By Louis James
Yesterday - just two days after our modern-day Evita got re-elected president of Argentina - Christina Fernandez Kirchner's government announced a change in rules for mineral exporters; they will be required to repatriate all sales revenue to Argentina. Apparently certain unpatriotic exporters didn't want to bring cash from abroad back home and convert them to rapidly inflating Argentinean pesos - how strange.
Prominent Argentina plays promptly sold off. Many investors evidently concluded that Canadian mining companies operating in Argentina would not be able to get any cash out of the country to the benefit of shareholders. According to our legal contacts in Argentina, however, this view is incorrect.
There had been a 30% repatriation requirement for oil and gas and no requirement for miners. Now, 100% of the money made from every ounce of gold and silver, every pound of copper, and every barrel of oil equivalent produced in Argentina will have to come back to Argentina and be converted to pesos. After taxes, Argentinean subsidiaries will be able to convert pesos back into dollars (or other currencies) and send them abroad again in the form of earnings dividends. Our sources tell us that Chile and Brazil, among others, already have similar requirements.
Why the change? Many reasons, official and otherwise, are possible. Prominent among them are reducing the flight of capital from Argentina, and perhaps a hope that forcing exporters to purchase pesos with the money they earn abroad will prop the peso up.
So, this move in and of itself is not "mining Armageddon" for Argentina, and yesterday's sell-off could be seen as a contrarian opportunity. However, it is clearly not a friendly move by a government that has already broken its "no new taxes on mining for 30 years" promise. Further, this is a "spending is the way to cure the economic crisis" regime, already experiencing inflation rates so high that economists and journalists who publish inflation figures that contradict government figures risk criminal prosecution.
Time to Head for the Exits (No Rush, but Get Out)
We don't trust CFK and her government. Things will probably settle down and appear to be business as usual for some time now, and exiting now may seem like overreacting to this elimination of an exemption to an existing rule. However, it's not about the rule change: It's about the government itself, and we expect ever-crazier moves as they become more desperate.
Let me stress that there is no need to rush to get to the exit first. In fact, I wouldn't sell now at all, while shares are recovering from the scare. Rather, I'd wait for the next day that gold goes screaming upwards or one of these companies announces positive results that generate both liquidity and higher volumes.
We exited Peru earlier this year for similar reasons - before the current populist president won the election - and have been very glad we did. And this is why we continuously monitor political conditions in mining jurisdictions around the world.
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