U.S.-Owned Doe Run Peru's Dispute With Government Deepens

LIMA, Jun 16, 2010 (Dow Jones Commodities News Select via Comtex) -- Relations between the Peruvian government and Doe Run Peru, an affiliate of U.S.-based Renco Group Inc., are fast deteriorating.

President Alan Garcia this week accused the company of trying to blackmail his administration by encouraging thousands of company workers to protest against the government. They have been shut out of their jobs after Doe Run Peru suspended operations at its La Oroya polymetallic smelter.

Those employees are blocking a main highway to back company demands that the government ease conditions under which Doe Run Peru can reopen the smelter. The company has denied being involved with any protests.

Environmentalists describe La Oroya, where Doe Run's smelter normally produces copper, lead and zinc, as one of the most polluted places on earth.

The company shuttered the smelter about a year ago after a cutoff in bank loans and problems emerged tied to an environmental cleanup program.

On Wednesday, employee protests entered their third day, with about 2,000 police and soldiers standing by to prevent a repeat of the highway blockades that paralyzed the town earlier this week.

The government--which last year gave Doe Run 10 months to find financing and restart operations, plus 20 further months to complete its delayed environmental clean up operation--is now threatening to find a new owner if the smelter doesn't reopen by July 24.

The government says the company has "systematically" failed to meet its commitments, while Doe Run has responded by saying that when it acquired the smelter complex, the government promised to share responsibility for environmental issues.

Doe Run says the government hasn't lived up to its responsibility, much less tried to find a solution, while it had invested heavily in cleaning up smelter operations.

Reports say that the company has liabilities of about $1.2 billion, including cash owed to suppliers, for taxes, for the environmental clean up, and for law suits against it in the United States, among other things.

That has led some analysts to say a takeover would suit Doe Run, since it would then be relieved of its debts, as well as legal and environmental liabilities.

Other observers say the government is unlikely to try a direct takeover, as that would make it responsible for various liabilities, and possibly open the door to international arbitration or lawsuits.

"If private mining companies - which currently have a lot of cash - are not considering buying Doe Run, why would the government," said Maria Chappuis, a consultant who was formerly General Director of Mining in Peru's Ministry of Energy and Mines.

"I believe the government cannot take over Doe Run. They can place fines, and they can shut down areas and use other sanctions, but they cannot close the whole company," she added.

Mining sector analyst Miguel Santillana said, "Doe Run has invested a portion of income towards the environmental upgrade, but they have postponed the completion date twice, it's a joke."

"The government cannot give in to a company that is playing the social unrest card and wants tailor made changes to laws and regulations," he added.

No one from Doe Run Peru was immediately available for comment.