A surge in demand for raw minerals is having a ripple effect throughout Latin America: governments across the region are scrambling to take advantage of the windfall by mining companies.
Nowhere is the debate as intense as in Peru, where the government in February reduced the sales tax by one percentage point – to 18% – on the expectation of additional revenue from mining. The 11 candidates vying to replace Alan García in the April 10 presidential elections are floating various ideas to tap into profits generated by the country’s vast natural resources.
On the table in Peru are proposals for a windfall tax, higher royalties, elimination of stability contracts for extractive industries and 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 and zinc and sixth in gold – metals currently fetching all-time high prices. It is also a world player in a host of other minerals, including iron ore, lead, molybdenum, tin and tungsten.
The National Mining, Petroleum and Energy Society (SNMPE) forecasts mining investment to top $42 billion in the coming 10 years, which would make Peru one of the principal destinations for investment worldwide.
Alejandro Toledo, the former president, leading in the polls to win another five-year term, has called for a windfall tax. “Mining companies need to start pulling more weight,” he says. Another option would be increasing the income tax on mining companies to 40%, a 10-point jump.
Ollanta Humala, who nearly won the presidency in 2006 and is in fourth in the polls, also wants a windfall tax. He alternately talks about increased royalties, increasing income tax on mining companies to 50% 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 former mayor of Lima. They are tied for second place in the polls.
Pedro Pablo Kuczynski, twice finance minister during Toledo’s government and also once a minister for energy and mines, says other options are more attractive.
“Before implementing a new tax, I would rather eliminate stability contracts 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-government organization that monitors extractive industries, says the mining debate has focused entirely on the economic equation, without taking into account social and environmental variables.
“There is consensus that change is coming, but the debate so far has been vague at best. There is no discussion on how resources would be used to address the principal demands of communities,” he says. “There are many issues involved in proposals such as a windfall tax that are simply not being discussed.”
Mining companies in Peru and elsewhere in the region share De Echave’s opinion, even if they are coming at the issue from a different perspective. The consensus in the mining community is that high mineral prices make mining an easy target, but governments are not looking at the whole picture.
“There is a perception that prices are high, so mining companies must be rolling in cash, which makes them an easy target,” says Jim Duff, chief operating officer of Minera Andes, which has gold, silver and copper projects in Argentina. “Prices are up, of course, but so too are operating costs.”
George Bee, president of Andina Minerals, says a case can be made that high prices should lead to greater benefits for communities closest to mines, but he says it is too simplistic to conclude that higher prices automatically mean that mining companies are swimming in profits.
“The price of minerals is one thing, but what policymakers need to look at are margins from sales. Gold prices are high because of international uncertainty, but this same uncertainty is also increasing costs,” 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 remains favourable, but there is an increasing level of uncertainty. “Uncertainty equals risk, and that is what keeps investors from developing projects,” says Duff.
This is the position of Canada’s Fraser Institute, a think-tank that analyses the attractiveness of policies for investment in 79 jurisdictions around the world.
“Royalty increases and convoluted regulatory schemes create uncertainty in mining, which will only drive mining investment away,” said the institute in its annual survey published this March.
TAX TILL THE PIPS SQUEAK
There is increased talk in Argentina about new taxes on mining, but nothing concrete has yet emerged. Presidential elections are scheduled for October, but with seven months to go before the vote, there is no clarity about what the next government might look like because there are still questions about who might be in the race.
President Cristina Fernández is leader in the polls, but she is coy about her intentions, keeping Argentines (and investors) guessing about a re-election bid.
“There are pressures in Argentina to increase revenue, which is the overriding concern. It is easy to go after mining, because once you invest in a mine you are kind of stuck and cannot avoid government actions,” says Duff.
Duff is confident Argentina will respect the ‘rules of the game’ – the phrase used most often by mining companies and analysts when describing the investment climate.
Chile, for example, is cited as the example to follow. “Chile is not going to change the rules of the game. Royalties were increased after the massive earthquake in February last year, but it was done in dialogue with the mining sector, and everyone stepped up. It is the way things should be done,” says Bee.
Chile is the only Latin American country that ranks in the top 15 in the annual survey by the Fraser Institute. The Andean nation ranked eighth among 79 jurisdictions in the latest survey. Six Latin American countries, however, rank in the bottom 15, with Venezuela and Honduras tied for the last spot.
Bee says part of the problem for some of the countries in the bottom rankings, such as Ecuador, is to treat mining like hydrocarbons, which leads to misguided policy. He said companies that have discovered potentially large mining reserves in Ecuador have been hesitant to develop them because of rapidly changing government positions and opposition to mining from civil society groups.
The allies of Rafael Correa, Ecuador’s president, broke with his administration on a number of issues, including a 2009 mining law that they claimed was too permissive to mining companies.
“The Ecuadorian government’s frame of reference has been petroleum, which is a totally different business. This appears to be changing, and if the government maintains its current approach, I think there are projects that will move forward,” says Bee, who was part of the team that discovered the still-undeveloped Fruta del Norte gold deposit in the Ecuadorian jungle.
That project, however, could be among the first mining deals to go ahead since the new mining law was passed two years ago. Fruta del Norte was acquired by Canada’s Kinross Gold in 2008. Estimated investment is pegged at $1.1 billion, which would make it the first large-scale mining project in Ecuador. Wilson Pastor, non-renewable resource minister, announced in February that the Ecuadorian government would likely sign deals with Kinross and International Minerals Corporation in April.
Still, political turmoil and the Correa administration’s economic management are keeping investors at bay, even as gold prices spark booms throughout the region.
Things could get messier now that the administration has decided on May 7 as the date for a 10-question referendum, which will ask voters if the government should restructure the justice system and limit banking operations by financial services companies.
Opponents charge that Correa wants to take control of the judiciary to ensure a third full term in 2013. They say he has purposely muddled the referendum by tossing in questions that would ban gambling and restrict bullfights and cockfights.
REGIONAL VARIETY
The situation is markedly different in Colombia, which is experiencing a mining boom. Colombian mining products, other than its traditional coal production, were hyped at a March mining conclave in Canada. The Fraser Institute lists Colombia as one of the good news stories of the past year, with its ranking rising by more than 10 points from its previous report.
The big story in Colombia is the possibility of a 10-million ounce Angostura project planned by Canada’s Greystar Resources. Development of the project, which has come under fire by environmentalists, would change Colombia’s mining landscape and vastly increase investment in the mining sector, which was close to $2 billion last year.
Talk of windfall taxes and higher royalties in Peru – there is a bill before Congress to double the royalties scale to 2–6% from the current scale of 1–3% – is not slowing investment. The ministry of energy and mines announced on March 7 that it had approved the environmental impact study for the new Las Bambas mine. The study was the final hurdle for Switzerland-based Xstrata to begin work on the $4.2 billion copper mine. Xstrata received approval last July for a $1.3 billion investment in Antapaccay, another copper project.
Kuczynski says new projects being announced send a signal to politicians that enforcing existing legislation for all companies, instead of increasing royalties or adding taxes, would give a tremendous boost to government revenues.
“If the royalty remains at 3% and it is the equivalent to increasing the income tax to 41% for mining companies, this is the way to go, because a windfall tax will only lead to lawsuits by companies with stability contracts that will make it impossible to enforce,” he says.