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Exclusive: Argentina mines minister interview

Argentina’s new government is serious. The government of president Mauricio Macri has shown it is righting the floundering economy that saw investors flee the country with increasing taxes snapping at their heels. Those days are past and the first steps of the new government are creating the impression the Cristina Fernandez de Kirchner years were nothing more than a hiatus. The message is clear: normal service has resumed.

MiningNews.Net
Exclusive: Argentina mines minister interview

The unsophisticated economic management of Fernandez de Kirchner brimmed with nationalistic fervour intertwined with leftist tenants that obfuscated issues and blinded the government to the development of realistic solutions. Her actions included the implementation of exchange rate controls, an export tax, failure to devalue the peso resulting in official and ‘black’ currency markets, and leading inflation well past double-digit levels.

But the monkey on Fernandez de Kirchner’s back was the holders of Argentina’s default bonds who refused to accept a restructure. Fernandez de Kirchner labelled these holders vulture funds and led the country to a New York court where a judge ruled Argentina cannot pay any debt anywhere until these bond holders had been paid off.

President Macri is cut from a different cloth: one of his first acts as president was to pay the bond holders and shed the anchor holding back investment, opening the door to issuing debt again. He then unwound other economic decisions of his predecessor such as restrictions on exports and foreign currency controls to create the conditions for investment to return.

“These measures will benefit all companies in Argentina, including mining companies. This is no small feat considering that the president does not have a majority,” Thomaz Favaro, associate director of global risk analysis, Brazil and Southern Cone, for Control Risks told Mining Journal.

“In the past six months, president Macri has delivered on his election promises and successfully delivered changes. He has also made an alliance with provincial governors as the provinces are highly dependent on fiscal transfers from central government that makes them more prone to support the administration,” he said.

The mining sector appreciates the changes.

“President Macri has set the tone from the top that Argentina is open to foreign investment and his administration understands that in order to attract that investment, you need to create a welcoming environment. It is a tough international environment to attract investment, and Argentina has made itself more competitive,” Michael Harvey, regional director of corporate affairs at Goldcorp, told Mining Journal.

Improvements to the macroeconomic panorama benefit mining, making Argentina a much more viable recipient for investment. Miners are also benefiting from the scrapping of an onerous law that forced them to source equipment and parts locally.

“This was a concern due to cost, availability and quality issues,” Andrew Kaip, managing director for mining research at BMO bank in Toronto, told Mining Journal.

“Some mining equipment can be sophisticated and there is no in-country supplier for items that miners need. Surrounding this was a healthy bureaucracy whereby if a company couldn’t source locally, it had to justify its rationale for importing equipment. This relief is quite significant.”

While the reforms have taken place quickly, there is still a feeling of “once bitten, twice shy” about the country.

“The industry understands that mining exposes you to a myriad of governments and in Argentina the devil may be in the details of the regional and national governments,” Rick Rule, CEO of Sprott US Holdings, told Mining Journal.

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“These measures will benefit all companies in Argentina, including mining companies. This is no small feat considering that the president does not have a majority”

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“The realisation by Macri is to recognise that with international investment it is necessary to provide for private as well as merely political rewards in the economy. This augers well for continued mining investment.”

This is perhaps why president Macri appointed industry veteran Daniel Melián as mining and energy minister. Since taking office, Melián has pounded the pavement of the world’s mining investment centres spreading the message that mining will be a big part of Argentina’s future.

“Our first action was to say we are going to change things which is easy to say but more difficult to do. Argentina had lost the confidence of investors and so my first actions were to go abroad and tell people what we are going to do and then show that it is being done,” he told Mining Journal.

Presenting at the Prospectors and Developers Association of Canada (PDAC) congress in Toronto in March, Melián reeled off the issues that left the sector in crisis: restriction on mining exports and taking money out of the country, a dearth of financing, provincial prohibitions, and a lack of clear mining policy or articulation with provincial authorities.

Following PDAC, Melián went with the country’s vice president to Japan, South Korea and Australia, and he has also visited Canada and Chile to mark out the new position of Argentina in the world. “The response was spectacular. I had meetings in large quantities as Argentina went from a deficit in people’s minds to something much more positive. They were very enthusiastic about Argentina because they believe in the changes,” he said.

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“I am the conductor of the orchestra but the provinces have to make the music. There are seven provinces that have implemented laws that obstruct mining in some way and we want to return to a situation where there are no restrictions in the main mining provinces”

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Provinces

Appointing an industry veteran like Melián has proved a shrewd choice given his prescience about the key item that needs fixing: re-establishing the federal/provincial relationship.

Under Argentina’s constitution, the provinces own the natural resources and the abandonment of a federal mining policy by the Kirchner’s saw several provinces pass restrictive legislation. Melián sees his key task as building bridges to remove such restrictions.

Provincial prohibitions apply throughout a province and fail to discriminate between areas where mining could or should be feasible and those where it isn’t. This can be summed up in the Chubut province paradox: communities rejected the development of Yamana Gold’s Esquel project but other zones of the province want mining, such as where Pan American Silver has its Navidad project. The provincial prohibition means both projects stopped, however.

