argentina poised to bounce back. mining journal. aug2015
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4/27/2016 Argentina poised to bounce back. Mining Journal. August 2015 Synergy Resource Capital
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Argentina poised to bounce back. Mining Journal. August 2015
December 23, 2015 | Articles,Latin American Mining,Synergy in the news | 0 Comment
In this article, Paola Rojas, Business Development Director of Synergy, was interviewed about mining in Argentina.
Argentina poised to bounce back
by Paul Harris August 4, 2015
Argentina is poised for a rebound in mining and exploration activity following the October presidential election, with the leading candidates expected
Argentina’s Macri steps on the gas. TheNorthern Miner. March 2016 In this article, Paola Rojas,Business Development Director ofSynergy, was interviewed among severalother experts about the new businessenvironment in Argentina, followingMauricio Macri being elected as President.
4/27/2016 Argentina poised to bounce back. Mining Journal. August 2015 Synergy Resource Capital
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to usher in policies that will be more positive for business and lead to a resumption of the mining boom the country experienced at the start of thedecade.
Goldcorp declared commercial production at its Cerro Negro operation in January this year
Economically speaking, Argentina has been through the mill since the turn of the millennium and is still living with the repercussions of its 2001 bonddefault that saw the government again default on its debt in July 2014 after a legal battle with some creditors – which the government labels vulturefunds – who declined to join its debt restructure.
President Cristina Fernández de Kirchner would not negotiate with the creditors who rejected Argentina’s efforts to renegotiate its debt after the 2001default, which saw them go to the courts in the US and win the right to repayment.
With reduced access to international funding, general economic conditions in Argentine have steadily deteriorated leading the president to implementemergency measures that began in October 2011 and have included currency controls and restrictions on the repatriation of profits.
These have hurt the mining industry and foreign investment in general due to the difficulty of taking dividends out of the country and the impact ofdoubledigit inflation and the emergence of a parallel dollar market, called the blue dollar, which is roughly 30% weaker than the official dollarpesoexchange rate that companies have to use.
The president is from Santa Cruz, a province that has benefited from mining, yet despite her understanding of the conditions that mining requires to besuccessful, she had to adapt state policy to the expediencies of the moment as the country’s economic situation deteriorated.
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“The mining industry had a relatively good relationship with the Nestor and Cristina governments until the end of Cristina’s first term in 2011,”Thomaz Favaro, senior analyst at Control Risks, told Mining Journal. “Then we saw a series of changes in the rules of the game that affected theprofitability of the sector.”
“In no way were these measures aimed at the sector, but mining companies became as trapped as other entities – locally owned firms andindividuals – as outflows of capital was severely restricted,” Paola Rojas of Synergy Resource Capital told Mining Journal.
Martin Dedeu of Argentina’s mining chamber CAEM said:“On top of the external problems [the fall in commodity prices], there have been internalissues in Argentina from political decisions adopted in the country that have been negative for investment in general in the country, such as thedifficulty [in] being able to repatriate dividends and profits, the exchange rate and increases in internal costs that have made it complicated to importand export.”
However, he was quick to point out “this is not exclusive to the mining sector”.
Other government efforts to shore up the economy and its finances have included a return to the import substation methodology that was typical of theLatin American Structuralism period from 19501980.
Import control measures were implemented in May 2012 and mean that miners have to get prior approval for overseas purchases and submit importplans 120 days in advance. Restricted licences for imports make it harder for companies to obtain raw materials and equipment and they face amandatory requirement to replace supplies from international purveyors with locally sourced materials.
Minister of Industry, Debora Giorgi, worked with miners and small and mediumsized companies on a validated list of products made incountry tosupply to miners in Argentina. This included safety glasses, springs, flexible metal pipes and ear protection, among other things.
“Companies had to negotiate on a casebycase basis their plans with the government to substitute their imports of supplies and equipment with thosemade locally. However, it is not that easy to find a local equivalent of many mining inputs with the same quality and price levels,” said Favaro.
Whilst economic measures have not targeted mining specifically, they have had a dramatic impact and mining activity in the country has decreasedsignificantly.
Mining investment peaked at just shy of US$4 billion in 2012 and 2013 before plummeting to just over $2 billion in 2014 and the forecast $1.7billion this year, according to Synergy Resource Capital. However, Argentina still has about 20 large mines in operation and some 3040active firms, according to Rojas, and a similar number on a care and maintenance.
