Peru Enters a New Era

What will a Castillo government mean for Peruvian mining?

“The people have awakened,” declared Pedro Castillo from a balcony in Lima on Thursday evening, June 11th, as the final votes were being counted in the narrowest of election victories. Castillo’s Perú Libre party won with 50.2% of the public vote, a 0.36 percentage point lead over Keiko Fujimori’s Fuerza Popular party (by a margin of less than 70,000 votes). Unfortunately, but perhaps inevitably, Fujimori was quick to call foul play, alleging claims of voter fraud in a move that evoked former US president Donald Trump’s reluctance to concede to Joe Biden.

To add to the drama in the wake of the election, José Domingo Perez, the lead prosecutor in the Odebrecht corruption case, urged a judge to send Fujimori back to prison after allegedly meeting with a witness. Although some may disagree with Castillo’s rhetoric, there is hope that the political turbulence that has characterized Peru in recent years will start to subside now that the election result has been ratified. The need for stability should not be understated for a country that has suffered more than most during the pandemic. As of July 2021, Peru held the grim title of highest Covid mortality rate per million of population, in addition to experiencing the biggest economic contraction in South America in 2020.

What exactly the people have awakened to is yet to be seen, but Castillo’s victory signals the dawn of a new era for Peru, an era that the country’s mining sector awaits with trepidation. For many Peruvians, Castillo vs Fujimori was a choice between being shot in the foot or shot in the hand. However, from the 120 interviews conducted for this report, it was clear who Peru’s mining industry preferred, and it was not the candidate threatening to retain up to 70% of mining profits.

Perhaps the key question is, how did it come to this? The unexpected rise of a relatively unknown rural school teacher speaks to how the pandemic has thrown politics into upheaval, reported the Wall Street Journal. Castillo capitalized on anger over a market model that left behind the country's poorest, a gap that has been particularly evident during the pandemic as hospitals collapsed and oxygen tanks ran out.

“Covid-19 has been the fuel onto the fire of a long-standing and deep-rooted social and political problem in Latin America,” stated Michael Cullen, managing director for Latin America at FTI Consulting.

Questioning why Latam, which is home to 8% of the global population but has accounted for 20% of Covid deaths, has performed so poorly in the face of the pandemic, Cullen suggested that populist governmental policies were not solely to blame. “There is something more endemic and pernicious at play, and the root cause is inequality.”

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“It is not possible to think about fiscal consolidation and sustainable growth without the mining sector, and this needs to be understood by our country’s authorities.”

Claudia Cooper, President, Lima Stock Exchange (BVL)

Expanding on the issue, Cullen explained how a rise in leftist politics is the result of a perfect storm of historical inequality, growing poverty and a corrupt establishment. He added: “A relatively uneducated father from a large family in Lima does not want a discussion about the benefits of Keynesian economic strategies in a time of recession – he simply wants food, shelter and work.”

Anthony Hawkshaw, president and CEO of Bear Creek Mining (TSXV: BCM), also observed how deep rooted issues of inequality have been exacerbated. “From the mid-90s until 2019, the level of Peruvians living below the poverty line dropped significantly, but many of those people had informal jobs,” reflected Hawkshaw, noting that when the pandemic hit, government-imposed lockdowns left a large section of society without the means to provide for their families. “Inequality and poverty, which cause disenchantment, have been enflamed by Covid,” he added.

Tellingly, Peru’s key mining regions overwhelming supported Castillo, underscoring how tensions have risen after years of conflict between mining firms and the local communities. In provinces such as Cotabambas, Espinar and Chumbivilcas, over nine out of 10 people voted for Castillo, election data showed. Strong support for Castillo was also apparent where new mining sites are being built, including 86.3% of the vote in Torata, where Anglo American’s Quellaveco mine is currently under construction, and 96% of the vote in Haquira, where First Quantum plans to invest US1.8 billion in a copper project.

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Will pre-election rhetoric result in tangible change?

Castillo has previously criticized mining firms for "plundering" the country's wealth, and has pledged to redraft Peru's constitution and redistribute profit. However, this raises the point of what is rhetoric and what will convert into real policy.

“I do not think we will get to a point of resource nationalization, and we will not see expropriation,” suggested FTI Consulting’s Michael Cullen, drawing parallels to the situation when former president Ollanta Humala came into power in 2011. “The economic reality of the situation dictated that he got straight into bed with the corporate element of society, despite having ties to Chávez and rising to power through leftist rhetoric,” Cullen recalled.

Acknowledging that the current situation might seem similar to the period before Humala was elected, political commentator and CEO of Viceversa Consulting, Oscar Díaz, warned that there are two fundamental differences from the context today. “First, Humala signed a roadmap towards the second round of the election, which represented a moderation of his discourse. Second, he never threatened to close the congress, nationalize industries, or disregard international agreements, like Castillo is doing.”

However, Díaz agreed that Castillo will not be able to nationalize the mining industry, as nationalization implies paying huge amounts of money to the affected companies. On June 27th, Castillo stated his willingness to reappoint the head of the country’s central bank, Julio Velarde, in a market-friendly move which indicates a path of moderation may be possible. Furthermore, Perú Libre will have to contend with a divided Congress.

