The government of Argentina has ordered Vale to continue to employ nearly 6,500 workers at the Rio Colorado potash mine that Vale is seeking to close. Vale wants to close the mine as it is presumably not making money, inflation in Argentina is 25 % per annum, and Vale did not get tax breaks they were seeking.
The government of Argentina has said; “You keep employing the workers; keep the mine running; or we will cancel your right to the potash; and then you cannot sell the mine to anybody.”
This is grand brinkmanship: the clash of a big mining company and venial & inept government.
Vale would like to sell the property to try to recoup some of the $2.2 billion it has invested in the mine so far. They bought it in 2009 from Rio Tinto. They workers would like to continue working and earning a living. The government, normally not pro mining, want the taxes and employed citizens. Now it looks as though it will all come crashing down.
For the investor, the lesson learnt is that even the big mining companies can make terrible investment decisions, and you as a shareholder may lose along with them. So much for the myth of constant capital growth with the big ones.
Maybe for governments everywhere this will be a salutary lesson: if you fail to manage your economy and keep mining taxes down, you will loose it all–killing the goose that lays the golden eggs.
But the consequence of the closing of a mine, huge losses for Vale, and 6,500 without work is a terrible price to pay to teach greedy governments to lighten up on the tax burden.
Of course, the government could take over the mine and run it as a losing proposition. The local governor said: “The mine will go ahead with or without Vale.” Bravado talk; macho muttering; and mayhem to follow. We all know what happens when politicians try to run unprofitable mines–nothing of value results and usually the environment gets it in the neck.
Rio Colorado and Vale are not the only big mines or big mining companies to have made terrible investment decisions recently. Last year I was at a mine that is loosing money hand-over-fist. But they keep operating as it is cheaper to operate at a loss than to undertake closure. Also they fear closure could (will) compromise their reputation and ability to maintain a social license to open a proposed new mine nearby. Crazy, but true.
Thus when seeking to invest in a big mining company, don’t look only at overall success; take a look at individual mines and try to establish if individual mines are profitable, or money looser kept open for nefarious aims.