Argentina: Mining Prospecting and Exploration Legal Framework - Guidelines for Foreign Investors

Article by Omar Beretta and Lucas Garcia

Foreign Investment (FI) on mining prospecting and exploration is influenced by many factors. Some of them, such as geology potential, international demand or pricing of commodities are not subject to governmental regulation. On the other hand, regulation and policy can be controlled and, under equal conditions of the first group of factors, might be decisive to swing FI from one country or another.¹

In this sense, according to the trends reported on 2005 the last year, Argentina has gained a respectful place within the world’s attractive target-jurisdictions for FI for mining prospecting and exploration purposes.² This overview of the main characteristics of the Argentine regulations may provide some guidelines for FI to conduct prospecting and exploration business in Argentina.

Good news first:

• Filings for the mining prospecting and exploration rights are simple and inexpensive; moreover there are no significant requirements for keeping such rights in good standing;
• There are no limitations for mining prospecting and exploration of particular minerals or minimum investment amounts requirements;
• Material and promotional regulations are tested and provide particular benefits specially foreseen for mining prospecting and exploration purposes;
• Foreign exchange limitations ––mainly the mandatory 30% one-year term non payable deposit–– do not apply provided that certain proceedings are carried out.

Now, the bad ones…

• Each Argentine province has particular concession regulations that although being similar, demand understanding and interpretation;
• Concession proceedings and due environmental approvals might take a while in some provinces and therefore timing might be a reason to worry about since without such approvals mining activities cannot legally commence;

In Argentina material mining regulations are given by the Federal Congress³ and have been contained since 1884 by the Mining Code, as amended and complemented, ("Mining Code")⁴.

On the other hand, original domain of mining natural resources belongs to the provinces⁵. Thus, provinces (i) appoint concession authorities and (ii) provide procedural mining regulations that individuals and legal entities must follow in order to be awarded mining rights and property. Exploration concessions granted are subject to specific terms, but resulting exploitation concessions ––provided that certain requirements are met–– are perpetual.

The bottom line of such division between Provincial and Federal spheres is to have standard material regulations for the performance of mining activities in all Argentine provinces.

It is important to point out that, despite the efforts pursued during the previous decade, Argentina still fails to harmonize procedural provincial regulations and jurisdiction and, as a result of such failure, FI will have to consider that:

• Concession procedures differ in each province; and
• Concession authorities are placed under different jurisdiction on each province.

Concession jurisdiction might be either placed with provincial administrative or judicial branch. The chart in Annex A hereto identifies the corresponding mining jurisdiction of each province.

Understanding the local extent of such difference entails challenges for FI. Hereunder, we refer the most relevant ones:

In practical terms, the abovementioned means that, when acting before administrative bodies, filings and requirements are more flexible than when dealt by judicial authorities. On the other hand, the enforceability of the concession resolution issued by judicial bodies is stronger than the concession granted under administrative resolution.

Also, appeals before judicial bodies ––in most cases–– will suspend the execution of decisions, while administrative decisions are deemed to be legitimate and, therefore, can be immediately executed irrespective of being appealed or not. This effect will be particularly relevant (i) in case the concession procedure is being challenged by landowners or other interested parties or (ii) in case concessions arose compensation or bonds obligations and quantification is being argued by the requesting party.

In general terms, procedures before judicial bodies might be slower than administrative ones since they also require the intervention of administrative offices (for cadastre, environmental and field control purposes, among others).

As referred above, the Mining Code is the principal Federal regulation to be considered for conducting mining activities. As regards prospecting and exploration, the Mining Code contains regulations in connection with general extent of concessions, technical requirements, concessionaire obligations as well as concession limitations.

The Mining Code also sets forth the guidelines to identify the limits of the rights and relationships between mining concessionaries, landowners and the community; providing specific material regulations in connection with (i) easements; (ii) guarantee bonds; (iii) indemnifications and (iv) environmental control of the mining prospecting and exploration activities.

Additionally, FI should also consider Federal regulations in connection with natural reserve areas, since such regulations might entail a particular inability to conduct mining prospecting and exploration activities in different parts of the country.

Federal Law No. 24,196, as amended and complemented, which created the Mining Investment Promotional Regime (see further comments on Section V below) ("Mining Investment Law"), should also be taken into account.

Each province has its own mining procedural law, which depending on the administrative or judicial structure of the concession authority will be a mining administrative proceedings law or a mining procedural code correspondingly (see Annex B).

FI also should bear in mind that there are particular provincial regulations that regulate the procedures for complying with the Mining Code environmental control requirements for mining prospecting and exploration activities.

Like in the case of Federal regulations, provincial regulations in connection with natural reserve areas should have to be considered. In this sense, the best practice to follow will be to identify and, if possible, avoid targeting such areas. This precaution will help to prevent both claims against concessions and potential undesired media negative exposure.

In legal terms, mining prospecting and exploration rights are easements which title can be granted to individuals or legal entities through administrative or judicial concessions ("Exploration Concessions")⁷. Any mineral discovery performed either by the concessionaire or third parties, provided they take place in the area and term of the concession, grants the concessionaire the right to turn such discovery into a mine.

There are three types of Exploration Concessions: (i) the ground survey ––Concesión de Exploración y Cateo––, (ii) the air survey permit and (iii) the underground survey. However, the last two types are generally considered expensive and ineffective and therefore they have not been broadly used in Argentina. Thus, our comments below are limited to ground survey concessions.

The most important feature of Exploration Concessions is that they are granted in connection with a limited ground area and for a limited period of time.

