A surge in demand forraw minerals is having a ripple effect throughout Latin America:governments across the region are scrambling to take advantage of thewindfall by mining companies.Nowhere is the debate as intense as in Peru, where the government inFebruary reduced the sales tax by one percentage point – to 18% – on theexpectation of additional revenue from mining. The 11 candidates vyingto replace Alan García in the April 10 presidential elections arefloating various ideas to tap into profits generated by the country’svast natural resources.
On the table in Peru are proposals for a windfall tax, higherroyalties, elimination of stability contracts for extractive industriesand the possibility of extending for another five years a controversial,so-called “voluntary contribution” programme for mining firms.
Peru is the world’s top silver producer, number two in copper andzinc and sixth in gold – metals currently fetching all-time high prices.It is also a world player in a host of other minerals, including ironore, lead, molybdenum, tin and tungsten.
The National Mining, Petroleum and Energy Society (SNMPE) forecastsmining investment to top $42 billion in the coming 10 years, which wouldmake Peru one of the principal destinations for investment worldwide.
Alejandro Toledo, the former president, leading in the polls to winanother five-year term, has called for a windfall tax. “Mining companiesneed to start pulling more weight,” he says. Another option would beincreasing the income tax on mining companies to 40%, a 10-point jump.
Ollanta Humala, who nearly won the presidency in 2006 and is infourth in the polls, also wants a windfall tax. He alternately talksabout increased royalties, increasing income tax on mining companies to50% and the elimination of stability contracts.
Of the other three major candidates, congresswoman Keiko Fujimori,daughter of the former president Alberto Fujimori, would extend the“voluntary contribution” scheme as would Luis Castañeda, the formermayor of Lima. They are tied for second place in the polls.
Pedro Pablo Kuczynski, twice finance minister during Toledo’sgovernment and also once a minister for energy and mines, says otheroptions are more attractive.
“Before implementing a new tax, I would rather eliminate stabilitycontracts so companies pay royalties. If all companies paid royalties,it would add 1% to 1.5% to GDP annually,” he tells Emerging Markets.
José De Echave, an analyst at CooperAcción, a non-governmentorganization that monitors extractive industries, says the mining debatehas focused entirely on the economic equation, without taking intoaccount social and environmental variables.
“There is consensus that change is coming, but the debate so far hasbeen vague at best. There is no discussion on how resources would beused to address the principal demands of communities,” he says. “Thereare many issues involved in proposals such as a windfall tax that aresimply not being discussed.”
Mining companies in Peru and elsewhere in the region share DeEchave’s opinion, even if they are coming at the issue from a differentperspective. The consensus in the mining community is that high mineralprices make mining an easy target, but governments are not looking atthe whole picture.
“There is a perception that prices are high, so mining companies mustbe rolling in cash, which makes them an easy target,” says Jim Duff,chief operating officer of Minera Andes, which has gold, silver andcopper projects in Argentina. “Prices are up, of course, but so too areoperating costs.”
George Bee, president of Andina Minerals, says a case can be madethat high prices should lead to greater benefits for communities closestto mines, but he says it is too simplistic to conclude that higherprices automatically mean that mining companies are swimming in profits.
“The price of minerals is one thing, but what policymakers need tolook at are margins from sales. Gold prices are high because ofinternational uncertainty, but this same uncertainty is also increasingcosts,” he says. “Policymakers do not look at the risks involved,because this complicates the equation.”
Both men say the general climate in the region for mining remainsfavourable, but there is an increasing level of uncertainty.“Uncertainty equals risk, and that is what keeps investors fromdeveloping projects,” says Duff.
This is the position of Canada’s Fraser Institute, a think-tank thatanalyses the attractiveness of policies for investment in 79jurisdictions around the world.
“Royalty increases and convoluted regulatory schemes createuncertainty in mining, which will only drive mining investment away,”said the institute in its annual survey published this March.
I think who ever wins will look into tapping into the profits of mining companies to a certain degree.