Mining in Argentina

Current situation, potential and opportunities

April 2016

kpmg.com.ar Introduction Argentina has an important mining tradition spanning over a century, especially focusing on the production of gold, silver, lead, aluminum and copper. The growing global demand for minerals, such as lithium and silicon, makes the country play a new leading role.

Minerals play an active role in our that produced distortive effects2, both (i.e. supplies demanded from one lives. They are present in all the things industries have shown an uneven economic sector to the others) and we use and consume in a proportion performance that might not reflect the production value added or PVA greater than imagined. Metals, such their real situation. However, they (i.e. the value that the sector involved as iron, aluminum, copper, zinc and offer good examples to show the adds to the IC through the intensive platinum are intensively used by the importance of mining for economic use of production factors, basically automotive and electronic industries. development. capital and workforce). The share of Other minerals, such as limestone, each element in GPV depends on In fact, mining is not only a sands and silica are used in the the business activity under analysis. significant activity within the national construction and paper industry; For example, in the case of mining, production structure or system (GDP), whereas coal and uranium are used the PVA represents 69%; therefore, but also provides basic supplies in the energy industry (without in relative terms (i.e. regardless of necessary for the production of considering oil and gas, which despite its absolute value of production and other finished products. Accordingly, being part of a separate industry, as its share in the national GDP), this is based on the most recent input- they are resources extracted from considered a “productive” economic output matrix (IOM) prepared by the the soil and rock, may be regarded as activity. For comparative purposes, Argentine Institute of Statistics and included within mining). the GPV of the industry is made up Census (INDEC) in 1997, it can be of a 66% CI (local and imported) According to a study conducted by concluded that the sales in this sector and only a 32% PVA. However, this IDESA (Institute of Argentine Social (Exploitation of mines and quarries, industry represents a share in GDP Development)1, a vehicle is made according to the classification made of more than 16% in absolute terms. up of 67% ferrous metals, and a by INDEC) have a significant influence In addition, it can be said that the cellphone, among other materials, in the gross production value (GPV) industry accounts for 40% of the GPV contains large amounts of metallic of the overall economy and some of the mining activity, which, in turn, minerals (copper, for example, areas in particular, such as the represents 58% of the demand for represents 50%). manufacturing (3%), power supply, mining products from all economic gas and water (12%) or construction These are only some examples sectors (except for the demand for (3%) industries. of everyday products in which the local and external final consumption, mining industry has left a permanent The conclusions that may be and the percentage allocated to the mark. In the particular case of drawn from the IOM are critical gross formation of capital). Argentina, in relation to the examples to understand the valuable role of However, the share of mining in given in the preceding paragraph, the mining in the Argentine economy the GPV of the industry results, in automotive and electronic industries (see Table 1). According to estimates fact, from calculating the average are two productive areas showing made by INDEC, the mining industry impact on the GPV of each industrial an increasing share in GDP and in represents almost 3% of the GPV activity. Therefore, it might be domestic exports. During recent of the manufacturing industry. expected that such share shows years, as a result of certain policies GPV is made up of two elements: a significant increase when, for intermediate consumption or IC example, the metallurgical, chemical and petrochemical (for which oil and

1 “La Minería y su aporte al desarrollo 2 The increase in luxury tax applicable to the gas are basic supplies), automotive económico nacional” [Mining and its contribution automotive industry, subsidies, tax exemptions and or machine production, metallic and to the national economic development], IDESA, the excessive promotion of import substitution for the December 2011. electronic industry provide a clear example of this. non-metallic minerals industries are

© 2015 KPMG, a partnership established under Argentine law and a member firm of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. analyzed. In these cases, the share of In addition, holding the results jobs per direct job, the figures mining is significantly higher than the of the IOM in 1997 fixed, we can obtained by the employment average share of the industry; which conclude from Table 1 that, in multiplier for the mining industry are clearly highlights its importance. aggregate terms, 70% of the GPV even more remarkable (even though, This is even more evident when we of mining is allocated to the IC of all historically, the mining industry analyze other sectors where mining economic sectors (i.e. as production has made a small contribution to represents the greatest share in its supplies) and that mining provides total employment, according to the GPV: power, gas and water supply around 4% of the total intermediate statistics on registered employment (PGWS). In this sector, which is consumption of production supplies. kept by the Ministry of Labor, critical for the industry, agribusiness Employment and Social Security). As regards employment, as it can and service provision, based on the be seen in the column Employment A parallel analysis may be IOM, it is estimated that the share of of Table 1, based on the IOM, it conducted by observing the main mining in the GPV is over 12%. Such is estimated that mining is the ten products (or groups of products) percentage, which is significant in productive area that creates exported by Argentina in 2014. As it itself, becomes more important when the greatest number of indirect can be seen from the table below we understand that the IC of PGWS jobs per direct job in other areas (Table 2), mining, without including represents 50% of its GPV or that it (around three additional positions). mineral fuels, represents a share of accounts for around 21% of the total If it is considered that the economy around 4.5% in total exports of the demand for mining products from the generates, on average, 1.7 additional first ten groups of products (or 11% other economic sectors.

