Miner Hochschild says YPF won't dull Argentina's shine

LONDON (Reuters) - Argentina's soaring inflation is more likely to dent the country's appeal for miners eyeing its gold, silver and copper reserves than Buenos Aires' takeover last month of its biggest oil firm, YPF, the chief executive of miner Hochschild said.

Mid-sized precious metals miner Hochschild Mining (HOCM.L) gets the bulk of its production from its south Peruvian mines. But its San Jose mine in Argentina - where President Cristina Fernandez has seized control of energy company YPF (YPFD.BA) from Repsol (REP.MC) - accounts for almost a third of revenues and an even bigger slice of profit.

"We see YPF as an independent case," Hochschild Chief Executive Ignacio Bustamante told Reuters in an interview.

"The challenges that we face in Argentina are different from the challenges that we have operating elsewhere, and the biggest one is definitely inflation, mostly in labour costs."

Argentina, where the London-listed gold and silver miner expects costs to rise 25 to 30 percent this year, already has the highest operating cost of Hochschild's entire portfolio. Argentina's unit cost, excluding royalties, of just under $170 per tonne last year compares to a Peru average of $60.8 a tonne.

Miners eyeing Argentina's resources have complained it is dampening their enthusiasm not only with inflation - fuelled in part by strong state spending - but also with moves to stem outflows of cash and push companies to find equipment locally.

"What they are doing is raising the bar on what makes a profitable project - what makes a profitable project in Peru does not necessarily make a profitable project in Argentina," Bustamante said.

Argentina's geological potential is "outstanding", he said, though mining remains a smaller slice of the economy than in Peru, Mexico or Chile.

"Out of the countries we operate in, it is by far the one that has been explored the least and we have expectations that there are many good world-class deposits that can be found."

Hochschild, which has three of the 14 largest silver mines in the world, has prospects and drill targets in Argentina, beyond San Jose, though all its potential transformational projects are in Peru, Chile and Mexico.

Issues of national and community pressure are not unique to Argentina, with Peru a major concern for investors last year after leftist President Ollanta Humala's government was elected, promising to boost social spending.

Bustamante said the focus for miners in Peru now was on the need for an institutional framework for companies and communities to cooperate, in line with government hopes and requirements, and on speedier permitting.

He saw no readacross to Hochschild's own projects from Newmont Mining (NEM.N) and Buenaventura's (BVN.N) $4.8 billion Conga gold mine in Peru, currently stalled due to opposition from local community groups.

Conga would be the most expensive mine ever built in Peru and if it is abandoned, analysts fear it could scare off $50 billion in private investment destined for mining in Peru.

"For the benefit of the country, it is very important that that materialises," Bustamante said.

But he said Hochschild's own most advanced projects, Inmaculada and Crespo, in its southern Peruvian "cluster", were on track, with the next stage of permitting due in the third and fourth quarter respectively, ahead of commissioning in 2013.

Inmaculada and Crespo, with a combined initial capital cost of just over $425 million, could boost Hochschild's current annual production - it is targeting 20 million attributable silver equivalent ounces in 2012 - by 50 percent.

"Conga should be seen as a particular case," Bustamante said. "We have already submitted environment impact studies, we have already had the public audiences with the participation of the community, the government and the company."

(Editing by Mark Potter)