/s).

Copper concentrate-producing mines use a disproportionate amount owater, as otation requires greater quantities o water than hydrometallurgicalprocesses. While saround 60% o Chiles total copper output is in the orm oconcentrates, these account or more than 80% o the reshwater used in thecopper production process.

During the past decade, Chiles total copper production grew 14% rom 4.74million tonnes in 2001 to 5.42 million tonnes in 2010. For the next eight years,total mining sector investment is orecast at some US$65 billion-US$70 billion,and copper output could reach 7.4 million tonnes per year over the next six

years. Te industrys water needs will, o course, grow accordingly.

So ar, no mining project in Chile has been abandoned due to water issues. Butthe industry is constantly working on this because it knows that i it does notsolve this bottleneck, it will be acing sooner rather than later the impossibilityo continuing to develop new mining projects, says Joaqun Villarino, executivepresident o Chiles mining council.

Apart rom northern Chiles natural dryness, questionable management oresources and inadequate inormation regarding real supply and extraction rateshave led to over-granting o water rights, meaning the reshwater draw in manyareas is most likely unsustainable; water is taken more quickly than it can be

naturally replaced, endangering the survival o surace water bodies and aquiers.

Climate change patterns are also reducing the amount o water naturallyavailable and extending the northern arid ecosystems urther and urther south.Overlying that is an increasing awareness throughout the whole community,but particularly at a local level, about the importance o water and the rights oindividuals and groups to water. Communities are becoming more orceul intheir approach to protecting their rights, which could lead to big problems ormining projects i not handled appropriately.

Te most serious conicts between miners, communities and agriculture overwater are occurring in region III, where mining has rapidly become the primarybreadwinner and competes most intensely with agriculture. Region III is alsohost to Barrick Golds Pascua Lama gold-silver project, the subject o muchcommunity opposition related to its water use.

But water scarcity in Chile in a sense reers more to the probability that supplywill run out i action is not taken rather than actual inaccessibility or allusers today. Mining companies have water rights and so do armers. But boththese industries are growing and the total quantities o water being drawn andavailable are not ully clear.


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Although miners might think they have a water right that says they can extract

this amount o water per year, there are two risks to them. One, that mightbe challenged and taken away rom them because o this greater communitymilitancy or aggressiveness around water. And two, the water might in act notbe there in the uture. It might not be there already, but also as climate changebecomes more apparent, there might not be the water available. Tats the riskor them, says Ralph Burch, regional manager, water and environment, atconsultancy Sinclair Knight Merz (SKM).

Another very tangible risk already maniesting itsel is the cost inationassociated with a decit market. Cesco listed growing water costs among the keyactors in a 29% average increase in operating costs among Chiles 12 largestcopper miners in the rst quarter o 2011 year-over-year, along with technical

difculties at operations and energy costs. Costs among the 11 biggest minershad grown 20% in 2010.

Te ormer head o Chiles water authority DGA, Rodrigo Weisner, said in 2010that prices or water rights in the countrys north had increased rom US$10,000per liter-per-second to US$60,000 per liter-per-second in the last 10 years,noting that new reshwater rights are difcult to obtain.

Figure 1

Freshwater extraction in copper mining by region2006 vs 2010

Source: Cochilco

Total 2010: 12,439 l/s

Total 2006: 11,171 l/s

Literspersecond

I

1,190

1,381

4,581

5,408

1,2171,406

439

839 9261091

2,100

1,838

718476

II

2006 2010

III IV V VI Metropolitan


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Seeking efciency

While overall consumption o water in Chiles mining industry has grown, sohas efciency in usage. Average consumption per tonne o ore processed in2010 was 0.70 cubic meters or copper concentrate processes and 0.13 cubicmeters or copper cathodes, versus 1.1 and 0.3 cubic meters, respectively, in2000, according to Cochilco. Te changes represent improvements o 36% inconcentration and 57% in hydrometallurgy.

I would say that this must be the only industry that has achieved suchimprovements in efciency, says the mining councils Villarino, adding that theoverall rate o recirculation o process water is now about 50%.

But with growing ore processing volumes both because o greeneld andexpansion projects and decreasing copper grades that require more and more oreto be processed on average to obtain a tonne o ne copper miners will haveto continue with improvements and investments to raise efciency levels.

