Peruvian tax changes could hurt miners

The Peruvian congress has passed a bill aimed at removing many of the existing financial incentives for mining.

The bill, presented by President Alberto Fujimori, who was recently re-elected to a third term, is part of the country’s attempt to overhaul its tax code and increase revenues. It would abolish the rights of mining companies to reinvest profits tax-free, while doubling the cost of holding mining concessions. The bill also proposes to eliminate guarantees to miners against changes in tax policies during the life of an operation.

In the early 1990s, the Peruvian government implemented a series of tax incentives that were partly responsible for revitalizing the country’s mining industry. Today, Peru is South America’s largest gold producer and the eighth-largest in the world.

Mining represents about 12% of annual tax revenues in the South American country. Under the previous laws, a mining company active in Peru could deduct up to 80% of its profits provided the profits were reinvested in the country. The new law eliminates that incentive.

In Peru, holding costs for mining concessions are now US$2 per hectare per year. Under the new law, the cost would double to US$4.

The bill also proposes to shorten the time frame for the development of mineral properties. Concessions would be valid for six years instead of eight, and exploration companies would be able to hold them for a longer period, though at costs of as much as US$20 per hectare per year.

The new law largely does away with tax stability agreements. Victor Flores, an analyst for HSBC Securities, calls these agreements “a necessary incentive at a time when the country is emerging from a decade of economic mismanagement and social unrest.”

He says the impact of the changes to Peru’s mining tax laws will be minimal for existing producers but that the new law could put the brakes on new project development. “More importantly, it tarnishes Peru’s image as a mining-friendly country. The impact will be greatest on new projects and on long-lived projects that could potentially outlive current tax stability agreements.”

Victor Borg, a spokesman for Barrick Gold, operator of the Pierina mine, 185 miles north of Lima, says the loss of the tax stability agreements makes it harder to calculate the rate of return on investment for a project.

The Pierina mine is unlikely to be affected by the new law, unless additional reserves are discovered. However, two other large projects, Yanacocha and Antamina, both of which are expected to last another 20 years, could suffer. Yanacocha is a gold joint venture among Newmont Mining, Peru-based Compania Minas Buenaventura and International Finance Corp., whereas Antamina is a copper-zinc project shared by Rio Algom, Noranda and Teck.