Peru Illegal Gold Mining Scale Surpasses Formal Sector, Raising Compliance Costs for Mining Companies

Overview

This report provides an in-depth analysis of the current status of illegal gold mining in Peru and its profound impact on macroeconomics, fiscal revenue, and formal mining companies. The report indicates that illegal gold mining is no longer an edge issue; its scale exceeds that of the formal export industry in some aspects, leading to huge tax revenue losses and severe environmental health crises. For investors, this means formal mining enterprises operating in Peru face higher security risks, labor competition pressure, and supply chain compliance challenges. Although rising gold prices may stimulate illegal activities, J.P. Morgan remains optimistic about the medium-term performance of gold and suggests selecting pure gold miners not directly affected by Peruvian regulatory risks among Latin American mining stocks.

Core views

Scale and Fiscal Impact of Illicit Gold Mining: The report estimates that tax revenue lost due to illegal gold mining in Peru in 2024 was approximately $1 billion to $1.5 billion. Assuming a 40% increase in illegal production and a 44% rise in gold prices in 2025, this loss could double, accounting for about half of Peru's 2025 fiscal deficit. Currently, only about 2% of registered miners have completed tax compliance under the Comprehensive Mining Formalization Registry (REINFO), with the majority remaining in the grey area, evading income tax, royalties, and VAT. Environmental and Social Costs: Illegal mining causes long-term environmental destruction, with the Madre de Dios region alone losing approximately 21,000 hectares of rainforest annually. Mercury pollution severely affects the health of residents in mining areas, estimated to affect about 78% of adults. Furthermore, the economic scale of illegal mining is huge. According to the Peruvian Financial Intelligence Unit, money laundering assets generated between 2014 and 2024 were approximately $9 billion, accounting for 60% of Peru's total money laundering during the same period, far exceeding drug smuggling. Investment Impact on Formal Mining Enterprises: Illegal mining brings lasting risk premiums to formal companies. First, illegal operators provide immediate cash compensation about 3.5 times higher than the national minimum wage, raising the local wage floor and exacerbating recruitment and retention difficulties for formal enterprises. Second, with the implementation of the EU Corporate Sustainability Due Diligence Directive (CSDDD), traders and refiners handling unidentified gold face stricter compliance and reputational risks. Finally, political uncertainty (such as protests and ineffective law enforcement) makes it more difficult to obtain permits and social licenses for formal projects. Political Game and Policy Outlook: Illegal mining has become a core issue in Peruvian elections. Right-wing candidate Keiko Fujimori advocates striking against illegal mining through technical means and institutional reform, including eliminating the shelter effect of REINFO; while left-wing candidate Roberto Sánchez tends to support small-scale miners, proposing to extend the validity period of REINFO and relax regulations. The report believes that regardless of who wins, large-scale formalization in the short term is unlikely, and the grey area equilibrium will persist. Gold View and Stock Selection: The J.P. Morgan Commodity Research Team forecasts gold prices will reach $6,300 per ounce by the end of 2026. Among the covered targets in Latin America, Aura Minerals (no Peruvian operations, pure gold miner) is listed as the top pick because it is not directly affected by changes in Peruvian regulations and valuation is attractive (2026E expected EV/EBITDA is 5.1x). In comparison, GMex/SCCO and Nexa are also exposed to significant gold co-product exposure although subject to Peruvian regulation. In Europe/Middle East/Africa regions, overweight Hochschild Mining (over half EBITDA from Peru) and Fresnillo.

Analysis framework

The report adopted a multi-dimensional cross-validation method to estimate the scale of illegal mining: first, customs gap method, comparing the difference between recorded gold exports and formal mine production; second, satellite evidence, inferring activity scope through monitoring deforestation and mining footprints; third, mercury tracking method, using the characteristic that illegal gold mining heavily relies on mercury amalgamation to reverse-calculate gold production through mercury import and seizure data. When analyzing investment impact, the report combined macro-fiscal calculations, micro-labor market competition analysis, and transmission mechanisms of international compliance regulations (such as CSDDD), constructing a complete logical chain from macro policy to micro-enterprise valuation.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Estimate the size of the underground economy through the gap between customs export data and formal production data (Gap Analysis)

  When official statistics cannot fully cover market supply, institutions often use the difference between import/export data and production data to calculate unrecorded informal supply volume. This is a common method for evaluating the underground economy in resource-based industries.

