Peru's Mining Investments May Be Threatened

If champagne was too bourgeoisie a tipple with which to be celebrating the victory of President-elect Ollanta Humala in Peru’s elections this week, you can be sure his Gana Perú party drank Pisco brandy or wine (maybe from the Ica region) as they edged out the more conservative Keiko Fujimori (the daughter of disgraced former president Alberto Fujimori, currently serving a 25-year prison sentence.)

Stock markets reacted negatively to the news that the left-wing Humala was heading for a 51.2%-to-48.8% victory, as business interests had hoped Fujimori would win the day. Humala’s rhetoric has softened as the campaign has gone on, from promising a ban on exports of natural gas and widespread tax hikes on mining company revenues, to saying that his failure to achieve an outright victory in the first round shows he does not have a popular mandate for the sweeping changes he would like. That would be just as well for Peru’s mining industry, not to mention the wider economy.

According to the FT, Humala suggested Peru could raise corporate tax rates on miners to 45 percent from the current 30 percent. (Miners also pay royalties of about 1-3 percent.) True, the current rate is low by international standards and is below the 35 percent levied in Chile, but such a drastic change would undermine plans to take Peru, already the world’s No. 2 copper miner, to 32 percent of global production by the end of the decade. Macquarie Bank says the expansion plans in 2015-16 that are expected to account for half of global copper mining expansion could be at risk.

An Economist Intelligence Unit (EIU) article took a more sanguine line, suggesting Gana Peru would need an additional 40 votes to add to the 47 they already hold in order to change the constitution that protects miners and investors from changes in contractual terms. The report contends they are unable to secure that degree of support, but clearly the sharp fall in share prices for miners with exposure in the country such as Xstrata and Glencore shows investors’ wariness.

Even if Gana Peru struggles to secure agreement for the dramatic, originally proposed increase in mining taxes, Humala may get support for a windfall tax to be used “as and when appropriate. By suggesting that such a tool would only be deployed in the event of record-high copper prices, he may defuse short-term fears of scaring away investment and yet arm himself with the means to claw in revenue in the future. Peru may have vast reserves of copper and other minerals, but sooner or later it appears they will be coming at a higher price; to the extent that higher costs impact investment decisions will in part determine the copper price we pay in the years to come.

Hopefully Humala will take note of the wholesale destruction of the Venezuelan economy, wreaked by his neighbor Hugo Chavez in the name of modern socialism, and not seek to copy it in the name of the popular vote. One look at the lot of the common man in Venezuela should be enough to persuade anyone of the error of that path, but Humala’s earlier rhetoric suggested that was exactly the path he was following. Let us hope the constraints of a democratic minority will be enough to temper the policy extremes he has voiced in the past.

–Stuart Burns

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