Pascua-Lama halt carries repercussions for Argentina, Chile

Reuters

By Anthony Esposito and Fabian Cambero

BUENOS AIRES/SANTIAGO, Nov 4 (Reuters) - Barrick Gold Corp'sdecision to mothball its huge Pascua-Lama project on the borderof Chile and Argentina has highlighted startling divergencesbetween the two South American countries over mining and energyinvestment.

In a role reversal of sorts, nationalistic Buenos Aires is championing the now-dormant Canadian-owned project, whilestricter environmental norms in business-friendly Santiago pavedthe way for the project's suspension.

Last week's announcement by Toronto-based Barrick Gold Co was a blow to Argentina's government at a time when itis seeking to attract tens of billions of dollars to develop itsshale oil and gas resources.

"Even if the cancellation isn't specifically related toArgentina's economic policies, it's still bad news" for theArgentine economy and the government, said Ignacio Labaqui, ananalyst with Medley Global Advisors.

The estimated $8.5 billion project, already about 50 percentcomplete, had enjoyed the support of President CristinaFernandez's leftist government, which is trying to changeArgentina's reputation for intervention, nationalistic rhetoricand runaway inflation.

Aiming to distance itself from the decision, her governmentsaid neighboring Chile was responsible, alluding to a courtdecision ordering the world's largest gold miner to suspendbuilding Pascua-Lama in the spring due to environmental harm.

"The delays the project is suffering are a product of legalconflicts Barrick has in Chile that prompted the Supreme Courtthere to get involved after indigenous communities filedcomplaints," Argentine Planning Minister Julio De Vido said in astatement. "This situation has nothing to do with the project'sconditions in our country."

Pascua-Lama has also been plagued by cost overruns and asharp drop in bullion prices, and policies in Argentina or Chiledid not directly trigger Barrick's decision.

"The decision to temporarily suspend construction wasprimarily based on economic factors, including a prolongedperiod of lower metal prices," Barrick spokesman Andy Lloyd toldReuters. "While the project faces a number of outstanding legaland regulatory issues in Chile, the regulatory system itself isstrong and the requirements on the project are clear."

The regulatory and political environment in Argentina didnot play a role in the decision, Lloyd added.

Still, Argentina's reaction to the announcement not onlypoints to the policy priorities in Buenos Aires, but highlightsa broad change underway in Chile despite its pro-businessreputation.

Like much of commodities-dependent Latin America, Chile isstruggling to maintain export-driven economic growth whileaddressing heightened environmental concerns and demands thatthe benefits of resource development be spread more equally.

The Chilean government pointed to Barrick's violation of theterms set out in its mining license.

"The difficulties they've had aren't due to our norms, butrather due to the breach of the conditions outlined in theirenvironmental permit," Mining Minister Hernan de Solminihac toldlocal radio Bio-Bio. "We regret the decision."

STRONGER REGULATORY TACK

The complex was one of the biggest mining projects plannedin commodities-dependent Chile. It would also have been aneconomic boon to Argentina, Latin America's No. 3 economy, whichis grappling with high inflation and the negative impact ofcurrency controls on investment."

Pascua-Lama, originally expected to produce up to 850,000ounces of gold annually in its first five years, was dogged bywhat the company has conceded were management problems on atricky construction project high in the remote Andes, as well asfears the project would damage glaciers and water quality.

In April, a Chilean appeals court halted work at the requestof a local indigenous group that said water polluted byconstruction ran off into the Estrecho River.

The complaint said high concentrations of arsenic, aluminum,copper and other elements have been found in the water nearPascua-Lama. Barrick denies it polluted the river.

Chile's new environmental regulator and Supreme Courtsubsequently also froze construction, setting the stage for lastweek's decision by the company to stop work indefinitely.Barrick said it intended to resume the project, on which it hasalready spent $5 billion, when conditions warrant.

Barrick's decision is likely to galvanize environmentalgroups in Chile, encouraging them to take on more mega miningand energy projects they deem unsound.

At stake is a third of the world's copper production andbillions of dollars in investment.

"Pascua-Lama marks a before and after for mining because ofthe conflicts that arose with local communities," said JuanCarlos Guajardo of CESCO, a mining think-tank in Santiago.

Public sentiment in Chile, the world's top copper producer,is strongly against the private mining industry. Around 83percent of Chileans say they favor nationalizing copper,according to a CEP survey published last week.

Although business-friendly Chile is highly unlikely tofollow the nationalizations of neighbor Argentina, Pascua-Lamaillustrates that private miners need to be especially cautiousand follow environmental law to the letter.

Dealing with these tensions is one of the major challengesawaiting Chile's next president. Polls show that MichelleBachelet, the center-left former president, holds a wide leadand might attract enough support to win outright in the firstround of voting on Nov. 17.

A BLOW TO ARGENTINA'S MINING DREAMS

Across the Andes, Argentina hopes to emulate itsmineral-rich neighbors and position itself as an attractivedestination for foreign investment in resources to supplementits powerful agricultural export industry.

Pascua-Lama was Argentina's main foreign investment projectafter Brazil's Vale halted a $6 billion potashproject early this year because of higher costs fueled byinflation.

Fernandez, who is convalescing after an operation to removeblood from the surface of her brain, had a sobering setback inlast month's mid-term elections.

Despite strong pro-environment sentiment in Argentina,Fernandez vetoed a glacier protection law in 2010 in a nod tomining and oil projects such as Pascua-Lama, on the grounds thelegislation would hamper provincial economies. Argentina'sSupreme Court eventually upheld the law.

Last year, foreign direct investment in Argentina amountedto only about 2.6 percent of gross domestic product, whereas itaccounted for 11.3 percent in Chile's far smaller economy,according to the United Nation's regional economic body.

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