Peru concerns weigh on Gold Fields

[] — SHARES in Gold Fields were 2% lower on the JSE on Monday, reflecting perhaps the worries presented by Ollanta Humala’s victory in Peru’s national elections, a country to which Gold Fields has some exposure.

As I mentioned last week, Humala is known to favour increasing taxation on miners operating in Peru, and once campaigned to nationalise Peru’s mining industry.

Regardless of Humala’s victory, however, mining in Peru was in any case likely to become a whole lot more expensive, while new projects could be tougher to approve. Humala’s rival was Keiko Fujimori, who had also earmarked the mining industry as a means of alleviating Peru’s estimated 35% poverty rate.

Humala has proposed doubling existing royalties and the introduction of a 40% “windfall tax’ on mining projects. Fujimori also backed higher taxation which could be on operating profit, according to one of her advisers, Juan Carlos Ramirez. A doubling in royalties, at current commodity prices, would not have hurt as much as a windfall tax.

“Both presidential candidates are proposing changes to the mining tax in a country that accounts for 5% of global copper output currently, and up to 10% by 2015,’ said Macquarie Equities in a research note before election results were released.

In addition to Gold Fields, Anglo American and, to a lesser extent BHP Billiton, also have Peru exposure. Xstrata, the UK-listed miner, has the most. All will face paying higher tax on their Peru operations/projects.

Gold Fields operates Cerro Corona, a gold/copper mine, while it is also exploring for gold and copper at Chucapaca. From an Anglo American perspective, it will later this year make a final investment decision on its 82%-owned Quellaveco copper project subject to acquiring water rights. The project carries a capital cost of some $3bn. It is also reviewing the investment case for the 300,000 tonne per year Michiquillay copper project.

For copper, however, the prospect of higher taxes crimps the likelihood of new projects in the region and, therefore, is positive for the metal. Peru is expected to account for about one-third of all new supply of copper. “Any delay in investment decision will further tighten the supply side for the red metal, especially in 2015/16,’ said Macquarie Equities.

“This further supports our view that after small surpluses in 2013/14, the copper market will again move into deficit in 2015/16,’ it said.

As mentioned last week, Humala has modified his views on the mining industry but this tends to create uncertainty as to what he’ll do once in power. It’s the uncertainty factor that spooks investors, as always.

Says CIBC Capital Markets: “We’ve seen these types of election concerns before, oftentimes with little follow through once in power, but fear of the unknown and recent trends in South American politics are likely to weigh on companies with heavy Peruvian exposure.’