Table 1 Input output matrix in 1997. Conclusions on mining. (In percentages and number of jobs created)

Source: prepared by KPMG based on INDEC data (IOM, 1997). Note: (1) =Taxes; (2) = It does not include imports; (3) = It is made up of the intermediate demand, final consumption, exports and gross formation of capital (equivalent to the GPV).

© 2015 KPMG, a partnership established under Argentine law and a member firm of the KPMG network of Mining in Argentina. Current situation, potential and opportunities. 3 independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. if fuels are considered). In addition, recent years, which occurred at the according to IOM estimates of same time as the ups and downs of the share of mining in the GPV of the mining share in GDP. other economic activities, it can be The information provided so far concluded that most of the groups gives a snapshot of the performance of products that record the highest and importance of mining in the export levels depend, to some extent, national economic development of on mining. recent years. This article is intended From the historical standpoint, as to provide an overview on the other productive activities critical for performance of, and changes in, this development, mining has kept pace sector during the 1900-2015 period, with the national economic growth. while showing different milestones As it can be seen from Figure 1, and how mining has contributed which shows growth rates using 10- to the national economic growth. year moving averages for both mining To that end, this article is divided in and GDP during the 1900-2015 period, two sections: the first one analyzes the acceleration and deceleration changes in mining as a productive cycle of the Mines and Quarries sector throughout the 1900-1960 category has kept pace with the period; the second one includes an economy, experiencing some evident analysis covering the following fifty deviations during 1956-1972 and in years until present days (1960-2015).

Table 2 Ranking of exported products. Year 2014. (In thousands of U.S. dollars)

Note: (e) = estimated value; (*) = including gold, which is the most significant in this group. Source: Prepared by KPMG based on Argentine Ministry of Economy (MECON) and COMTRADE data.

© 2015 KPMG, a partnership established under Argentine law and a member firm of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Figure 1 Historical performance of mining gdp and national gdp (1900-2015) (In %, with 10-year moving averages)

Source: prepared by KPMG based on ORLANDO FERRERES and INDEC data.

© 2015 KPMG, a partnership established under Argentine law and a member firm of the KPMG network of Mining in Argentina. Current situation, potential and opportunities. 5 independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. First fifty years: 1910-1960

Mining in Argentina dates back foreign private initiatives. In addition, been important for the economic to the beginning of the Republic. the State had had little influence and development of the nation, both in The first remarkable milestone involvement in the promotion and terms of its share in the production was the enactment of the Mining development of the mining activity value added and its potential to Promotion Law in 1813, which was and the tax policies adopted by generate direct and indirect jobs. intended to encourage research on, the State had not boosted mining, Both the First and the Second and exploitation of national mineral either. Nor were there any controls World War, which took place in wealth. Some years later, in 1862, the over production or additional rules 1914-1918 and 1939-1945, and the then current governor of the province preventing, for example, monopolistic international financial crisis in 1930 of San Juan, Domingo Faustino activities at the domestic level, mainly were clear drivers of the development Sarmiento, commissioned a soil study in metal mining, which was led by and growth of different productive to determine the mining potential companies having a clear link with sectors of the Argentine economy of the soil of such province. Then, international large firms. by the middle of last century. The during his presidency, the Minister During the first years of production, three historical events showed a of Domestic Affairs, Dalmacio Vélez mineral extraction activities, mainly series of factors and circumstances, Sarsfield, was in charge of the overall conducted in the provinces of San encouraging the progress of the inspection of all mining fields of Juan and Mendoza, recorded low national economy and helping it move the nation, which enabled to keep levels, if compared with those that from an agro-exporting economy to an a detailed record of the numerous may be reached nowadays with incipient industrial-based economy. mining deposits throughout the existing processes and technology. country, where metal minerals show The First World War was a The number of employees assigned the greatest potential. milestone that reversed the was around 2700 people and, in light production standstill of an economy Upon the adoption of the Argentine of the low production levels, product that was based on primary activities Mining Code in 18873, the subsoil per man (i.e. a productivity indicator) and the export of agricultural and and its wealth became the property did not reach significant levels during livestock products. Until then, the of the State (the “regalian doctrine” the first years of the last century. country’s business relationship was adopted). However, the new Mining was clearly a fledgling industry with Great Britain had generated regulatory framework allowed private with great development prospects. all revenues necessary to sustain exploitation. In fact, the development At the beginning of last century, a moderate economic growth, but of the mining activity, at least during mining was characterized by metal which did not leave room for the early stages, as well as of the production cycles. During the first implementation of other production metallurgic industry, which might be half of the 20th century, this sector models, such as import substitution considered an industrial link within experienced a moderate growth as a industrialization, which was emerging the value chain of mining, was until result of the discovery of tungsten, in the region. the 30’s the result of both local and tin, iron, lead, silver, zinc, copper The restrictions imposed by the two and oil fields, in response to the World Wars interrupted international 3 It is the basis of the Argentine mining two wars that marked this period, legislation. Some amendments were made in relation trade and capital flows, having a direct leading to severe global economic to mineral fuel and nuclear minerals during the 50’s. impact on most economic activities, The latest amendments were introduced through crises, an also as a result of the Law No. 22259, enacted in 1980 and intended to including mining and the public fact that the manufacturing industry encourage private investment. Further amendments investment program, which heavily were introduced in the 90’s, together with the was undergoing a full development constitutional reform in 1994, which, in general depended on foreign funds. terms, were aimed at boosting investments (Laws stage. In fact, if we assumed as Nos. 21382 and 24196), updating the Mining Code constant the results of the IOM that To put it in figures, the drop in and passing the original ownership of minerals to the provinces, thus enabling the creation of state-owned would be estimated around 80 years the national GDP at the beginning mining companies at the provincial level. later, by then, mining should have of the First World War was around

