Thursday, June 9, 2011

Peru, Humala, Elections etc (from IKN109 last Sunday)

I've been asked in several mails this week for a longer comment on the Humala victory last Sunday, what it means to the market and Peru exposed stocks, etc etc and as I'm a bit too lazy to answer them with something new, what follows is the intro piece that appeared in The IKN Weekly issue 109 published last Sunday evening (very slightly redacted to remove a piece of unimportant personal information).

At that time Humala was clearly leading in the polls and a virtual certainty for the Presidency (which is now confirmed). Also, we were still waiting for Monday's open that saw the Lima exchange main index dive by 12.5% and we didn't know about Tuesday's and Wednesday's action that added back 7% and 3.5% we got our call on this week in Peru about right (perhaps off by 24 hours). But there's lots more to chew over, so read at thine leisure, kind lector.

Peru is a buy, but not tomorrow morning (published Sunday June 5th, 2011)
This one gets put here instead of in the ‘Regional Politics section just to make sure it gets read. So let’s start with a nice clear statement about Peru exposed stocks: Tomorrow they sell off.

But with the short-term reactions out the way, Peru exposure is still a good option for mining exposure even with its now almost certain new President Ollanta Humala. Yes, there will be hand-wringing and wailing over this near certain Ollanta victory but once it becomes clear that the mining industry and its investment isn’t about to come grinding to a halt in Peru, the sector will adapt to the new rules, likely higher (though not prohibitive) State burdens and get on with the job of mining in Peru. What follows now discusses the Ollanta Humala side of things because he’s now the near-certain President elect and we’ll assume that from now on even though results are not official. If by some freak of stats Keiko is eventually called the winner we’ll cross that bridge another day.

Humala isn’t “anti-mining” per se. In fact he’s pro-mining, but he uses that “pro responsible mining” cliché that sends shivers down the spines of foreign investors and gets him comparisons with Rafael Correa along with the dog’s breakfast of a “nascent mining industry” in Ecuador that has so far done little else but antagonize locals and halt any sort of progress towards the large-scale mining operations he says he wants in Ecuador (sorry Rafa, evidence very thin). Ollanta Humala has said out loud that he’s in favour of mining, that the industry is extremely important to the country, that mining will continue to happen, that there aren’t going to be nationalizations in the industry, that private property is not under any sort of threat, all that backed up by the more general policy statement that he’s not going to change the rules to allow a second term of office as was the case in Correa’s Ecuador, Morales’ Bolivia, Chávez’s Venezuela and (interestingly and always left out by the fearmongerers) Uribe’s Colombia. He’s said, pledged, signed papers and put his hand on the bible to the effect that he’d do his five years and then leave. But back to the main issue that we cover, mining, and the main line of thought behind his proposed changes to the mining industry is that the mining companies pay more to the State as part of his ‘social inclusion’ policies and the monies raised going to State programs such as better schooling, pensions, healthcare etc. As for details, put simply his policies are to raise royalties from the current 1%-2%-3% rates to a 2%-4%-6% (a change that will probably happen). He has also spoken of raising corporate taxes on mining companies from the nationwide level of 30% to 40%, a rate exclusively for mining companies (this may be tricky to implement). Finally, he has often spoken of raising a windfall tax on mining companies to take advantage of exception profit levels, with a main eye firmly placed on the mega-mining operations such as Antamina, Cerro Verde, Yanacocha, Toquepala/Cuajone etc. As we’ve seen before in other debates on WFT, the theory sounds good to the outsider but putting these fiscal regimes into operation has been very difficult, so even if the spirit of the new Humala administration is willing it may take years rather than months even to get to the stage where WFT charges are levied.

The bottom line to this is that the royalty rates are likely to rise in Peru first, but you’ll also hear a lot from a Humala government about how Peru currently charges much less to its mining companies than peers in Chile or the USA (which is true) to offset the new round of taxes. The corporate tax changes may happen, perhaps as a negotiation trade-off against a windfall tax which your author believes will be tough for Humala to put in place, realpolitik-speaking.

However much Humala’s Peru claims the new taxes on miners there is a fair policy, businesses won’t like the idea much and there’s clearly going to be a rough period for Peru-based mining companies because he will run a government that raises more money from mining companies via higher royalty charges and/or taxes. This means that stock prices will be under pressure on today’s news, but you’ll also have to note that stocks downing in price will also be accompanied by fearmongering and will add in all the “them commies gonna eat your babies” type stuff. It’s important at these moments to separate the wheat from the chaff, because the chances are that Peru’s market and the miners therein will bounce back much faster than Northern commentators imagine...and that means opportunity for nimble traders. We’ll expand on that thought in a moment.

