UPDATE 1-Peru, miners in pact to change royalties-sources

Tue Aug 16, 2011 8:19pm EDT

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* Firms reach deal in negotiation with government-sources

* New royalty rate still to be determined-sources

By Teresa Cespedes and Patricia Velez

LIMA, Aug. 16 (Reuters) - Peru's mining firms have agreed to pay higher royalties in an overhaul of the current system, sources on both sides of negotiations between companies and leftist President Ollanta Humala's government said on Tuesday.

Under the new system, companies would pay royalties based on their operating profits instead of their sales. The new system would be similar to one used in Chile.

The new royalties rates still need to be defined, but they would likely be higher than the current rates of 1-3 percent charged on sales, a mining source said.

A government source said the agreement had been reached.

"There is agreement that they (royalties) be charged on operating profits instead of sales, with the aim of not hurting the competitiveness of the sector," the government source said.

During his campaign, Humala promised to introduce a tax on the windfall profits of miners to raise funds for social programs in a country where a third of the people live in poverty.

The new royalties' structure would likely apply a sliding scale to miner's operating profits, the source representing miners said.

In Chile, the world's No. 1 copper producer, miners agreed to a new royalty contribution of between 4 and 9 percent of operating profits to fund reconstruction after a deadly earthquake in 2010.

"The important thing is that there was consensus that the royalty should not be applied to sales, because that creates a distortion and makes it hard to turn a profit on new projects or expansions," a source representing miners said.

The sources said meetings would continue this week with the goal of agreeing on precise tax rates as soon as possible, to avoid uncertainty for investors.

Even companies that signed tax stability agreements with the government in the 1990s have agreed to pay more in royalties, the mining source said. Many of those agreements are scheduled to expire in the next few years.

Mining accounts for 60 percent of Peru's exports. The country is the world's No. 2 producer of copper and silver and the sixth most important gold producer.

Large international mining firms including Xstrata XTA.L, BHP Billiton (BHP.AX), Anglo American (AAL.L), Barrick Gold (ABX.TO), and Grupo Mexico 's (GMEXICOB.MX) Southern Copper operate in Peru.

"This system is expected to generate a kind of partnership between the state and investors in the sense that when prices are soaring both sides will have more resources, but when prices fall neither side gains," the mining source said. (Reporting by Teresa Cespedes and Patricia Velez; editing by Terry Wade and Carol Bishopric)

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