ROYALTY NEWS Peru Approves Sliding Scale for Concentrates

PERU On June 10, the Peruvian congress approved details of a bill to charge a royalty on mining production that l...
PERU On June 10, the Peruvian congress approved details of a bill to charge a royalty on mining production that lawmakers had overwhelming voted for the previous day. The approved bill consists of a 1%, 2% and 3% sliding scale royalty on the sale of mineral concentrates, rather than on gross sales or production as previously planned, Armando Mendoza, political advisor to lawmaker Javier Diez Canseco.

"Sales of up to US$60 million will be charged 1%, sales of between US$60 million and 120 million, 2% and sales of over US$120 million, 3%," he said. Artisan and small mining companies will be exempt from the bill.

On June 9, Peru's congress had approved the royalty bill by 90 votes in favour, with 11 against and two abstentions. Decisions on the tax rate and distribution of the funds raised were decided the following day.

Mendoza said all the revenue from the royalty would return to the regions where mining takes place and be distributed among the districts, provinces and departments along similar lines to the mining canon (which distributes 50% of income tax from mining companies to the regions). The bill also stipulates that the funds will have to be used for investment purposes.

The proposed legislation now goes to Peruvian President Alejandro Toledo for approval. Toledo can either sign it into law directly or send it back to congress with observations.

Mendoza said the overwhelming support for the bill among lawmakers sent a clear message to Toledo of the country's wish to see the measure enforced without changes.

The bill will not affect the mainly large foreign companies that have signed stable tax agreements with the Peruvian state, but the country's largest copper miner, SOUTHERN PERU COPPER, and its biggest precious metals producer, BUENAVENTURA, will have to begin paying royalties.

"The most worrisome thing is the impact the bill will have on medium-size copper and zinc miners," said Buenaventura's CFO Carlos Glvez. Peruvian zinc companies such as VOLCAN and EL BROCAL, already under pressure from low zinc prices, will have serious difficulties recovering if a royalty is imposed. Glvez also said a royalty would hit Peru's competitiveness and reduce the country's mineral reserves.

The Buenaventura CFO said he was optimistic that "clever people" in Toledo's cabinet would suggest modifications to the bill to lessen the impact.

The royalty could also hit the expansion plans of American miner PHELPS DODGE's Cerro Verde copper mine, although the current operation is protected by a stability contract, explained Cerro Verde CFO Rohn Householder. "I haven't run a model of the latest scenario yet, so I can't tell you what kind of effect it would have on the expansion project," he said. Phelps Dodge has yet to green light the sulphide project expansion which could cost up to US$700 million if the company opts to build a 100,000 tonnes/day concentrator.

Meanwhile, Canada's BARRICK GOLD previously pointed out that it regarded as unfair the introduction of a new tax half way through its investment to build the US$331-million Alto Chicama gold mine, set to start production in 2005.

Peru currently has an income tax rate of 30% for mining companies but an overall tax burden of about 46.5% if, among other factors, customs duties and employees' participation are taken into account, according to research by James Otto of the Colorado School of Mines. The country's national society of mining, oil and energy, the SNMPE, had previously calculated that a royalty could lift the overall tax burden to as much as 53%. The SNMPE put out a statement Thursday describing the royalty bill as "discriminatory and anti-constitutional," and said the measure threatens the legal stability of the country.

Mining is the cornerstone of Peru's US$60-billion economy, accounting for 50% of exports.


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