In hydrometallurgy, water losses mainly occur due to evaporation rom the leachpads and must continually be replaced with reshwater. Strategies to reducewater losses include eliminating any ltrations, recirculating leach solutions andminimizing evaporation.

At concentration operations, water is primarily lost because it ends up in a

tailings pond, making it inherently more recoverable than water losses at anSX-EW operation. However at some operations the tailings dams are locatedat a signicantly lower altitude than the otation plant, requiring expensivepumping to recirculate water. In these cases, reshwater consumption per tonneis highest, notes Cochilco.

While some operations have already high levels o efciency, others recoveralmost no water or recycling back into processes, Cochilco says. otalconcentrator water usage is 25.6 cubic meters per second and on average 33.3%o that comes rom reshwater extractions. Te least reshwater-consumingconcentration operations consume in the order o 4.44 cubic meters per second,while the highest consumers average 68.2% reshwater.

Te lowest consumption rates tend to occur in medium- to large-scaleoperations and the highest in small- to medium-scale ones, mainly due to theoperating cost structure o smaller concentrators and the difculty o investingin recirculation equipment and technology.

But operational water efciency improvement must be an ongoing process orall mines. Te rst undamental step or any mining operation is to have an


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integrated water management strategy that looks at water use as a whole, a step

that most mines have taken with varying degrees o success, says SKMs Burch.

Some miners are now taking the next step o creating water balance spreadsheetsor computer models. Te idea is to translate models into operations using Isolutions designed to support water-efcient decision-making on a daily basis.

Meanwhile, miners are increasingly taking advantage o the latest watertreatment technology to recover water they would previously have disposed odue to difculty o treatment, such as acid mine drainage and tailings water.Wastewater treatment not only increases a mines water supply, but is also animportant element o sustainability strategies, particularly or big mining.

But clearly at the back o the mind is more security in the water outlook ortheir operations as well. Decreasing dependence on external water supplies is akey risk management strategy, says Burch.

Figure 2

Consumption of freshwater by process

Sources: Clean Production Agreement for large-scale mining, 2002

Proust Consultores and DGA, 2008 Cochilco, 20104 Cochilco, 2011

Cubic meters / tonne of ore

Process 2000 2006 2009 20104

Concentration1.1 0.79 0.72 0.7

(0.4-2.30) (0.3-2.1) (0.3-2.0) (0.3-2.9)

Hydrometallurgy0.3 0.13 0.13 0.13

(0.15-0.4) (0.08-0.25) (0.07-0.92) (0.06-0.8)


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Diversifcation

Seawater is without a doubt the most widely reerenced alternative to reshwaterand will be a key element in northern Chiles water supply solution. While someconsider seawater almost a panacea and mines in Chile have begun to use it,many industry players are also quick to point out its aults, a deense mechanismthat is rather understandable considering the costs involved.

Desalination technology is proven and widely used around the world, and thecost o desalinating is coming down as the efciency o plants improves. Butin Chile, the main cost o using desalinated water or direct seawater or amining company is transporting the water to the mine.

A 500-liter per second desalination plant using the dominant reverse osmosistechnology consumes an average estimated 3.4KWh per cubic meter odesalinated water, representing about 80% o the total cost o the desalinationprocess, according to gures rom Cochilco.

Chiles mines sit at about 180 kilometers inland and an average 3,000 metersabove sea level, requiring a long pipeline, at least our pumping stations andaverage energy consumption o 14KWh per cubic meter, or about our times theenergy required to desalinate the water, to deliver the water to its destination.

In northern Chile, energy supply is equally important to water or even more

critical, with scarcity and rising costs already impacting the mining industry.Villarino notes that much o the solution to the water problem depends onreliable, aordable power.

In addition, desalination is not environmentally neutral. Te water intake pointcan be harmul to marine lie i not well planned, while the desal byproduct, ahighly saline brine, must be returned to the ocean in a way that does not causean imbalance at the point o discharge or elsewhere. Plants also require siteson the coast and although Chile has an exceptionally ample coastline they willalmost always compete with tourism. All seawater supply projects to mines alsohave to consider the impact o the pipeline to the mine and its power supply.

A much anticipated US$254 million, 1,000-liter per second desal project bythe Spanish rm Aguas de Barcelona (Agbar) in region III, the rst desalinationproject in Chile where a third party would sell reshwater to a diverse user base,had its EIS rejected in August 2011 by the environment ministry. Te authoritycited the proposed plant locations impact on the landscape and tourism and saidthat the power supply system was not adequately addressed in the EIS.