© 2015 KPMG, a partnership established under Argentine law and a member firm of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 10% and this situation remained performed in a similar way during and raw materials, the net benefits unchanged until the end of the war the period covered by the two World received by such economies cannot in 1918. In aggregate terms, the Wars. From 1914 to 1918, the prices be estimated if changes in the Argentine economy had dropped by of silver, copper and oil increased by prices of exported products are not 21% from 1914 to early 1918, the 78%, 86% and 144%, respectively. compared with those of imported industry by 17%, and mining by 25%. Likewise, during the period spanning products. Furthermore, the share of mining from 1939 to 1945, the prices of In the case of Argentina, as it is in the gross product and in national these resources increased by 32% shown in Figure 3 (chart III), the exports was under 0.1%. Such figures (silver), 7% (copper) and 3% (oil). In increase in the prices of products and behaviors clearly show the great line with such increases, domestic imported during the First World War dependence and sensitivity of Latin prices of mining and energy products was higher than that of exported American economies to external rose by 21%. products; therefore the terms of imbalances, mainly those occurring at trade (TOT) for that time in the old total exports were continent4. not very favorable. In both wars, the The two world wars However, mining effects on European exports benefited economies and on from a context of other economies price rises, since, having a commercial of the past century from the beginning relationship to the end of the with them were war, prices grew at significant. had a negative impact a very significant While European annual average rate. economies had The opposite trend to change their on local mining was seen during the productive structure 1939-1945 period. and reallocate most During the Second resources to the arms industry and A similar trend was followed by World War, the overall increase in the maintenance of their armies, the some typically industrial products, the prices of the products exported other economies, especially Latin as their relative scarcity contributed was higher than that recorded by the American ones, started to see a to increasing the prices of such products typically imported by the substantial increase in the demand for products, since some of the world’s country. This was triggered by the food, raw materials and fuels, among largest economies participated in import substitution industrialization other items, which should have both wars, thus putting a halt to process that the country had initiated encouraged their participation in world the production of non-strategic some years ago, following the crisis trade and increased their international industrial products. This triggered of the 30’s to replace the agro- reserves as well as their household an inflationary process that affected exporting model, which had been income and trade surplus. However, almost all countries and products a characteristic of the country. In increases in the international involved in international trade, though furtherance of this new development demand for commodities or slightly to a different extent. Accordingly, the model, which would be intensified manufactured goods directly apparent benefits derived from this after the war, Argentina had managed impacted on prices, and supply was context for Latin American economies to substitute industrial products far outstripped by demand and could (mainly those typically engaged that were formerly imported and to not keep pace with it. The goods in primary production) cannot be reverse the negative effects that the affected by the increase in prices properly estimated, unless some TOT had on trade during the 1914- during both wars included, in addition of the factors that determined their 1918 period. The growth in exports to food, several mining products, intensity and extent are described. during the Second World War was in such as cooper, silver, zinc or mineral Firstly, the effects of the two wars line with the changes in prices: while fuels such as coal and oil (see Figure that broke out in the last century on Argentine total exports grew by 54% 2). Accordingly, the changes in the the demand and exports of these (in dollars) from the beginning to the price of the three minerals referred countries depended on the type of end of the war, the exports of mining to above show that they have products produced and provided by and energy products grew by 34%. them to the global market. Secondly,

