ESTUDIO LUIS ECHECOPAR GARCIA - Peru

GENERAL LEGAL ASPECTS OF MINING ACTIVITIES IN PERU

By: José Ramírez Gasón Roe

Mining activities in Peru are subject to the provisions of the Uniform Text of Mining Law, approved by Supreme Decree N°. 14-92-EM of June 4, 1992 (hereinafter the "Mining Law"), as well as its Regulations approved by Supreme Decree N° 018-92-EM of September 8, 1992 and Supreme Decree N° 03-94-EM of January 15, 1994.

Pursuant to the Mining Law, any local or foreign individuals or legal entities are required to hold a specific concession granted by the Ministry of Energy and Mines (MEM) to carry out any mining activities different than: sampling, prospecting and trading in mining products or minerals of any type and condition.

The concession grants to the concessionaire the right to perform, on an exclusive basis, certain mining activities within a duly determined area. Under the Mining Law, the system of concessions includes; (i) mining concessions, which grant their holders the right to explore and exploit the mineral resources, whether metallic or non-metallic, conferred by the concession; (ii) processing concessions, which grant the right to process, purify, melt or refine minerals, whether by means of physical, chemical, or physical-chemical processes; (iii) general service concessions, which grant the right to render auxiliary services, i.e. ventilation, sewage, hoisting or exploitation, to one or more mining concessions; and (iv) mining transportation concessions, which grant the holders the right to operate a continuos massive transportation system of mineral products between one or more mining units, and one harbor or processing plant or refinery, using conveyor belts, pipelines and track cables.

All mining concessions; local companies whose purpose consists of performing mining activities and branches of foreign companies which are duly established in Peru in order to carry out mining activities, are required by law to be registered with the Public Mining Registry.

Under Peruvian law, it is a general rule that any investor may carry out mining activities throughout the country. Discrimination based, inter alia, on the nationality or legal structure of the concerned investor, is precluded.

Peruvian state owned enterprises may also participate, without any exception, in the mining sector. However, they are not entitled to any privileges or better conditions than to those that are generally granted to local or foreign private investors. The Mining Law has also eliminated any and all exclusive rights that were established previously in favor of the State. Thus, private investors may currently carry out, among others, mining activities in connection with radioactive substances.

Notwithstanding the above, pursuant to the provisions of article 71 of the Peruvian Constitution, foreigners are restrained from holding, directly or indirectly, property rights in areas located within 50 kilometers from any of the country's boundaries, except in case of public need expressly declared by a Supreme Decree approved by the Ministries Counsel according to the pertinent laws.

The Mining Law sets forth certain obligations that the concessionaires must comply with, in order to maintain their concessions in force:

(a) Engaging into the economic exploitation of the correspondent concession, that is investing in the concession in order to obtain mineral products. It is relevant to note that: (i) such mineral products must be obtained before the end of the eighth year after submission of the application for the concession; and (ii) such production shall maintain a level of at least US$100/year per each hectare granted for the case of metallic substances, and to US$50/year per each hectare granted for the case of non-metallic substances); and,

(b) Paying a certain amount in local currency, equivalent to US$ 2/year per each hectare held (or to US$ 1/year per hectare in the case of minor mining producers and holders of non metallic mining concessions).

Non compliance with the obligations set forth in (a) (i) above, shall trigger a penalty, to be paid by the concessionaire during the time such production is not obtained, for an amount in local currency equivalent to US$ 2/year per each hectare and up to US$ 10/year per each hectare after the tenth year of default. The penalty herein described shall be paid in addition to the payment referred to in (a) (ii) above.

The Mining Law provides for the lapsing of the correspondent concession in case the concessionaire does not comply with its obligations of making payments as explained before.

The area of the concessions granted generally rank form a minimum of 100 to a maximum of 1,000 hectares, but may extend to a maximum of 10,000 hectares when the concessions are located in the sea. Any concessionaire may hold two or more concessions, whether or not of the same type and nature, provided that it complies with the relevant legal requirements.

Concessions may be transferred, conveyed and subjected to mortgage, while any movable assets engaged to mining activities as well as minerals extracted and/or processed from such concessions that belong to the concessionaire may be subject to pledge. Any and all of these transactions and contracts must be recorded into a public deed and registered before the Public Mining Registry for them to be enforceable against the State and third parties.

Investors are obliged to perform their mining activities in accordance with systems, methods and techniques that lead to an improvement in the development of such activities, and in compliance with the security and environmental regulations applicable to the mining industry. They must take all necessary steps to avoid damages against third parties, and are obliged to permit the entrance to the area of their concessions, at any time, of the mining authorities in charge of controlling the concessionaires' obligations.

ENVIRONMENTAL ASPECTS

Environmental matters in mining activities are specifically regulated by Supreme Decree N° 016-93.EM as amended (the "Environmental Regulations").