The area of each concession is divided in surface units and each unit has a size of 500 hectares. Each concession can have up to 20 surface units and therefore the largest concession might cover an area of 10,000 hectares. However, as the concession term runs, its size should be gradually reduced by the concessionaire.

The term of Exploration Concessions depends on the size of the granted concession area. The basic 500 hectares concession lasts for 150 days and each surface unit added to such basic concession increases the term in 50 additional days. Therefore, the largest possible concession will last for a 1,100 days term.

Provided that the area of the Exploration Concession is entirely free from mining rights or properties previously granted, the exclusive right to claim mines in such area shall be binding as from the date of filing of the concession request with the corresponding provincial mining authority.

Exploration Concessions require a relatively small number of obligations for the concessionaire. However, they are mandatory to achieve concession and keep it in good standing. Here follows an outline of such obligations:

• A one-time exploration canon payment⁸;
• Identifying the landowners of the requested area and to perform publications of the request with the local official gazette; it is worth to point out that, although ––in general terms–– landowners are not entitled to file oppositions against Exploration Concessions, they can demand a bond from the concessionaire given in guarantee of potential damages to its property.
• Forecasting mining exploration activities and, upon the concession award, to be performed as forecasted. Failure to fulfill such requirement obliges the corresponding provincial authority to terminate the concession.
• Prior to the execution of any exploration activity, an environmental report in connection should be filed and approved with the mining provincial authority in order to be able to legally initiate mining activities. This report should be filed and approved on bi-annual basis.
• Once the Exploration Concession expires the concessionaire must file with the corresponding provincial mining authority the information and documentation resulting from the exploration activities conducted.

Argentina has historically supported mining prospecting and exploration activities. In fact, mining activities are considered of public interest, which means that confronted against other rights mining development activities shall prevail⁹. A direct consequence of this fact is the relatively small number limitations associated Exploration Concessions. Below we provide the outline of the most relevant ones:

• FI should consider that the largest area that can be simultaneously awarded to a single person or legal entity is 200,000 hectares per province;
• Also there is a limit of 20 Exploration Concessions for a single person or legal entity per province;
• Exploration Concessions cannot be granted consecutively to the same person or legal entity over the same area; however after a one year term from the termination of the concession, former concessionaire will be allowed again to file a request for such area;
• Conducting prospecting and exploration activities nearby crops, gardens, buildings or other facilities, requires the acceptance of the corresponding landowner;
• Conducting prospecting and exploration activities is forbidden nearby cemeteries, streets, roads, railroads, pipelines, public waters or other public facilities.

Ever since enacted, the Mining Investment Law has been a key ally to conduct mining prospecting and exploration activities in Argentina since it provides special benefits that reduce the economic burden and risk.

To become a beneficiary of the Mining Investment Law, individuals or legal entities must file an application with the National Mining Secretariat. The applicant is entitled to the relevant benefits in connection with prospecting and exploration activities on the date of the Mining Secretariat’s resolution registering its application.

The benefits of the Mining Investment Act relevant to the prospecting and exploration phase of a project are the following:

• Reimbursement of VAT;
• Exemption from the payment of customs duties and customs fees for capital assets used in mining activities.
• Minimum Presumed Income Tax does not apply to beneficiaries of the Promotional Regime for Mining Investments¹⁰; and finally
• Research, prospecting and exploration expenses were exempted from the imposition of the mandatory one-year deposit over 30% of funds transferred into Argentina¹¹.

Additionally, the Mining Investment Law provides other benefits that are practical and specially foreseen for the exploitation stage:

• Fiscal, foreign exchange and custom-duties stability for the mining project for a 30-year term, as from the filing date of the feasibility study, exception made of VAT ("Fiscal Stability").
• Income Tax benefits such as (i) double deduction of prospecting and exploration expenses in the assessment of the Income Tax; (ii) option to choose an accelerated depreciation system of fixed assets and property, land and equipment; and (iii) exemption on profits from mines and mining rights contributed in consideration for participations in the relevant company’s equity.
• Option to capitalize 50% of proved mining reserves.
• Royalty cap at 3% of the mine-mouth value of extracted minerals.

The Mining Investment Law sets forth the following obligations and formalities to be observed by its beneficiaries:

• Filing of corporate, tax and mining information and documents with the application to become a beneficiary, and filing of annual updates thereafter.
• Filing of annual affidavits on forecasted investments; investments made in the concluded term; use of double deduction of expenses and accelerated depreciation for the assessment of the Income Tax.
• Creation of a special accounting provision for the prevention and mitigation of environmental damages and the filing of an annual affidavit reporting this provision.
• Use of the equipment subject to any of the above benefits only for mining purposes (i.e.: goods exempted from custom duties when imported, assets over which income-tax double deduction or accelerated depreciation was applied, etc.) However, with the authorization of the National Mining Secretariat, such goods can be transferred to other individuals and legal entities registered in the promotional regime.

Important efforts are being carried to harmonize regulations in the region, especially with Chile. These efforts recently resulted in bi-national treaties and protocols to support exploration projects¹². This fact reveals that Argentina’s policies are active and evolving towards regional integration. Other important sign is the local presence of many of the most important legal entities that lead the mining activity worldwide.

During the 90’s the Latin American mining sector in general and particularly Argentina, radically changed its mining investment regulations and policies to become a target of middle size and large scale FI for both medium and long term projects¹³. According to the trends of investment in mining prospecting and exploration activities ever since, Argentina expects to continue to grow into a successful model.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.