new argentine tax will postpone financing

A new 10% export tax on minerals (see excerp below) has cast real doubt over Rincon Solars viability and risk regards financing (ie selling forward 10% of production unsecured to finance mine development etc). Essentially this tax is a 10% NET royalty regardless of profitability and drastically reduces the projects NPV and increases financial risk for project financiers.

If cost are higher than expected and/or prodcution lower then after 10% NET royalty project could operate at a loss with no way of paying back development debt. No wonder buyers (and probably financiers) are standing aside until clearer resolution of the tax and any court challenges are reached. In current enviroment, despite what management might say to hold up share price, Rincon may end up being financed through significant cheaper equity issue and onerous convertible debt.


article Dec 6th but highly relevant to ADY!


BUENOS AIRES -(Dow Jones)- By placing a new export tax on mineral exports despite a 30-year guarantee of tax stability, Argentina has shattered confidence in tax stability, which will discourage future mine investment, industry players said Wednesday.

On Tuesday, the mining chamber CAEM said that customs agents demanded the new taxes on Rio Tinto PLC's (RTP) Borax Argentina S.A., Procesadora de Boratos Argentinos S.A., Minera del Altiplano FMC and Xstrata PLC's (XTA.LN) Minera Alumbrera Ltd.

The companies previously had received letters from the Mining Ministry certifying that they would enjoy tax stability for 30 years, but this assurance was cast in doubt by the new tax.

Some companies immediately announced that they would challenge the new tax in court.
Borax Argentina is in the process of asking for an injunction after customs agents demanded a 10% export tax payment for its latest borate shipment.

"We will argue to the court that a note cannot modify a law," mine director Alberto Trunzo told local industry magazine Mining Press.

However, other companies were waiting for more clarity before reacting.
"We have a stability agreement at Veladero...(but) are monitoring and assessing developments," Barrick Gold Corp. (ABX) spokesman Vincent Borg said. Barrick operates the Veladero gold mine in Argentina and is developing the $2.4 billion Pascua-Lama gold mine project straddling the Chile-Argentina border.

Said the CEO of a company involved in exploration in Argentina and Chile: "This makes Argentina much less attractive for foreign investors. The effect won't be immediate, as companies have budgeted programs...The effects will show up initially with decreased exploration investment.

"This is a real problem for Argentina. There isn't a lot of mining investment in Argentina relative to its mineral potential," the CEO said.

The CEO asked not to be identified because of the sensitivity of the situation.
Lower margins due to the export tax will also push companies to mine higher grade ores, leaving behind more of the lower grade ores.

"Effectively this shortens the mine life, so in the end the government will get less revenue, less employment, etc.," the CEO said.