Editorial: Fleece Navidad

At the halfway mark of the year, the political difficulties are starting to pile up for North American and European explorers and miners operating in several Latin American countries.

But front and centre these days is Argentina, with its rich mineral potential and famously topsy-turvy politics at both the provincial and national levels. The latest setback is the push by Chubut Governor Martin Buzzi to overhaul the regulations for new petroleum and mining projects in the oil-rich province.

“Nice little resource project you have there — it would be a shame if anything were to happen to it,” is the broad message the governor is now giving to resource developers in the province.

More specifically, his administration is proposing several new burdens for mining and petroleum companies: adding a 5% net smelter return royalty (NSR) to be paid to the province, in addition to the province’s existing 3% NSR; a new tax of no less than 4% of total sales payable to the provincially owned company Petrominera; and a new requirement for Petrominera to receive a 7% direct carried net pre-tax profit interest.

Pan American Silver, which has been developing its world-class Navidad silver deposit in Chubut, notes that these new proposals are in addition to an existing 10% export duty payable on the sale of concentrates and Argentina’s 35% federal income tax.

As many Argo-skeptics stood on the sidelines, Pan American cast a major vote of confidence in Argentina in late 2009 by buying Aquiline Resources and its Navidad deposit in an all-share deal valued at $626 million.

It was a daring, counterintuitive move reminiscent of Kinross Gold going against the current and snapping up Bema Gold and its Kupol project in Russia’s dodgy Far East, and buying Aurelian Resources and its Fruta del Norte deposit in Ecuador during a wave of anti-mining sentiment there. (The Kupol deal was clearly savvy in hindsight, though the jury is still out on the wisdom of these other two high-stakes deals.)

The Chubut governor’s proposals will go before a parliamentary sub-committee for possible modification, and then be presented to the full legislature for debate and a vote.

One bit of cold comfort is that the draft law allows for the open-pit mining of the Navidad project, a mining method that is increasingly shunned in the more agriculturally oriented parts of South America.

Pan American isn’t hiding its deep dissatisfaction with the sudden turn of events, saying that the “proposed legislation, when coupled with the current inflationary environment in Argentina, indicates that the increased provincial participation will render the Navidad project uneconomic at any reasonable estimate of long-term silver prices.” As such, if the legislation is passed with few modifications, Pan American says it will have “no other reasonable option but to suspend further investment in Navidad.”

Pan American Silver president Geoff Burns sums it up as an “incredibly unfortunate development” for the mining industry in Chubut and Argentina.

Investors clearly agree with Burns’s assessment, and carved the value of the Navidad project out of Pan American’s market capitalization. Pan American shares have dropped $2 to $17 since the news of the possible legislative change broke on June 20, with $300 million in market value vanishing. The simultaneous US$2-per-oz. retreat in silver prices didn’t help, either.

The wider economic view of Argentina is also daunting, as miners grapple with obtaining supplies, paying employees and exporting mineral product in a monetary environment that teeters on the verge of hyperinflation.

In late June, Argentina’s biggest unions carried out their first nationwide strike to protest rising wages — intended to keep up with 24% inflation rates — that are putting ordinary workers into higher tax brackets. With no fiscal room to manoeuvre, the left-leaning government can only rebuff the union’s demands to bend on tax margins.

The Argentine government has been blocked from international credit markets since the country’s bond default in 2001, so instead it resorts to import restrictions and fiddling with the foreign currency markets to halt capital flight and bolster central bank reserves.

The Argentine government has also stepped up the rhetoric about taking back the Falkland Islands from the British, and there are concerns the Argentine Olympic team will use the games in London as a platform to bash the host country. The age-old Falklands dispute has taken on greater urgency in light of major oil discoveries made in April by British oil explorer Borders and Southern off the islands’ southern coast, and two years ago by Britain’s Rockhopper to the north of the islands.


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