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A perfect example of political risk for a large investor in an
emerging but fragile country.

Mining sector feels heat as Peru turns left
By John Paul Rathbone in London, Adam Thomson in Mexico City and
Lucien Chauvin in Lima
Published: June 6 2011 19:29 | Last updated: June 7 2011 00:33
Shares in mining companies operating in Peru fell sharply on Monday
after a leftwing former coup leader won a narrow victory in the
country’s presidential election.

Grupo Mexico, a metals mining company with operations in Peru, fell 8
per cent in New York trading. Hochschild, a silver miner, andSouthern
Copper Corp, tumbled 5 per cent and 11.3 per cent respectively. Shares
in Xstrata, which is building one of Peru’s biggest mines, were off
0.86 per cent, while Volcan Compañía Minera, in which Glencore has a
stake, fell 8 per cent.

Ollanta Humala’s victory has provoked widespread fears he would lead a
wave of nationalisations and higher taxes on foreign companies. Mr
Humala has suggested Peru could impose a windfall tax of up to 40 per
cent on mining companies, and also raise the 30 per cent rate that
miners currently pay.

Trading was suspended after Peru’s stock market plunged more than 12
per cent. The precipitous fall dragged down other markets from Chile
to Mexico.

BHP Billiton, Rio Tinto and Anglo American, none of which have
Peruvian operations, escaped the sell-off.

Peru, South America’s fastest-growing economy, is the world’s second-
largest producer of copper after Chile, and is also an important gold
producer.

With 51.3 per cent of the vote, Mr Humala narrowly beat Keiko
Fujimori, the candidate widely supported by business, in Sunday’s
election. Ms Fujimori is the daughter of disgraced former president
Alberto Fujimori, who is currently serving a prison sentence for
corruption and human rights abuses.

“We would see a sharp sell-off in Peru as a buying opportunity,”
JPMorgan, the investment bank, said on Monday. “[Humala] can ill-
afford to see Peru’s growth collapse given his intention to fight
poverty.”

However, Mr Humala’s party, Gana Peru, will have just 36 per cent of
congressional seats, making it difficult for him to push through
radical reforms.

On Monday morning, members of Gana Peru sought to reassure investors.
“We won’t expropriate even a dog,” an adviser to Mr Humala told the
Los Angeles Times.

Many people had feared that a Humala victory would usher in the sort
of radical policies implemented by Hugo Chávez, Venezuela’s socialist
president. In recent years, Mr Chávez, a former coup leader himself,
has nationalised key sectors of the economy in pursuit of what he
calls “21st century socialism”. But during the campaign Mr Humala
sought to distance himself from the Venezuelan leader.

On Sunday night, the 48-year-old Mr Humala said that he would seek to
form a government of “national consensus” in an attempt to calm the
hysteria that the presidential race bought about.

Pressure is already mounting on Peru’s president-elect to nominate a
finance minister well ahead of his July 28 inauguration.