even when inflation of foreign prices 4 During 1913, Argentina allocated around might have leaned international trade 60% of its exports to its European partners (mainly Great Britain, which represented 25%) and only 5% and its profits towards economies to the United States. Other countries, such as Bolivia, engaged in the production of food Chile or Brazil behaved in a very similar way. © 2015 KPMG, a partnership established under Argentine law and a member firm of the KPMG network of Mining in Argentina. Current situation, potential and opportunities. 7 independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Figure 3 also shows that the From 1920 to 1941, the share of a gradual but sound change in its performance of the mining gross mining in GDP and in national exports bilateral commercial relationships, product followed a trend similar to the went from 0.1% to 0.5% and from giving priority to the United States, national GDP during both periods (I). 0.1% to 2.2%, respectively (see which boosted new investments that This must be clear. The mining sector Figure 3, chart IV). By the early 40’s, were allocated to different industries, generates productive resources and the production of gold, silver, zinc, such as oil and gas, mining and other energy supplies that are critical to lead and copper had reached, in the primary and secondary activities that the overall economic development of aggregate, 107,000 tons, while mining promoted national economic growth a nation. As detailed in the previous exports had surpassed USD 10 billion. in the post-war period. section, mining provides essential As regards national mining private Following the crisis of the 30’s raw materials to the industry that activity, it is to note that from 1914 and the Second World War, the enable to reduce costs and improve to the beginning of the crisis of the State was forced to intervene productivity levels, which is translated 30’s, a large number of English mining in this activity through publicly- into a proportional increase in GDP. companies left the country, whereas owned businesses5 with the aim of However, as it can be noted in the the inflow of U.S. capital increased continuing to evaluate the soil and second chart (II), the drop in the significantly, showing a completely exploiting mining resources, as the growth of the mining GDP was in opposite trend. The commercial private sector was unwilling to bear line with the stagnation and plunge in leading position and potential of the the risks of this activity. However, national GDP during both the 1913- United States had already threatened some private small and medium 1918 and the 1939-1945 periods. the English position prior to the sized enterprises (SMEs) continued Notwithstanding the foregoing, the First World War. Furthermore, the to be present in the subsector of acceleration and deceleration cycles presence of the United States in the non-metallic minerals (clay, sand, of the mining GDP have always been international scene progressively silica, borate, gypsum, among others). more volatile than those related to increased since such war, mainly in the national GDP, due to its higher terms of foreign investments. In this dependence on prices and foreign 5 The main public bodies in charge of new scenario, Argentina initiated directing investment towards mining within the demand. framework of the ISI model were the Mining Department (Secretaría de Minería), the General Department of Military Industries (Dirección General de Fabricaciones Militares) and the Argentine Commission of Atomic Energy (Comisión Nacional de Energía Atómica) (Tolón Estarelles, 2011).

Figure 2 Changes in the prices of minerals and fuels. 1910-1960 Period.

Source: prepared by KPMG based on ORLANDO FERRERES and INDEC data.

Source: prepared by KPMG based on ORLANDO FERRES, INDEC and Argentine Ministry of Economy data.

© 2015 KPMG, a partnership established under Argentine law and a member firm of the KPMG network of Mining in Argentina. Current situation, potential and opportunities. 9 independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Since then, the development of the During this period, some specific mining sector has had a significant regulations have been adopted. presence of the State and has been Such regulations were aimed at exclusively oriented to the provision improving the business conditions of supplies for the industry. During and environment in order to promote this stage, the first exploration and mining exploitation. By then, mining prospecting works for iron (in Sierra was already a provider of supplies de Zapla, Jujuy, and Sierra Grande, critical to industrial development. Río Negro), coal (in Río Turbio, Santa Such regulations included Decree Cruz) and copper (in Tinogasta, No. 22477/1956 related to nuclear Catamarca), among others, were minerals, Decree No. 5760/1958, conducted. These two decades and Hydrocarbons Law No. 14773 and the following decades until enacted in 1958 and overturned by 1960 were marked by a continuous Law No. 17319 (new hydrocarbons industrialization process that required law regime). a greater amount of supplies from mining. The production of the mining sector reached an average share of 1.1% in GDP during the 60’s and, by the end of such decade, this sector produced around 120 thousand tons of the main minerals (gold, silver, zinc, lead and copper) in the aggregate. In addition, from 1960 to 1969, although the share of mining in GDP was only 1.2%, such sector represented from 2% to 3% of the growth experienced by the national GDP and exports, which clearly shows the increasing performance of this sector and its importance in development policies. However, despite the growth experienced by the sector, the amounts of mineral required for the purposes of the import substitution industrialization model could not be wholly provided by local production. Therefore, since then and until 1997, the import of the additional raw materials required led to a sustained and traditionally negative balance of trade6.

6 For instance, the exports of the mining sector in 1964 and 1980 represented around 3% and 43%, respectively, of the exports recorded in 1997.