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And simply using saline seawater is not necessarily an option. Existing mineswishing to switch to or add seawater to their water supply in virtually all caseswould be obligated to desalinate because o the cost or technical impossibility oadapting equipment and processes or use o raw seawater. In some cases, newmine projects could consider skipping the desalination step, like AntoagastaMinerals Esperanza, but oten the nature o the ore and metallurgy will notallow it.

Desalination has many virtues. But in order to utilize this resource, two thingsare needed. One, energy, and the other, management o the environmentalimpact o desalination It is not thinkable that all o the large scale miningin the country, we being the worlds biggest copper producer, could use

desalination, says the mining council chie.

However, a multi-partisan group o lawmakers has proposed just that. InNovember 2011 ten representatives o the lower house o congress submitted abill, now under study by the mines and energy committee, to require all miningoperations currently extracting more than 200 liters per second o reshwaterto incorporate desalination and reduce their reshwater draw by 2016. Minesextracting 150 liters or more would be subject to the same requirement startingin 2020.

Figure 3

Freshwater extraction versus production in Chilean copper mining byregion

Source: Cochilco, 2011

Region I

11%

Region I

13%

RM

4%

RM

4%

Freshwaterextraction forcopper mining

by region2010

Fine copperproduction by

region2010

Region VI

15%

Region VI

8%

Region V

9%

Region V

4%

Region IV

7%

Region IV

9%

Region II

43%

Region II

55%

Region III

11%

Region III

7%


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Te idea is to return water rights to the state and ree up reshwater or human

consumption and small scale agriculture, and the proponents o the initiativecite mining as a particularly protable activity and the most intensive user oreshwater.

While some kind o policy is clearly necessary, as we will discuss in the nextsection, the parameters o this particular proposal appear somewhat unrealistic.

As a reerence, the Collahuasi copper mine in region I, one o Chiles biggest,currently uses 1,070 liters per second o reshwater. Te mine is planning aUS$500 million desalination plant or its phase III expansion that would supply1,500 liters per second in addition to its reshwater extraction. Te desal systemis at the preeasibility stage and the preliminary expectation is that it will be

ready to start operation by end-2017 to coincide with expansion startup.

Meanwhile, seawater may be plentiul, but the expense and impact o using it,desalinated or not, means that mines that do plan to use it must be as efcient aspossible to transport a minimum volume up to their mines.

Desalinization has a big role to play, but it needs to be part o an overallsolution; it shouldnt just be seen as a silver bullet. Its expensive to build andto operate, so it should only be considered as part o a solution that looks atintegrated water management on site, having your operation run as efcientlyas it can, minimizing reliance on external sources such as desal. But clearly desalhas a role, in particular or some o the big operations, says Burch.

A number o mine expansions and greeneld projects are already using orplanning on seawater aside rom Collahuasi and Esperanza, such as MineraEscondida and CAP.

Te mining industry is skeptical o proposals to bring reshwater rom arawayplaces as a supposedly cheaper option than desalination. Chilean water authorityDGA has looked at transporting water rom the Argentine province o La Rioja,while two major projects are in the works to bring reshwater rom southernChile to the north.

One involves transporting water by barge rom a US$3.5 billion port to bebuilt in region X and selling it to miners. Te company in charge, Chilean rmRecurso Agua, says the cost o water would be higher than the average US$2.50-US$3.00 or desalinated water delivered to a mine site, but that the systemwould be more reliable and aster to implement. Recurso Agua is in the processo acquiring water rights rom the DGA and aims to start transport in 2013.

A second project headed by Va Marina, the Chilean arm o French concessionsand construction company Vinci, together with local technology transer


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11/19



Policy and working together

I a long-term, integral solution to the water scarcity problem in northern Chileis to be ound, the dierent sectors involved are going to have to work together.While the mining industry acknowledges that it has a responsibility to continueseeking greater efciencies and diversication o sources, so do agriculture andsanitation.

I the rest o the sectors that use water are more efcient, then this will be alot more possible, says Villarino. Indeed, agriculture overall uses a much largervolume o water than mining operations and eorts to improve efciency byarmers would provide the largest savings.

