There are signs that Peru’s likely next president will be less of an enemy to mining than first feared. But until the policy environment becomes clearer, don’t expect the No. 2 copper supplier to see major new investments.
With more than 95% of ballots counted, left-winger Pedro Castillo has a slim lead in the presidential race. Early in his campaign, the former school teacher spooked investors with threats of nationalisation, before shifting to a proposed tax overhaul to address inequalities.
There are reasons for industries like mining to hope drastic measures won’t actually be implemented -- a fragmented congress includes market-friendly factions, while Peru has a track record of candidates moderating their actions once in office. Even so, policy risk will keep miners cautious at a time when the copper market in particular is looking to Peru to help meet surging demand in an electrifying world.
“Until there is greater certainty as to the political situation and implications for the mining industry, we do not expect to see many long-dated projects approved for development by mining companies,” Colin Hamilton, managing director for commodities research at BMO Capital Markets, said in a note to clients.
Based on recent comments from his team, Castillo now seems unlikely to try to expropriate mines. He sought to calm markets this week, saying he would pay the country’s debt and keep central bank independence.
But even a tax overhaul could erode returns on future mining investments, jeopardising key expansions the market needs to close supply gaps. He’s proposed a new tax on profits and royalties based on sales and vowed to renegotiate tax stability contracts with large companies.
Adding to the uncertainties surrounding Castillo’s policies are prospects of a contested election. His opponent, the market favorite Keiko Fujimori, said the rival party has been “distorting or delaying” election results. She provided no evidence to back up her claim, but vowed to do so.
TOO BIG
Still, mining may be too big to fail in Peru. Besides copper, the country is a major supplier of zinc and silver. Mining is worth at least 11% of gross domestic product and 15% of total fiscal revenues, according to Eileen Gavin, a principal analyst at Verisk Maplecroft.
“The state is in no position to either run the sector itself, or go to international arbitration for breach of contract with global majors,” Gavin said.
Castillo’s razor-thin lead could also make it harder for him to govern, with less clout in congress to push through plans.
“One thing is to talk about it, and another is to see the legal and judicial mechanics of all these topics,” BTG Pactual analyst Cesar Perez-Novoa said by telephone. “This is not a short-term event.”