Peru - Gold

By: Ian Campbell | Wed, Jun 29, 2011
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I have frequently commented that 'country, and in some cases state-specific and province-specific, political and economic risk' profiles are critically important when researching and assessing risk in the context of investing in mining and oil & gas companies - or for that matter, any company irrespective of business sector. I wrote the following in Valuation of Mining Companies (page 13):

Geography of Principal Operations: The geographic location of the Company's project(s) is of significant importance. Many mining explorers have one or a small number of geographically scattered projects. On one hand it can be argued that this mitigates risk through diversification. On the other hand it can make a company's prospects more difficult to assess, and leads to questions related to whether company management is capable of maximizing opportunity as a result of time and effort dilution. Of particular importance, current and prospective government stability, political risks, and political attitudes with respect to labour and safety laws, the environment, mining, mine permitting, mine infrastructure, and income tax law and rates all bear on project risk. Hence all are things that require careful consideration by investors in their respective risk assessments.

As I am sure you are well aware Peru, a Democratic Republic, elected Ollanta Humala as its new President in early June. Humala, a retired military officer, is reported to have won what was a very closely contested election because the vast majority of Peruvians do not feel they have benefitted from the economic growth enjoyed by Peru over the past 10 years. Current Peruvian President Alan Garcia will transfer power to Humala on July 28. An article titled 'Peru presidential victor Humala faces a balancing act' - reading time 2 minutes - says that "Humala's victory means a leftward shift in Peruvian policies, though he claims his model will not emulate Venezuela, as his critics fear". In the past Humala has been linked with Hugo Chavez. For example, a March 31, 2011 article titled 'Hugo Chavez: Humala is a good soldier' - reading time 2 minutes - reports that the "Peruvian press has suggested Chavez is financing Humala's campaign, as happened during the (Humala's) presidential run in 2006".

With that background, the Garcia administration recently "enacted five laws including the revocation of a concession granted to Bear Creek Mining Corp (BCM.V) in an attempt to meet the demands of anti-mining activists in southern Peru" - see 'Peru's Humala To Put Finishing Touches On Cabinet After Trip' - reading time 2 minutes. That article also reports: "Humala called on the Garcia administration to resolve the mining conflict before he takes office", and further reports that according to Deutsche Bank, Peru accounts for 16%, 12%, 9% and 7% of the world's silver, zinc, gold and copper production respectively. The article also says Peru's "mineral wealth and free-market-friendly governments have attracted billions of dollars in investment by foreign mining companies ...".

Bear Creek closed at Cdn$11.65 on March 4, 2011, in early June traded in a range of approximately Cdn$5.00 - $6.50, and closed yesterday at Cdn$3.77. You can find information on Bear Creek in recent articles 'Peru mine dispute hammers Bear Creek shares' - reading time 3 minutes, and 'Bear Creek fights back in Peru mine dispute' - reading time 3 minutes. provides access to 40 mining exploration, 9 mining producer, and 8 oil & gas companies listed on the Toronto and Toronto Venture Stock Exchanges who we currently categorize as conducting operations in Peru.

Peru is only one of the 'flavours of the day' in terms of country political risk. Burkino Faso, Cote-d'Ivoire, Eygpt, Libya, Tunisia, and one Argentina State are only some other geographies where recent - and in some cases ongoing - political (except for the Argentina State) and societal issues have arisen. Resource companies operate in all those geographies. Further, it seems that with each passing month new societal (and hence political) disruptions erupt. Irrespective of how each is resolved, for me each raises a new geographic specific 'red flag'. I think the foregoing discussion with respect to geographic risk ought to be considered carefully by investors who participate in the equities markets, and by their investment advisors - and I think this is becoming an ever more important issue from an investment perspective. You might also want to read a Forum Post I wrote in January were I spoke to the issue of the equity markets 'pricing in' country risk at any given point in time.

With respect to physical gold, it seems to me the increasing country specific political/economic risk in countries that currently represent significant percentages of annual world gold production (Peru qualifies at 9% of world gold production - see above) can do nothing in theory (all other things equal) but provide impetus to push the trend price of physical gold higher over time.



Ian Campbell

Author: Ian Campbell

Ian R. Campbell, FCA, FCBV
Business Transition Simplified

Through his website and his Business Transition & Valuation Review newsletter Ian R. Campbell shares his perspectives on business transition, business valuation and world economic and financial markets influences on those two topics. A recognized business valuation and transition authority, he founded Toronto based Campbell Valuation Partners Limited (1976). He currently is working to bring his business valuation and transition experience to both business owners and their advisors in our new economic, business and financial markets normal.

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