Anglo-Australian mining giant Rio Tinto will decide later this year whether to proceed with one of the biggest planned FDI projects in Argentina: a $1.5bn potash mine near the Colorado River and the city of Malargüe in Mendoza province.

Gary Goldberg, chief executive of Rio Tinto Minerals Worldwide, tells fDi: “Our company’s board will ultimately do whatever it wants to do. It will make a very thorough assessment before going ahead with the investment. Overall, we have had a good experience with our investments in Argentina – and a good track record with our borate mine in Tincalayu in Salta province.”

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Rio Tinto’s investment decision is complicated by the Argentine government’s move, at the end of November last year, to put a tax of 5% or 10% on mineral exports, depending on the mineral and its quality. Most silver, gold and copper exports are now subject to a 10% charge.

Major mining players in Argentina, including Rio Tinto, were angered by the step, arguing that it violates the 1994 Mining Investment Law, which had been established by the Menem administration. The law enables a company to receive an acquired right from the federal mining secretariat, guaranteeing for a 30-year period that it is only liable for the tax regime in place at the time that the right is granted. No new taxes can be added afterwards.

Government agreement

Mr Goldberg says that Rio Tinto has already signed an agreement with the national government that means that the new export tax will not apply to potash from the Colorado River mine. He says: “We expect this deal to stand. However, our borates production has been hit by the new tax and we are watching what happens next. Stability is very important and the government must stand by previous decisions.”

Argentina’s Secretariat of Mining declined to comment on the issue. According to the country’s National Agency for the Development of Investment, apart from the Colorado River mine, other important FDI projects include a $1bn oil and gas field by BP in San Jorge Gulf in the Santa Cruz and Chubut provinces, and $11.7bn in oil and gas fields and refineries by the Spanish-Argentine group Repsol YPF in the provinces of Mendoza, Santa Cruz, Chubut and Neuquén (YPF Repsol’s investments will be spread over five years).

The Colorado River mine would produce two to three million tonnes of potash a year for a 50-year period. It is among the top five potash deposits in the world and would meet the whole of Latin America’s needs.

Potash is an important component in the production of fertiliser, and fertiliser use is rising rapidly in Latin America as more and more land is being turned over to agricultural use to meet the burgeoning Chinese demand for food and to produce crops that can generate alternative forms of energy. Mr Goldberg says: “Brazil does not have its own potash production. The Argentine mine would supply all of Brazil’s needs for the mineral.”

Spreading doubt

Other mining companies in Argentina have thrown into doubt future investments in the country following the imposition of the new export tax. Swiss group Xstrata is reconsidering its $2bn El Pachón copper project in Calingasta, San Juan, and is taking legal action to overturn the new export duties.

Claude Ferron, the chief operating officer of Xstrata Copper Canada, told Reuters in an

e-mail: “The decision of the government to apply the export duty on mining companies... sends a very negative message to international investors and affects the credibility of the country.”

Alexander, a London-listed mining firm, has also said that the new tax was one of the reasons for its recent failure to obtain debt financing for its León copper and silver project in Salta province.

Rio Tinto expects to obtain all of the necessary permits for the Colorado River project from four provinces by May. The project’s biggest challenge has been trying to secure a long-term energy supply because it is estimated that it will require 1.1 million cubic metres of natural gas a day, which it will turn into electricity. This is hard to guarantee in the energy context of the country.

Mr Goldberg says: “It’s a challenge to get enough energy for this project in Argentina. We have not yet received assurances from the government that there will be enough.”

One of the most important considerations faced by Rio Tinto’s board will be whether there is sufficient long-term energy to give the project the all clear.

Rio Tinto has also had to appease local environmentalists who are concerned that if the project goes ahead it will contaminate soil in Mendoza and the local Colorado River. They argue that the mine will produce 100 billion kilos of sodium chloride or salt, which will seep into the ground, affecting the waters used for irrigation and consumption in the provinces of La Pampa, Neuquén, Río Negro and Buenos Aires.

“I can see why people would have concerns if the mine were to contaminate the river. This is the kind of issue that we encounter with mining projects anywhere in the world, not just in Argentina,” Mr Goldberg says. “In the case of the Colorado River, we would have to decide how the sodium chloride is stored, whether it can be kept underground or whether it would be stored on the surface.”

Possible timeline

If all goes well, construction could begin in the second half of this year and will take three years, meaning that the start of production would be in 2011. The project is expected to create 1170 direct jobs and 14,600 indirect jobs during construction – and 850 direct jobs and 11,000 indirect jobs during operation.

“I recently visited the planned project in Malargüe and I was very impressed by the quality of the staff. Argentina has a number of factors in its favour, including world-class deposits, good quality people, a vibrant economy and fairly free employment laws,” says Mr Goldberg.

“The country has some long-term problems, including infrastructure and energy, but I understand that the government is looking at addressing those,” he adds.

Rio Tinto has had a long and fruitful relationship with Argentina. It is on the verge of bringing its commitment to the country up to a whole new level, but the Argentine government has not made that important decision any easier by levying the export tax and by failing to provide long-term energy assurances.

 

COMPANY PROFILE

Rio Tinto

Headquarters: Melbourne and London

Sector: Mining

Annual profit (2007): $7,746m

Source: Rio Tinto, 2007