Resilience
Despite the headlines of economic doom and gloom, Argentina’s economy has been quite resilient, indeed, growth in Argentina’s stock marketoutstripped that of the S&P500, Canadian TSX and several Latin American markets in the first half of this year.
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This in turn, and the expectation of a change in government policy, is starting to produce a change in investor perceptions of the country andinvestment is starting to flow again. In May, JP Morgan Chase & Co said it would make Buenos Aires its regional hub and triple its staff there inanticipation of a more stable monetary outlook.
Investor sentiment towards Argentina’s mining sector is also turning. “There has been the perception in the capital markets in recent years thatArgentina is high risk and the pools of capital do not invest there,” John Kanellistas of Lithium Americas told Mining Journal.
“That view has now changed for the better. We have seen for the first time in years large and sophisticated pools of capital looking to invest hereanticipating the change.”
“We started observing interest in Argentina increase 1824 months ago and people are now less frightened by it as a jurisdiction,” John DeCooman,VP corporate development at Silver Standard told Mining Journal. “People anticipate that the next president will be more market friendly.”
“A year ago, only a handful of investors would even discuss the country,” said Rojas. “Now we are getting many more inquiries. People wantto know what is happening, what the candidate’s policies are, and what their stance on business, foreign investment and mining is. They arelooking for advanced opportunities at reasonable discounts to prior valuations.”
It is not just international investor sentiment that is changing towards Argentina. Local investors are also seeing opportunities. Theperformance of Argentina’s economy is perhaps one reason why miners facing capital access issues have started to tap into local investors,says Rojas. “The majority of the top 10 wealthiest Argentinean groups have become involved in mining and we think this trend willcontinue,” she said.
Election
The October presidential election has developed into a twohorse race between the favourite Daniel Scioli, of Fernández’s Frente Para La Victoriaparty and the current governor of Buenos Aires province, and Buenos Aires mayor Mauricio Macri of the PRO party.
Sergio Massa of the Frente Renovador party, a former cabinet chief under Fernandez de Kirchner, is now an outside possibility. Most agree thoughthat all three candidates would bode well for the country’s mining sector.
“The three presidential candidates with the best possibilities have the mining sector as one of the substantial themes for the development of thecountry in the next few years,” said CAEM’s Dedeu. “All support sustainable mining and have it clear that mining is an important and transcendentactivity for the country.”
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Cristina Fernandez de Kirchner’s government has fallen out of favour with miners
“There is general consensus in Argentina on the importance of mining as an economic engine for the future of the country,” Michael Harvey, regionaldirector of corporate affairs at Goldcorp, told Mining Journal.
Scioli is Fernández’s favoured candidate, and he is running with Carlos Zannini, picked by the president herself. Scioli recently gave an indication ofwhat the mining sector can expect should he become president when he spoke at a press conference at the International Conference for Mining andSustainable Development, which took place in San Juan in July.
Scioli said: “Mining is capable of generating $30 billion (of economic activity in Argentina) in the next four years, as well as hundreds of jobs,”telling delegates that, “If I am made president, I will create a great development so that the millions of dollars that this activity attracts, as well as thegreat number of jobs it generates, arrive in Argentina”.
He also provided reassurance to the sector by stating that, “our objective is to bring certainty, security, calm and prevision to business executives, thatin Argentina they will have the necessary conditions to develop a sustainable mining industry”.
Adding weight to Scioli’s mining credentials is the fact that he appeared at the press conference flanked by a who’s who of Argentina’s provincialmining authorities, including San Juan’s retiring ultrapromining governor Jose Luis Gioja, as well as incumbent or governors elect of miningprovinces Jujuy (Eduardo Fellner), Mendoza (Francisco Pérez), Catamarca (Lucía Corpacci), La Rioja (Luis Beder Herrera and Sergio Casas),Neuquén, (Jorge Sapag), Río Negro (Alberto Weretilneck) and Tierra del Fuego (Rosana Bertone).
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Whichever candidate wins, there is a broadbased expectation that with the change of government will benefit mining and the legal framework withinwhich it is developed. What is more open for debate is what the pace of that change will be.
“We are confident that the new administration will be friendlier towards business in general than the current administration. We are more cautious onthe pace of policy change however and think there will be a gradual phasing of new policies,” said Control Risk’s Favaro.
