Argentine Mineral Extraction Co.s Must Repatriate All Export Revenue

Argentina has ordered oil, gas and mining companies to cash in all their export revenue on the local foreign-exchange market, moving strongly to protect dwindling central bank reserves as capital flight surges.

The surprise rule change on Wednesday puts the industries on equal footing with powerful grains exporters and could cool investment at a time when Argentina's trade surplus is shrinking and its energy supplies are overstretched.

President Cristina Fernandez took the measure just days after winning a landslide re-election victory, making good on her vow to deepen the model, which includes heavy state intervention in the economy.

Also on Wednesday, the government decreed that Argentine insurance companies with investments totaling $1.6 billion held outside the country had 50 days to bring them back, according to local newspaper Cronista. ()

Capital flight has forced the central bank to sell billions of dollars on the currency market since August to stem the peso's losses. But the strategy was seen as untenable as concerns grow over global and local economic conditions and some sort of measure was expected.

Some of the biggest energy firms operating in Argentina include Repsol's YPF and Pan American Energy, part-owned by China's CNOOC and Argentina's Bulgheroni family. In the mining sector, foreign heavyweights include Xstrata and Barrick Gold .

Until now, energy companies were obligated to repatriate 30 percent of their export revenue in dollars, while miners faced no such requirement.

Mining sector sources said the measure will increase company costs because they will be forced to trade their dollars into pesos in Argentina and then repurchase the greenbacks to make payments abroad. This will also be taxed.

Many companies have their export income committed for use to pay debts abroad, meaning they could run into problems if limits on dollar purchases in Argentina disrupt these flows.

The measure affects (company) rights, it affects the sector's stability. We're analyzing whether there is room for improvement in the actual implementation, but it's too early to say, a mining company executive said on condition of anonymity.

Nomura investment bank said the measure, decreed in the government's official gazette, was bad news.

The message that the authorities are sending at this critical juncture is not auspicious. Faced with strong portfolio dollarization, we think they seem to be communicating that more controls are coming, the bank said in a research note, adding the measure should boost dollar flows into the spot market by a maximum of $800 million per month.

Argentina's center-left government plans to continue tapping billions of dollars in foreign reserves to pay debt in 2012, although the excess reserves available for this use are disappearing, due partly to inflation of about 25 percent.

In recent days, tax inspectors have tightened controls on dollar purchases at foreign-exchange houses and banks to dampen demand by small and institutional investors. Analysts expect the government to allow the peso to depreciate faster post-election to restore competitiveness to local industry.

In afternoon trade on Wednesday, the peso was steady on both the formal interbank market and the informal market dominated by foreign exchange houses .

Obviously the measure will force an increase in dollar inflows, but it creates uncertainty and doesn't solve the underlying issues, a currency trader said.

'LOGICAL'

Argentina's crude and natural gas exports have shrunk due to booming domestic demand and low private investment, exacerbated by the government's price controls and largely frozen rates on natural gas and power.

Energy shortages during the winter have slowed industrial production growth and spurred costly fuel imports, which are eating into the trade surplus.

Argentina holds more natural gas trapped in shale rock than all of Europe does -- a bounty that could transform the outlook for Western Hemisphere supply, according to the U.S. Department of Energy. (DOE report:)

But hefty private investment would be needed to exploit this.

Meanwhile, Argentina's mining industry is growing but it is still tiny compared to regional powerhouses Chile or Peru.

Fuel and energy exports totaled $4.55 billion from January through September, while copper sales abroad fetched $1.29 billion and gold exports were $1.69 billion. This compares with an estimated $27 billion for agricultural exports.

A source in the energy industry called the government move logical and unobjectionable, adding the two sectors had been exempted from a norm that applied to every other industry.

A mining company official said that while companies had expected a tax increase at some point, it's still surprising how quickly (this happened) and how we weren't advised beforehand.