Figure 4

Total freshwater extraction in copper mining by usage, 2010(In liters per second)

Source: Cochilco, 2011

TotalCopper

productionprocesses

Other uses*

2,203Hydrometallurgy

1,715

Copper

production

processes

10,236

Concentrati

8,521

* Mining camp, services, other

Note: 1,000 liters per second = 1 cubic meter per second


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But investing in a water-saving irrigation system is not cost-eective or the

average irrigated armer because the water that armers use today is relativelycheap, says the consultant Burch.

In Australia, state governments are planning major programs to improve theefciency o water use in irrigation in order to reduce the losses that haveoccurred historically, eectively creating access to more water and improving thereliability o the water allocations that already exist, says Burch. Chile has beensending delegations to Australia in recent months to study the lessons learned inwater management there and how they might be applied in Chile.

Tere does appear to be a desire on the part o the government to manage waterin a more strategic sense at a national level. Ive yet to see a lot o hard evidence

o that being promulgated, but its not something you can do overnight becausethere are so many issues involved, says Burch.

Beore any overarching water management policy can be made in Chile, morework is needed on identiying the surace and underground water availableand how much is actually being consumed. Such a process, which must becontinually ongoing, helps to provide all users with some certainty regarding

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current and uture supply. At the moment we dont have that so there seems

to be this rapidly growing industry in an environment in which there is nocertainty about, or some lack o clarity about, the management processes ingeneral, Burch says.

All the more reason or cooperation at the user level. But so ar, the dierentsectors have been hesitant to come to the table willing to take on some riskdespite the act than none will be able to continue expanding without a solution.

Until now, each has deended its own interests because the issue had notbecome so critical, nor its criticality so imminent Te level o criticality hasbeen approaching aster than was expected and that is going to obligate [theparties] to sit down and talk, says Villarino.

But even among mining companies, cooperation on projects like desalinationis very complex, in part because they are competitors, but more importantlybecause each has its own agendas, processes, timelines and risk perceptions. Assuch, industry bodies like the mining council have an important role to play inencouraging and acilitating cooperation, because today the very real risk is thattwo nearby mines each build a desal plant and pipeline without ever talking toone another.

Someone has to impose some order, says Villarino, noting that certain areascould be designated on the coast or desalination.

While cooperation may be difcult, it is necessary i everyone is to have theirlong-term water needs met in in an aordable, sustainable ashion. Government,industry associations and companies and producers rom all sectors must beinvolved with open minds to ensure an eective debate.


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Peru

Peru has vast per capita water resources, but not in the areas where the bulk othe population and industry coexist. Seventy percent o the population lives inthe arid or semiarid areas o the Pacic basin, which holds just 1.8% o Perusavailable water resources. Te vast majority o the countrys reshwater is oundin the scarcely populated Amazon region.

As in Chile, agriculture accounts or the bulk o reshwater extraction (80%),while mining represents about 2%. Water scarcity in the regions where mostmining and other activity occurs is causing major conict, perhaps a naturalsituation in an environment o growing demand among competing users.

But water conict in Peru is exacerbated by poor water management andcomplex historical and political roots that have created the right conditionsor conict. Further complicating matters is the lack o mechanismsand institutional ramework or conict resolution with participation ocommunities and grass roots organizations.

Peru suers rom a water crisis plagued by inefcient end-use, inefcientallocation o water, pollution, depletion o water resources and widespread waterconicts, said water management expert Julio Alegra in a paper.

Growing water conict is aecting mining development, but it must be noted

that, as in Chile, explosive mining industry growth is also impacting watermanagement. Mining may only account or 2% o the countrys reshwater draw,but the perception o its impact on water supply is much greater, due perhaps inpart to the industrys long history as a major polluter in Peru.

In Peru, water has always been a priority, in accordance with the culture. Wateris part o their [communities] zone, their area, their very system. So or them,touching the water is going against their identity, because they eel they arepart o their soil, says Rosa Retegui, CEO o Lima-based consultants Agua yAmbiente Per.

Te Minas Conga gold-copper project in Cajamarca is presently experiencing

the most active o an extensive list o water-based mining-community conictsin Peru. Construction at the US$4.8 billion project was halted in November2011 ater protests over perceived impacts on water supply or human andagricultural use became increasingly violent.

Te people dont want them to use their waters. Tere are a number o lakesthat they [Conga] are going to use Te problem is that there, at the base othe lakes, is the gold, says Retegui. Te companys plan is to replace the our


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lakes at the project with our reservoirs that will store more than double the

volume o water in the lakes and provide water to downstream users year-round.Tree o the reservoirs would be exclusively or supplying other users.