“Politicians in Peru are similar to politicians all over the world. They promise a number of things, but do not realize that there are checks and balances in place. In the case of Peru, this means the conformation of Congress,” reflected Roque Benavides, chairman of Buenaventura.

Orlando Marchesi, country senior partner at PwC Peru, stated that it will be almost impossible for Castillo to carry out any expropriations, as the Congress, which was elected during the first round of presidential elections in April, is made up by a majority of parties which favor the market economy and private investment as the main driver of the economy.

Fernando Pickmann, partner at law firm Dentons, highlighted that approximately 60% of Peru’s exports come from the mining industry, which generates a vital part of the country’s gross income. “When you are elected as president and have to run a country whose economy is based on mining, you need to start making alliances and thinking about improving mining development, otherwise the economy will fail.”

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This sentiment was echoed by Claudia Cooper, president of the Lima Stock Exchange (BVL) and former finance minister, who emphasized the mining sector’s role in both short-term recovery and long-term macroeconomic stability: “It is not possible to think about fiscal consolidation and sustainable growth without the mining sector, and this needs to be understood by our country’s authorities.”

According to the IMF, Peru is expected to experience the strongest recovery in Latin America in 2021 (9% growth), but this will be put in jeopardy if protectionist policies that do not attract foreign investment are implemented. Speaking in February, Michael Scherb, founder and CEO of Appian Capital Advisory LLP, stated that he would like to increase Appian’s position in Peru, where the company’s head of Latam and COO (Igor Gonzales, formerly of Sierra Metals) is based. However, he warned: “I speak with the ministers of mines of many countries, and we are clear with the point that our capital will go to the path of least resistance and best risk-reward.”

If Peru is to rebound successfully from the economic devastation caused by Covid-19, a middle ground will have to be found between Castillo’s ideals and the financial reality of a country hugely dependent on its mining industry.

“When you are elected as president and have to run a country whose economy is based on mining, you need to start making alliances and thinking about improving mining development, otherwise the economy will fail.”

Fernando Pickmann, Partner, Dentons

Moving forward:

The need for dialogue and collaboration

With copper trading above US$4/lb, the new administration is blessed with macro conditions as favorable for mining as anything seen since the previous super cycle that ended in 2011. Long term planning and collaboration are necessary to make the most of the country’s natural resources. Currently, the sector consists of a mining portfolio of 46 projects totaling a value of more than US$56 billion, and the geological endowment to increase this further.

Furthermore, an infrastructure deficit worth nearly US$100 billion also offers an opportunity for economic revival. “The best way to fund infrastructure investment is through the income provided by mining, generating a virtuous circle for employment and development,” reflected Víctor Gobitz, president of the Peruvian Institute of Mining Engineers (IIMP) and CEO of Antamina.

Although the Castillo election has been a shock to the country’s mining community, the political circus of the previous three years, which saw three presidents and five mining ministers, has hardly been a beacon of stability. When the dust settles after the election, the hope is that the new regime will not disregard the positive work carried out by previous mining minister, Jaime Gálvez, who was a key figure in the formulation of the Vision of Mining to 2030, promoted by the Center for Convergence and Good Mining-Energy Practices (Rimay).

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“It is important to re-start workshops that had to stop due to the pandemic, where mining companies, government authorities, NGOs and civil society came together to define the vision of mining in Peru for 2030,” commented Luis Rivera, Gold Fields’ executive vice president of the Americas.

Expanding on this point, Víctor Gobitz, elaborated: “The mining industry is so important to the country that there should be a defined mining policy, in the same way Peru has solid tax policies and macroeconomic policies. This would assure continuity regardless of government changes.”

Streamlining permitting should be top of the agenda for the next mining minister, with adjustments to the prior consultation law of paramount importance to stimulate investment into early-stage exploration. “It is essential that political leaders establish consensus and guarantee an environment of stability, predictability and compliance with deadlines,” said Jorge León Benavides, president of the Canada Peru Chamber of Commerce (CCCP).

Soaring metals prices in 2021 have been a catalyst for renewed optimism, and a mature, well-run mining industry with a deep pool of local talent puts Peru in the position to rebound strongly in 2021. Whether this potential is realized is another question, and the first months of the Castillo administration will give an indication of what can be expected moving forward.

2021 is more than just an election year for Peru, it is also recognized as the bicentennial anniversary of the country’s independence. However, Roque Benavides believes that the real bicentennial anniversary of Peru’s independence is, in fact, in 2024, 200 years after the last battle against the Spaniards was fought. On that note, he gave a final message to the Peruvian mining community: “In these next three years, the private and public sectors have to work together to take advantage of the opportunities in front of us,” he said, imploring the industry to become more involved in civil society.

“I would say that Peru has a brilliant future,” added Benavides, concluding that the election has shown the need to be more active in contributing to the wellbeing of the country.

Image courtesy of Ashim D’Silva on Unsplash