Cablegate: Argentina Imposes New Mining Export Tax

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DE RUEHBU #2313/01 3441254
ZNR UUUUU ZZH
R 101254Z DEC 07
FM AMEMBASSY BUENOS AIRES
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UNCLAS BUENOS AIRES 002313

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E.O. 12958: N/A
TAGS: ETRD EINV ECON PGOV ENRG AR

SUBJECT: Argentina Imposes New Mining Export Tax

1. (SBU) SUMMARY. The GOA has imposed a comprehensive 5-10% tax on
mineral exports as one of a number of recent measures designed to
boost Argentina's primary fiscal surplus. The measure represents a
significant departure from Argentina's 1993-era mining law, which
includes provisions for royalty payments to provinces but otherwise
guarantees tax stability for 30 years. The sudden and
non-transparent method in which it was enacted - not by law or
decree, but via instructions from the Internal Commerce and Mining
Secretaries to GOA customs - also unsettled investors. Private

SIPDIS
sector contacts strongly reacted against the tax, and predicted it
would undermine mining sector investment and Argentina's overall
investment climate. Argentine mineral exports are expected to grow
18% in 2007 to reach a record US$3 billion and new mining
investments of $2.9 billion are anticipated this year. While US
mining interests here are small(Idaho's Coeur d'Alene mines silver
in Santa Cruz province and North Carolina's FMC extracts lithium in
Catamarca province), we are a major exporter of mining equipment
used here. Investment in Argentina's promising gold and copper
reserves is dominated by British, South African, Australian and
Canadian companies. END SUMMARY.

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A New Tax on Mineral Exports
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2. (U) On November 30, the GOA imposed a 5-10% federal tax on the
mineral exports of 14 companies that had previously been exempted
from export taxes. This tax, which the GoA only officially
announced December 4, is in addition to the existing 3% provincial
royalties on the value of gross mineral output. According to
private sector contacts, mining companies who had presented export
documentation to Aduanas on December 3 were taken by surprise by the
new tax. Four of the 14 firms were immediately affected - Borax
Argentina, Procesadora de Boratos Argentinos, U.S.-based FMC's
Minera del Altiplano and Minera Alumbrera - and the remaining 10
mining firms who had been exempt will reportedly soon also face this
tax. (Media reports from earlier in November had speculated that
the measure would only cover copper and gold, which have seen major
world price increases. However, the announced measure covers all
minerals.)

3. (SBU) To attract investment into the capital intensive and highly
risky mining sector, an important provision of the 1993 mining law
guarantees tax stability for 30 years. So, when minimum 5-10%
tariffs were imposed on all Argentine exports in the aftermath of
the 2001/2 economic crisis to raise badly needed revenues, already
licensed mining operations were exempted. The GoA's recent
expansion of export tariffs to all mining exports appears to
contravene stability provisions of the 1993 mining law.

4. (SBU) The GoA's regulatory rationale for imposing export tariffs
on previously exempt companies derives from the Secretary of
Mining's authority to revoke tax stability exemptions for those
mining companies who have failed to fulfill investment commitments
made when they requested official approval to begin operating.
However, in comments to Econoff, the mining companies have roundly
rejected this justification. EmbOffs have attended two meetings on
this subject, involving about fifteen embassy and company
representatives from the US, UK, Australia, South Africa,
Switzerland and Canada.

5. (SBU) Private sector contacts and media reports have been largely
critical of the manner in which the GoA enacted the tax, which they
argue effectively ends a decade and a half of a world-class mining
investment and tax regime. According to private sector contacts,
Secretary of Internal Commerce Guillermo Moreno wrote directly to

SIPDIS
GOA Customs Director Ricardo Echegaray, instructing him to
immediately impose this new 5-10% tax, i.e, to end the tax exemption
that grandfathered companies enjoyed. Echegaray reportedly replied
that Moreno had no authority to order this tax. This was followed
by another letter to Echegaray, with identical instructions, with
the additional signature of Mining Secretary Mayoral. Echegaray
accepted this letter and enacted its provisions. Private sector
contacts speculate that the GoA chose this measure - rather than
pursue a wholesale change of the 1993 law - to allow the GOA to
portray the change as no departure from, or violation of, the 1993
law, and so less legally challengeable.

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Reaction from mining chamber and firms
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6. (SBU) The national mining chamber (CAEM) stated publicly on
December 4 that the tax is in "no way part of the existing law [that
specifically guarantees 30 years of investment and tax stability],
and threatens legal stability." Embassy mining sector contacts have
privately expressed disappointment and frustration, and contend that
the measure will hurt their own operations, the Argentine mining
sector as a whole, and Argentina's overall investment image. A
former mining secretary from La Rioja province and the former
president of Canada-based Barrick Gold Argentina both said that they
were "flabbergasted." They indicate that their firms will all
undergo a major review of their operations and investments. It is
too early to know if this new tax will result in any major reduction
in inestments or departures, as the media has speculated. Mining
sector contacts acknowledge that the present strength of world
mineral prices, particularly for copper and gold, is a strong
inducement to remain in Argentina (despite the new tax). Private
sector contacts also questioned whether the extra GOA revenue
anticipated would even materialize.

7. (SBU) Representatives of local affiliates from multinational
companies have largely remained silent so far about what responses,
if any, they are considering. On December 6, however, U.K.-based
Borax Argentina sought an injunction against this action in federal
court. The local Xstrata representative (from the joint Swiss-UK
Alumbrera gold and copper project in Catamarca province) said that
his and other foreign companies are also contemplating legal
challenges. At the same time, many company representatives note
that any efforts to challenge this could be counterproductive. They
note that the GOA would "surely retaliate" with all kinds of
"harassments:" customs, environmental and tax related inspections.
A unified sector reaction is difficult to envision, since there is a
wide variety and size of projects in different stages of
development, involving different minerals and provinces, all with
their own financial profiles. These same reps indicated that the
GOA "will play hardball, and as always, personalize" any resistance
to their measures, and that the GOA had already privately warned
companies "not to put up a fight."

