Chubut’s draft mining law confounds miners

Pan American Silver (PAA-T, PAAS-Q) is warning shareholders that if draft mining legislation proposed by the governor of Argentina’s southern Chubut province becomes law, its Navidad silver project in the province will become uneconomic.

The draft law recently submitted to the provincial legislature for debate and review apparently modifies the province’s ban on open-pit mining, which is the preferred method to exploit Navidad, but the compromise comes at a prohibitively high cost, with increased royalties and greater state ownership.

The draft law includes a new 5% net smelter return royalty (NSR) on top of the existing 3% NSR; a requirement that Petrominera, a company owned by the Chubut government, will receive no less than 4% of total sales; and that Petrominera will receive a 7% direct-carried net pre-tax profit.

If a company can prove that Petrominera’s right to receive 4% of total sales would make a project uneconomic, Petrominera’s participation on the project’s total sales would be cut by up to 75%. But in such cases, the net pre-tax profit interest would be increased to a 12% minimum.  

The new regulations come on top of the current 10% export duty payable on concentrates, and a national corporate income tax rate of 35%.

“Based on significant [20%] inflation in Argentina over the past few years, we already believed Navidad was challenged, and we believe these additional regulations would undoubtedly eliminate the prospect for positive returns,” mining analyst Chris Lichtenheldt of UBS Investment Research writes in a research note to clients.

Geoff Burns, president and CEO of Pan American Silver, one of the world’s largest primary silver producers, could not be reached for comment. But in a prepared statement he described the proposed legislation as an “incredibly unfortunate development” that would make Navidad uneconomic “at any reasonable estimate of long-term silver prices,” and declared the company would have “no other reasonable option but to suspend further investment” in the project.

“This level of government participation and tax burden is unprecedented relative to the other jurisdictions where Pan American operates,” he continued, “including the province of Santa Cruz in Argentina,” where the company’s Manantial Espejo mine is located.

In May, Pan American said it had invested US$7.1 million developing Navidad during the first quarter.  Work focused on completing an updated feasibility study, which is expected in the second half of this year.

A scoping study completed at the end of 2010 outlined a mine life of 17 years, with life-of-mine silver production of 275.5 million oz. at an average cash cost of US$6.96 per oz. silver, net of by-product credits.

Analysts Brad Humphrey and Phil Russo of Raymond James write in a research note that “one cannot help but be concerned by the developing landscape in Chubut [in its proposed form] . . . on one hand, it is positive that legislation is advancing. But on the other hand, the seriousness of Chubut’s government to create a viable mining sector must be called into question, with proposed regulations that would likely suffocate even the most economic projects.”

The analysts note that Pan American’s declaration that it would not to move the project forward unless the draft legislation is amended “is the most sensible option for the company.” And if the legislation is amended in a meaningful way, they add, “Pan American’s intent to move a scaled-down version of Navidad forward initially is a likely move.”

Paola Rojas, vice-president corporate development at Rojas & Asociados, a mining consultancy headquartered in Mendoza, Argentina, argues that while it is “positive that the government of Chubut has realized that mining is a viable solution for development and improving the quality of life of their people,” the proposed tax scheme is “too high,” and should be adjusted so that it is in-line with other South American countries such as Chile and Peru.

“The worldwide trend to lift taxes has been taken too literally by the [Chubut] government,” she writes in an email. “As much as everyone expected changes in royalties and social benefits for the provinces — like what has happened in San Juan and Jujuy, to name some provinces, and has actually been beneficial for all parties involved — we think the proposed law will be negative for the whole province. If companies leave and do not develop their projects, the government won’t have anything to tax, so it’s a lose-lose situation.”

Christopher Ecclestone, a mining analyst at Hallgarten, concedes Chubut has never been mining friendly, but sees the issue a bit differently. He argues that the draft legislation will probably be passed in the legislature and is “not out of line” when compared to other emerging economies in Africa and in South America.

“The big thing in Argentina right now is the talk about social benefits. And frankly, they’re on pretty strong ground, because [historically] what you’ve had has been really circumscribed benefits to the local population,” he explains in a telephone interview from his office in New York. “You’ve had fly-in and fly-out foreigners, minimum numbers of locals employed and minimum royalties for the provinces.” He also notes that much of what has been mined to date in Argentina has been sent out of the country, rather than refined or processed into value-added products locally.

“Mining companies really have to think about the social angles here,” he continues. “What are they providing for anyone? They’ll say: ‘Oh, we’re investing $400 million,’ for example, to build a mine . . . but are they talking $400-million worth of mining equipment made in Argentina? No — they’re talking $375-million worth of mining equipment that is imported, and perhaps $25 million that is sourced from Argentina. And they’re talking maybe thirty to forty local jobs.”

“The federal government, a month or two ago, started talking about the whole issue of local sourcing,” he adds. “There’s a lot of stuff that goes into building a mine that isn’t high-tech. Argentina has a huge steel industry, for example.”

The draft mining law will be subject to review and debate by a parliamentary sub-committee that will have the opportunity to make amendments to the proposed legislation.

Once the sub-committee has completed this process, the legislation will be re-submitted to the full legislature for debate and a vote.

Other companies with assets in Chubut include U3O8 (UWE-V, UWEFF-O), whose Laguna Salada uranium-vanadium deposit lies 200 km southeast of the provincial capital of Rawson, and UrAmerica, a private uranium exploration company whose Cerro Solo project is located 350 km southwest of Rawson. Calypso Uranium (CLP-V) also holds claims and concessions in Chubut, as does Metallum Resources (MRV-V), which is earning a 70% interest in the M-18 silver-gold property from Silver Standard Resources. Golden Peaks Resources (GL-T) is exploring its La Fortuna gold project in the eastern foothills of the Andes mountains, 1,300 km southwest of Buenos Aires.   

In June, Pacific Bay Minerals (PBM-V) reported encouraging results from a prospecting, mapping and sampling program at the July uranium project, where the Canadian junior is earning a 90% interest from state-owned Petrominera. Pacific Bay retains over 400 sq. km of claims in the Cerro Solo uranium region of Chubut, i
ncluding the wholly owned KM Regalo property.  

Earlier this year in January, Marifil Mines (MFM-V) signed an option agreement to purchase full interest in Arroyo Verde, a 150-sq.-km property hosting an epithermal gold target and a separate porphyry copper-­molybdenum target.