VZCZCXYZ0001
RR RUEHWEB

DE RUEHBU #2313/01 3441254
ZNR UUUUU ZZH
R 101254Z DEC 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 9868
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF INTERIOR WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEHC/DEPT OF INTERIOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 6721
RUEHMN/AMEMBASSY MONTEVIDEO 6923
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RUEHBR/AMEMBASSY BRASILIA 6608
RUEHLP/AMEMBASSY LA PAZ DEC CARACAS 1615

UNCLAS BUENOS AIRES 002313 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
INTERIOR FOR USGS STEVEN ANDERSON 
TREASURY FOR LTRAN AND MMALLOY 
E FOR THOMAS PIERCE 
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE 
PASS USTR FOR DUCKWORTH 
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER 
US SOUTHCOM FOR POLAD 
 
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. 
 
---------------- 
A New Tax on Mineral Exports 
---------------- 
 
¶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. 
 
-------------------------------------- 
Reaction from mining chamber and firms 
-------------------------------------- 
 
¶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. 
 
--------------------------------------------- 
Part of a broader GOA tax collection strategy 
--------------------------------------------- 
¶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). 
 
------------------------------------ 
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. 
 
--------------------------------------- 
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. 
 
---------------------------- 
Radio silence from the GOA 
---------------------------- 
 
¶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. 
 
----------------------------------- 
Comment: surprise move will likely hurt mining investment 
----------------------------------- 
 
¶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