The Argentinian province of Chubut has proposed a new law regulating future mining operations that could force Pan American Silver Corp. (NASDAQ: PAAS) to cease development of its Navidad project. Pan Am acquired the project in January 2010 and estimated that silver production in the first five years of the mine’s life would approach 20 million ounces per year.

The new law includes three major provisions, according to Pan Am’s press release:

• A new 5% Net Smelter Return Royalty (“NSR”) in favor of the province, which is in addition to the 3% NSR in favor of the province that already existed;
• A new requirement for Petrominera, a resource company owned by Chubut province, to receive no less than 4% of total sales; and
• A new requirement for Petrominera to receive a 7.0% direct carried net pre-tax profit interest. (In the event that a company can demonstrate that Petrominera’s right to 4% of total sales would render a project uneconomic, then Petrominera’s participation on the project’s total sales would be reduced by up to 75%. However, in such case, the net pre-tax profit interest would be increased to a minimum of 12%.)

At the end of 2011, Pan Am said it had invested about $40.5 million in developing the project against a total cost of about $760 million. If the new law is adopted as it stands, Pan Am says:

The Company’s initial review of the effects of the proposed legislation, when coupled with the current inflationary environment in Argentina, indicates that the increased provincial participation will render the Navidad project uneconomic at any reasonable estimate of long-term silver prices. … Pan American will have no other reasonable option but to suspend further investment in Navidad.

Shares of Pan American are downl nearly -2.5% at $16.47 in a 52-week range of $14.80-$34.49.

Paul Ausick

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