The company-specific news flow certainly didn’t suggest that it should be massively trailing Freeport, especially since Southern had better reserves than Freeport. There were violent protests over a mine in Peru that resulted in a delay after the company had already invested serious money, but that wasn’t unusual. This happens in mining all the time, and it should have been mostly priced into the stock some time ago.
And then I saw the recent election results and I immediately understood — it was Peru itself.
The leftist candidate for Peru’s presidency, Ollanta Humala, won the biggest number of votes in the April 10 election and was leading the polls for the June 5 presidential runoff election. This is similar to what we saw in the 2006 election, as companies with huge exposure to Peru underperformed significantly.
Then, Humala campaigned “wearing red T-shirts and expressing admiration for Venezuelan socialist leader Hugo Chavez. This year, he’s donning business suits and vowing to expand ties with investor-favorite Brazil,” according to Bloomberg. The former army officer’s abrupt about-face has helped put him in first place in polls, and the outcome of the likely runoff is currently too close to call.
While investors want to see Peru go the direction of Brazil, a Latin American success story, there is fear that the country may go the way of Venezuela and Bolivia, which have been governed with a remarkable lack of pragmatism.
So investors are wary — and with good reason — that Humala may enter office wearing a suit, but he may still have those red shirts from 2006 in his closet.
If mining royalties rise and the state increases control of the country’s gas reserves, there is about $42 billion worth of foreign investment in the mining industry earmarked over the next 10 years that is at risk.
patience is virtue!
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