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Peruvian election strikes fear into global miners

The election of a left-wing nationalist as Peru's next president has panicked investors, who fear the country will join a growing trend of governments squeezing more profits from the resource sector.

Ollanta Humala's narrow victory Sunday over conservative Keiko Fujimori is expected to result in, at the very least, higher tax and royalty rates for mining companies operating in the mineral-rich nation.

Investors are also fretting that Mr. Humala's past ties with Venezuela's president Hugo Chavez will lead to suggestions about nationalizing operations based in Peru.

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The concerns caused Peru's stock market to drop by a record 12.5 per cent on Monday, alongside steep selloffs of Canadian and international mining companies with operations in the country.

That's despite Mr. Humala's attempt to run a free-market friendly campaign this time around, a shift in stance from his unsuccessful 2006 run for the top job.

Mr. Humala even went as far during the campaign as to rest his right hand on a Bible and swear not to alter the country's constitution or the market economy, according to local media reports in Peru. The grand gesture was intended to symbolize his abandonment of past political beliefs.

The former army rebel also surrounded himself with well-regarded economic advisers during the campaign to show support for his new, more moderate position.

Despite these moves, and even though Mr. Humala's party represents just one-third of the nation's Congress, making it difficult to pass unpopular legislation, markets reacted badly to his win.

Miners with operations in Peru saw their stocks plummet around the world Monday. Hochschild Mining, which has three mines in Peru, saw its shares fell nearly 9 per cent on the London Stock Exchange, while shares in Southern Copper Corp., Peru's biggest copper producer, fell more than 11 per cent in New York. Toronto-listed International Minerals & Chemical Corp. (Canada) Ltd. stock fell by almost 5 per cent while HudBay Minerals Inc., which recently took over the Constancia copper project in Peru with its purchase of Norsemont Mining Inc., fell by about 4 per cent.

"Financial markets are not enthralled. Go figure," Scotia Capital economists Derek Holt and Karen Cordes Woods said in a note Monday. "At stake is progress that has allowed Peru to pursue years of strong growth and turn aside its political problems of the past."

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Peru is one of the fastest-growing economies in Latin America, driven by surging prices for its commodities, including base metals such as copper and gold. About 70 per cent of Peru's GDP comes from the mining industry, which gives executives faith that the negative market reaction will be short-lived.

Many industry players believe Mr. Humala will waste little time proving to the markets that he favours international investment to help generate wealth for his country.

"I think it's a bit hysterical, frankly," HudBay chief executive officer David Garofalo said of Monday's stock reaction. "He's no Chavez … Peru has been a wide-open market economy for 20 years. So, the prospect of him nationalizing things is ludicrous."

Andrew Swarthout, CEO of Bear Creek Mining Corp., which has two projects in Peru, said the industry is expecting some form of tax hike or royalty increase when the new administration is installed.

"The current royalty structure is quite favourable and there's room for discussion, especially given these commodity prices we've seen for the last five to 10 years," Mr. Swarthout said.

Royalties today are 3 per cent and could rise to about 5 per cent, while taxes could be raised from about 30 per cent to 35 or even 40 per cent, experts say.

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That's in line with other countries, such as Australia, Chile and parts of Canada, all of which have raised taxes to generate income to help pay down rising debt and higher costs for government services.

In Australia, for instance, the government is implementing a 30-per-cent tax on iron ore and coal profits next year, which is expected to generate $8.3-billion (U.S.) in its first two years.

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