Royalty debate threatens Las Bambas auction

The Congressional debate on whether to introduce a 3% royalty on mining production in Peru is causing concern among investors and may hijack the state's sell-off of Las Bambas copper project, BNamericas has learnt. "The damage [of a 3% royalty] is already done because investors are already worried," said engineer Augusto Baertl, executive president of consultants Gestora de Negocio e Inversiones, and formerly chairman of Peru's Minera Antamina. Baertl said by telephone that companies interested in bidding for Las Bambas, due to occur in 1Q04, had expressed concern to Peruvian authorities about the proposed royalty and its potential impact on the project's economics. So far at least 11 companies have been pre-selected to take part in the Las Bambas auction, among them Southern Peru Copper Corp (NYSE: PCU), US miner Phelps Dodge (NYSE: PD), Anglo-Australian mining house BHP Billiton (NYSE: BHP), and Brazilian mining giant CVRD (NYSE: RIO). BHP Billiton spokesperson Francis McAllister told BNamericas, that although he could not comment on individual projects, the company was "working with" the Peruvian government on the royalty issue. "Peru is a country in which BHP Billiton has invested a great deal of capital and this kind of legislation causes a lot of concern for us," said McAllister, adding that a possible royalty would cause the company to evaluate short-term investment opportunities in the country. Opposed by Peru's private mining sector and the ministries of mines & energy and economy, the measure had been approved by congress' mining & energy commission and is on the agenda for when Congress resumes in January. "Congress is capable of passing this measure," said Baertl. "It's very populist and will win votes." Describing the measure as "negative," Baertl said it would blunt Peru's competitive edge and reduce returns on mining projects. Industry sources say it could take two or three years before Congress takes any final decision and the president has the final right of veto. Mining & energy minister Hans Flury reiterated his opposition to the tax this week, questioning constitutional aspects of the measure given that it would apply only to mining and not to other sectors.