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Argentina: Macri plans latest reforms to regulations governing the mining sector

2017-06-14 Protection Group International Ltd Argentina: Macri plans latest reforms to regulations governing the mining sector
  • Argentina’s provinces are set to sign a federal mining agreement on 13 June to unify mining legislation and tackle major regulatory discrepancies between provinces.
  • The government hopes that the unification of mining regulations will improve the investment climate, which has been strengthened by plans for largescale investment in energy and transport infrastructure as well as wider macroeconomic reforms. 
  • Despite marked improvements, key challenges will continue to face investors. The compliance of each province to new federal laws is unproven, and three provinces have refused to sign the pact. Civil unrest will remain a key operational issue and the upcoming October mid-term elections provide a degree of political risk for long-term investment stability, especially if Macri’s Cambiemos coalition loses seats. 

Despite Argentina boasting an estimated USD 400 bn of untapped mineral resources, including rich deposits of copper, gold, silver, zinc and lithium, an unfavourable regulatory environment under former president Cristina Fernández de Kirchner, served as a major deterrent to investment. Foreign currency controls and high export taxes restricted investment in the mining sector, which totalled USD 10 bn between 2007 and 2015, in comparison with the USD 80 bn in Chile and USD 52 bn in Peru in the same period. Since his election in October 2015, President Mauricio Macri has undertaken a series of more investor-friendly reforms as part of the government’s aim of attracting USD 25 bn investment in the sector over the next eight years. Reforms have included the lifting of a five percent mineral export tax and liberalisation of rules around transferring profits and importing capital goods. These reforms have already had an effect, with Argentina’s mining chamber estimating some USD 14.6 bn in investment is expected between 2018 and 2020 to develop projects by Glencore, First Quantum, Yamana Gold and McEwen Mining.

More broadly, the mining agreement comes at a time when the government is undertaking ambitious plans to make long-term improvements to energy and transport infrastructure, which have long been cited as external impediments to investment in the mining sector. Once a net exporter of electricity, Argentina now relies on electricity imports and unstable electricity supplies are frequently cited as an obstacle by investors. The government is undertaking measures to increase domestic electricity generation by boosting domestic natural gas production and diversifying power sources to include renewables. Four energy auctions in 2017 aim to attract investments up to USD 7 bn. Similar momentum has been witnessed in transport infrastructure, which deteriorated after years of underinvestment under the previous government. Macri’s government aims to increase investment in infrastructure from 2 to 6 percent of GDP, with projects including upgrades to ports, airports, freight rail lines and roads, as well as the construction of new transport links to neighbouring Chile. 

Federal Mining Agreement

The latest move to improve the regulatory environment for miners will see 20 of the country’s 23 provinces ratify a federal mining agreement on 13 June. The aim of the agreement is to harmonise existing legislation around mining, which has been previously shaped at the provincial level, leading to significant regulatory inconsistency between provinces. The agreement places a three percent cap on mining royalties received by the province, with an optional additional 1.5 percent tax towards a local infrastructure fund which provinces can choose to opt out of. In addition, the agreement contains provisions to prevent conflicts between federal and local government, enhance the public consultation process and improve environmental management through better supervision. The agreement will also see the promotion of local purchasing and employment and the creation of a unified mining registry, including standardisation of mining rights, properties and procedures.

While the move towards unifying regulations is a positive step, issues around the implementation of the agreement persist. The agreement still requires approval by the legislatures of each province as well as the opposition-dominated Congress, where its passage cannot be guaranteed. Months of negotiations towards reaching the agreement have already demonstrated the challenges related to securing support for the measure from provincial governors. The accord was originally due to be signed on 5 June, but was delayed after Salta’s governor refused to participate unless concessions were made, including the withdrawal of a 1 percent tax for a community development fund. Importantly, the agreement will not be ratified by all provinces, as the governors of Chubut, La Rioja and La Pampa have refused to participate, citing environmental reasons. Chubut’s withdrawal marks a blow to Pan American Silver, which in April expressed optimism over negotiating the reopening of its Navidad mine in the province. The mine was closed in 2013 for breaching provincial rules banning the use of cyanide in open-pit mining.

Environmental standards will be harmonised under the agreement, which could see the easing of strict environmental restrictions in certain provinces, though this brings with it an increased risk of unrest. While it has not been explicitly stated, it is likely that coordination between provinces on environmental regulations could see the seven provinces in the country that still prohibit open pit mining as well as the use of cyanide for extraction ease restrictions. However, this scenario would also heighten the risk of unrest targeting operations, particularly in the event of an environmental accident. For example, in October 2015 police injured several protesters who had blocked access to Barrick Gold’s Veladero mine in San Juan to denounce a cyanide leak at the mine. Unrest in Argentina is already a key consideration for operators, and several of President Macri’s economic reforms have already fuelled high levels of popular unrest including mass protests and strikes, driven by discontent over worker dismissals and high rates of inflation.

While Macri’s agenda for creating a more business-friendly environment has been praised by investors, mid-term congressional elections in October present a threat to the trajectory of reforms.  Key to Macri securing support will be whether the economic benefits of 2.3 percent forecasted growth in 2017 begin to be felt by the electorate and the related momentum of social unrest ahead of the vote. An increase in seats for Macri’s Cambiemos coalition would provide legitimacy for further market-oriented reforms, while a negative result would undermine his minority coalition in the Senate, weakening prospects for both the passage of legislation and his re-election in 2019. The threat of a negative result therefore demonstrates that, despite regulatory reforms since 2015 significantly boosting investment in the mining sector, short-term political risks at both the provincial and national level could threaten long-term investment stability. 

Protection Group International Ltd

Argentina: Macri plans latest reforms to regulations governing the mining sector - Protection Group International Ltd
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