Future export revenues from mining operations in Argentina will have to be repatriated to Argentina and converted to Argentine currency before being distributed either locally or back overseas, according to a new law in the South American nation. Distributing the earnings overseas will require that Argentine pesos be reconverted to foreign currency for repatriation.
The decree is President Cristina Fernandez de Kirchner's first move since winning re-election in a landslide victory Oct. 23 in which she received 54% of the popular vote, and is designed to prevent capital flight and prop up dwindling foreign currency reserves.
Mining companies had been exempt from a previous law that required the oil and gas and agriculture industries repatriate 30% of their export revenues. The new law supersedes that law and now requires that all three industries repatriate 100% of their future export revenues.
"They're trying to get as much as they can out of international investment that is coming into Argentina and they continue to find new and innovative ways of doing it," says Karen Hooper, Latin American analyst at Stratfor, a private intelligence company. "It's making it an increasingly harsh investment climate and I don't necessarily expect that to change."
Hooper argues that the new law shouldn't come as a surprise as Argentina has been increasing economic controls across the board for years with increasingly strict attention to detail on all of these industries at the same time as it uses subsidies to ensure that the government remains popular among voters.
The Texas-based analyst refers to the 2007-2008 subsidies in Argentina's natural gas sector to illustrate her point. "Argentina went from being a natural gas exporter to being a natural gas importer and that wasn't because it ran out of gas, it was because they incentivized domestic consumption of natural gas by keeping prices low, which reduced profits for producers and generally made the country a bad bet for investors," she explains.
"It all comes back to political popularity and understanding the political culture in Argentina. Every person in power uses the state to redistribute income to stay in power...As a general rule, because the goal of the political system is to protect the voter and the consumer, the cost is largely borne by the business sector."
Riyaz Dattu, a partner at Toronto law firm Osler, Hoskin & Harcourt says what is concerning about this particular measure is that it potentially could be one of many measures to come that effectively lead to what he calls "creeping expropriation."
"It's a sign of desperation by the government of Argentina and reminiscent of what it did in 2001 and 2002," Dattu says, referring to measures the country took during its massive currency crisis and debt default a decade ago. "People were hoping that the period of 2001 to 2002 was behind us, but this measure by the president bodes ill for foreign investors in the country. The concern is that whenever governments get desperate they start taking incremental measures but in totality it can amount to creeping expropriation, so this measure is quite damaging to the reputation of Argentina."
"They are cash-strapped and they are essentially targeting resource companies," he adds. "They're an easy target because unlike factories that make goods, you can't just shut down the factory and leave the country because they've got too much investment sunk into the ground."
Dattu dismisses Argentina's claims that the new law will put the mining industry on an equal footing with other industries such as the country's powerful grain exporters. "Foreign investors in mining have a timeline for recovery of their capital in the range of decades and so to say they're treating the agriculture industry in the same manner as the mining industry is a specious argument and wouldn't hold up in arbitration."
Dattu, who was involved in an investment treaty proceeding against Argentina following its 2001-2002 financial crisis, notes that Argentina ranks at the very top of the list of countries sued by foreign investors and has faced more investment arbitration cases than any other country in the world. In addition, the new measure runs contrary to investment treaties Argentina has signed with a number of countries including Canada, and could be contested on several grounds including clauses related to "fair and equitable treatment" and "transfers of capital out of the country."
John Turner, head of the mining group at law firm Fasken & Martineau in Toronto said it would be difficult to immediately quantify the actual costs to mining companies of the new decree but noted that what was perhaps more worrying was whether the president's move is the beginning of more change and whether it is something that mining companies will be consulted about before future action is taken.
"Nobody likes to wake up in the morning to a headline," he says. "What we all hope in the industry is that change is done in a consultative way...If you look at the recent experience in Peru and to some degree Zambia, by and large mining companies were aware of what the party platforms were and were consulted in the process. That's the most you can hope for."
Reaction in the mining sector has varied. Many companies did not return email requests for comment while others said they were still trying to come up to speed with the new law and were seeking advice from financial and legal advisors. Others were more forthcoming.
Miles Rideout, president and chief executive of Latin American Minerals (LAT-V) noted in an email that the new measure wasn't surprising because similar regulations exist for all other export sectors, and added that the latest decree was a rapid government response to present exchange conditions in Argentina. (He also pointed out that most of the company's assets are in Paraguay, a strongly deregulated country, and so doesn't expect the Argentinian rules to have an impact on the company.)
"I don't think we see any new tax implications for miners," he continued. "Argentina presently has a 1% spread in the dollar buy-sell price, so the cost of the actual two-way currency conversion will likely be in the 2% range."
"Mining has been and continues to be excluded from substantial regulation in Argentina, in particular the broadly-applied import tariffs," he added. "While by no means good news, this currency exchange measure is a relatively minor point. It will represent increased risk during unstable times and changes of this sort will damage industry confidence. We'll need to see if further measures are contemplated."
Mining analysts say that at the very least the new decree will lead to higher currency transaction fees, higher interest rates for debt facilities, and higher FX hedging costs. In a research note to clients Macquarie Capital Markets noted that the president's decree "should have little impact on how our covered companies operate" but conceded that "there is a risk that in the future the government could delay the exchange from Pesos back into USD when requested by companies intending on paying dividends."
It also noted that the "powerful new government could mean more change."
"Her ruling coalition now controls both houses of the federal government in Argentina and the governorship in all states except for one and the city of Buenos Aires. We see the concentration of control and this recent decree as a sign that political risk for Argentina may have increased."