© 2015 KPMG, a partnership established under Argentine law and a member firm of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2015 KPMG, a partnership established under Argentine law and a member firm of the KPMG network of Mining in Argentina. Current situation, potential and opportunities. 11 independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Last fifty years: 1960-2015

As presented in the previous rate of the sector was 3%. However, time, already had a share of 60 % section, the first half of the last the greatest growth in the sector, in national mining production). In century was not so favorable for mainly as regards gold, copper, silver this new context, various mineral national mining production. However, and aluminum production, occurred deposits were launched, such as mining as a productive sector has as from the 90’s, given the series of Salar del Hombre Muerto (lithium evolved towards a great market changes introduced to the regulations production) and Bajo de la Alumbrera of supplies for local production. At effective up to that moment. Among (copper, gold and silver extraction) in the end of the 60’s and beginning these changes, we must highlight Catamarca, and Cerro Vanguardia in of the 70’s, certain projects for those seeking to favor foreign Santa Cruz (mainly gold). the exploration of metal minerals investments in general (Law No. Despite the changes produced were carried out, fostered by the 21382/1993) and particularly in the by the amendments to the mining increase in foreign prices7 and the mining sector (Law No. 24196/1993)9, model regulations that had ruled difficulties encountered by companies the amendment to the Mining Code until the 90’s, and by the significant abroad (Sarudiansky and Nielson)8. (Law No. 24498/1995), and the projects launched in the national Furthermore, during the 80’s, a new changes produced jointly with the territory, Argentina did not record exploratory wave, mainly for gold, constitutional reform of 1994, which any significant variation in its share was generated which, despite the reoriented the original ownership in the global production of minerals. detection of metal mineral areas and of natural resources from the However, changes had an effect on deposits of interest, did not cause a State to the provinces and enabled the sector development, at least significant increase in the activity. the creation of provincial mining compared with the production levels companies10. Since 1970, as an answer to the previously evidenced. In this sense, domestic crisis faced during that During this period, the new Figure 4 shows a change in the trend decade and at the beginning of the regulatory framework, together experienced by the joint production 80’s, the mining GDP was in line with with the country’s openness and of gold, silver, aluminum, copper, lead the national GDP’s fall. It is estimated the attractive foreign price structure, and zinc, mainly after the first half of that from the beginning of that fostered the establishment of foreign the 90’s. decade to the return of democracy companies, mainly from Canada and As noted in the previous figure, the in 1983, the annual average growth Australia, with a significant rise in the joint production of minerals showed sector’s production levels (basically a rise of 104% from 1990 to 1999. of metal production which, at that 7 From 1970 to 1980, the prices of cold, At the beginning of the new century silver and copper, just to name a few, recorded (2001), the sum of the production of considerable increases. These increases, jointly with the growth in the price of other tradable goods, drove 9 The Mining Investments Law promoted these minerals reached 500 thousand Argentine terms of trade by 24%, favoring the net the increase in investments through strong incentives tons, and the GDP of the mining inflow of foreign currency. Likewise, these increases such as tax stability for a term of 30 years and certain generated investments and the production of minerals tax benefits (accelerated depreciation, VAT refund and sector grew at rates ranging from 5% in our country. deduction of exploration expenses). to 7% annually. Furthermore, during this period, Argentina began an active 8 As explained by R. Sarudiansky and H. 10 Other laws of interest for the mining Nielson, an example of this was noted when certain sector were the following: Law No. 24402/1994 and growing participation in the export foreign companies conducted copper exploratory (VAT financing and early refund regime), Law No. of some basic minerals for industrial activities in our country, due to the nationalization 24585/1995 (Environmental protection for the mining of copper deposits in Chile. With the support of activity), Law No. 24585/1996 (Binational Agreement production, such as copper, gold and the United Nations, the National State developed with Chile on Mining Integration and Cooperation) and other non-metal minerals such as the following plans: Cordillerano, NOA, San Luis, Laws No. 25161/1999 (on the mineral pithead value) Patagonia-Comahue and Misiones, intended to and No. 25429/2001 (Mining Activity, amended by lithium. promote and order this new exploratory wave. Law No. 24196 on mining investment).

