--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's Santa 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's Vale 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 shane.romig@dowjones.com