Peru Election Raises Specter of Mining Tax

(Updated to include analyst commentary and for closing stock prices)

NEW YORK ( TheStreet) -- The apparent election victory of a leftist presidential candidate who wants to hike taxes on mining companies has clouded the resource-extraction business Peru, which has enjoyed booming economic growth in recent years.

Shares of Southern Copper ( SCCO) and Buenaventura ( BVN), the most visible U.S.-listed plays on Peruvian mining, fell sharply in Monday morning trading in New York. Southern Copper, majority owned by the Mexican minerals giant Grupo Mexico, saw its shares drop more than 11% to $30.78, while Buenaventura, a gold and silver miner, plunged nearly 15% to $35.75.
Peru's new president, Ollanta Humala

In a runoff election Sunday, Ollanta Humala won a tight race over rival Keiko Fujimori, the daughter of former Peruvian president Alberto Fujimori, who is serving a 25-year sentence for human-rights crimes. Humala's victory came as something of a surprise. Heading into the weekend, polls showed that Fujimori, widely perceived as more investor-friendly, held a narrow lead.

Humala, a one-time ally of Venezuela's Hugo Chavez and the leader of a failed military coup in 2000, has attempted in recent years to curb a reputation for strident left-wing views. Still, he has achieved success among voters in Peru by promising to do more to spread the wealth produced by one of South America's fastest-growing economies. Discontent has been brewing in the country as poverty remains a widespread problem, in spite of the boom.

Peru is the second largest producer of copper in the world, behind its southern neighbor Chile.

Humala has discussed instituting a windfall mining tax in order to distribute the country's mineral wealth, though the candidate hasn't detailed a specific plan.

Because of his reported connection with Chavez, some observers have even speculated about outright nationalization of the country's mining interests, though most feel that possibility is remote. "There's always that risk with a nationalist coming to power, and the market is quite risk-averse at the moment," said David Radclyffe, metals and mining equities analyst at BMO Capital Markets in London.

A spokesman for Southern Copper at its U.S. offices in Phoenix declined to comment on the Humala victory or how the company might respond to an effort by the new government to raise taxes on natural-resource profits. "We're not a political institution, we are a productive institution," the spokesman said. "We can say congratulations to the new president, but no more."

Shares of Freeport McMoRan ( FCX) slid 14 cents to $49.79 after spending much of the session in the green. The company has substantial Peruvian exposure, holding a more than 50% stake in the Cerro Verde copper mine. By Radclyffe's reckoning, the asset makes up 10% of Freeport's value.

Like many other global mining companies, Freeport is staking much of its future copper growth on developing new mines in Peru. Action taken by Humala's government to raise taxes and squeeze miners' profits could, therefore, curtail foreign investment in Peruvian mining projects and reduce future copper supply, analysts say. "Any disruption to the expectations of Peru would mean a higher copper price for longer," Radclyffe said.

The metals markets have come to rely on the expansion of Peruvian copper mining to meet projected demand for the red metal, largely fueled by rapid growth in Asia. As existing copper mines age, ore grades the world over have deteriorated, leading to speculation about "peak copper."

Other companies with Peru exposure include the British miner Xstrata, BHP Billiton ( BHP) and Canada's Teck Resources ( TCK), which all own a stake in the big Antamina copper and zinc mine.

Adding to the near-term uncertainty, a national strike by the country's miners was set to begin this week. Workers are demanding better retirement benefits.

-- Written by Scott Eden in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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