Peru Mining Sector Wary Of Humala Poll Win

Peru mining sector wary of Humala poll win

The radical nationalists plan to introduce a windfall tax' on foreign companies has caused investment to dry up, reports Hal Weitzman

by Financial Times

1st March 2006

They call it the "Humala effect". When polls in December showed that Ollanta Humala, a radical nationalist former soldier, had taken the lead in Peru's presidential race, markets reacted badly. The sol, Peru's currency, dropped to its lowest level in 18 months. Lima's stock market suffered its biggest falls for five years. Peruvian sovereign debt plunged.

As Mr Humala fell into second place behind Lourdes Flores Nano, a market-friendly conservative, markets began to recover. They have been further buoyed in recent weeks by polls that saw Mr Humala losing yet more ground, running seven to 10 percentage points behind Ms Flores.

But international mining companies, the biggest investors in Peru, have not yet been calmed. Spooked by his threat to levy a "windfall tax" on foreign mining companies and review contracts with international miners "that are not fulfilling their promises", they have put investment on ice, industry insiders say.

"The tap has been closed," says Mark Smith, head of the Peruvian office of Vector, the US mining consultancy. "Across the board, no one is going to make any significant investment in Peru before July."

While most political analysts expect Ms Flores to win on April 7, none will discount1 Mr Humala. Even though an Apoyo poll this week showed Mr Humala had managed to narrow the gap with Ms .Flores slightly, gaining one point to reach 26 per cent, while she fell two points, to 33 per cent, seasoned! political observers take their polls with a pinch of salt.

Apoyo, the most respected polling organisation in Peru, wrongly predicted the results of the Bolivian election - in which Evo Morales won a landslide - by 20 percentage points.

Many analysts also speak of a "hidden vote" made up of respondents who mistrust pollsters and will not reveal their true voting intentions. They also point to the growing number of undecided voters and stress the volatility of the electorate.
If history is any guide, Peru may well experience an upset on election day. At this point in previous electoral cycles, polls showed two "establishment" candidates in the lead: the novelist Mario Vargas Llosa in 1990 and Javier Perez de Cuellar in 1995. On both occasions, the winner was Alberto Fujimori, whose "outsider" appeal Mr Humala has deliberately sought to echo.

Foreign investors have good reason to be concerned. "The mining sector would be hit squarely in the balance sheet," says Fritz Du Bois, of the Peruvian Economic Institute, a free-market think-tank in Lima. "That would make it unlikely that big investment projects would go ahead. They would probably be put on hold until a The mining sector would be hit squarely in the balance sheet' more friendly government came in."

In addition to imposing a windfall tax on foreign mining companies, Mr Humala advocates state participation in "strategic sectors" of the economy. "The minerals God has put in our land should primarily benefit us and our children," he told the foreign media last week. "International investment is welcome, but the state must have authority."

He also attacked the way in which international companies entered Peru as a result of the economic reforms of the 1990s. "We didn't have privatisation here, we had 'foreignisation' of state resources," he said.

If the mining sector were hit, it could have a damaging knock-on effect on Peru's export-led economy. Mining is a critical engine of growth. The country had a trade surplus of $5.2bn (?4.4bn, £3bn) in 2005, in large part due to the performance of big foreign investors in the sector.

Peru is the world's third largest copper producer and last year overtook Russia to become the fifth biggest gold miner.

The political threat to the operations of international miners in Peru conies in the context of rising unrest, much of it targeted at foreign-owned operations. Several high-profile international investors have been targeted by protesters in the past year, including BHP Billiton, the Anglo-Australian group, Newmont of the US and Monterrico Metals, a UK resource development company. All have been forced to suspend operations or withdraw from projects in response.

"Peru has been very popular in terms of attracting exploration dollars, but given local unrest and national political uncertainty, it is becoming one of the more difficult places to invest capital," says an analyst based in New York. Mr Smith is more forthright. "Who would want to invest billions of dollars in a mine when the potential president is a radical socialist in the mould of Hugo.