Miners on ‘red alert’

What's next for the mining sector in Peru under a Castillo presidency?

Pedro Castillo, Peru’s President-elect, campaigned with a radical, left-wing discourse which targeted the mining industry; initially calling for nationalisation before softening to demand 70% of the sector’s profits. While this is concerning, and unsustainable, a highly fragmented Congress significantly reduces Castillo’s ability to implement such radical measures.

It is also worth noting that Presidents in Peru tend to moderate their agendas once in office and Castillo has already tried to reassure markets by saying that his government was committed to the repayment of foreign debt and keeping the central bank independent from political interference.

Further comfort may also be sought from Castillo’s appointment of a number of moderate advisors, the mining executive explained, “His ‘moderation’ is represented by Pedro Franke, who intends to negotiate with the mining companies. It is not known yet if Franke will be part of the government but he has been meeting some businessmen from other sectors.”

A board member of a mining company operating in Peru did not have an optimistic outlook for the sector either, “The mining sector is on red alert! Not only because of the threat of nationalisations and expropriations but because it is expected that innumerable control measures and bureaucratic and environmental regulations are coming. Castillo also plans to alter the tax regime, with that 70/30 absurdity and taxing sales and not profits. Furthermore, there are still no valid interlocutors in the sector, making dialogue challenging.”

“The mining sector is on red alert!”

Board member, mining company, Peru

The other side of the story is that historically important mining regions such as Cotambas, Espinar and Chumbivilcas overwhelmingly voted in support of Castillo, with the President-elect registering over 90% in some areas. A mining company executive vented his frustration, “The people in these areas feel let down by mining companies but, after collecting a lot of money from taxes and royalties, those who have failed them are the local and regional governments who are inept and corrupt.” A commodity trader felt better community engagement was needed, “What companies should do is strengthen their direct relationships with the communities and show them that mining is a reflection of growth and development for their community. The problem is that with mining projects, it takes a long time for you to start seeing results.”

“What companies should do is strengthen their direct relationships with the communities and show them that mining is a reflection of growth and development.”

Commodity trader, Peru

Although sector experts are not expecting projects to be cancelled, especially projects like Quellaveco and Mina Justa which are considered to be past the point of no return, there will likely be an increase in royalties and a review of the tax regime. All of this uncertainty is already causing investment in expansion and exploration to slow, the commercial director of a supplier to the mining industry confirmed, “The proposals are driving away much-needed investment and slowing down activity at a time when we should be ramping up to compete with Chile.” A commodity trader agreed, “Many of the large mining companies have foreign partners or investors and the political environment will worry them and in turn hurt the sector.”

“The proposals are driving away much-needed investment and slowing down activity at a time when we should be ramping up to compete with Chile.”

Commercial director, mining supplier, Peru

The likelihood of these proposals coming into effect will also depend on who is appointed the Minister for Mining. A mining executive in the country is watching closely, “There are no names on the table yet. We are hoping for a moderate but who knows? There are divisions with Castillo’s party and he is ignorant enough that he could be influenced by either the moderates or radicals.” The commodity trader had some thoughts on the type of person the next mining minister may be, “It will probably be someone within Castillo’s inner circle with experience in public management. It is very unlikely to be a former mining entrepreneur, Castillo’s team has not contacted the industry yet.”

 

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