8. (SBU) Local contacts speculate that to the extent companies might
alter investment plans, it would depend on the mineral involved.
Gold and copper producers might find it hard to justify scaling back
production while world prices for these products are so high.
However, in the case of non-metallic minerals, such as lithium,
boron, phosphate, and soda, margins are much smaller. An early test
of what effect this new GOA tax will cause might be seen in the
actions of the UK-based Rio Tinto potassium Rio Colorado project in
Mendoza province, nearing completion in the coming year. Industry
reps speculate that if the new export tax proves untenable to their
bottom line, Rio Tinto might choose to cut their losses now.

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Part of a broader GOA tax collection strategy
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9. (U) The new export tax is only the latest of a series of GOA
measures aimed at boosting the 2008 primary fiscal surplus to about
4% of GDP. This action follows similar recent tax increases on
agriculture and hydrocarbons exports. According to Ecolatina (a
local consultancy), increases of export taxes in agriculture,
hydrocarbons and minerals together will bring an additional $2.8 -
3.2 billion (roughly 1.4% of GDP). In the context of the strong
increases in prices of minerals that Argentina exports (particularly
gold and copper which have increased in value by 20% and 60%
respectively in the last three years), the action seeks to retain
for the government part of the increased revenue going to the
sector. Media estimates for additional GoA tax revenues from this
new mining tax alone are in the range of 800 million pesos (about
$255 million) in 2008, assuming international mineral prices,
particularly for copper and gold, remain stable at current levels.
The amount and relative value of these new taxes are telling. The
federal mining export tax rate has increased substantially, from 0%
to 5%-10% (apart from the 3% provincial royalties), but is still
significantly below export tariff rates assessed on agricultural
exports (roughly 28% for soy) and hydrocarbon exports (roughly 45%
for crude).

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Mining, a star performer (until now)
------------------------------------

10. (U) Mining activity in Argentina is experiencing unprecedented
growth due to high metals prices, large mineral potential,
relatively low extraction costs, and - at least up to now - the
model 1993 mining law. According to the federal Mining Secretariat,
minerals and byproducts exports reached a record $2.6 billion in
2006, and are expected to increase an additional 18% in 2007.
Investments in 2006 alone reached $1.27 billion, up 56% from 2005,
and 2007 investments are slated to reach $2.9 billion. The Mining
Secretary earlier estimated that the sector will receive $12.5

SIPDIS
billion in new investment over the next eight years, as Argentina
develops at least 5-10 new major mine projects. According to the
Mining Secretary, in 2006 mining provided 37,000 direct jobs and
160,000 indirect jobs, and average monthly wages were about $1550,
far above the average national formal monthly wage of about $586.
More importantly, a half-dozen projects, with typically one to three
decade long projected life cycles, are on the verge of approval and
coming on line in the coming year or two. The UK Embassy estimates
that current and prospective British mining investments alone are in
the $3 billion range.

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Relatively small U.S. interests at stake
---------------------------------------

11. (U) Compared to other foreign-based mining firms operating in
Argentina, direct U.S. mining interests are small. Idaho-based
Coeur d'Alene -- one of the mining companies that were not exempted
from the payment of export tariffs imposed in 2002 -- reports that
they have invested about $25 million since it began operating its
Santa Cruz province-based Mina Martha silver mine in 2001, and
employs about 210 workers. (Coeur recently completed a new silver
processing facility at this site, in which it invested about $12
million. Semi-processed silver ore was previously exported across
the border to Chile for further refining there.) North
Carolina-based FMC Lithium has invested about $150 million since
1996 in its Minera del Altiplano site in the northern province of
Catamarca, and grossed $58 million in 2006, and employs about 230
workers. FMC exports lithium carbonate and lithium chloride. FMC
told EmbOffs that a planned new investment to produce lithium
fluoride is now on hold as a result of this new tax. Both companies
have privately expressed deep concern about these measures, but so
far have not indicated what, if any, actions they might take.

12. (U) The United States has larger interests in mining equipment
sales to mining companies operating in Argentina, with about 30% of
the market. The U.S. Foreign Commercial Service estimates that U.S.
2006 mining equipment exports were about $125 million. These
exports levels could be affected by this new mining tax if it
resulted in less investment.

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Radio silence from the GOA
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13. (SBU) Embassy has sought without success an appointment with
Mining Secretary Jorge Mayoral, with whom we enjoy a good working
relationship, for a fuller explanation. A miner by background, he
is understood to not agree with this measure. A private sector
contact calls Mayoral a "good soldier." Other embassies report the
same. Embassy calls and requests for meetings - with several senior
GOA officials and even governors - have been largely turned away or
not returned. Following news reports on November 30 that this tax
would be imposed, Mayoral canceled a planned breakfast meeting with
the UK Ambassador at the last minute.

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Comment: surprise move will likely hurt mining investment
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14. (SBU) Although the possibility of a new tax on mineral exports
was rumored for some time, the size, scope and manner in which it
was enacted has surprised most observers. It is still too early to
know if investors will alter their mining activities, but it
certainly appears that the measure will be reduce investor
confidence in the sector. The mining sector, one of the few that
has enjoyed stable and transparent rules of the game, now joins the
list of basic infrastructure and natural resource extraction sectors
of the economy where GoA interventions and sudden changes in
regulatory and tax regimes have made foreign investors think twice
before committing long term capital.

WAYNE

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