Peruvian mining stocks plunge after leftist Humala wins presidency

Peruvian-focused mining stocks took a nosedive this June after left-wing populist candidate Ollanta Humala narrowly won Peru’s presidential electoral run-off held on June 5. With 99% of the ballots counted, Humala captured 51.5% of the votes compared with 48.5% for right-wing candidate Keiko Fujimori.

As a result, Lima’s General Index of stocks tumbled 12% in mid-day trading on June 6, the Lima Stock Exchange halted trading twice and closed three hours early, the national currency weakened and bonds fell.

Investors worry the election of Humala might lead to the nationalization of certain industries, higher corporate income taxes and royalty rates for mining companies, and general economic policies that might shift away from those which have helped Peru become one of the world’s fastest-growing economies over the past decade. 

Shares in many of the 102 companies listed on North American exchanges with operations in Peru also faced downward pressure as skittish investors took money off the table. The top copper producer in Peru, Southern Copper (SCCO-Q), fell 11% or $3.94 to close at $30.78 on nearly 12 million shares traded. 

Peru is the world’s second-largest silver producer, second-largest copper producer, third-largest zinc producer and a top-10 gold-producing country. 

It comes as no surprise that most of the world’s biggest mining companies have substantial operations in Peru. Barrick Gold (abx-t, abx-n), BHP Billiton (BHP-N, BLT-L), Gold Fields (GFI-N), Freeport-McMoRan Copper & Gold (FCX-N), Teck Resources (TCK-T, TCK-N), Newmont Mining (NEM-N, NMC-T) and Xstrata (XTA-L) all have producing mines in the country
and fell slightly on June 6 on a down-day for the markets.

Mid-tier miners with a proportionately higher focus on their Peruvian operations fared worse. Hochschild Mining (HOC-L) has three producing precious-metals mines in the country and fell 9%, while Pan American Silver (PAA-T) has two producing silver mines in Peru and fell roughly 5%.

The juniors, however, were hit the hardest. Bear Creek Mining (BCM-V) has two advanced silver projects in southern Peru, and fell as much as 16% in intraday trading before closing down 32¢ to $5.88 on 504,000 shares traded. Rio Alto Mining (RIO-V), fresh from pouring the first gold from its La Arena gold mine there in early May, fell 26% during the day before closing down 33¢ to $2.05 on 4.32 million shares traded. Also hit were Sulliden Gold (SUE-T) and Candente Copper (DNT-T), closing down 11% and 13% respectively.

Latin America analyst Erasto Almeida of global political risk research firm Eurasia Group predicted Humala’s electoral victory earlier. His June 6 research note to clients expressed concern about the potential consequences of the new presidency. “There is tremendous uncertainty amongst investors and businesses alike over what his agenda will be. Humala is likely to begin on a positive note. We expect him to signal continuity on fiscal and monetary policy and nominate reasonably well-respected economists to his economic team. 

“Nevertheless, over time Humala will be challenged to manage the trade-offs between his goals of increasing spending and expanding the role of the state in the economy without threatening macroeconomic stability. As a
result, we expect the direction of economic policy to deteriorate over the course of his mandate. The sector most immediately at risk is mining – Humala will seek to increase revenues substantially by increasing royalties and instituting a high windfall tax that will affect new and existing projects. Humala will probably try to negotiate changes with companies who have contracts guaranteed by Peru’s constitution.”

Humala, a 48-year-old former lieutenant colonel in the Peruvian army, burst onto the country’s political scene in 2000 by leading a short-lived revolt against Peru’s then-president, Alberto Fujimori, with 50 soldiers briefly seizing and occupying a mine owned by Southern Copper. 

He started as a radical, outspoken nationalist with a campaign platform of rewriting the constitution, unilaterally hiking mining taxes and nationalizing private pension funds to finance a state retirement plan. But Humala moderated his political discourse after losing the last presidential election in 2006. In the months preceding the recent presidential run-off, he has moved even more toward the centre-left while pledging to respect central bank independence and fiscal prudence. 

Still, certain economic proposals contained in Humala’s original 198-page campaign platform remain worrying for many foreign companies operating in Peru. 

According to Reuters, the proposals include upping the tax rate on foreign mining profits from the current 30% to 40% or even 45%; raising tariffs on utilities and royalties on oil and gas production; reorganizing the government’s pro-investment agency ProInversion to promote domestic rather than foreign private investment; carving out a greater role for state-run companies; giving local communities more rights to consultation before granting concessions for extractive industries; and creating internal markets for raw materials rather than prioritizing exports.

As the markets demonstrated after the election, for some investors the added risk is not worth the wait. For others, the political uncertainty means stocks appear to be trading at a discount, presenting an opportunity to buy Peruvian mining stocks on the cheap.