According to the Environmental Regulations, the competent authority for environmental matters in the mining sector is the MEM, which is the only governmental body in charge of:

(a) Establishing the environmental protection policies for mining activities and issuing the corresponding rules;

(b) Approving the environmental Impact Assessment (EIA) and the Program for Environmental Management and Adjustment (PAMA), and authorizing their execution;

(c) Entering into administrative-environmental stability agreements with the holders of mining activities on the basis of the EIA or PAMA approved; and

(d) Controlling the environmental effects produced by mining activities on operational sites and influence areas, determining the holder's liability, in case of violations to the applicable environmental provisions, and imposing the sanctions provided for therein.

Concessionaires are required to:

(a) Submit an EIA when applying for a mining and/or processing concession, permits to broaden operations or size of a processing plant in more than 50%, or execute any other mineral project (in mining, processing, general service or transportation concessions). The EIA must be executed by an Environmental Auditor registered in the MEM, establishing the terms and procedures for execution, investment, monitoring and efficient control of mining activities, and containing an annual investment program that cannot represent less than one percent (1%) of the annual sales of the mining entity.

(b) Submit to the MEM, in an annual basis, information on the generation of emissions and/or disposal of wastes, together with a Consolidated Annual Statement, before June 30 (this information must include, inter alia, data regarding the general background of the company, its production processes, atmospheric emissions, liquid, solid and other wastes produced, treatment and final disposal procedures used, site-location, and industrial wastes produced, as well as describe measures taken by the holder in order to comply with the EIA approved by the MEM).

Non-compliance with environmental rules in force may cause the holder to be subject to administrative sanctions (fines ranging from 0.5 to 500 U.I.T.'s or, in case of material relevance, the total closing of operations.

INVESTMENT GUARANTEES

Foreign and local mining investors may enter into stability agreements pursuant to Mining Law and the Regulations approved by Supreme Decree N° 024-93-EM.

The benefits granted to holders of mining activities are aimed to promote private investment in the mining industry. The most relevant among these benefits are: (a) the execution of Stability Agreement; and (b) the Profits Reinvestment Regime.

Stability Agreements. Holders of mining activities may enter into Stability Agreements with the MEM setting as the State representative. Pursuant to these agreements, the holder shall be granted stability in connection with the tax regime in force at the time the holder's Investment Program is approved, among other benefits. The basic requirement in order to enter into these Stability Agreements is the submission, approval and further execution of a given Investment Program.

The main aspects to be highlighted regarding benefits granted under Stability agreements are the following:

(a) Holders of mining activities are guaranteed that the only taxes that shall be applied during the terms of the corresponding agreement are those in force at the time of approval of the corresponding Investment Program. However, they may freely adopt any possible new regimes established for the assessment and payment of the stabilized taxes within 120 days after the variation has been produced.

(b) During the term of the Stability Agreement, holders of mining activities may choose, at any time but only once, to be subject to the general tax regime, which shall be the new stabilized tax regime that shall remain unmodifiable during the rest of the term of the agreements; and

(c) Any individual or entity that invests funds in the capital stock of any mining company in order to finance investments guaranteed through a Stability Agreement, shall be granted the same guarantees granted to such target company, according to the percentage or amount of its investment in addition to any other benefits established under the general system referred to above.

(d) Holders of mining activities are entitled, among others, to the following additional stability guarantees: (i) free transferability of foreign currency; (ii) non discrimination regarding exchange rates; (iii) free trade of mineral products; (iv) stability of draw back, temporary importation and other similar regimes.

Guarantees granted under the Stability Agreements may not be unilaterally modified by the State. These agreements may be in force for a 10 to 15 year period counted as of the date when the investment is effectively made, depending on compliance with the following requirements: (i) 10 years, for those investors that start or are currently carrying out mining operations with a processing capacity of 350 to 5,000 metric tons per day, or that submit an Investment Program for a minimum amount in local currency equivalent to US$ 2,000,000; (ii) 15 years, for those investors that start a project with an initial processing capacity of at least 5,000 metric tons per day, or that submit an Investment Program for a minimum amount of US$ 20,000,000- in case of a new project-, or that financially support a broadening of operations aimed to reach such a capacity, or that invest in existing mining companies under an Investment Program of at least US$ 50,000,000.

Holders of mining activities that have executed a Stability Agreement, shall be able to apply in advance the guaranteed regime to the investment phase, for a maximum period of 3 consecutive years (in the case of 10-year Tax Stability Agreements) and of 8 consecutive years (in the case of 15-year Tax Stability Agreements). In both cases, the term applied in advance shall be deducted from the total term of the relevant agreement.

Profit Reinvestment Regime. In addition to the benefits granted under the Tax Stability Agreements, profits obtained by holders of mining activities that are reinvested in order to broaden mining production, are exempted from Income Tax payments (in other words, only the distributed profits are subject of the Income Tax). To resort to this benefit, holders of mining activities require the previous submitting and approval by the MEM of an Investment Program guaranteeing at least a 10% increase in the production value of the relevant mines or processing plants.

Non-distributed profits and investments made shall appear in a separate special account. Investments made shall be taken away from the non-distributed profits.