Bruised investors were reminded last week that nationalist intervention in the Argentinean economy is not merely a thing of the past and that widening economic imbalances in the country could give the new-elected president an excuse to intervene in the economy again, writes analyst Wendell Zerb in Canaccord Genuity’s Junior Mining Weekly.
He was referring to a new decree requiring all mining, oil, gas and derivative sector to repatriate 100% of their export revenues to Argentina
The decree replaced the one from 2003 that exempted mining companies from having to repatriate any of their export revenues to Argentina, and another from 1989 allowing companies in the oil, gas and derivative industry to retain as much as 70% of export revenues abroad
As Zerb points out in the November 1st report, market reaction was predictable. Some of the 43 U.S. and Canadian mining companies with operations in Argentina saw their share prices tumble on October 26th, the day on which the decree was announced.
Among the worst hit: Hunting Mining Corp. (TSX: V.HMX, Stock Forum) was down 29% to 22 cents. Mansfield Minerals Inc. (TSX: V.MDR, Stock Forum) fell 21% to $1.23. Extorre Gold Mines Ltd. (TSX: T.XG, Stock Forum) tumbled 20% to $7.40. Metallum Resources Ltd. (TSX: V.MRV, Stock Forum) dropped 17% to 17.5 cents.
Among the producing companies, Minera Andes Inc. (TSX: T.MAI, Stock Forum) was down 7.5% to $1.84. Yamana Gold Inc. (TSX: T.YRI, Stock Forum), gave up 5% to close at $15.40.
Zerb said the market’s reaction was compounded by the lack of detail from the government with respect to how these measures would be implemented, and the degree of restrictions companies might face when trying to export their revenues abroad.
However, by the end of the week, it was clear that the immediate impact on the mining industry could be relatively minimal and stock prices have recovered.
The repatriation decree should come as no surprise, writes Zerb, adding that it is part and parcel of efforts by the government to step the flight of capital and support the value of the peso.
After repatriation of the export revenue to Argentina, companies can still export them to their country of origin, subject to transaction fees levied each way (entering and leaving Argentina), potentially amounting to no more than 1.2% to 2% of the export’s total value.
Still, the Canaccord analyst sees the Argentine decree as a negative for junior miners for the following reasons:
- It will result in higher currency transaction fees.
- Higher foreign exchange hedging costs.
- Higher interest rates associated with debt facilities (provided that lenders are still available).
- In the short term, premiums for M&A potential will likely become discounted in the market as acquirers look to other jurisdictions with less political risk.
In a worst case scenario projects may be postponed, particularly if the Argentinean government continues to demonstrate its willingness to pursue interventionist policies for political gain.