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“We have to return to a federal mining agreement with the provinces like we had in the 1990s. In six months of work we have had four meetings with all the provinces and this is an exercise in re-establishing trust,” Melián said.

“I am the conductor of the orchestra but the provinces have to make the music. There are seven provinces that have implemented laws that obstruct mining in some way and we want to return to a situation where there are no restrictions in the main mining provinces.”

Sprott’s Rule would like to see the government improve the permitting process, much of which happens at provincial level. “It would be lovely if the central government exerted some leadership in permitting. My hope is that public opinion and the opinion of regional elites would allow for extractive industries to develop,” he said.

To do so, the mining ministry is working closely with its counterparts in the environment ministry, legislators and provincial governors to allow development of projects undertaken to a high standard.

Melián’s near-term goal is to arrive at a heads of agreement with the provinces in early 2017 to provide them with guarantees of the government’s seriousness in establishing a pathway for the provinces return to state policy based on responsibilities, commitments and benefits.

To this end, Macri’s relationship with the provinces has got off to a good start. Resolving the bond holdout issue gave Argentina access to international lending markets and it issued its first bond in 15 years in April, raising US$15 billion. “After the government settled the bond payments, pretty much its first measure was to issue a bond in international markets and many provinces quickly followed suit. There was a clear benefit for governors to cooperate with Macri to approve legislation,” said Control Risks’ Favaro.

Future growth

With attractive deposits of lithium, boron, silver, gold, copper, lead and zinc, among others, the government expects mining to become a powerhouse as it is in Chile, its western neighbour with whom it shares the Andes cordillera.

Industry body Camera Argentina de Empresarios Mineros (CAEM) has been quick to embrace the government message. CAEM 20/21 is a vision that sees investment of $20 billion through 2021 in the sector to create 40,000 jobs and 8,000 new supplier companies, and provide $6.5 billion in taxes.

A catalyst for increased mineral investment and exploitation could come from further development of the oil and gas sector. “Argentina has spectacular latent energy resource potential from shale in the Valle de Vaca Muerta which could be developed to the eventual benefit of the mining sector. This could attract huge capital expenditure and whet the appetite of other regions to use mining to develop their economies,” said Rule.

CAEM forecasts significant growth if commodity prices play ball with at least eight large projects at feasibility stage including Glencore’s Pachon copper-molybdenum project in San Juan and First Quantum’s Taca Taca copper-gold project in Salta.

The large projects of Barrick Gold at Pascua Lama and Vale’s potash asset in Mendoza are ready to build should economic, political and social conditions allow. At least seven projects follow at prefeasibility stage and over a dozen are at advanced exploration stage. Many projects are on the Argentina side of famous producing belts in Chile such as Maricunga, El Indio and Pelambres.

Yamana Gold was the first mover, perhaps sensing the changes to come and giving a green light to the development of the Cerro Moro gold-silver project in Santa Cruz in early 2015. Initial production is expected to begin in the June quarter of 2018 with annual production in the first three years expected to be 150,000 ounces of gold and 7.2 million ounces of silver. Yamana also wants to advance the Agua Rica copper, gold, silver and molybdenum deposit in Catamarca and signed a definitive agreement with the provincial government in March 2015 for cooperation on consolidating important mining projects.

Another early adopter of the ‘new’ Argentina is Fortuna Silver Mines, which announced the acquisition of Goldrock Mines and the Lindero openpit gold project in Salta that has a feasibility study and environmental permit to its name. Fortuna aims to bring Lindero into production by 2018 with potential production of about 26.5Moz per annum of silver equivalent.

Goldcorp is stepping up exploration around its Cerro Negro mine as a result of a change in policy. “The province of Santa Cruz has lifted the previous administration´s tax on reserves, which basically punished a company for exploring. This removes a strong negative incentive that used to be there,” said Harvey.

Sprott has also got in early through its 10% shareholding in prospect generator Mirasol Resources that has projects in the northwestern Puna and Santa Cruz provinces.

Silver Standard is hoping to continue operating in Argentina through a mine life extension at its Pirquitas mine. An option agreement with Golden Arrow Resources over its Chinchillas project could provide this.

John DeCooman, vice president of business development and strategy for Silver Standard, told Mining Journal: “Chinchillas is an important silver development asset and will be the single largest investment in our exploration portfolio at $7.5 million this year. This will include resource drilling, engineering and permitting with a view to enter production in 2017-2018.”

The potential of Argentina is attracting the world’s largest silver producer, Fresnillo. “Our largest exploration is in Mexico but we have also been in Peru for several years and will start soon in Chile and we are looking at Argentina. We want to have that mix. We recognise these countries have world-scale deposits,” CEO Octavio Alvidrez told Mining Journal.

While Argentina appears to have turned a corner and the listing ship of its economy is being righted, Macri still has one macroeconomic bogeyman to address: inflation. This will be the priority during the second half of the year and getting it under control will be key to many investors deploying capital once again.

*For real global mining investment and business insight, go to www.mining-journal.com

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