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On his desk in Lima, Peru’s mining minister Iván Merino has a list of criteria that mining companies must meet if they want to continue operating under the new leftwing government of President Pedro Castillo.
Some relate to economic matters, others to environmental regulations, labour laws and community relations.
“If you meet each requirement, you get a tick,” Merino says, putting his thumb and forefinger together and tracing a check mark through the air. “If you count up your ticks and meet all the requirements then not only will we allow you to work here but we’ll support you.”
As the Castillo government settles in to power, no sector is more important to its income stream than mining. The industry accounts for 60 per cent of export revenue in Peru, the world’s second-biggest producer of copper and a significant source of gold, silver, zinc, tin and iron ore.
Multinationals such as Anglo American, Newmont, Glencore and Freeport-McMoRan operate, as do Chinese-controlled companies including MMG Ltd and Chinalco and local mining companies such as Buenaventura.
The Castillo government says the sector must contribute more to help pay for education and health spending, but how much more is unclear. In a now-notorious document published last year, Free Perú — the Marxist-Leninist party that propelled Castillo to power — said miners should hand over up to 80 per cent of their profits and warned that if they refused “the state must proceed with nationalisation”.
Castillo has since unveiled a more moderate plan for government but even so it proposes “a new tax on profits” for mining companies and “an end to tax breaks”.
“We must nationalise our wealth, that is, make it serve Peruvians, with new rules of taxes and royalties,” it says.
Merino told the Financial Times the government was still evaluating these changes. He hoped to have a clearer idea about the new tax regime “within 100 days” and that, on royalties, Peru would “employ the best practices used in other countries”.
The Peruvians are watching neighbouring Chile closely. There, legislation is before the senate which would oblige copper miners to pay royalties on a sliding scale tied to the price of the metal. When it rises above $4/lb — as it has this year, hitting a historic high of $4.76 in May — royalties could amount to 75 per cent of sales.
In Peru, the mining sector says that this year, fuelled by high commodity prices, it will contribute nearly $3bn in taxes and other payments to the state — a record and more than twice as much as in 2019, before the pandemic.
“We’re at our limit,” said Pablo de la Flor, head of Peru’s national mining, petroleum and energy association (SNMPE). “We’re paying eight different taxes and charges and between them they take away nearly 50 per cent of the profits the companies make. That’s a heavier burden than in any of the mining countries with which we compete.”
He said that during the five years of the Castillo presidency, mining is likely to provide over $20bn to the state. “Never before has it generated so much during a single five-year period.”
Mining companies say the problem is not the amount of money they generate but how it is spent or not spent at a local level. Once they pay their corporate tax, the central government redistributes half of it to local and regional governments. The SNMPE estimates that only 61 per cent of that half is ever reinvested.
Castillo says he wants to renegotiate tax stability agreements that companies signed with previous administrations. These contracts give firms a long-term vision of their liabilities and are regarded as essential for investment.
MMG Ltd, a subsidiary of China Minmetals Corporation, has a tax stability agreement in place until 2030 at its massive Las Bambas mine high in the Andes near Cusco. Chinalco has a similar deal at its Toromocho mine until 2028. Anglo American and Japan’s Mitsubishi, who are building the $5.3bn Quellaveco mine in southern Peru, have an agreement until 2037. These companies will be reluctant to renegotiate those deals.
While trying to squeeze more cash from miners, Castillo also has to play to his own electoral base. Many who voted for him in June’s election are from poor, remote mining areas of the Andes and their expectations for wealth redistribution are sky high. They want the government to deliver on its campaign promise of “no more poor people in a rich country”.
“Here in Chumbivilcas, nearly 97 per cent of us voted for Castillo,” said Wilber Fuentes, a leader of protests against the Chinese-owned Las Bambas mine. Local farmers say the constant convoys of trucks leaving the mine on a dirt road generate dust clouds that ruin their crops.
Days after assuming the presidency, Castillo dispatched his prime minister Guido Bellido to Chumbivilcas to sort out the dispute. The farmers have agreed to halt their protest for 60 days while a solution is found. “We’re all supporters of Pedro Castillo but if we don’t see any progress in that time we’ll start demonstrating again,” Fuentes warned.
The next few months are likely to involve a tax tug of war between the government and the mining lobby, with the government insisting its proposed changes are long overdue.
“As President Castillo says, Peru is a rich country,” Merino said. “We’re going to make sure this wealth reaches the people.”