© 2015 KPMG, a partnership established under Argentine law and a member firm of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Figure 4 Production of main metal minerals. and aluminum production), strongly (In thousands of tons) related to mining. The start of the already known cycle of increases recorded by prices of most commodities as from 2003, as an answer to the pressures of the main emerging economies on the international demand for supplies and factors (basically China and India), has been defined as the driver of the reemergence or boom of the mining activity in Argentina in the new century, accompanied by the regulatory reforms in the 90’s and in 2001. Accordingly, the mega- devaluation of the peso against the dollar in 2002 considerably reduced production costs faced by domestic mining companies which, together with high prices, explains the sector performance during those years. Source: Prepared by KPMG based on O. FERRERES data, U.S Figure 5, intended to show the Geological Survey and British Geological Survey. changes in the national contribution to the global production of the main minerals (in this case, gold and silver) In addition to the previous and resources, were favored by a growing and their global prices, evidences preexisting mineral deposits11, other domestic market of supplies, to the high dependence between deposits opened such as Veladero the benefit of the industrialization both, while explicitly provides a (2005, silver and gold extraction) and process, due to the replacement of representation of our previous Gualcamayo (gold and silver) in San imports (in general, this new mining comments. As it can be noted in Juan, Mina Pirquitas in Jujuy (2009, model helped both the industry and the different charts (I y II), gold and silver and zinc production), Potasio Río the construction sector, as explained silver cases are clear. Throughout Colorado in Mendoza (2010, currently in the first section on the results of the last decade, the behavior of suspended), Cerro Negro in Santa the IOM, 1997). these resources in the national Cruz (2015, gold) and Pascua Lama, After the end of convertibility in production has been related to the also in San Juan (2013, gold and silver, 2001 and the currency devaluation in changes in global prices and, thus, currently suspended). Other deposits 2002, jointly with the growth of China the local contribution to international are El Pachón (copper) in San Juan and its pressure on the international production has grown sustainably, and Agua Rica (gold and copper) in demand for supplies, mining became mainly after 2006, and jointly with the Catamarca, which are expected to the main recipient of foreign direct cycle of increases in the international begin operations before 2019. investments (FDI), primarily during the price of commodities. At the same The multiplication of deposits for period 2002-2005 and then again in time, there was a fall in such mineral production, mainly metal 2009 (Tolón Estarelles, 2011). In fact, contribution as from 2012/2013, as minerals, after the implemented the impact of mining on FDI went an answer to the recent deceleration reforms, not only transformed the from 1 % in the period 1992-2001 to of international prices. In the case national mining sector production an average of 4% in 2002-2004 (Calvo of gold, however, an additional structure, but also, at the same Vismara, 2008). Moreover, as it relates explanation is required. For the last time, drove certain industrial areas to the industry, its impact on FDI months of 2015, the price of this which, by the intensive use of these doubled from one period to the other, metal has been falling at a monthly whereas the highest increases were average rate of around 1%, though led by the industry of common metals a certain recovery is seen during 11 Among the most important ones: Cerro Vanguardia (gold and silver) in Santa Cruz, Sierra de and their production (basically steel the first months of 2016. Some Zapla (iron) and El Aguilar (lead, zinc and silver) in Jujuy, and Sierra Grande in Río Negro (iron). © 2015 KPMG, a partnership established under Argentine law and a member firm of the KPMG network of Mining in Argentina. Current situation, potential and opportunities. 13 independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. of the primary factors explaining As a result of the processes Regarding exports, imports and this behavior (when in prior years, previously described, mining currently the balance of trade (see Figure 6), following the positive and growing represents around 1% of the GDP12 the sector had been posting a deficit trend in the price of commodities, (Mines and quarries) and 6% of total until 1997, when it started to show gold recorded annual average rates national exports. In 2014, around positive signs and even maintained of approximately 20 %, which made 900 aggregate tons of golden and a surplus in the trading account (= the global production increase from silver were produced, in addition exports – imports) to date. In general 2500 tons at the end of the 90’s to to 625 thousand aggregate tons of terms, it can be asserted that this almost 3000 in 2014) have been, aluminum, copper, lead and zinc, event, that must be understood as a among others, purchases from China being 73 thousand people employed critical reversal of the foreign trade which, according to specialized by the whole activity (direct and structure of the sector, has been reports, would have risen by 60%, indirect jobs of the Mines and quarries driven by the contribution of gold compared with the figures reported sector), out of which an important and copper to total mining exports13. by that country in 2009, and the portion is engaged in the extraction These resources, by themselves, rise in US interest rates, jointly with of metal minerals. If we take into are higher in terms of export value the dollar recovery. Considering the account that, according to data than the demand for the import of previous issues and the correlation presented, the quantities produced minerals from the economy as a between prices and production (or in previous decades represented a whole. Figures enable us to observe share) no important increases should portion of those described now, it can that exports of the mining sector have be expected in national production be concluded that the growth in the grown by more than 800% between in the next years, which will have mining sector has been simultaneous, 1997 and 2013 (from US$ 400 million an impact on the contribution of our at least locally, to the behavior of to US$ 4000 million). Additionally, country to global production (as other most of the other performance it is estimated that during 2014 the countries, of course, can show the indicators (i.e. production, exports and mining sector’s exports were worth same behavior). employment, among others).

