Bearish Outlook On Mining Sector
BMI View: We hold a bearish outlook for Argentina's mining sector given our expectation that metal prices will head lower over the medium-term view. In addition, we expect greater resource nationalism will ensure that Argentina become a significantly less attractive mining sector in future.
We hold a bearish outlook for Argentina's mining sector over the coming months as a perfect storm of problems coalesce and significantly reduce the attractiveness of investing in the country. Argentina had long been feted as a key growth area in terms of mining, but our expectation for further weakness in metal prices, rising costs and the effects of greater government intervention should ensure that we see projects in the country delayed and a reduction in mining output growth as investors look elsewhere.
|Firmly Below Consensus|
|BMI 2012 Average Price Forecasts vs Bloomberg Consensus (% Difference)|
Political Concerns To Come To The Fore
We expect Argentina to remain one of the riskiest mining destinations in Latin America as the government seeks greater control of the resources sector. This is already playing out with the government takeover of oil company YPF this year as well as capital controls and stricter foreign trade restrictions. Given our bearish outlook on the country's economy it is likely that the government may turn to the mining sector in the form of higher taxes or greater government control to further stem capital flight and increase revenues.
Companies operating in Argentina also have to deal with regional and national level environmental regulation as well as substantial public opposition. Recently a local community has filed a lawsuit in San Juan province forcing Barrick Gold to submit the environmental reports for its Pascua Lama gold mine. This follows a revision by Barrick Gold to the cost of Pascua Lama from US$3.3-3.6bn to US$4.7-5.0bn over the coming years. Should local opposition to mining projects increase in Argentina as it has in other regions of Latin America, early stage mine projects could face significant setbacks. Finally, aside from concerns over government intervention and the myriad of bureaucracy which faces investors, Argentina has some of the highest labour costs in the world, with very strong unions, which add a further headache for potential and current investors.
|Barrick Gold||Pascua-Lama||800-850kozpa gold and 35mozpa silver during first five years of operations||2013-2014|
|Goldcorp||Cerro Negro||550kozpz during first five years of production; Reserves of 4.26moz||2013|
|Yamana Gold||Gualcamayo Underground||Production ramp-up from 180kozpa in 2012, 190kozpa by 2013 and 200kozpa by 2014||2014|
|Patagonia Gold||Cap-Oeste, COSE, Manchuria, Monte Leon, Lomada||Total production of 200kozpa||2015|
|Yamana Gold||Agua Rica||Reserves of 6.56moz gold 102moz silver 4.5mnt copper||Feasibility study by 2013|
|Pan American Silver||Calcatreu||Total resources of 8.4moz silver and 902koz gold||Project resumed as ban on use of cyanide lifted|
|Extorre||Cerro Moro||120kozpa gold and 6.2mozpa silver||Engineering and development planning to continue|
As well as political concerns, our below consensus forecasts for metals will ensure that projects in the country become less attractive. Most pressing of these is copper, which we are almost 3% below consensus on, forecasting prices to average US$7,800/tonne in 2012 and US$7,200/tonne in 2013. If these forecasts play out we could see project delays in Argentina as the profitability of mining is reduced significantly.