Peru Election 2006

Navigating a Peruvian Political Minefield, By Michael Brush, RealMoney.com Contributor, April 28, 2006 – 2:16 PM EDT
Financial writer Michael Brush says fears of nationalization are overblown. He recommends buying shares in Peruvian mines. Unfounded worries about a radical shift in Peru mean these share will ultimately rebound.

Navigating a Peruvian Political Minefield
By Michael Brush, RealMoney.com Contributor
RealMoney.com, April 28, 2006 – 2:16 PM EDT
I have to take issue with Tom Cruise if he really thinks journalists are unhappy.
It may not be as thrilling as pretending to be a spy in Mission: Impossible III, but an exciting part of covering the markets is developing intelligence on important global issues. I’ve had some fun recently looking into Peruvian politics.
What does Peruvian politics have to do with making dinero in the stock market? Quite a bit. To see why, look no further than Venezuela. Among other things, President Hugo Chavez has muscled foreign oil companies to convert their operations in the country into joint ventures with the government, shaking up investors and even scaring off giants like Exxon Mobil, which sold production fields in the country rather than deal with Chavez.
The top vote-getter in the first stage of Peru’s presidential elections April 9 was a populist former army officer on the left who led a failed coup attempt in 2000 — sound familiar? That’s spooked investors into thinking that Peru will become the next Venezuela, so they’ve cleared out of mining stocks with exposure to Peru.
I think they are making a big mistake.
While Peruvian plays have dropped off, many gold and silver mining stocks have zoomed higher since late March because of the strength in the precious metals.
I think the market has it wrong — even the worst-case scenario in Peru won’t be too bad for these miners. Here’s a quick primer on Peruvian politics, and why misperceptions about what’s going on there offer you a chance to make some money.
Two Colorful Candidates
The former army colonel Ollanta Humala’s support is based on populist rhetoric that appeals to Peruvians who’ve missed out on the wealth that has flowed into the country as commodity prices have spiked (about 60% of Peru’s GDP comes from mining). Humala’s Peruvian Nationalist Party has called for nationalizing foreign companies. Humala has pledged to redistribute Peru’s wealth more fairly among the poor majority, and he promises heavy state intervention in Peru’s free-market economy, higher taxes on foreign mining companies and an end to the U.S.-backed eradication of coca.
In the runoff vote, which will be held May 28 or June 4, Humala will face a left-of-center former president, Alan Garcia, who tried to nationalize banks while he was in power from 1985-90. His administration left Peru’s economy in a shambles, says Daniel Kerner, a Latin America analyst for the Eurasia Group in New York. “There was a lot of state intervention,” he says.
Those are a couple of tough choices for Peruvians, and neither looks great for foreign mining companies, but the analysts I spoke to said that the fears for the miners are overblown.
Max Cameron, a professor from the University of British Columbia, who is in the country following the heavily contested election, tells me he believes Garcia will win. “But it really could go right down to the wire,” says our man in Peru. “It is very, very close.” (For updates, check out his blog.)
Cameron believes Garcia will win the support of voters who backed a right-wing candidate in the first round, pushing him over the 50% mark. Humala’s populist rhetoric notwithstanding, Cameron believes he faces a ceiling to his support at around 30% to 35%.
Despite Garcia’s past attempts to nationalize banks, political analysts like Kerner believe he is unlikely to try to strong-arm foreign miners. “I don’t think he will do anything crazy or radical, especially at first,” says Kerner. “He has learned his lesson.” Besides, Garcia has strong ties to mining companies.
Even Humala wouldn’t be that pernicious, say experts. “His nationalist rhetoric and military past have raised concern in the Western media,” says David Stein, a mining-sector analyst with Sprott Securities in Toronto. “But in Peru, he is seen as a leader who will fight poverty and stand up to the U.S. government, not so much against foreign businesses.”
It also has to be reassuring that Humala’s vice presidential running mate is a director of Peru’s central bank — hardly a radical. “Humala has got some very smart and market-friendly people working with him,” says Stein.
To be sure, Humala will seek to renegotiate tax concessions granted to foreign mining companies in the 1990s, when Peru was desperate for foreign capital, points out Scott David Palmer, a professor at Boston University and author of The Shining Path of Peru. So will Garcia.
But this won’t much affect Bear Creek Mining and Fortuna Silver Mines, because they don’t have operating mines yet.
I’d buy shares of Bear Creek Mining, Fortuna Silver Mines and Peru Copper here on unfounded worries about a radical shift to the left in Peru. Even though these stocks have rebounded nicely since the first-round voting, they have more to go. I’ll go into details on these companies in my next column.
Be prepared for volatility if you purchase now: With the election so tight, the candidates could ratchet up their rhetoric regarding foreign businesses in a battle for the nationalist vote.
One approach would be to buy part of your position now, with a plan to purchase more if inflammatory statements cause pullbacks.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Bear Creek and Fortuna Silver Mines to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.