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humala softens stance on mining sector

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    July 20, 2011 9:50 am
    Humala softens stance on Peru�s mining sector

    By Javier Blas Financial Times

    The election of Ollanta Humala as the president of Peru triggered waves of concern in the mining industry after he had campaigned on a platform of higher taxes and state intervention.

    Stocks exposed to the country�s mining sector plunged in the sessions following his election victory, yet, the worst fears have proved, so far, to be premature. Mr Humala, who will be invested as president on July 28, has moderated his economic message and has confirmed the current central bank president will keep his job.

    Political developments in the country are closely watched by the markets as it is the world�s second-largest producer of silver, copper and zinc. The country is particularly important for copper as it is set to account for a third of global mine output growth over the next five years, according to data collected by Macquarie.

    But the mining industry has breathed a sigh of relief and share prices of mining companies heavily exposed to Peru have rallied. The day after Mr Humala�s election, New York-listed Southern Copper Corp, a top copper producer with several mines in Peru, fell more than 10 per cent, and extended the losses on the following days. So far this month the shares have rallied 18.5 per cent, recovering all the losses. London-listed Hochschild, a silver miner based in Peru, fell 8.5 per cent the day after the election, but has recovered nearly 11 per cent this month, returning to pre-election levels. Other miners have followed a similar path.

    The decision to keep respected economist Julio Velarde in his post as the president of the central bank is so far the most clear message that Mr Humala plans to follow the so-called �Lulismo� economic model of former Brazilian president Luiz In�cio Lula da Silva.

    Yet, the dangers of higher taxes and tighter state control are not yet over.

    �In Peru, people know there has been economic growth, but at the same time it hasn�t necessarily reached them,� Mr Humala said ahead of the election, indicating that the miners needed to pay more. His message has since become more nuanced.

    Ahead of the election his focus was on a windfall tax, suggesting that the corporate tax rate paid by miners could be raised as high as 40 per cent. The current corporate tax rate for miners, at 30 per cent, is relatively low by international standards � a 35 per cent rate is levied in Chile. But now he aims to lift the royalty tax, currently at 3 per cent and talk of a windfall tax is, for now, subdued. Mr Humala and his advisers also say they want to sit down with the miners to negotiate better terms, rather than risk industrial action that could hamper the billions of dollars of investment planned.

    Senior mining executives are under no illusion that they will escape untouched. Peru is, after all, the latest natural resource-rich nation seeking a larger share of the benefits of rising commodities prices as a new wave of �resource nationalism� sweeps the sector.

    Since the beginning of this year, countries from the UK to Australia have imposed higher taxes on natural resources companies or renegotiated oil and mining contracts as commodities prices soar. But as the example of Australia earlier this year shows, governments that negotiate terms with the industry can soften the blow.
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