Home > Market change > Mining sector feels heat as Peru turns left

Mining sector feels heat as Peru turns left

June 8, 2011

“Shares in mining companies operating in Peru fell sharply on Monday after a leftwing former coup leader won a narrow victory in the country’s presidential election. Grupo Mexico, a metals mining company with operations in Peru, fell 8 per cent in New York trading. Hochschild, a silver miner, and Southern Copper Corp, tumbled 5 per cent and 11.3 per cent respectively. Shares in Xstrata, which is building one of Peru’s biggest mines, were off 0.86 per cent, while Volcan Compañía Minera, in which Glencore has a stake, fell 8 per cent.

Ollanta Humala’s victory has provoked widespread fears he would lead a wave of nationalisations and higher taxes on foreign companies. Mr Humala has suggested Peru could impose a windfall tax of up to 40 per cent on mining companies, and also raise the 30 per cent rate that miners currently pay. Trading was suspended after Peru’s stock market plunged more than 12 per cent. The precipitous fall dragged down other markets from Chile to Mexico. BHP Billiton, Rio Tinto and Anglo American, none of which have Peruvian operations, escaped the sell-off.”

Source: Wall Street Journal, June 7 2011

Observations:

  • Current corporate tax rate for miners in Peru is 30% + 3% royalties/duties + 4.1% on dividends, which is below international benchmarks (see PWC Global mining tax comparison for details)
  • The most active international mining companies in Peru are Xstrata, Newmont, Freeport-McMoran, and First Quantum. The effect of the election results on the stock price of Newmont is displayed below, showing a sudden 2% loss vs. other gold miners.

Implications:

  • The average stock price decrease of around 10% of Peruvian companies reflects the risk of a tax increase. As the market value is the market’s expectations of future profits, the 10% increase corresponds well with a high likelihood of an approximate 10% tax increase (i.e. 10% after-tax profit reduction) plus the additional risk of increased government control.
  • Besides the risk of tax increase and increased government control, foreign companies face the risk of rapid employment cost increases as the new government will quickly try to make a mark in supporting wage increases.

©2011 | Wilfred Visser | thebusinessofmining.com

Advertisements