Leveraging Argentina’s Mineral Resources for Economic Growth

Despite facing significant macroeconomic challenges, Argentina remains one of the most attractive mining jurisdictions in the world, given both its mineral potential and the stability of its investor-friendly mining policies. Exploration expenditures in Argentina increased by 77.1 percent between 2021 and 2023, from $241 million to $427 million. Argentina was the third-largest recipient of lithium exploration expenditures, receiving $139.9 million worth of expenditures, and the eighth-largest recipient of copper exploration expenditures, receiving $103.4 million worth of expenditures.

The growth in private sector exploration is remarkable given that Argentina’s macroeconomic situation has deteriorated significantly in recent years, which has raised the risk and cost of doing business. In 2023, the debt-to-gross domestic product (GDP) ratio reached 157.9 percent and real GDP contracted 1.6 percent. For some perspective, a study by the World Bank found that in emerging economies, there’s a 0.02 percentage point decline in annual real growth for each percentage point over a 64 percent debt-to-GDP ratio.

By 2024, inflation in Argentina reached 249.8 percent year-on-year owing to a devaluation of the official exchange rate and the elimination of price controls. Real GDP is expected to contract by 4.8 percent this year. Sovereign credit ratings from the three main agencies—Standard & Poor’s, Moody’s, and Fitch Ratings—are all sub-investment grade. This has put further pressure on domestic capital markets and has resulted in higher bond yields, exchange rate depreciation, and borrowing costs.

A large part of Argentina’s ability to continue attracting investment despite a volatile macroeconomic and political climate has been both its resource endowments (it has roughly 10.4 percent of the world’s known lithium reserves—the third-largest in the world) and its relatively stable and pro-private sector policy environment. This is evidenced by the Fraser Institute’s annual survey of mining and exploration companies. The institute’s Policy Perception Index measures the effects of government policy on attitudes toward exploration investment. It has remained among the top three performers in Latin America since 2018 and has outperformed both Chile and Bolivia, the other two countries in the “Lithium Triangle” that is home to 56 percent of the world’s lithium supply.

Advantages in the Lithium Triangle

Argentina’s mining sector is primarily governed by the Mining Investment Law (No. 24.196), which was passed in 1993 and offers a 30-year period of fiscal stability for tax and custom duties; 0 percent tax on capital goods for equipment, spare parts, and raw material imports for mining; and additional tax incentives throughout every stage of project advancement. The Foreign Investment Law (No. 21.382) was also passed in 1993 and provides equal treatment to foreign and domestic investors. Argentina is distinctive within the “Lithium Triangle” for being the only country that permits private ownership, exploration, development, and production of lithium resources. There are no restrictions on foreign investment in mining, enabling foreign entities to acquire and hold mineral rights in Argentina. Conversely, Chile and Bolivia have not adopted policies that permit foreign companies to exploit their reserves. Argentina also has over 20 bilateral treaties to safeguard against double taxation and incentivize foreign investments.

Argentina also has the most favorable tax code in the Lithium Triangle. The Mining Investment Law caps royalties at 3 percent. In contrast, in Chile progressive royalties can reach 40 percent. The effective tax rate allows mining firms in Argentina to retain 72 percent of their profits, compared to 64 percent in Chile. Furthermore, Argentina allows companies to maintain their concessions if they pay an annual tax and execute the investment plan. On the other hand, Chile limits the annual extraction amount, and tax concessions have an expiration date. Chile has also announced plans for a state-led public-private model in the country’s lithium industry, which means that private companies will have to partner with the government to exploit lithium. In Bolivia, exploration is solely managed by state-owned companies. Additionally, Article 28 of the Mining and Metallurgy Law prohibits foreign companies or individuals from executing administrative mining contracts or holding any mineral rights.

Even against a negative macroeconomic outlook, investors have been encouraged by policies that incentivize private investment. In a significant move, President Javier Milei introduced a reform package to Congress in December 2023, which included bolstering the legal framework to entice private investment in the mining sector and proposals for the privatization of two state-owned mining companies. Additionally, Milei has pledged to remove the 8 percent export tax on mining products, signaling a strong incentive for the mining industry. 

Mining investments can generate a virtuous cycle. The sector has tremendous potential to alleviate Argentina’s macroeconomic challenges. JPMorgan has forecasted that Argentina will overtake Chile as the world’s second-largest producer by 2027, supplying up to 16 percent of the world’s lithium by 2030. Argentina currently has three lithium projects in the pipeline, more than any other country in the world. The International Monetary Fund has estimated that the mining industry could provide a five-fold increase in its exports over the medium term—three-fourths from lithium exports ($12 billion) and most of the remainder from copper ($5 billion)—when production starts in 2027. Forecasting shows that after 2024, foreign direct investments and sustained trade surpluses, particularly from energy and mining, will lead to a reserve accumulation of $5–10 billion per year over the medium term. Argentina has signaled its intention to do this responsibly. In February 2019, the government implemented recognized transparency standards when it joined the Extractive Industries Transparency Initiative.

