Ollanta Humala is not a name that many outside of South America are familiar with. In 2006, however, the Peruvian Nationalist actually won the first round in Peru’s 2006 presidential vote. Although Hugo Chavez openly backed him Humala was, ultimately, defeated in a runoff 53 per cent to 47 percent by current Peruvian President Alan Garcia.

Humala was back in the news this past Sunday when, yet again, he won the first round of Peru’s elections with 31.7 % of the vote. This sets the stage for another runoff which is scheduled for June 5th, this time against Keiko Fujimori, the daughter of incarcerated former President Alberto Fujimori. On 7 April 2009, Alberto Fujimori was convicted of human rights violations and sentenced to 25 years in prison for his role in killings and kidnappings by the Grupo Colina death squad during his government’s battle against leftist guerrillas in the 1990s.

Peruvian Nobel literature laureate Mario Vargas Llosa went as far as to call the Humala-Fujimori runoff option “a choice between AIDS and terminal cancer,” given their perceived anti-democratic tendencies. Vargas Llosa was defeated by Alberto Fujimori in Peru’s 1990 elections.

The Peru election results caught the financial markets off guard.  The cost of insuring Peru’s debt against default has jumped to a five-year high relative to neighboring Colombia, on concern that Ollanta Humala may win the presidential vote and expand government control over the economy. Marjorie Hernandez, a currency strategist at HSBC Holdings Plc in New York stated, “While everyone had expected this to be a non-event election, we were proven wrong. The market was not positioned that way. Everyone was long Peru everything.” Since Peru is ranked #5 on the world’s mining exploration list, the political instability is spilling over to the mining sector.

Compañía de Minas Buenaventura S.A. (NYSE: BVN), Peru’s largest publicly-traded mining company, with seven operating mines in the country, is being hit hard this week down $4.50 to $39.00 (10.3%).

Some Canadian listed Peruvian precious and base metal juniors have also been affected by the news. Candente Copper (TSX: DNT) is down $0.24 to $1.56 (13.3%), Tinka Resources (TSX-V: TK) is down $0.04 currently trading at $0.60 (6.3%); while Duran Ventures (TSX-V: DRV) has managed to buck the trend and is up half a cent.

Peru is the world’s largest silver producer, second in zinc, and sixth in gold production. Peruvian silver production totaled 135.8 million ounces in 2009. Meanwhile, zinc and gold production totaled 1.50 million tons and 6.42 million ounces, respectively. So when Humala talks about renegotiating mining contracts with foreign companies, investors naturally take note.

But Eduardo Suarez, a strategist at RBC Capital Markets in Toronto thinks the market may be overreacting.  In a report on March 29th, he estimates Humala’s chance of becoming president at about 20 percent, and believes recent declines in asset prices are overdone. Suarez says “the current sell-off should be seen as a buying opportunity, but timing is key.”