Peru Mines Groups Fear Tax Increases

Peru mines groups fear tax increases

by Richard Lapper and Hal Weitzman in Lima

23rd March 2006

International mining companies would face aggressive tax rises under a government run by Ollanta Humala, the radical nationalist former army officer who is the frontrunner in Peru's presidential race.

The increases would be used to fund a large expansion in public spending, with an emphasis on building roads, bridges and other infrastructure, according to senior economic advisers. "The extraordinary profits mining [companies] are currently enjoying must be taxed," said Félix Jiménez, Mr Humala's top economic aide. "The situation is like in 1973 when oil prices spiked."

Peru is the world's third biggest copper producer, the fifth most important gold miner and a significant producer of zinc, lead and molybdenum. Prices for such commodities have risen sharply in recent years on the back of huge increases in demand from Asia. Newmont Mining, BHP Billiton, Southern Copper and Barrick all have significant operations in Peru.

Lima's stock market and Peru's dollar bonds fell further this week as polls showed Mr Humala taking a four percentage point lead over Lourdes Flores, the market-friendly candidate who is his main rival in the run-up to presidential elections on April 9.

Gonzalo García, one of Mr Humala's two vice-presidential running mates, played down the market reaction. He said Mr Humala enjoyed good relations with business groups and would implement an orthodox fiscal policy.

"If anyone is frightened, they should knock on the door and talk to the candidate," the former central bank director told the FT.

Mr Humala has unsettled investors by calling for the nationalisation of "strategic sectors" of the economy, such as mining, hydrocarbons and utilities. At a campaign rally in La Victoria, a poor area of Lima, on Wednesday night Mr Humala told a crowd of 20,000 that "foreign companies continue to enter our country and destroy our industries" and pledged to "rescind contracts that are against the national interest".

Mr García said the emphasis would be on promoting local Peruvian investment in industry rather than creating new state companies. "Peru's government often operates as though its main priority is to defend the interests of private companies," he said.

"We have to nationalise the state, so it defends national interests."