• Company Fundamentals and Financial Framework

  Internalization Analysis of Externalities in Informal Economy

  Analyzing how illegal activities indirectly erode the profit margin and valuation multiples of formal enterprises by raising labor costs, increasing security expenditures, and compliance risks, i.e., the process of converting external social costs into corporate financial burdens.

• Event Gaming and Behavioral Finance

  Marginal Impact of Political Policies on Industry Regulatory Environment

  Assessing how the policy tendencies of different political candidates (such as relaxing or tightening regulations) change the long-term operational uncertainty and compliance costs of the industry, thereby affecting investors' risk premium requirements.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Aura Minerals (AURA33.SA)

  Top Pick, Benefits from rising gold prices and no Peruvian operational risk

  Strengths

  Pure gold miner, no Peruvian business exposure, production expected to grow 75% by 2028, free cash flow yield 9%

  Comparison

  Not directly affected by changes in Peruvian regulations compared to GMex/SCCO and Nexa

  Risks

  Gold price volatility risk

• Hochschild Mining

  Overweight, but over 50% EBITDA comes from Peru, affected by regulatory risks

  Strengths

  Listed in UK, preferred among EMEA gold miners

  Weaknesses

  High percentage of Peruvian business exposure to regulatory and operational risks triggered by illegal mining

  Comparison

  Higher risk than Aura, but valuation may reflect partial risk

  Risks

  Peru policy changes, illegal mining interference

• GMex/SCCO, Nexa

  Possess gold co-product exposure, but affected by Peruvian regulatory changes

  Strengths

  Diversified metal portfolio, gold as a co-product provides additional elasticity

  Weaknesses

  Main business affected by overall Peruvian mining environment

  Comparison

  Lower gold purity than Aura

  Risks

  Peru regulatory risk, copper/zinc price fluctuations

Key data

• 2024 Tax Revenue Loss Estimate$1-1.5 billionConservative estimate, possibly accounting for half of 2025 fiscal deficit
• Illicit Gold Production Estimate (2024)Approximately 92 tonsCalculated based on customs gap and mercury consumption
• REINFO Formalization Completion Rate~2%Only 2,081 miners completed full compliance
• Illegal Miners Salary Premium~3.5xPaid in cash without social security deductions compared to national minimum wage
• 2026 End-of-Year Gold Price Forecast$6,300/ozJ.P. Morgan Commodity Research Team viewpoint
• Aura Minerals 2026E EV/EBITDA5.1xValuation is attractive

Impact & implications

The report believes that the prevalence of illegal mining makes the operating environment for Peru's formal mining companies more complex, and investors need to demand higher risk premiums for these companies. This is reflected not only in direct cost increases (security and manpower) but also in the burden of supply chain due diligence. For global investors, this means needing to screen mining enterprises that can effectively manage ESG risks and supply chain transparency more strictly. At the same time, the results of political elections will be a key variable affecting the intensity of future industry regulations. If policies shift towards relaxation, it may further worsen the competitive environment for formal enterprises.

Risks

• Peru political situation unstable, policy execution falls below expectations
• Illegal mining activities expand further, leading to intensified social conflict
• International gold prices fluctuate significantly, affecting illegal mining incentives and formal enterprise profitability
• EU CSDDD and other compliance regulations are implemented more strictly than expected, increasing supply chain costs

What to watch

• Results of the second round of Peru presidential election on June 7th and subsequent policy direction
• Actual progress of REINFO formalization process
• Intensity of enforcement actions taken by the Peruvian government against illegal mining
• International gold price trends and their elastic impact on illegal production