Argentina's improved business environment spurs mining investment

Recent efforts should see Argentina catch up to its regional neighbours in terms of mining investment. During the commodity boom that lasted through the 2000s, Argentina’s Latin American neighbours reaped the benefits of their primary industries. Chile’s stateowned copper mining company generated $6.9bn in direct revenue for the government in 2011; Brazil produced 346m tonnes of iron ore; Peru became the one of the top-five global producers of copper, silver and gold; and Colombia, a country with little mining history, saw hundreds of junior mining companies invest in exploration activities. Argentina, however, remained largely apart from the expansion, despite having significant mineral deposits. Political disagreements between federal and provincial governments and the lack of judicial security discouraged many foreign miners from investing in the country.

That image is beginning to change, however. In June 2017 the new Federal Mining Agreement saw 20 of the country’s 23 provinces agree to a 3% cap on royalties charged by provincial governments and an additional 1.5% royalty charge to be set aside for developing infrastructure for the industry (see analysis). The Ministry of Energy and Mining (Ministerio de Energía y Minería, MINEM) has also stepped up efforts to promote the sector’s dormant potential.

“The aim is not for Argentina to become a mining country, but rather a country with mining,” Daniel Meilán, the former national mining undersecretary, told OBG. “The economy will continue to focus on the agricultural and industrial sectors, but the renewed focus on mining could see it become an important activity for some regions. Ultimately, we would like to see it account for 4% of GDP,” he added.

PRODUCTION

In 2016 the mining sector contributed 1% of Argentina’s GDP, or around $5.9bn, according to the latest figures from MINEM. Of this total, 40% came from the sale of industrial rocks and minerals containing calcium, salt and dolomite. The main export destinations are Argentina’s southern cone neighbours, with Chile accounting for 68% of exports, followed by Brazil (19%) and Uruguay (6%). In terms of non-industrial minerals, there are 14 mines in operation, comprising mostly precious metals operations in the southern provinces of San Juan and Santa Cruz, and lithium and boron mines in the northern province of Salta. MINEM does not keep statistics of national production of these minerals.

Nearly two-thirds of the area in Argentina with mining potential remain unstaked, leaving investment opportunities in a number of provinces. MINEM identified six key regions with particular opportunities: Santa Cruz, Río Negro and Chubut, Neuquén, Mendoza and San Juan, La Rioja and Catamarca, and Salta and Jujuy. While private sector spending on exploration more than doubled from $140m in 2016 to $300m in 2017, MINEM expects that around $400m of annual investment will be required to fully explore these six mining regions in the coming years. “Argentina has appeared on the radar of global investors, and a number of companies have begun exploring,” said Meilán. “We have over 750,000 sq km of land, and only 15% of that is under concession. The advantage is that the mining industry in Argentina is just at the beginning stages; however, those projects in isolated areas will require great deal of investment in infrastructure.”

Gold

Argentina holds recoverable reserves of around 61.7 tonnes of gold in several highly prospective mines, according to MINEM. The ownership of the Veladero gold mine in San Juan province is evenly split between Canadian mining firm Barrick Gold and China’s Shandong Gold Group, which purchased a 50% stake in April 2017 for $916m. In 2017 the mine produced 432,000 oz of gold and has a further 2.8m oz in proven and probable reserves. Canada’s Yamana Gold owns the Gualcamayo mine, which produced 154,000 oz in 2017. One of the country’s newest mines is the Cerro Negro in Santa Cruz province. Owned by Goldcorp, it made its first pour in July 2014 and has since ramped up production to reach 452,000 oz in 2017, with a highly competitive all-in cost of $684 per ounce. South African firm AngloGold Ashanti’s Cerro Vanguardia mine, also in Santa Cruz, hit a 17-year peak in production in 2016, extracting 281,000 oz of gold.

In early 2018 there were 20 gold and silver projects in the advanced development stage. The three largest were Yamana Gold’s Agua Rica mine, which required a capital expenditure (capex) of $2.22bn; Barrick’s Lama project requiring $1.2bn; and South African firm Sibanye Gold’s El Alta mine which initially cost $1.5bn.

Rocky Start

While the country has also opened up to junior mining companies, many smaller projects at the development stage were affected by lower global gold prices from 2012 to 2016. According to a March 2018 MINEM presentation at the annual Prospectors and Developers Association of Canada conference in Toronto, the country needs a total of $2.7bn of capex to bring its current batch of gold projects on-line by 2025, and a further $1.29bn for silver. “In recent years it has been difficult to push forward with large capex projects anywhere in the world,” said Meilán. “Things are starting to improve, however, and now the priority lies with seeing which projects can be put into development. Porphyry projects, for example, require huge investments and could be harder to finance.”

However, recent increases in the value of gold, which saw prices rise by 9.1% and 13.6% in 2016 and 2017, respectively, have encouraged renewed interest in exploration for an increasing number of junior mining companies. Through local subsidiaries, the UK’s Patagonia Gold holds mineral rights on over 220 properties in Argentina and Chile, with a particular focus on Santa Cruz’s highly prospective Deseado Massif area. In March 2016 Australian junior firm Austral Gold announced that it would acquire 70% of the Casposo gold and silver mine in San Juan province from Troy Resources. The firm also acquired the Pinguino development project and over 336,000 ha of exploration titles in Santa Cruz through the August 2016 acquisition of Canadian firm Argentex Mining.

