Argentinian legislation might sink Pan American’s flagship

Canadian Pan American Silver (TSE:PAA) is warning its shareholders that if the reform of mining law in Argentina's Chubut Province is approved, the company will have to declare its Navidad Project "uneconomic at any reasonable estimate of long-term silver prices."

The Navidad silver project, the richest undeveloped silver deposit in the world, is located in one of the more unfavourable jurisdiction for mining companies. This is because the reform proposed last month by the governor, Martin Buzzi, includes a series of new royalties, taxes, and economic participation by the province.

The three major provisions included in the proposal are, as Pan American’s press release outlines:

  • A new 5% Net Smelter Return Royalty ("NSR") in favour of the province, which is in addition to the 3% NSR in favour of the province that already existed;
  • A new requirement for Petrominera, a resource company owned by Chubut province, to receive no less than 4% of total sales; and
  • A new requirement for Petrominera to receive a 7.0% direct carried net pre-tax profit interest.  (In the event that a company can demonstrate that Petrominera's right to 4% of total sales would render a project uneconomic, then Petrominera's participation on the project's total sales would be reduced by up to 75%.  However, in such case, the net pre-tax profit interest would be increased to a minimum of 12%.)

The new rules come on top of the current 10% export duty payable on concentrates and an income tax rate of 35% imposed to mining companies.

Pan American paid over $500 million for Navidad in 2009 and had planned to spend $22.8 million on the project this year, as well as another $89 million in construction start up if positive mining reform was enacted in the province by mid-year.

Other companies that will be affected by the reform are U308 Corp. and its Laguna Salada uranium-vanadium deposit and UrAmerica, a private uranium exploration company that owns the Cerro Solo project.

Calypso Uranium Corp. and Metallum Resources also have assets in Chubut and so does Gold Peaks Resources, which is exploring its La Fortuna gold project about 1,300 km southwest of Buenos Aires.