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For a country whose name means "Land of Silver," you may expect Argentina's mining industry to be in great shape. But a combination of energy shortages, governmental incompetence, and the global credit crunch makes the outlook for local mine operators grim for the foreseeable future.
A few weeks ago, the Argentinean government announced a halt to subsidies for industrial energy consumers, in order to help restore fiscal balance in Buenos Aires. Incidentally, that's also the reasoning behind President Cristina Fernandez de Kirchner's nationalization of 9.5 million citizens' pension funds, totaling $26 billion.
Neither step is making many friends for the powers that be.
Companies like Australia's Intrepid Mines (TSX: IAU) have announced the suspension of exploration and production in Argentina, due to the fact that project funding is harder than ever to come by.
On October 13, Intrepid announced that it would pull out of a $70 million gold and silver project in the Argentinean province of San Juan, citing a lack of both debt and equity funding.
The more recent energy price hike surely won't help get Intrepid back on its feet there anytime soon, and Argentina does not have a good track record of dealing with its national debt.
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In 2001, the country defaulted on $100 billion in foreign debt, and soon 60% of the population was below the poverty line. That was the biggest national debt default ever, making Argentina the poster child for how out-of-control accounting can lead to complete economic disaster.
Until this month's subsidy cut, energy prices hadn't increased since the default, even though inflation has been a problem and non-energy costs rose across the board. In June 2007, an abnormally cold winter caused widespread blackouts and stretched stagnant natural gas and oil supplies.
While the government scrambles to shuffle money around and make the balance sheet looks better than it is, Standard & Poor's lowered the country's sovereign credit rating to B- junk bond status, six levels below investment grade!
That was the second S&P downgrade in three months for Argentina, and reports say that of $20 billion in debt payments coming due in 2009, only $8 billion is accounted for in the annual budget.
So in the near-term at least, the economic environment for mine operators in South America is better in Argentina's neighbor, Chile.
Investing in South American Mines
Chile's national debt is investment grade, and the country's robust pension system is fortified with the largest copper reserves in the world.
The problem in Chile may actually be the country's solvency and ability to take on mining projects for itself. In 2006, Intrepid was boxed out of a stake in the Jeronimo gold exploration project in Chile, since the national copper mining company Codelco has the right of first refusal.
And let's not forget that energy prices and fiscal stability aren't the only threats facing metal companies operating in South America.
In Bolivia, Ecuador, and Venezuela, political concerns over Bolivarian nationalization plans are the main menace to miners.
South America has its share of political problems. But the continent also has an vast wealth of mineral reserves. Often times investors are lured in by a company that controls a significantly-sized mineral resource, but end up losing their money due to political problems in the country where the deposit is located.
As always, be sure to do your due diligence on any company before buying into it.
Regards,
Sam Hopkins
Investment Director, Global Growth Stocks
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