Meridian Gold Inc. (fka MDG)

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Argentina Mine Tax Threatens Stability, Investment -Industry

DOW JONES NEWSWIRES
December 5, 2007 4:13 p.m.

By Shane Romig

Of DOW JONES NEWSWIRES

BUENOS AIRES (Dow Jones)--By placing a new export tax on mineral exports despite a 30-year guarantee of tax stability, Argentina has shattered confidence in tax stability, which will discourage future mine investment, industry players said Wednesday.

On Tuesday, the mining chamber CAEM said that customs agents demanded the new taxes on Rio Tinto PLC's (RTP) Borax Argentina S.A., Procesadora de Boratos Argentinos S.A., Minera del Altiplano FMC and Xstrata PLC's (XTA.LN) Minera Alumbrera Ltd.

The companies previously had received letters from the Mining Ministry certifying that they would enjoy tax stability for 30 years, but this assurance was cast in doubt by the new tax.

Some companies immediately announced that they would challenge the new tax in court.

Borax Argentina is in the process of asking for an injunction after customs agents demanded a 10% export tax payment for its latest borate shipment.

"We will argue to the court that a note cannot modify a law," mine director Alberto Trunzo told local industry magazine Mining Press.

However, other companies were waiting for more clarity before reacting.

"We have a stability agreement at Veladero...(but) are monitoring and assessing developments," Barrick Gold Corp. (ABX) spokesman Vincent Borg said.

Barrick operates the Veladero gold mine in Argentina and is developing the $2.4 billion Pascua-Lama gold mine project straddling the Chile-Argentina border.

Said the CEO of a company involved in exploration in Argentina and Chile: "This makes Argentina much less attractive for foreign investors. The effect won't be immediate, as companies have budgeted programs...The effects will show up initially with decreased exploration investment.

"This is a real problem for Argentina. There isn't a lot of mining investment in Argentina relative to its mineral potential," the CEO said.

The CEO asked not to be identified because of the sensitivity of the situation.

Lower margins due to the export tax will also push companies to mine higher grade ores, leaving behind more of the lower grade ores.

"Effectively this shortens the mine life, so in the end the government will get less revenue, less employment, etc.," the CEO said.

In 2002, the government implemented broad export taxes to generate revenue in the midst of a deep financial crisis. However, mines such as Barrick's Veladero and Xstrata's Bajo del Alumbrera, which came online prior to 2002, were given guarantees that their taxes would remain unchanged based on a 1993 federal mining law, a spokesman from the mining chamber said.

The way the new taxes were implemented also fueled uncertainty and speculation.

Argentine Mining Minister Jorge Mayoral sent a note to customs agents last week revoking the export tax exemption for the companies, the spokesman said. The companies didn't receive notice of the move, and were surprised by a demand for payment when they sought to register their latest shipments.

"Decisions of this nature threaten legal stability and diminish the constitutional concept of making government acts public," CAEM said in a statement.

The new export taxes vary from 5% to 10%, depending on the level of domestic processing, the spokesman said.

Mines in Argentina currently pay a royalty of 3% of gross output with tax credits for development costs.

The latest move comes amid a wave of export tax increases. Last month, the government imposed sharp export tax increases on grains and petroleum products in an effort to increase government revenue and shield the domestic market from surging international prices.

Argentina mining hopefuls also have faced environmental resistance to development plans and a number of provinces have shut their borders to the industry.

In June, the province of Mendoza banned mining activity using chemicals such as cyanide, mercury and sulfuric acid, effectively shutting down gold and uranium mining.

A group of local mining companies and the Argentine government's national atomic energy commission, or CNEA, brought a lawsuit in Mendoza provincial court challenging the ban.

In addition, Calypso Uranium Corp.(CLP) announced Wednesday that it had filed a case before the Argentine Supreme Court challenging the constitutionality of the chemical ban in Mendoza.

A number of other provinces recently also have enacted laws limiting mining activity. Tucuman, Rio Negro and La Rioja provinces have all passed local laws banning open-pit mining using cyanide.

Meridian Gold Inc.'s (MDG) attempts to mine gold in Chubut province also have been on hold since a local court decision blocked the project in 2003. The Supreme Court upheld the decision earlier this year.

Despite the uncertainty, mining activity is experiencing unprecedented growth in Argentina due to high metals prices, large mineral potential and low extraction costs. Investment in mining projects reached $1.27 billion last year, up 56% from 2005, according to the Mining Ministry.

Investment across the country over the next eight years is expected to reach $12.5 billion as Argentina develops at least 10 new major mine projects, according to the ministry.