Argentine president-elect Mauricio Macri is getting ready to take office.
And mining firms with interests in his country couldn’t be happier.
Macri campaigned to make significant free-market reforms as incumbent president Cristina Fernandez’s leftist administration has done nothing to stem double-digit inflation and a hell-for-leather widening of the country’s budget deficit.
Part of the planned reforms includes ending a series of strict capital controls, including restrictions on cash exports, limits on dollar savings, restrictions on imports, and heavy taxes on offshore credit card payments, among others.
For foreign mining companies with projects in Argentina, the end of such controls could eliminate millions of dollars in extortionate costs associated with exchanging currency.
Under the current controls, mining companies have to exchange the U.S. dollars they receive from exports into pesos on Argentina’s regulated currency market.
And the exchange rate for the USD on the regulated market is some 40% less than what the greenback fetches on the black market.
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Inflation and the Argentine peso The inflation rate in Argentina is almost legendary. Between 1944 and 2015, the average inflation rate in Argentina has been a seemingly impossible 203%. In 1990, the inflation rate climbed over 20,000% after a new economic plan failed, leading to astronomical interest rates and a depletion of the Argentine central bank’s foreign reserves. The current inflation rate of the Argentine peso is a seemingly impossible number to pinpoint. The current government’s figures simply cannot be trusted. However, estimates of the Argentine peso’s inflation rate range from 15% to 30% per year. |
You see, the Argentine peso is so overvalued, and limits on buying and selling the dollar are so strict, that private individuals and businesses have created their own exchange rates to use with each other when they can’t get dollars through official channels.
These currency exchange market restrictions have been significantly inhibiting investment into Argentine mineral development.
The Argentine mining chamber estimates that there are $5 billion worth of mining projects in the country waiting for a more supportive government.
Some mining firms have shut down operations altogether.
Back in 2013, Vale SA (NYSE: VALE), the world’s largest iron-ore producer, stopped the development of a large potash project after spending $6 billion citing economic pressures.
And mining isn’t the only industry shying away from using the Argentine peso.
Just a few weeks ago, American Airlines (NASDAQ: AAL) announced that it will no longer accept the Argentine peso (either in the form of cash, credit, or debit) as payment for flights and services.
American Airlines said in a statement:
We have not reduced our flights, although we currently do not have inventory available for purchase in Argentine Pesos due to repatriation issues. We look forward to working with the Central Bank and the new government on this matter.
Translation: Converting pesos to dollars is too expensive. We don’t want to do that.
While Argentina’s capital controls are still in place for the time being, the future of mining in the country looks very bright.
Here are a few precious metal miners currently working in Argentina…
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Hochschild Mining (LON: HOC)
Hochschild’s major interest in Argentina is its San Jose Silver-Gold Mine located in Santa Cruz province. San Jose is a large-scale project with 87.7 million ounces of silver-equivalent resources. This year, San Jose is expected to produce about 6.5 million ounces of silver and just under 100,000 ounces of gold.
Yamana Gold (NYSE: AUY)
Yamana has a few different mineral assets in Argentina, including three significant development projects, a non-core gold mining interest co-owned with Goldcorp (NYSE: GG), and the Gualcamayo Gold Mine located in San Juan province. The Gualcamayo Mine contains 5 millions ounces of gold reserves and resources in total and produced a little over 180,000 ounces last year.
Goldcorp (NYSE: GG)
Goldcorp’s Argentine interests include the previously mentioned gold mining interest with Yamana and the Cerro Negro Gold Mine, which was just put into commercial production in January of this year. The Cerro Negro Mine contains about 5.25 million ounces of proven and probable gold reserves. Targeted production for the first year at Cerro Negro is expected to range between 425,000 to 475,000 ounces with increases going forward.
Good Investing,
Luke Burgess
Energy and Capital