13 Copper exports amounted to US$ 1500 million in 2012, US$ 950 million in 2013 and US$ 930 12 This figure is related to the share in the million in 2014. Gold exports amounted to around actual GDP valued at prices of 1993. US$ 1800 million in 2013 and 2014. The sum of these figures represents between 60% and 70% of total mining exports made in the last years.

Figure 5 National contribution to global production and prices. (Contribution right axis, prices left axis)

Source: Prepared by KPMG based on ORLANDO FERRERES, WORLD BANK, U.S. Geological Survey and British Geological Survey data.

© 2015 KPMG, a partnership established under Argentine law and a member firm of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. US$ 3900 million, and that in 2015 which created the bases for a future As it relates to the mining gross that figure was exceeded. By the sustainable expansion. This is shown product, the figures presented for end of 2016, the sector’s exports are by production, investment and export the last two years (2014 and 2015) expected to record a share ranging statistics, as well as the influence of are estimates that may differ from from 6 % to 6.5 % of total national the sector in the industrial and general actual figures (not available to exports. development. The end of the cycle of the date of this report) due to the increases in the price of commodities, following factors: 1) passthrough Moreover, Argentina could have added to moderate estimates that of international prices to domestic become, after the reforms of the 90’s have been made on the expected prices; 2) the recent behavior of and the investments made in this growth for emerging economies, foreign prices of minerals and period, in the 9th global producer of requires a thorough review of commodities which, added to copper and the 14th producer of gold medium term growth projections for certain local events, may discourage (Bajo de la Alumbrera)14. Accordingly, the sector, particularly if we consider production, making the business lose after Salar del Hombre Muerto began the linkage of mining in the value liquidity; 3) certain macroeconomic to operate in Catamarca in 1997, chain, especially with the industry and problems characterized by high the country started to contribute infrastructure. inflation, growing internal costs, around 30 % of the lithium globally impossibility of remitting profits demanded (Tolón Estarelles, 2011). The chart presented as Table abroad, rise in imports and tax Although the mining sector is waiting 3 summarizes some of the main pressure; and 4) investments to see the impact that the recent variables of the mining sector and projected for national mining, mainly monetary changes announced by the their relationship with the aggregate foreign direct investments (FDI), National Government may have, the economy. As it can be appreciated, which may be delayed and not truth is that throughout these years, except for the estimate made in 2007 meet the stipulated terms due to the sector went from a sluggish on tax revenues, which has remained new expectations derived from the period to a first stage of development constant because no recent statistics behavior of prices and profitability. are available, most of the variables show a significant growth to date 14 According to statistics from trustworthy (mainly investment and exports). bodies (mainly the U.S. Geological Survey), the national production of gold grew by 2000% between 1990 and 2000. In the last fifteen years (2000-2014), production went up by 95 %.

Figure 6 Mining balance of trade. (In millions of dollars)

Note: Upon preparing this report, the 2015 import figures were not available. Therefore, these figures are approximate, considering the value for the prior year. Source: Prepared by KPMG based on CAEM and World Trade Organization (WTO)

© 2015 KPMG, a partnership established under Argentine law and a member firm of the KPMG network of Mining in Argentina. Current situation, potential and opportunities. 15 independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Table 3 Mining: summary of main variables

Note: (*) = direct and indirect jobs recorded only for Mining production (Ministry of Labor, Employment and Social Security); (**) = direct and indirect jobs recorded for production in the Mines and quarries area –which includes oil and gas– (Ministry of Labor, Employment and Social Security); (***) = estimate for year 2007, only of tax revenues from income tax on metal mining (Machado et al., 2011); (e) = estimate. Source: prepared by KPMG, based on INDEC, WTO, Ministry of Labor, Employment and Social Security and CAEM.