The other effect of a Humala government on Peru’s mining industry comes at the social interactive level and would be to give more power of decision to local communities on whether they want a mine built near to them...or not. This, for example, would mean the end for the Santa Ana project, the end of Dorato Resources (DRI.v) hopes of minebuilding in the Cenepa region of North Peru, the curtailing of activities in the jungle regions where anti-mining opposition is strong. But this would also mean that mining projects don’t cause the type of crisis flashpoints we’ve seen in recent weeks in the Puno region, so it’s worth noting both sides of the equation. The knock-on effect would mean that companies may not be so keen on committing to the less explored areas of Peru and NGOs might start making more of a nuisance of themselves as well, but resulting problems would be extremely unlikely in places like Rio Alto’s (RIO.v) La Arena mine, or Focus Ventures’ (FCV.v) exploration in Santa Rosa, or Fortuna’s ( Caylloma, or Vena ( at Azulcocha, or literally thousands of other examples, because mining is welcomed in the areas in which they operate. Or put another way, the mining exploration business in Peru is likely to continue just fine in the areas known for mining acceptance, but lessen in the farther flung spots that have attracted attention in recent years.

Expanding on that second point a little further, let’s re-emphasize something that’s been mentioned on these pages (and on the blog) more than several times. Peru has been, is and will be a miner-friendly country in general but the time is long past to heed ignorant commentaries about ALL the country being miner-friendly. Peru is miner-friendly in the areas that are traditional spots for mining. It’s not miner-friendly in the jungle areas (that make up over 50% of its country by area) because mining activity there is 1) new and 2) damaging to sensitive ecological areas, no matter what the mining companies say otherwise. It’s also important to understand Peru on a micro-regional scale, because a single village in the middle of a centuries-old miner-friendly spot can be dead set against mining for its own sweet reasons and be surrounded by others that are perfectly relaxed and happy to co-exist with the biggest type of world-class open pit operation.

So yes, we’ll be in for a rough few days now that Ollanta has seemingly gotten the nod in this election, but to use that horrid and hackneyed newsletter writer’s neverwrong bullshit, “Great buying opportunity!!!” (three exclamation marks used to emphasize irony). Also, I’d expect the Peru market, and therefore its exposed miners, to snap back more quickly than most foreign observers imagine, because the big controllers of the Peru stock market, the “AFP” pension funds, will be keen to protect their asset book and have already clearly raised cash in order to buy back into this market. This is because Ollanta Humala isn’t the radical raving Commie lefty boogieman he’s made out to be in the northern (and local right wing) press and there’s a mountain of evidence that points to his moderation of policies, particularly his move to the centre in the last few weeks. Yes, he’s left wing but no he’s not a radical lefty. No, he’s not Hugo Chávez so put that one behind you. I know that during the election he’s tried to attach himself to the image of Lula da Silva, so if he turns out like that President did Peru will be just fine. Personally, I see him more along the lines of a mining-friendly Mauricio Funes (El Salvador), but pigeonholing Humala is always going to be difficult.

Humala has moved to the centre to win this election and he has no choice now but to run a coalition government, else be slaughtered down the line. He doesn't have the natural charisma of Evo Morales (or Hugo Chávez or Rafael Correa) which will be a problem for him. He will adopt what are regarded by observers as left-wing policies wherever he gets the chance but the opposition is going to be fierce, worse than anything Evo or Hugo or Rafa suffers because the opposition forces in Peru are solid, organized and long-standing. He'll also piss people off when they realize they'll have to wait at least a couple of years for the Plan65 pension and his traditional radical supporters will either have to be reined in or seriously affect his credibility with the majority of mainstream Peruvian who have voted Humala on sufferance because they’re more opposed to a new Fujimori-led government (Peru has a memory for the bad things that went on, something that pleases your author on a non-business level). Finally, as a person I actually think he's quite a decent guy. Family man, more mature than 5 years ago, naturally intelligent, not a bullshitter in the normal politicians' way.

To wrap up, Peru mining stocks are still a buy, but they’re a buy later or a hold today if you’re already bought. A Humala win will make for a rough few days but it’s also totally buyable (and so would be Rio Alto at under $2 or Focus Ventures or Vena Resources at (or even under) 25c). The question is when the AFPs will step up to buy and my best guess is that they’ll wait two or three days before the bargain buys begin...but that’s just a guess. When it comes to mining Peru isn’t going the path of Ecuador, it isn’t going the path of Bolivia or Venezuela, either. Peru is Peru, a mining country and it will stay that way, period.

Post Script: For those of you versed in Spanish that care enough, find out a lot more about Ollanta Humala via the book he wrote in 2006, which goes into his past history until that point and explains his trajectory and his political stance. A free online copy of the most important sections of the book is available at link (1) in the appendix below. It’s actually a pretty interesting read, too.