March/April 2012

Eye on Business

Mining regulatory landscape changes in Peru: a state of emergency?

By Kevin O'Callaghan and Leah Plumridge

With the election of Ollanta Humala and recent legislative changes, Peru’s already scrutinized mining industry is facing significant challenges. To fund its anti-poverty infrastructure, Peru introduced a new mining tax and royalty regime last October. As Peru is a leading producer of silver, zinc, gold and copper, foreign investors will need to ensure compliance to the new regime.

The new law – which increases the tax burden for mining operators to between 41 and 45 per cent of operational profit – was discussed with affected companies prior to being submitted to Congress, thus garnering support from investors.

There is some concern, however, that because the new regime supersedes the previous “voluntary contribution” scheme, it may result in decreased corporate social responsibility expenditure in communities local to mining operators. Local and regional governments have recognized they have been unable to efficiently invest hundreds of millions of dollars available for anti-poverty infrastructure. The new mining tax will re-direct these funds centrally, so they can be used in areas throughout Peru that are in need.

The law involves two structures, allowing for the preservation of stabilization agreements previously executed with the Peruvian government, and exempting the new tax for the term of these agreements. Mining companies and integrated entities without stabilization agreements will be subject to a special mining tax at a progressive marginal rate of two to 8.4 per cent of operating profits from the sale of metal and non-metal mining resources, collected on a quarterly basis. Mining companies and integrated entities with stabilization agreements that sign a voluntary agreement will be subject to a special mining contribution at a progressive marginal rate of four to 13.12 per cent of operating profits on a quarterly basis.

Changes to the royalty system include amendments to the rates, tax base and the events triggering the obligation to pay. The mining royalty is now to be paid on a quarterly basis, rather than monthly, and is calculated based on a progressive marginal rate of one to 12 per cent of operating profits with a floor of one per cent of net sales. Effective rates are in the range of one to 6.3 per cent. Previously, the marginal rate was one to three per cent of net sales.

The Peruvian Congress unanimously passed the Law on the Right of Consultation of Indigenous Peoples in September 2011, two years after the clashes in Bagua saw 30 police officers and protestors killed. The law implements Peru’s obligations pursuant to the International Labour Convention 169, which was ratified in 1993.

The law gives indigenous communities the right to apply to the government to open a consultation process with respect to any project that will affect their traditional lands. If the government rejects an application, the indigenous community has a right to challenge the decision to the Specialized Technical Entity on Indigenous Affairs, and further, to the courts. An agreement reached between the government and indigenous community is legally binding and enforceable. The government has the final say where agreement cannot be reached; however, it is still required to ensure that measures are in place to protect the rights of indigenous people.

While the hope is that enacting new laws regarding indigenous consultation will bring comfort to the minds of foreign investors by diminishing the risk of local clashes around mining projects, conflict in the region continues. After protestors were injured last November, the Newmont Mining Corporation ceased work on its Conga project, a $4.8-billion extension of Peru’s largest gold mine in the northern region of the country. The company says its plans to move water from four lakes to reservoirs were drawn up in consultation with local communities and meet the highest environmental standards.

Nonetheless, protests prompted Humala to introduce a state of emergency in many of the northern provinces. Humala blamed the “intransigence of local and regional leaders” for the inability to reach even the most basic agreements that would ensure peace and re-establishment of local services. Thus, he instituted the security measure that was to remain in effect until early February 2012. Local elected leaders, including Cajamarca’s governor, led protesters who demanded a new environmental impact study be conducted.

While it may be too soon to tell what impact the new laws will have on stability in the region, the current protests and the state of emergency in Peru suggest that even those projects that undertake careful consultation and environmental impact studies are not immune from the risk of work stoppages due to local conflict. Although the new laws give indigenous communities the right to initiate a consultation process, it would be prudent for mining companies to proactively initiate a process that includes input, not only from indigenous communities, but also from all regional stakeholders to ensure support for their proposed project.

Kevin O'Callaghan and Leah PlumridgeKevin O’Callaghan is co-chair of Fasken Martineau’s CSR Law Practice group and gives strategic advice to the extractive industries on aboriginal (indigenous) law, environmental assessment, and other CSR issues. Leah Plumridge was an articled student with Fasken Martineau in Vancouver.
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