As in the case of oil and gas, mining is a critical not contribute to global production, but nowadays, it activity to promote national development and achieve represents 2% of total global production. Silver, a mineral improvements in productivity, competitiveness and with historical tradition, to which Argentina owes its to leverage economies of scale. A country without a name, had a similar experience and now represents 3.2% significant availability of these resources or a country that of global production and the country would rank 7th in has simply decided not to exploit them will depend on terms of its reserves. Copper, aluminum and lead have imports, thus being tied to the volatility of world prices. developed in step with the aforementioned minerals. It is If, as noted hereinbefore, the economy and production of worth noting the potential of minerals with an increasing a country depend on mining, exploiting all its potential is demand at the worldwide level, such as lithium, silicon essential to achieve a sustainable growth for the country. and graphite. The last-mentioned mineral is critical to the production of lithium-ion batteries (used to provide The balance for 2015 was below the expectations of power to cellphones, tablets and notebooks) and to the this sector. In addition to the drop in the international development of the steel and aeronautical industries, prices of the main minerals, which reduced the liquidity and has shown a growing impact on the future of nuclear of the business, the activity was also affected by and photovoltaic energy. As regards lithium, it has a macroeconomic problems encountered by Argentina, great demand potential derived from new storage energy such as inflation and increased tax pressures as well sources and is used in the production of cellphones, as permanent social conflicts related to environmental batteries and other IT assets. It is forecasted that, with issues. The process aimed at normalizing the main the scale production of the so called hybrid or electric economic and financial variables of the country during automobiles, the demand and price of lithium will rise last month, which included, among other measures, in the middle run. Lithium was originally produced in lifting foreign restrictions on foreign exchange, imports Catamarca, Salta and Jujuy. As regards silicon, according and exports, and allowing the free use of foreign to the statistics of the U.S. Geological Survey, China currency, represents an encouraging change in the is the main producer worldwide (over 5 million tons scenario towards the recovery of the mining activity. produced in 2014), followed by Russia (699 thousand tons), Norway (369 thousand tons) and the United States However, beyond any temporary problems caused (360 thousand tons). Argentina produces 11 thousand by internal and external factors, what is true is that tons (0.1% of global production) and is showing an Argentina is rich in mineral resources, which positions the upward trend. country as one of the main producers of copper, lithium, potassium, gold and silver at the world level and as It is necessary that sectorial policies aimed at sustaining one of the first five generators of foreign currency from and increasing the growth of this strategic activity be exports, which has helped overcome the negative energy implemented. Such policies will help reduce production balance of trade. costs for this industry and other sectors as well as increase productivity levels, competitiveness and The production of gold, silver, lead, aluminum and copper investments. Furthermore, this will pave the path has stood out within the Argentine mining industry towards the increase in exports, the inflow of a greater during the last century and to these days. For instance, amount of foreign currency and, therefore, an increase in Argentina ranks 15th in production and reserves of tax income. gold at the worldwide level and, based on its potential, it might be among the top ten countries. During the first two decades of the last century, Argentina did

© 2015 KPMG, a partnership established under Argentine law and a member firm of the KPMG network of Mining in Argentina. Current situation, potential and opportunities. 17 independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. References

In the long run, a steady recovery of the demand for CAEM, “Minería Argentina. Todas las Respuestas: minerals in the global market is forecasted, despite Aspectos Económicos” (Argentine Mining. All Answers: the volatility shown in the short run, basically due to Economic Aspects), CAEM, 2013. the drop in China’s activity levels. The major matters of concern of the public-private agenda that the country CALVO VISMARA, J.P. “Evolución de la Inversión will have to address in the next years include levying Extranjera Directa en Argentina. Una comparación entre taxes on net income – instead of on gross income – la década del ’90 y el período post-crisis” (Changes in reinvesting earnings, promoting the development of Foreing Direct Investment in Argentina. A comparison the supply chain, improving infrastructure and logistics, between the 90’s and the post-crisis period), Universidad correcting the tax imbalance among the nation, provinces Nacional de Mar del Plata, 2008. and municipalities, and producing within a context of environmental sustainability and social consensus. A new IDESA, “La Minería y su aporte al desarrollo económico impetus towards Argentine mining will ensure that the 21 nacional” (Mining and its contribution to national largest mining projects of the country will help promote economic development), IDESA, 2011 investments, new exports and generate employment sources in all the stages involved (i.e. feasibility, MACHADO, H. et al. “15 Mitos y Realidades de la minería exploration and exploitation). transnacional en Argentina” (15 myths and facts of transnational mining in Argentina). Colectivo Voces de Faced with this challenge, the new Argentine Alerta, 2011. Administration has stressed its commitment to the development of a responsible mining activity, preserving PRADO, O., “Situación y perspectivas de la minería the environment as a cornerstone for economic growth, metálica en Argentina” (Current situation and prospects and as a productive activity with potential to generate of metallic mining), CEPAL, 2005. employment sources. Accordingly, the normalization of the main macroeconomic variables of the country – a SARUDIANSKY, R. Y H. NIELSON, “Minería en la process that started with the removal of exchange, República Argentina” (Mining in Argentina). Centro de export and import restrictions – as well as the creation of Estudios para la sustentabilidad, Instituto de Ingeniería policies by the national State, in cooperation with mining e Investigación Ambiental, Universidad Nacional de San provinces and the private sector, are amongst the most Martín. critical objectives for the development of a responsible and sustainable mining activity with a significant impact TOLÓN ESTALLERES, G. “Situación actual de la on national economic growth. Now that all conditions minería en la Argentina” (Current situation of mining in seem to be met, there is a need for interests to Argentina). Asociación de Economía para el Desarrollo de converge. la Argentina, 2011.

Néstor García Leader Partner of Energy & Natural Resources KPMG Argentina Omar Díaz Leader Partner of Mining KPMG Argentina Diego Calvetti Leader Partner of Oil & Gas KPMG Argentina Matías Cano Manager, Business Intelligence KPMG Argentina

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