As the government of Argentina works to leverage the mining industry for economic growth, here are three recommendations to maximize outcomes:

1. Diversify ownership of mines.

The government of Argentina is seeking a critical minerals agreement, which would allow minerals produced and processed in Argentina to be eligible for the Section 30D tax credits in the Inflation Reduction Act. It’s a worthy consideration. However, in the instance that it did receive these tax benefits, much of its output would be ineligible due to Chinese ownership. After December 31, 2024, when the U.S. government’s Foreign Entity of Concern (FEOC) rules go into effect, electric vehicle batteries with critical minerals that are extracted, processed, or recycled in an FEOC (China, Russia, North Korea, or Iran)—or by a firm with over 25 percent cumulative FEOC ownership in a third country—will be ineligible for IRA tax credits.

Cauchari-Olaroz is Argentina’s biggest operating lithium mine. It is located in northwest Argentina’s Lithium Triangle in Jujuy Province. Ganfeng Lithium Group, which is headquartered in Jiangxi, China, owns 46.66 percent of Cauchari-Olaroz, which renders any lithium mined there ineligible for IRA benefits. Chinese firms have a dominant presence in projects at various stages of development. Ganfeng also has 100 percent ownership of the Pozuelos lithium mine, which is currently in the scope/prefeasibility stage. Construction has started at Zijin Mining’s Tres Quebradas, a wholly Chinese-owned operation.

As Western countries increasingly turn to carrots and sticks to create supply chains independent of Chinese control, Argentinian officials should diversify ownership and ensure that some mines have 0 percent FEOC ownership in the instance that FEOC rules are tightened to prevent companies with any level of Chinese ownership from receiving taxpayer-subsidized IRA benefits.

2. Adopt credible macroeconomic reforms.

Reigning in macroeconomic volatility is key to creating a commercially viable environment for the mining sector. A stable policy framework has always been investors’ priority when selecting project locations. Argentina’s neighbor and rival, Chile, has been excelling in this regard. It has an advanced macroeconomic and prudent fiscal policy regime in place, which has led the country to hold one of the strongest sovereign bond ratings in Latin America. These include a functioning inflation-targeting framework with an autonomous central bank. Additionally, Chile has adopted a structural rule that adjusts revenues based on economic activity and copper prices. The combination of credible policies managed by the independent central bank allows Chile to maintain its macroeconomic strength and support countercyclical policy, making the country a solid option for foreign investment.

Argentina needs to make significant progress. The Argentinian peso has depreciated against the dollar by 75 percent year-on-year. This means that if a $10 million investment was made in April 2023, it would be worth $2.5 million if repatriated now. While Chinese firms may be more able to absorb financial losses for the sake of long-term supply chain dominance, Western firms have fiduciary responsibility to shareholders. Thus, they need to return a profit and cannot indefinitely remain in markets with such foreign exchange losses long term.

In February 2024, the International Monetary Fund (IMF) approved an immediate disbursement of $4.7 billion to support Argentine officials’ policy reforms to restore macroeconomic stability. The IMF noted that “the plan is centered on the establishment of a strong fiscal anchor along with policies to durably bring down inflation, rebuild reserves, and tackle distortions and long-standing impediments to growth.” Reforms include temporary import-related taxes, strengthening fuel taxes, streamlining energy and transport subsidies, reducing priority discretionary spending, and providing social assistance to safeguard the vulnerable. Executing this effectively is key to improving the macroeconomic climate of Argentina. Once the macroeconomic challenges have eased, the government should also consider loosening the capital controls that were implemented in September 2019 to suppress capital outflows. Foreign companies will need to repatriate their earnings.

3. Pursue stable policies to attract and retain long-term investments.

Argentina is currently navigating a period of transition and crisis, with the administration focusing on strengthening the policy framework to further expand the mining sector and attract investment. The country has experienced multiple policy reforms that have caused fluctuations in industrial output. This inconsistency in policy direction is one of the major factors undermining Argentina's economic well-being, characterized by the term “policy temporariness.” For example, in 2016 the Argentine government reduced export taxes, only to increase them again for a broader range of exports in 2019. Additionally, it established an independent antitrust authority, but months later it was placed under the industrial sector's supervision. If Argentina cannot ensure the stability and consistency of its policies, attracting investors will be challenging. Temporary and reversible policies offer neither protection nor guidance for investment. Despite the current high incentives, if the government continues to demonstrate a lack of commitment, investors will naturally seek to avoid the associated risks and uncertainty. Stable policy is particularly crucial in the mining sector, where projects are capital intensive and long term.