Political Polarization in Peru Threatens Miners Within its Borders
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Opposition to mining projects has polarized Peruvian politics and now threatens the future of mining in the Andean nation. Protests against the giant Minas Conga copper and gold project being developed by Newmont (NYSE: NEM) and Beunaventura (NYSE: BVN) and other projects got so rowdy that the nation's president effectively declared a state of emergency. A state of emergency is a euphemism for martial law.
Newmont has had to delay the opening of the $4.5 billion Minas Conga because of complaints that it threatens water quality and could be forced to write the project off. If that happens the company's stock values will take a major hit.
Now there are at least some protests in favor of the Minas Conga which could make the situation worse. A group of businessmen and merchants have formed something called the Cajamarca Collective and are marching in favor of the plan.
The reason that this could make the situation worse is that the real motivation behind mining opponents is social and economic rather than environmental as they claim. Reuters noted that the people who benefit most from mining in Peru are rich city dwellers. Around 60% of Peruvians are poor farmers who haven't seen any benefits from mining.
If the political cauldron in Peru boils over it could do a lot of damage to the stocks of miners that are heavily invested in the country. Another stock that could take a hit is that of Xstrata (XTA.L). Peru's interior minister told reporters that violent protests against Xstrata may have caused as many as 30 deaths.
Violence over mining in Peru appears to be escalating on May 30 heavily-armed riot police took over the town of Espinar and arrested the town's mayor. The mayor was one of the leaders of protests against Tintaya. The mayor had apparently been demanding that Xstrata turn 30% of the profits from Tintaya over to local governments.
The situation in Peru is liable to get worse because low prices for minerals will put miners in a position where they cannot meet protestors' demands. Prolonged unrest will force mining companies to pull out and write off projects.
Guerrilla Warfare could be Imminent in Peru
The worst case scenario would be organized violence against mines. This could happen if Peru's notorious Communist guerrilla movement, the Shining Path, gets involved in the protests. The Shining Path has close connections to criminal gangs that profit from illegal mining. The gangsters and the guerrillas want legitimate miners shut down so that they can keep the best ore for themselves.
The Shining Path was defeated in the last Peruvian civil war but it is now rearmed and reorganized under new leadership that is dedicated to profit rather than revolution according to the Associated Press. The AP reported that the new and improved Shining Path has already started attacking natural gas fields and kidnapping construction workers. The next logical step is attacks on mining company properties.
Part of the reason why the Shining Path is so dangerous is that it generates large amounts of money from the cocaine trade. This income allows the organization to purchase sophisticated weapons and hire professional mercenaries to train its soldiers. The next logical step for the Shining Path would be to enter Peru's illegal mining business which is now larger than the drug trade according to some experts.
If the Shining Path is really back in business it could make mining in Peru less profitable. Miners may have to spend a fortune on security to protect the facility or pay huge bribes to the Path and its leaders to stay in business. That could hurt profits and the bottom line. This could undermine future dividends and stock values for miners that operate in Peru.
A major Shining Path attack on a mine or mining company vehicles could send the value of companies that mine in Peru plummeting. It could also convince major companies like Newmont and Xstrata to pull out of Peru and write off projects there. Those losses could destroy the value of those stocks.
Other mining companies that operate in Peru include Southern Copper (SCO) and Vale (VALE). These companies could also be faced with major losses and falls in stock values if the situation in Peru explodes. Companies that are not heavily exposed to Peru such as Freeport-McMoRan (FCX) and BHP Billiton (BHP) could benefit from this situation.
It is doubtful that political unrest in Peru will affect copper prices. Falling demand for the metal in China has led to a glut of the metal on the market and falling prices.
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