Lima spooks miners

Miners in Peru on tenterhooks after Vásquez-Hochschild scare.

Mirtha Vásquez, Prime Minister of Peru, announced last week that the government would revoke the operating licences of four mines in the Ayacucho region due to environmental concerns. This included the Inmaculada and Pallacanta mines, the largest sites of UK-listed Hochschild Mining Plc, representing about 80 per cent of their annual production – cue the share price crash.

Hochschild came out fighting, claiming the unilateral move was illegal and threatening immediate legal action against the government. The government almost immediately backtracked, saying it would not close mines which, “fulfil legal requirements and conditions established in national and sectoral legislation, and which have corresponding permits in effect.”

Our sources in Peru were not concerned, even before the government U-turn, “This has happened before, with Camisea and the Agrarian reforms,” explained a former director of a mining union, “it is cheap populism, pure and simple. They know they can’t unilaterally force mines to close, that scenario never existed.”

“It is cheap populism, pure and simple. They know they can’t unilaterally force mines to close, that scenario never existed.”

Former director, mining union, Peru

A mining executive in Peru confirmed, “Regardless of whether it is legal or not, they can’t just shut down a mine overnight, leaving a hole in the ground, there is a decommissioning process and it costs millions, who is going to pay for that if the government unilaterally closes the mine?”

International mining companies operating in Peru have faced uncertainty ever since President Pedro Castillo stated his intention to distribute the profits from mining more equally. Hochschild has publicly stated it is expecting the rate of taxation on the profits of mines in Peru to increase. Our sources also think the price of licenses and permits are set to increase.

The environmental impact of mining companies in Latin America is an increasingly important issue. The National Society of Mining, Energy and Oil is holding talks with the government to reach agreements on the extension of mining operations.

“If you’re going to invest in Peruvian mining you need a 50-60 year outlook and you have to expect that there are going to be political cycles.”

Experienced mining investor, Peru

The mining executive was not optimistic about the future of the mining industry in Peru, “What sort of message do these actions send out? In mining, it is very difficult to divest and asset values will now fall as the project cashflows will be different. The main problem is that new investments will be paralysed which hurts the sector and the country.

An experienced investor in the sector had seen it all before, “If you’re going to invest in Peruvian mining, you need a 50-60 year outlook and you have to expect that there are going to be political cycles of this type, we are not in Sweden, you are in Peru, investing in mining, you have to put this type of stuff in your model.”

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