--Argentina mining industry on the ropes as costs, regulations
bite
--Investors Move to cancel Argentina mining projects
--Miners balk at government limits on profit repatriation
By Shane Romig
BUENOS AIRES--Argentina's mining sector is on the ropes as
soaring costs and government regulations scuttle dreams of a mining
boom in a country better known for its grain and beef exports.
Mining exploration as measured by both investment and drilling
plunged 50% on the year in 2012 and is likely to slump an
additional 20% this year, said Julio Rios Gomez, president of
mining exploration chamber Gemera.
Junior mining companies, small firms that explore new deposits
and develop mining properties, usually focusing on precious metals
such as gold and silver, can't get financing and there's no one
willing to buy promising discoveries, Mr. Gomez said.
The recent slump in prices for Argentina's copper, gold and
silver exports isn't the only headwind facing miners. Despite its
vast untapped mineral wealth, Argentina has lost its appeal as a
place to dig because of costs, capital controls, and legal
insecurity.
"Mining isn't a profitable business the way things are and
existing mines are cutting back production," said Mario Capello, a
mining consultant and former congressman.
Inflation and lower metal prices have pressured margins, said
Jorge Palmes, general manager of AngloGold Ashanti Ltd.'s (AU,
ANG.JO) Cerro Vanguardia gold mine in Santa Cruz Province. The next
step would be to cut costs, but nobody wants to start laying people
off, Mr. Palmes said.
Most economists think annual inflation has been at or above 20%
for the past three years as the central bank keeps interest rates
low and expands the money supply to finance the government. Wages
alone rose almost 25% on the year in March, according to the
government.
Salaries aren't the only source of cost pressure. Miners have to
exchange the U.S. dollars they get from exports into pesos on
Argentina's regulated currency market at a rate that is 40% less
than what the greenback fetches on the black market.
But many of the services that mining companies use are priced at
the black market dollar rate, said Ricardo Alonso, a lawmaker who
heads the Mining, Transportation and Communications Committee in
Salta Province's lower house.
Years of high inflation have made Argentina one of the most
expensive countries for mining, said Christopher Ecclestone,
principal and mining strategist at financial advisors Hallgarten
& Co.
Some companies are cancelling projects. In December, Pan
American Silver Corp. (PAAS, PAA.T) shelved work on its Navidad
silver mine in Chubut Province, saying inflation and proposed tax
increases would make the project unviable.
Brazil's Vale SA (VALE) recently stopped work on its Rio
Colorado potash mine in Mendoza Province after already spending
$2.23 billion. The Argentine government said the company told it
the mine's $5.9 billion price tag had nearly doubled.
The future of Barrick Gold Corp's (ABX) massive Pascua Lama gold
and silver mine that straddles the Argentina-Chile boarder is also
up in the air.
In April, a Chilean court suspended construction due to alleged
pollution. Work continues in Argentina, although the Argentine
Supreme Court is considering a case on the constitutionality of a
glacier-protection law that could derail the mine.
Barrick so far has spent about $4.8 billion on Pascua Lama,
which has been plagued by overruns. In February, the company
announced a cost increase of $500 million, bringing the total price
tag to finish the mine to $8.5 billion.
Barrick said in its first quarter earnings report that it's
evaluating different options for Pascua Lama, including suspending
construction. A company spokesman said that Barrick wants to finish
Pascua Lama.
Government limits on the repatriation of dividends and profits
has sent a shudder through the sector. Canada's McEwen Mining Inc.
(MUX, MUX.T) is considering the sale of its Los Azules copper
project to fund construction of the El Gallo gold mine in Mexico
due to those restrictions. McEwen had planned to use the profits
from its Argentina mine to build El Gallo.
The government has authorized Cerro Vanguardia to remit $1
million dollars a day back, but sometimes that tap is slammed shut,
Mr. Palmes said. Cerro Vanguardia has repatriated about $75 million
of the $100 million it made in profits in 2011. The company hopes
to start sending $100 million in last year's profits back to
headquarters soon, he added.
Legal uncertainty also looms large in investors' minds. Last
year, President Cristina Kirchner nationalized Argentina's top oil
company YPF SA (YPF) without offering compensation to its former
controlling shareholder.
More recently, the Kirchner-controlled Congress passed
controversial legislation that severely limits the ability of
judges to issue injunctions against government acts. Those
injunctions are frequently the only legal protection that mining
companies have, said Carlos Frias, attorney and former mining under
secretary.
Meanwhile, cash-strapped provincial governments like Santa Cruz
are pushing to increase taxes and expropriate stakes in mining
companies.
"The higher taxes will make projects unfeasible," Mr. Palmes
said. "The numbers don't add up."
Write to Shane Romig at shane.romig@dowjones.com
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