Copper

While precious metals are highly lucrative, the success of the Chilean mining industry suggests that the long-term future of Argentine mining could be in copper. The red metal is vital to global industrial production, and its mines usually attract far larger infrastructure investments than do gold projects.

Between 2000 and 2016 Chile commissioned 12 new copper mines with a total investment of $23.8bn, while Peru attracted $18.8bn in capex to open eight new mines. Both countries benefitted from a copper price that all but quadrupled from $2.42 per kg in 2009 to $8.8 per kg in 2011. Over the same period, no new copper mines were opened in Argentina.

However, the current administration, under the pro-market administration of President Maurcio Macri, has provided renewed momentum for the development of the country’s latent copper resources. The Federal Mining Agreement and the elimination of export taxes for minerals provided the improved judicial and fiscal stability needed to proceed with 10 projects with a combined total capex of $15.6bn.

Four of these projects stand out for their size. The Los Azules project, owned by Canada’s McEwen Mining has indicated resources of 4.63bn kg of copper in addition to 55.7m oz of silver and 1.7m oz of gold. A preliminary economic assessment of the project forecast 188.2m kg of annual copper production for the first 10 years, placing it in the world’s top-25 largest copper mines. Two other projects, each with estimated capex of over $3bn, remained in the permitting stage at the time of publishing. In Salta province, First Quantum Minerals’ Taca Taca project was investigating power and water options, while in San Juan the Pachón project, owned by Switzerland-based mining giant Glencore, was continuing with its environmental and impact assessments. Also in San Juan, NGEx Resources are developing the Josemaría project just 10 km away from their existing Los Helados copper project in Chile.

The scale of Argentina’s undeveloped copper projects means that production costs can be kept low. A comparative study by MINEM shows that copper production at Argentine projects typically costs less than $3.30 per kg, compared to between $4.40 and $6.60 for Peruvian and Chilean projects. Global copper prices, which, having dipped below $2.20 per kg in 2016, have since recovered strongly, holding above the $6.60 line in late 2017 and early 2018. Such prices, if they hold steady, should guarantee strong margins for the development of the domestic copper industry.

Other Minerals

While precious metals and copper projects – along with lithium (see analysis) – are expected to be the focus of investment in the coming years, Argentina has a rich diversity of minerals to exploit now that business conditions are improving.

Brazilian mining giant Vale announced in January 2017 that it had hired consultants for a new feasibility study on its Rio Colorado potash project in Mendoza province. The project was previously shelved in 2013 on the back of falling prices for the fertiliser component and fears of potential nationalisation of the mining industry under the previous government of President Cristina Fernández de Kirchner.

Uranium deposits, which could be used as the raw material for domestic nuclear power generation, also pose a potential new investment opportunity as additional nuclear energy projects are developed. In the second half of 2018 construction will begin on two modern reactors at a cost of $13bn over 10 years. Three nuclear reactors are already in operation in Argentina, with a combined capacity of 1600 MW, supplying about 5% of the country’s power demand.

At present, all uranium is imported, but the Río Negro region has become the focus of exploration work with a number of ongoing projects. In March 2018 Vancouver-headquartered Blue Sky Uranium announced an initial resource estimate from its Amarillo Grande project. An inferred resource of over 8.6m kg of uranium was announced, with the possibility for expansion along a 140-km geological trend. Shortly before the announcement, the company’s CEO Niko Cacos told Canadian media that a preliminary economic assessment would follow six months after the resource estimate, and that the size of the resource was likely to grow.

Meanwhile, in January 2018 a memorandum of understanding was signed between Russia and Argentina on uranium exploration and mining. A consortium of government and private companies will invest $250m in the project, creating 500 new jobs.

The Way Ahead

Despite the recognised potential of its mineral deposits, the industry still faces challenges, many of them stemming from the lack of experience in formal mining in many regions. Labour issues also remain a challenge for investors. “We have a problem with coordination between unions,” said Meilán. “Some unions do not respect the declarations and frameworks of others, and given that the mining union is small, it is often overlooked by wider union movement and this generates conflicts.”

There is also opposition to mining projects in certain regions based primarily on the expected impact on the environment. In recognition of this, in June 2018 three memoranda of understanding – one of which directly addressed the mining industry – were signed by Jim Carr, Canada’s minister of natural resources, and Juan José Aranguren, Argentina’s minister of energy and mines, to combine their countries’ expertise to mitigate the environmental impacts of certain industries.

Another criticism is that large mining companies do not focus enough on creating local job opportunities. The mining industry creates relatively few direct jobs compared to the huge initial capital investments required; however, many indirect jobs are produced in the provision of services and equipment to miners. The Federal Mining Agreement, for example, is expected to help create 125,000 new jobs in the coming years as mines open up and expand capacity.

The challenge for the sector will be to ensure that foreign firms working in drilling, lab analysis, mine design and engineering services have the surrounding conditions and human talent available to establish local offices and provide local jobs. “We are working to establish the priorities of local communities in mining regions,” Melián said. “If we put too much of an emphasis on local content provision, however, the sector could suffer in terms of competitiveness.”

Outlook

The Argentinian mining sector has experienced false starts before. While Chile grew its mining industry to represent 14% of GDP form the late 20th century to today, Argentina lacked the political environment required to encourage major mining firms to provide in the necessary funds. Even after the positive news of the June 2017 mining agreement, many investors remained on the sidelines, concerned that President Macri’s pro-market administration would be a one-term anomaly. But the success of the ruling Cambiemos party in the October mid-term elections has altered that perspective and there is increased confidence in the long-term prospects of the industry.