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Newmont, Metals Eyeing Peruvian Elections


Peru's election casts the spotlight on an increasing trend of countries attempting to capture a larger portion of the wealth derived from their natural resources.


Editor's Note: Minyanville is proud to introduce this column by long-time Minyan Adam Michael. Adam is a partner at a Houston-based Investment Advisor. Prior to this, Adam spent five years at Honeywell International in various capacities focusing on the energy industry. He has a Bachelors Degree from Texas A&M University in Industrial Distribution and a Masters in Business from Rice University.

On June 4, Peru will hold a runoff election to determine a new President. In the running are Peruvian Nationalist party leader Ollanta Humala, a "Chavez-like" socialist who has promised to reclaim Peru's natural resources for the people of Peru, and Alan Garcia, a former President who guided Peru to hyperinflation and some of its toughest economic times in the late 1980's. (On Sunday night, Peru held a debate between the two candidates – here is a good summary.)

Several pre-election polls show Garcia with a double digit lead over Humala, but a large amount of Peruvian voters remain undecided. Although Garcia would be better for foreign investment than Humala, his checkered past is enough to warrant caution. Should Humala win, he has made it clear on numerous occasions he intends to renegotiate contracts with foreign investors over Peru's natural resources at a minimum, and might even go as far as full nationalization. In addition, Humala has promised to sever the free trade agreement between the United States and Peru, industrialize the coca leaf, and rewrite the constitution to empower the indigenous and poor.

Peru's election casts the spotlight on an increasing trend of countries attempting to capture a larger portion of the wealth derived from their natural resources. While the trend has not been limited to South America (Russia, Mongolia, and Nigeria also come to mind), countries such as Venezuela, Bolivia, and Ecuador have all made moves in the past year to nationalize natural resources or renegotiate contracts with foreign investors.

Peru has significant gold and silver natural resources currently produced by some of the largest and best run mining companies. For example, Newmont Mining's (NEM) 2005 annual report shows 16.8 Million of their 93.2 Million ounces of gold reserves and 34% of Newmont's revenues came from Peru. Newmont Mining even cited the Peru elections as a risk in their 10K, saying:

"Presidential, congressional and regional elections will take place in Peru in 2006, and a new national government will take office in July 2006. We cannot predict the new government's positions on foreign investment, mining concessions, land tenure, environmental regulation or taxation. A change in government positions on these issues could adversely affect Yanacocha's assets and operations in Peru."

How much political risk from Peru is embedded in the stock price of Newmont is debatable (my analysis suggests a fair value of around $60 USD for Newmont using $600 gold even when one assigns zero value for its Peru assets). Will a Garcia victory provide a catalyst that sparks the precious metals to resume their climb? Perhaps. More important in my opinion is the general trend of a world that wants a larger share of the natural resource wealth created by the rising prices of commodities. Investors should keep an eye on Peru as the June 4th elections approach.


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