17 February 2020

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Despite the uncertainties surrounding newly-elected President Alberto Fernández’ policies toward various business sectors, mining may be one area that may benefit. Before the election, he told representatives of 24 mining companies that he considered mining an opportunity. He also promised that the technical team of economist Guillermo Nielsen, a liberal economist and one of his key advisors, was working on a plan to guarantee clear rules for the natural resources sector over the next 10 years. (Fernández subsequently appointed Nielsen President of YPF, the national oil company.)

Argentina’s mining potential across various resources remains relatively untapped.  Both Argentina and Chile share the Cordillera mountain range, in which Chile has over 400 mines.  Most notable as a source of lithium, this area is also rich in copper, gold, iron, lead, molybdenum, silver and zinc.  There are opportunities for both large and small players.  Indeed, there has not been a significant mining project in the country since Glencore began the Alumbrera gold and copper mine.  There are opportunities to supply mining equipment, mining software, environmental related products and services, engineering services, and industry education and training.

Current projects are estimated to be worth almost US$29 billion according to Argentina’s Chamber of Mines.  In March 2019, Yamana Gold, Goldcorp (now Newmont Goldcorp) and Glencore announced potential joint development of Agua Rich gold and copper project in northwest Argentina.  It is estimated to have reserves of 4.5 million tonnes of copper and 6.5 million ounces of gold.  Exploration budgets grew by 92% to US$250 million during 2015-2018, while mining projects grew by 30%.  Argentina’s annual metals exports currently total US$4 billion.  Some of the world’s other large mining companies are already active are Barrick Gold, McEwen Mining and Hochschild Mining.  Meanwhile, China has been stepping up its commitment to the country’s mining sector.  Its investment in mining exploration and project construction was US$233 million in 2017 and US$244 million in 2018.  Much of China’s interest in the country is naturally focused on lithium, a key resource for batteries.

The Macri administration is credited with increasing foreign interest in Argentina’s mining potential through a series of pro-mining policies, including a federal mining agreement to standardize regulations and taxation, which has been agreed to by all but two of the country’s 23 provinces.  This was an important project since Argentina’s individual provinces have the legal right to regulate mining.  Macri initiatives also included ending a 5% metals export tax, rescinding a ban on overseas repatriation of profits and instituting VAT refunds.  Argentina’s 1993 Mining Investment Law is also considered competitive, thus enhancing the country’s attractiveness to foreign investment.

Lithium leads the sector, due to its high worldwide demand.  There are currently three lithium projects in production, producing 30,400 tonnes annually, while there are another 23 exploration projects moving forward.  The Inter-American Development Bank estimates that Argentina holds 13% of the world’s reserves, and Argentina is the world’s third largest lithium producer.  Within the Lithium Triangle (Bolivia – Chile – Argentina), Argentina has 25% of the reserves.  However, only two companies are actively mining in the country, and a third project will not begin for a year.  Attracting more investment is currently hindered due to the lower prices for the metal, which have dropped significantly from their record highs in mid-2018.

Although his actual policies remain uncertain, for many in the mining industry, the new administration does not represent a danger of Peronist opposition to foreign investment.  Mariano Lamothe, Undersecretary for Mining Development under Macri, believes that the infrastructure of reforms will withstand any possible hard return to populism.  As with oil & gas, mining represents a source of export revenue for the incoming Fernández administration which could bring the hard currencies that the country needs to tackle its huge debt problem long term.  It must resist the temptation to attempt short-term fixes through export taxes or currency restrictions that will scare off or burden the industry.  The potential influence of incoming Vice President Cristina Fernández de Kirchner on energy and mining policies, as well as on foreign investment overall, is still an open question.  But Fernández has already demonstrated the importance of mining by recently meeting with executives of companies currently active in the country.  On his first overseas trip, on 6 February Fernández also met in Paris with directors of a mining company interested in investing in Argentina.  A further indication of the importance of mining in generating hard currency is his compromise on increasing export taxes on mining production.

Many local communities continue to voice concerns over mining’s environmental impacts.  Greater national standardization of regulations also remains a challenge to providing the legal certainty investors seek.  We believe this scenario offers opportunities to companies that can provide solutions to reduce the negative environmental impacts of mining and thereby increase the acceptance of new projects by environmental groups and local communities.

Business Analysis

While we generally recommend a wait and see approach to investment in the country overall, we believe that the mining sector offers lower risk than other sectors due to the new president’s focus on the industry and its strong potential to benefit the country.  It offers particularly attractive opportunities for small and medium-sized companies at various levels.  Even though risk may be lower than for other sectors, uncertainly about the country’s overall policy direction and alternatives in other countries or regions that may offer less potential but also lower risk must still be considered.

 

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