However, as natural resource blog Inca Kola News points out, the “substance [of the message] is no different to that of the current Fernández deKirchner administration and we’ve seen how ineffective the national promining policies are when they hit the barrier of regional provincial issues,politics and laws”.
“Regions will unblock Argentina’s mining sector, not the national administration.”
Provincial issues
In terms of legislative changes, CAEM’s Dedeu says that perhaps the most important initiative for all the country’s mining provinces will be thereactivation of the federal mining agreement of 1993 which led to the first mining boom.
Mining provinces are organised under the Organización Federal de Estados Mineras (OFEMI) that includes Jujuy, Salta, Catamarca, La Rioja, SanJuan, Santa Cruz, Mendoza, Rio Negro, Chubut and Neuquén provinces.
Dedeu believes more uniform laws are required in the provinces to enable Argentina to become the mining powerhouse that it has so much promise tobe. That possibility has been harmed as governors in some provinces have passed legislation restricting mining activity.
“It is not easy to attract investors to Argentina when they have to take into account different regulations in different provinces,” said Dedeu. “InArgentina, the constitution says that the natural resources are owned by the provinces, not the state. As a federal country, this means that the rules arenot the same in all provinces. Therefore there is a need to update this treaty so that there are similar general rules in each mining province. I am veryoptimistic that whoever wins the election will take this initiative forward and develop a favourable climate for investment in the sector.”
As Inca Kola News has said, the provincial government role in mining matters cannot be underestimated. Some mining provinces that have otherimportant land use industries such as wineries and adventure – and ecotourism – have been successful in prohibiting open pit mining and the use ofcyanide. The power of provincial authorities means that developing good relations with them is more important than with the national government.
“Argentina is such a complex business environment that local knowledge, whilst mandatory in all markets, is much more necessary in Argentina ascompanies are forced to navigate a range of regulatory burdens and restrictions on their day to day operations,” said Control Risk’s Favaro.
“There are not many other countries that present similar challenges to mining companies. We advise all companies in all jurisdictions to establishgood relations with local government but this is even more important in Argentina.”
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A key reason why provincial authorities seek to create their own rules and regulations rather than relying on central government is the lack ofindependence among the regulatory bodies which enforce regulation, ultimately resulting in a lack of public trust in their decisions.
“The environmental watchdogs are weak and therefore the population does not trust their approvals, which fosters social unrest to demand betterenvironmental standards,” said Favero. “The judiciary in Argentina has serious concerns about its independence from government which is moreacute at local level, especially in provinces where a single party has ruled for many years such as in Neuquén province.”
Mineral potential
What is in no doubt is that Argentina still has enormous mineral potential and its mining industry is relatively undeveloped compared with regionalpeers Chile and Peru.
Prior to the recent economic downturn, Argentina’s mining sector had been successful in attracting significant mining investment and it has severalprojects ready to go into development.
Argentina’s mining minister Jorge Mayoral clearly believes the change of president will be positive for the sector and he looks forward to better days.Earlier this year he forecast mining investment of US$15 billion from 20162018.
There is also evidence that Argentina’s project pipeline, frozen for a number of years, is starting to unthaw. In February, Yamana Gold announced itsplans to invest $398 million in its Cerro Moro gold and silver project in Santa Cruz province. This followed Goldcorp declaring commercialproduction in January at its Cerro Negro operation, also in Santa Cruz.
“This is a young orebody and we see additional reserve growth potential at Cerro Negro,” said Goldcorp’s Harvey. “Cerro Negro remains a very solidproject and will be a long term cornerstone mine for Goldcorp.”
Other development projects include Yamana’s Agua Rica project; First Quantum Minerals’s Taca Taca project; Glencore’s El Pachón project andGoldrock Mines’s Lindero gold project.
Of course, there is also Vale’s halfbuilt Rio Colorado potash project in Mendoza province. The project is about 45% complete and has alreadyreceived some $2.2 billion investment from the company including a potash mine, 800km of new and upgraded railway and a potashloading terminalat Bahia Blanca, southwest of Buenos Aires. With potential to produce 4.3 million tonnes per year of potash, Vale is looking for a buyer for it.
Where new projects will come from is more uncertain as exploration activity in Argentina has dried up due to the combination of government issuesand a distinct lack of exploration funding. However, the country’s incredible mineral potential means it is starting to attract new faces again. “Thereare plenty of players who are now looking at opportunities,” said Rojas.
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