By Fiona Bond | Fri, 28th May 2010 — 16:19

For centuries, explorers have come to Peru in search of gold and today the country shows no signs of losing its Midas touch, reports Fiona Bond.For centuries, explorers have come to Peru in search of gold and today the country shows no signs of losing its Midas touch.

Peru, currently the number one Latin American gold producer and ranked sixth in the world, is on a mission to become one of the world’s top five producers by 2015.

Last year, gold became Peru’s main export worth $6.8 billion, representing 42% of the value of all mining exports and a quarter of the country’s total exports.

Growing production levels and rising investment in the Andean country’s resources prompted President Alan Garcia to hail the country an ideal destination for international gold investors at the Gold Symposium in Lima earlier this month.

Justification for Peru’s bullish attitude can be found in the figures, with the country’s mining GDP shooting up 260% in the past 20 years, compared to the country’s overall GDP growth of 135%.

President of the National Society of Mining, Petroleum and Energy, Hans Flury, says that over $18 billion has been ploughed into the mining sector in the last 15 years.

And it shows no signs of stopping.

The price of gold has increased 50% over the past two years and tripled over the past five years, with expectations rife that it is set to breach the $1,300 mark in the near future.

The precious metal’s soaring rise has not gone unnoticed, enticing several large names into the country including the world’s number one gold producer Barrick Gold (ABG) and British company Hochschild Mining (HOC).

The FTSE 250 -listed Hochschild Mining operates three underground epithermal vein mines in Southern Peru and has seen its star rise over the past year with a 10% rise in share price over the past month alone.

Chief executive Ignacio Bustamante told Interactive Investor: Hochschild has been working successfully in Peru since 1925 and today we operate three high grade, underground operations in the south of the country. We also have numerous exploration projects throughout Peru reflecting the country’s enormous mineral potential and significant prospects for growth.

Bustamante went onto say that Peru’s mining-friendly regulatory framework and stable economy help to make it an appealing destination.

Miners elect for Peru’s political stability

Metals analyst David Wilson at Societe Generale agrees with the sentiment, noting that Peru has managed to stave off the troubles plaguing other Latin American countries.

The key attraction for mining companies is political stability and royalties which Peru seems to offer. When dealing with Latin America, there is the fear that you can get caught in political price cycles; wishing to nationalise projects when prices are high and engaging in a sell-off when prices fall. However, Peru seems to have largely avoided this trap which creates a more solid environment for investors.

Some of the big mines are depleting which means there needs to be a lot of investment in the area, but with its political stability and mining laws it looks likely that it will continue to secure this, he added.

AIM -listed Minera IRL (MIRL) recently signed an option to purchase the Quilavira gold exploration project in southern Peru earlier this year.

The group hailed the project a strategic, longer term exploration opportunity in a highly prospective area, following on from better-than-expected production results at its Corihuarmi gold mine in Peru in the final quarter of 2009.

Fellow UK-listed company Horizonte Minerals (HZM) is developing in tandem with Barrick Gold the 2,147 hectare Pararapa gold property in South Peru.

The AIM-listed group, which has seen its shares rise by 100% in the past year, said Peru’s democratically elected government and favourable mining codes make it a hotbed for large mining companies to operate there.

Indeed, Peru has been awarded investment grade status of BBB- by three of the main international credit ratings agencies; Standard & Poor’s, Moody’s and Fitch.

The Ministry of Mining and Energy said Peru continues to work to consolidate an adequate regulatory framework to foster foreign investment.

Peru is a member of the Multilateral Investment Guarantee Agency, among others, and has subscribed to several bilateral agreements including Free Trade Agreements with the US, Canada, China and Singapore, it hastens to add.

The country, made up of 128 million hectares, has granted 14.89 million hectares, or 11.6%, to mining activities. However, only 891,367 hectares are currently under mining exploitation and 813,626 hectares under exploration.

There is a vast and diverse geological wealth recognised by the international community, most of which has not yet been exploited or explored, the Ministry said.

Peru came in the top 30 global jurisdictions for the strength of its mining policy in the 2008-09 Fraser Institute survey.

Domestic troubles

However, it fared less well in terms of uncertainty surrounding native land claims, with protesting communities and strike action continuing to blight the industry.

There are fears that a growing number of miners in the area could wreak havoc with the country’s environment.

Earlier this week, Peruvian indigenous leader Alberto Pizango returned from Managua, where he fled for exile almost a year ago after heading up a protest again foreign mining companies.

And in December last year, it was reported that up to 200km of deforestation had torn through the Madre de Dios (Mother of God) region, threatening the country’s environment.

Poverty run deeps in many rural parts of the country, with the feeling that many have been left behind by the commodity boom.

According to Peru’s human rights agency, rural towns are protesting against 100 mining or oil projects, with roadblocks set up along the country’s main highway by wildcat miners in protest at the country’s lenient attitude towards foreign companies.

However, the country’s new finance minister Mercedes Araoz has warned that the government must do more in its power to stop social conflicts, while the Ministry of Mining and Energy said the government has excellent environmental practices and socially-responsible practices in place.

As world demand for gold hots up at a rapid rate, it looks highly unlikely that anything will stop Peru fighting for its slice of the action.