Mauricio Macri’s surprise 2015 presidential victory raised hopes in Argentina’s mining sector. After all things couldn’t get much worse. Under his predecessor Cristina Kirchner mining had been hit by a 5% export tax imposed in 2010, lost out from the artificial exchange rate, faced constant legal battles with activists and suffered from the lack of transport infrastructure needed to develop projects in remote locations. As a result, miners already in the country battened down the hatches and froze investment while international players looked to Chile and Peru instead. Indeed, according to the Argentinian Ministry of Energy and Mines, from 2007-2015, just $10.5billion was invested in Argentine mining, compared to $80.5billion in Chile and $52billion in Peru.
Yet the sector has huge potential. According to the Argentina Chamber of Mining Companies, just 15% of the country’s mineral deposits have been exploited. Think of it another way: Argentina and Chile both share the same section of the mineral-rich Andes mountain chain but 2014 Argentina produced just 200,000 tonnes of copper, while Chile produced 6 million.
Tax cuts and infrastructure investment
Macri set out to re-invigorate mining investment by working on two fronts – tax cuts and infrastructure investment. He ditched trade and currency controls, most notably Cristina Kirchner’s 5% tax on mining exports, and set out to harmonise the provincial tax systems. Consultancy, Deloitte, estimates that removing export duties will cut costs for companies by 8%, and lead to a 5% sales increase. The government will lose around $223million in revenues after the removal of these duties, which it hopes will be outweighed by the positive impact of extra investment.
“Macri set out to re-invigorate mining investment by working on two fronts – tax cuts and infrastructure investment. …”
In June 2017 Macri passed a law that unified mining and regulations between 20 provinces and the government. It set a 3% ceiling for royalty payments from companies to provinces, but allowed a levy of up to a 1.5% tax on mining sales if the funds are then directed into infrastructure projects. The reason for the infrastructure focus is that the lack of connectivity between key mineral deposits and ports was a barrier to mining investment. Macri earmarked $33billion of federal funds for transport investment, particularly to connect isolated lithium rich deposits in Salta and Jujuy to Chile so that it can be exported via the Pacific to China.
It’s still early days, but Macri’s reforms are beginning to bear fruit. In the wake of scrapping export taxes in 2016, four companies that were planning to close operations decided to continue production. Bajo La Alumbrera, the country’s largest open-pit operation, which directly employs 1,500 people, pledged to keep operating until December 2018. Fortuna Silver (CVE:RAK) bought its Lindero gold project in Salta province, in the wake of Macri’s election victory, a clear sign of changing sentiment. It expects to spend $239 million in capital costs to bring production online in 2019. Yamana Gold’s (TSE:YRI) Cerro Morro gold and silver mine in Santa Cruz province is expected to begin production in early 2018, after deciding to continue with investment after Macri was elected.
Investment is also beginning to build up a pipeline of new projects. Goldcorp (TSE:G) is spending $125million on exploration in its flagship Cerro Negro project, which came online in 2014. Glencore (LON:GLEN) has restarted studies at its El Pachón copper mine, whilst Barrick Gold (BCBA: ABX) which has begun a pre-feasibility study for the Argentina side of is Pascua Lama project on the Chilean border. Undersecretary of Mining Development Mario Capello estimates exploration spending came in at around $200million in 2017, with contributions from 40 companies, which bodes well for the development of future projects.
The lithium mining sector stands out in Argentina for its potential, and investor interest. Positioned in the lithium triangle, along with Chile and Bolivia, Argentina is home to around 65% of global reserves of ‘white petrol’. Projected global demand for the metal is set to jump as the increased use of electric vehicles means more lithium batteries are made. The Ministry of Energy and Mines forecasts Argentine lithium production will reach 145,000 tonnes in 2022, from 29,000 tonnes produced in 2016. Currently Argentina has two producing lithium operations: Sales de Jujuy, a joint venture between the Jujuy provincial government and Japanese outfit Toyota Tsusho Corporation, and FMC’s Fenix operation, which began production in 1997. New investment in the sector will drive the growth. Production rose 60% in 2016, and investment surged to $1.5billion in 2016, indicating that the government’s optimism is well warranted.
The most exciting prospect is a joint venture between Lithium Americas Corp (TSE:LAC) and SQM (NYSE:SQM), a Chilean mining company with experience in the lithium sector. They are developing the $425million Caucharí-Olaroz project in Jujuy province that will begin producing in 2020. The partners met with Macri’s government in June 2017 to discuss the project, and have openly praised his reforms. It will be the third-largest lithium project in Latin America, and the largest in Argentina, producing 50,000 tonnes per annum for 40 years. Other standout projects are Galaxy Resources’ (ASX:GXY) Sal de Vida which could produce 25,000 tonnes a year, as well as French miner Eramet’s (EPA:ERA) 50,000 tonne venture with Canada’s Enirgi Group and Australia’s ADY Resources (ASX:ADY).
According to the Ministry of Energy and Mines, there are 30 proposals to develop lithium reserves, as well as three companies looking to build processing plants. It all bodes well for Argentina’s mining sector, says Gavin Montgomery, Director, Metals, at energy and mining consultant Wood Mackenzie.
LatAm’s brightest star?
Macri’s reforms and the investment surge suggest that Argentina is on track to become a major mining player in Latin America. It’s always had the mineral resources and now finally it has a government that is willing to support the sector. But Argentina has also been helped by favourable global trends. The boom in lithium investment with the coming shift to electric vehicles is perfectly timed for Macri’s government. Meanwhile a general uptick in commodity prices in 2017 meant mining companies finally have money to spend after years of painful restructuring. Argentina’s name is derived from the Latin for silver – but in the coming years it looks set to rewards all types of miners.