Despite intensive independent review o the EIS beore its approval in October2010, which theoretically would ensure that impact on water supply wouldbe more positive than negative, and a prior public consultation period,communities do not trust the idea o their lakes being replaced by reservoirs.

Independent consultants are now carrying out a US$300,000 review o wateravailability in Cajamarca, though the region president, Gregorio Santos whoopposes the project, has said he will not recognize the results o the study. MinasConga is run by Minera Yanacocha, which is owned by US-based Newmont

Figure 5

Water prices for mining in Peru

Source: Autoridad Nacional del Agua

0.0462009 2010 2011 2012

0.047

0.047

0.048

0.048

0.049

0.049

0.050

0.050

0.051

The price of water the government charges mining companies has risensome 5% in the last 2-3 years. The price char ted here represents thecharge for the areas with greatest water scarcity, such as Tacna,Moquegua, Ica and Chicama. Miners operating in less water-restrictedzones pay up to 36% less.

Solespercu

bicmeter


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Mining with 51.35%, Perus Ca. de Minas Buenaventura with 43.65% and the

IFC with 5%.

Other large projects, like Anglo Americans Quellaveco and Southern Coppersa Mara, are also in the midst o major delays due to water permits andconict.

Te solution experts envision involves an elusive combination o an integratedstrategic water management policy starting with comprehensive studies owater resources enhanced end-use efciency and greater cooperation andparticipation among stakeholders. Te use o seawater is also seen as an elementthat could alleviate scarcity in some areas.

Tere are eorts in the works. President Ollanta Humala announced inNovember 2011 the creation o a committee within the ministry o energy andmines (MEM) that will oversee water issues in environmental impact studies.Te committee will include members rom MEMs EIS ofce, the national waterauthority (ANA), the agriculture ministry and environment ministry watchdogOEFA.

Meanwhile, ANA has a project to modernize hydro resource management that isaimed at solving management deciencies that are blocking the implementationo development projects. Te project has nancing rom the Inter-AmericanDevelopment Bank and the World Bank and aims to improve usage efciencybasin by basin, eventually in all 159 basins. O the total 80% o reshwater

extraction that goes to irrigation, some 65% is lost through inefciencies in theirrigation systems.

Eorts by industry are also being made to treat and reuse wastewater that wouldotherwise be dumped, notes Retegui.

But the level o conict surrounding water use makes truly working togethervery difcult. What is being sought is integrated management, one, and two,that through that integrated management we can develop the environmentalside, the economic side and the social side But the problem is that in manycases it is not being handled like that. Tis new government is looking or theway, but they have not achieved a completely open dialogue to be able to reallywork on it, Retegui says.


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Conclusion

Water supply and its costs are without a doubt a very serious risk or miningcompanies in Chile and Peru, particularly as production capacity is set to growsignicantly in the coming decade. In both countries, experts are more or lessclear on what needs to happen to deuse the situation, but saying is much easierthan doing.

In both places, greater end-use efciency rom all users would be a good start.Miners in Chile consider themselves the only ones to have made eorts in thisdirection and would like to see agriculture and water utilities nd ways to bemore efcient. In Peru, it is known that large quantities o water are lost throughinefcient irrigation, and in both countries, it is arming that uses the greatestvolumes o water, meaning efciency measures in that sector have the greatestoverall potential or savings.

Among copper mining operations, which generally use more water than gold orother mines, the greatest consumption occurs in otation, so copper concentratemines have the greatest potential or water savings.

Meanwhile, miners and other users must develop alternative water sources, likeseawater, to ease the draw on oten already over-burdened reshwater systems.Tis must be done in conjunction to increase the efciency o investments andlessen the environmental impacts.

But working together has been extremely difcult so ar, as everyone has theirown agenda and has been quick to play the blame game. Even a basic opendialogue has proved elusive in many cases due to the environment o conictsurrounding water supply.

Tis is why good policy is needed. Both Peru and Chile lack solid, integratedwater management plans or the long haul. Such policy might start with betterinormation regarding the water resources available in a basin, valley or, betteryet, at the national level to enable intelligent and broad-scope decision making.From there a management plan would consider all users needs and seekintegrated, efcient solutions that commit both the state and the end users in

investments and eorts to reduce consumption. Tis is perhaps the only way toensure supply or everyone, today and in the uture.


18/19



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