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Canadian miners stare down a deep hole in Argentina

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You have to have a sense of adventure and humour to do business in Argentina, or at least a deluded sense of hope that the country might some day get its economic act together. But even the patience of committed foreign investors can wear thin, as happened when Brazilian mining giant Vale this month suspended a giant potash development project. Canadian investors should take note: several mining companies, including Barrick Gold Corp., have made significant bets on Argentina that have already proven costlier than expected, and could go south if the country's sorry economic state worsens. That seems likely.

If you think Argentina is an international embarrassment, you're in good company. The International Monetary Fund recently began formal censure proceedings against Argentina over its official economics statistics. Nobody quite believes Argentina's GDP or inflation reports: while the country's statistics agency, Indec, says inflation in 2012 was 10.8 per cent, credible observers estimate the figure is closer to 25 per cent.

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Moody's Investors Service, this week stated "Argentina's haphazard economic policy decisions coupled with increasing questions about the reliability of official statistics make is extremely difficult to know with certainty Argentina's real economic conditions, raising questions about the country's ability to manage adverse shocks."

The government refuses to devalue its inflated currency, seized control of the country's largest oil company last year without compensating its Spanish owner, and remains in arrears on payments to sovereign creditors dating to its default more than a decade ago.

This week, Vale, said it was suspending its planned Rio Colorado potash mine after estimated costs almost doubled to $11-billion (U.S.) and the government refused to extend a tax break to the company during the project's start-up phase. CEO Murilo Ferreira blamed exchange-rate controls and runaway inflation, and the company even pulled the project's two leaders out of the county over concerns for their safety, the Financial Times reported.

That's not the only grief miners have encountered in Argentina. The government has generally employed heavy-handed tactics with foreign investors, imposing import and currency restrictions last year. Barrick, which hopes to develop its massive Pascua Lama gold mine in the Andes, has played along, but one has to wonder how much longer that will last. Barrick has already jacked up the estimated cost of Pascua Lama, to $8.5-billion last fall from an initial $3-billion in 2009. With mining projects being cancelled or scaled back around the globe due to rising costs and weaker commodity prices, the Argentine fiscal situation and tense relations with outside investors hardly helps.

Meanwhile, the forecast for Argentina is bleak: weak GDP growth, surging inflation and poor political leadership, with no end in sight, said Nick Chamie, global head of emerging markets research with RBC Dominion Securities. "It means more and more projects will fail to meet the hurdle of being profitable or not," he said. Don't be surprised if more foreign investors, including Canadian miners, decide to tango elsewhere.

Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff.

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About the Author

Sean Silcoff joined The Globe and Mail in January, 2012, following an 18-year-career in journalism and communications. He previously worked as a columnist and Montreal correspondent for the National Post and as a staff writer at Canadian Business Magazine, where he was project co-ordinator of the magazine's inaugural Rich 100 list. More

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