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Argentina Drops Bomb On Los Azules
Argentina Province Slaps Hefty Tax on Embattled Mining Companies

--Santa Cruz Province imposes new 1% tax on mine reserves

--Companies vow to challenge the duty in court

--Industry struggling due to low metals prices, soaring costs and government regulations

By Shane Romig

BUENOS AIRES--Mining companies in Argentina'sSanta Cruz province are gearing up for a courtroom clash after the local legislature passed a steep tax hike that the companies say threatens the industry's viability.

Last week, the Santa Cruz congress passed a bill slapping a 1% annual tax on mine resources in the province as the local government struggles with a wide spending deficit.

While the percentage seems small, it will cost mining companies in the province $100 million in new taxes next year, said an executive from one of the province's leading mines who requested anonymity. In effect, the tax amounts to about 8% of the total resources of a mine with a 15-year life, considering that it must be paid annually, he said.

Companies must pay the percentage on proven reserves regardless of sales or output, posing another challenge to startups that may be sitting on a mountain of gold, but have yet to start production.

As soon as the law is formally implemented, mining companies will be heading to court to challenge its constitutionality, the executive said.

Companies argue that the tax clashes with an article in Argentina's constitution that grants mining projects 30 years of fiscal stability. The tax law also signals to investors that provincial governments won't shy away from changing the rules to plug budget deficits.

Companies with operations in Santa Cruz include AngloGold Ashanti Ltd. (AU, ANG.JO), McEwen Mining Inc. (MUX, MUX.T), Hochschild Mining PLC (HOC.LN), Mirasol Resources Ltd. (MRZLF, MRZ.V), Minera IRL Ltd. (MIRL.LN, IRL.T), Goldcorp Inc. ( GG ) and Pan American Silver Corp. (PAAS, PAA.T).

Even though mining companies plan to challenge the tax, "the biggest damage will be irreparable, causing the rejection of Santa Cruz as a destination for international investment," the Santa Cruz and nationwide mining chambers said in a joint statement.

"It condemns functioning projects, those in construction and will completely stall exploration," according to the chambers.

Higher taxes that strain the bottom line are a "significant concern," especially with global mineral prices in a slump, said Andrew Elinesky, vice president of McEwen Mining, in a recent interview.

The new tax comes at a time when some mining companies in Argentina are already scrambling for the exit. Low metal prices, soaring costs, capital controls and the absence of consistent rule of law have taken the shine off of projects that aim to develop the Andean country's vast, untapped mineral wealth.

In December, Pan American Silver Corp. shelved work on its Navidad silver mine in Chubut Province, saying inflation and proposed tax increases would make the project inviable.

Brazil'sVale SA ( VALE ) recently stopped work on its Rio Colorado potash mine in Mendoza Province after already spending $2.23 billion.

Mining exploration, as measured by both investment and drilling, plunged 50% on the year in 2012 and is likely to slump an additional 20% this year, Julio Rios Gomez, president of mining exploration chamber Gemera, said in a recent interview.

Economists said annual inflation has been at or above 20% for the past three years. Wages alone rose almost 24% on the year in April, according to the government.

Government limits on the repatriation of dividends and profits, which aim to stem capital flight, have added a further sting. McEwen Mining Inc. recently cut its forecasts for production growth at its El Gallo gold mine in Mexico, citing lower metal prices and higher borrowing costs.

The company had hoped to finance construction by using its profits from Argentina, but it hit a wall when Argentina's government stopped allowing companies to send dividends home.

Legal uncertainty also looms large in investors' minds.

Last year, President Cristina Fernandez de Kirchner nationalized Argentina's top oil company, YPF SA (YPF, YPFD.BA), without offering compensation to its former controlling shareholder.

More recently, the Kirchner-controlled Congress passed controversial legislation that severely limits the ability of judges to issue injunctions against government acts. Those injunctions are often the only legal protection that mining companies have when appealing adverse court rulings.

Write to Shane Romig at [e-mail]


(END) Dow Jones Newswires
06-18-131218ET
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