Industry Trend Analysis - Mining Reform To Mitigate Key Hurdle To Investment - JULY 2014

BMI View: Recent policy pronouncements by Peruvian President Ollanta Humala confirm our view that the Humala administration will encourage mining investme nt despite objections from his political base. We forecast the mining sector will remain a crucial source of economic growth and government tax revenue in the coming years, and as such expect further business-friendly policies to help fund social spending promises.

We believe President Ollanta Humala's latest announcement to simplify the permitting process for mining projects and offer tax incentives for investment further indicates his administration will pursue centrist mining policies through his presidential term to April 2016. Humala has sent a package of reforms to Peru's congress which include various proposals, including reducing red tape, making environmental regulations more flexible, and allowing mining companies to lock in tax rates for 15 years on investments valued at USD500mn or more. Despite Humala's anti-mining stance during the 2011 presidential election, his administration has consistently pursued a pro-growth agenda for the mining sector, a trend we anticipate will continue given Peru's fiscal accounts' high exposure to mining ( see ' Commodity Headwinds To Have Varying Fiscal Impacts , ' May 6, 2014).

Given our below-consensus price forecasts for both copper and gold in the years ahead, we expect the government will further enable mining sector investment in order to maximize mineral output and maintain sufficient government revenue from tax and royalty regimes. Peru currently generates 26.6% of its total government revenues from the mining sector, which is dominated by copper and gold. This represents a significant change from as recently as 2008, when the mining sector contributed to less than 5.0% of total government revenues, and is reflective of the success of major legislation passed in 2011, which was designed to increase tax revenue from the industry.

Fiscal Exposure To Metals Prices On The Rise In Peru
Peru & Chile - Mining Revenues As % of Tax Revenues

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