Foreign Relations of the United States, 1969–1976, Volume E–10, Documents on American Republics, 1969–1972

615. Memorandum From the Executive Secretary of the Department of State (Eliot) to the President’s Assistant for National Security Affairs (Kissinger)¹ ²

Washington, May 1, 1970

Subject:

• New Peruvian Mining Law Leaves Many Questions Unanswered

In response to Mr. Watts’ memorandum of April 17, the following information is provided.

On April 14, 1970, the Government of Peru decreed a new Mining Law which will significantly increase state involvement in this major sector which accounted for more than $450 million in exports in 1969. A new Mining Code implementing the decree law is to be prepared within four months.

Major provisions of the new decree law include:

—Assumption of marketing of all minerals by the GOP. Marketing of copper, the only mineral specified, will be taken over within eighteen months. Meanwhile, producers will continue to do their own marketing; however, the state will fix a “Peruvian Producers Price” and will have the right of prior approval of all contracts.

—Refining of copper is reserved for the state, although the law states that “acquired rights” are not affected.

—A new sliding scale income tax structure based on volume of output. The tax rate for the large American producers will remain at approximately the same level of 68.5 percent in effect since January 1, 1970.

—Guarantee of tax stability and foreign exchange availability for the investment recovery period.

—Tax free reinvestment allowance of 30 percent of profits up to a maximum of $5.2 million annually.

—Creation of a state mining company.

—Encouragement of joint ventures with the state mining company. Operations with a minimum of 25 percent state participation will receive tax stability and exchange availability guarantees of double the investment recovery period. They will also receive preferential income tax treatment and will be able to guarantee future payment in products to assist in acquiring financing.

Major features of the previous law which have been discarded include:

—A depletion reserve allowance.

—A tax free reinvestment allowance in refining or other metallurgical processes of up to 50 percent of profit for five years after the investment recovery period.

—An extended investment recovery period.

—Guarantees of tax stability and exchange availability beyond the investment recovery period.

—Guarantee of uninhibited marketing and of a price no lower than the world market price.

The effect of the new law on U.S. companies operating in Peru is not completely clear and will not be until the new code is promulgated some months from now. The initial reaction of major U.S. companies has been one of caution and restraint as they await the implementing laws and regulations. Nevertheless, the new decree has had an immediate disquieting effect on their plans and has created several uncertainties.

A major uncertainty is the effect of the new law on the Southern Peru Copper Corporation contract to develop the Cuajone concession (a $355 million investment project). The contract, signed December 19, 1969, guarantees SPCC the right to market its production, the availability of foreign exchange for an extended period, a depletion reserve, a reinvestment allowance based on the old code, and a lower income tax rate for a substantially longer period than the new law. It also envisages the use of the depletion reserve from its present operation at Toquepala, and it grants SPCC the right to construct its own refinery with much of the financing to be derived from a tax-free reinvestment allowance.

Whether these contract provisions will be superseded by the new law is not yet known. Southern Peru officials in Lima say that the law will not affect the Cuajone contract. However, SPCC spokesmen in New York have stated publicly that the new law will make the financing of Cuajone much more difficult. They are particularly concerned with the possibility that they will not be able to guarantee future payment in products, which would be a key element in Japanese or European financing.

The effect of the new law on Cerro is less dramatic. Its refinery at La Oroya is clearly an “acquired right” and will not be affected. However, according to a Cerro official in New York, the new law has killed negotiations with three European companies for a joint venture with the GOP to develop the Moracocha concession (a $300 million investment project). Moreover, this official said it has become virtually impossible to arrange financing for any new mining investment in Peru. He said SPCC would probably be unable to come up with financing for the Cuajone contract.

ASARCO and Anaconda, which have less advanced plans to develop concessions at Michiquillay (a $300 million investment project) and Cerro Verde (a $100 million investment project), respectively, may be considering abandoning these projects.

The new mining law fits into the general pattern of recent actions by the GOP with respect to private investment. Within the last month the Government has taken over the marketing of fish meal. There have also been reports that the GOP is concerned about the extent of foreign participation in the fish meal industry and intends to limit and reduce such participation. It has also taken steps to reduce the amount of foreign participation in the banking system. Additionally, in recent speeches before international audiences, both President Velasco and his Minister of Economy and Finance, Morales Bermudez, have attacked the role played by foreign private investment in development and have spoken of disinvestment schemes whereby foreign investors would be allowed to recover their investment and earn an acceptable profit, with such investment reverting after a specific period of time to Peruvian ownership “with decisive state participation.” A draft industries law now being circulated in Lima embodies the same concept. Such actions by the GOP have aggravated an already serious confidence problem and reveal a basic dilemma. The GOP believes it needs foreign capital, but it has not yet discovered how it can derive the benefits of this capital without incurring what it considers to be its liabilities.

Since the new decree negatively affects the interests, of U.S. companies, it does create potential future bilateral problems. However, the only immediate effect of the new law on U.S.-Peruvian relations is to accentuate the often-stated desire of the Peruvian Government to be completely independent economically, as well as politically. This aggressively independent stance assumed by the GOP also increases frictions between the two governments and makes the search for solutions to our outstanding bilateral problems even more difficult.

Theodore L. Eliot, Jr.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 792, Country Files, Latin America, Peru, Vol. 1, Through June 70. Confidential. Robert Snow signed for Eliot above Eliot’s typed signature. Watts requested the study in an April 17 memorandum to Eliot. (Ibid.)
2. Eliot provided Kissinger an information report on the principle provisions of the April 1970 Peruvian mining law and described possible implications for U.S. investment and relations with Peru.