Publish in Perspectives - Monday, April 15, 2013
The $6 billion Rio Colorado in Argentina. (Photo: Vale)
High inflation and tightening of capital, price and export controls are proving highly discouraging for miners.
BY CARLOS CAICEDO
On March 18, 2013, Brazilian mining firm Vale announced it was suspending its $6 billion Rio Colorado potash project in Mendoza province. The decision followed negotiations with Argentine authorities, which failed to secure an improved business environment. Vale said production costs had escalated due to taxation, lack of access to dollars and export duties on potassium chloride.
This highlights the difficulties currently faced by mining companies operating in Argentina. Marked deterioration in Argentina's macroeconomic environment (high inflation, rapid peso devaluation and capital flight), together with tightening of capital, price and export controls are proving highly discouraging for miners. The nationalization of oil company YPF last year led several companies to review investment plans in the country. Foreign miners are either calling off projects, as in the case of Vale, or postponing investment due to uncertainty over profit repatriation. The deteriorating business climate has prompted Lumina Copper to look for a buyer for its Taca Taca copper project in Salta province.
Operational conditions for mining companies in Argentina have deteriorated markedly over the last 12 months. Junior companies, for example, are concerned that despite Argentina's potential, they are struggling to secure interest from major mining multinationals in their projects. The situation is compounded by inflation of over 25 percent, which adds to production costs. Unions are very effective at securing wage settlements well above inflation levels. Already health workers and teachers are demanding 50 percent wage increases; this will likely impact on negotiations with mining workers. Regulatory challenges at regional level are also proving a major hurdle. Pan America's Navidad project, for example, has faced delays due to a ban on open-pit mining in Chubut province.
Last year mining attracted $5.5 billion in foreign direct investment (FDI). Mining Ministry officials have predicted that mining FDI would triple to about $16 billion by 2016. However, independent sources in the sector suggest this target is highly unlikely to be met, mostly because of increasing currency and regulatory risk. The risk the country could again default on its international debt, if a US court ruling ordering Argentina to pay bondholders who refused to accept the 2005 debt restructuring is upheld, adds to these concerns.
Carlos Caicedo is head of the Latin America division at Exclusive Analysis, a UK-based global risk consultancy recently acquired by IHS.
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