Ollanta Humala, a left-leaning nationalist, won nearly 51% of the vote in Sunday’s presidential election in Peru and will take office in late July. Humala has promised to raise royalty payments on mining and that has caused some concern both among the miners themselves and in commodities markets. Higher tax rates are also on the table. In addition to its leading position in silver production, Peru is tied with the US as the world’s second-largest producer of copper behind world leader Chile. It is also the world’s sixth-largest producer of gold.
Peru’s copper production is expected to account for about half the world’s production growth over the next ten years. Mining companies with interests in Peru include BHP Billiton plc (NYSE: BHP), Newmont Mining Corp. (NYSE: NEM), Pan American Silver Corp. (NASDAQ: PAAS), and Teck Resources Ltd. (NYSE: TCK). The miners like Xstrata plc (OTC: XSRAY), Anglo American plc (OTC: AAUKY), and Freeport-McMoran Copper & Gold Inc. (NYSE: FCX) were expected to lead the charge. The proposed tax hikes could cool their enthusiasm, even though copper and gold prices remain high.
Peru’s corporate tax rate on miners is 30%, and Humala has said that the country could raise that to 45%. Peru also collects royalty payments of from 1%-3%, which are extremely low by international standards. Chile’s royalty rate is 35%, and even the US charges around a 17% royalty rate for Gulf of Mexico oil.
Raising Peru’s royalty payments or taxes should not have a huge impact on whether or not a company chooses to develop a project. Gold and copper prices are high enough to support more development, and the number of high-quality prospects anywhere in the world is small and getting smaller.
Mining companies could argue that even though market prices for gold and copper are high, so are costs. At some point, they could say, developing a new project is simply too risky.
In either case, though, investors will pay more for copper or gold. If the government raises royalties and taxes, some of those increases will get passed along. If mining costs continue to rise, those increases will certainly get passed along.
Fears that Humala will follow in the footsteps of Venezuela’s Hugo Chavez and nationalize Peru’s national resources are probably overwrought. But the new president’s support for higher taxes and royalties could hamper production of silver, gold, and copper. For investors, that means that prices should remain high.