Chile: great success but fresh challenges
Most noted for its copper reserves, Chile is on the map for mining other minerals, too. Michael Schwartz reports.
Four years ago, Chile became the first South American country to join the Organisation for Economic Cooperation and Development (OECD), with a GDP growth averaging 4.6% from 2005–2012. Furthermore, the United Nations Conference on Trade and Development (UNCTAD) listed Chile as the world’s 11th largest recipient of foreign direct investment (FDI) in 2012 (from 17th in 2011), after investment inflow reached a record US$30bln.
While sales of copper by the world’s largest copper producer, Codelco – Chile’s state-owned copper company – were at their lowest for four years at just under US$15bln, it is clear that mining is a key player driving the Chilean economy. The country’s fine copper reserves are estimated at more than 100Mt, with the minerals listed in the table opposite also playing major roles.
It is a bullish market, with increases in reserves of copper, molybdenum, gold, lead, zinc, potash, coal and petroleum between 2012–2013. Only silver, iron, and natural gas reserves show a decline. Exceptional growth in coal production is due to a new operation in the Región de Magallanes y de la Antártica Chilena. For last year, the main destinations for Chilean copper were China (2Mt), Japan (720,800t), the USA (435,700t) and Korea (422,700tonnes). In terms of continents, Asia’s consumption of 3.9Mt tonnes greatly exceeded Europe’s 723,600t.
In another successful market, silver, Thomson Reuters GFMS’ World Silver Survey released in May this year ranks Chile seventh globally for silver production in 2013 (39.2Moz). Bolivia is slightly ahead (41.2Moz), although both fall well behind the top two countries, Mexico (169.7Moz) and Peru (118.1Moz). In potash, one of the world’s emerging markets, Chile is again overshadowed by the leading producer, Russia. However, potash operations often yield spinoffs – Sociedad Quimica y Minera, for example, also produces lithium and iodine from brines at Salar de Atacama in northern Chile.
Chile is well known for its vigorous support for private sector initiatives, but there are still areas of substantial public sector involvement in mining. Codelco, formed in 1976 from companies nationalised in 1971, is an obvious example. Less well known is Empresa Nacional de Minería (ENAMI, the Chilean National Mining Corporation). Founded in 1960, ENAMI promotes small and medium-sized mining projects via technical initiatives such as supplying metallurgical infrastructure, as well as providing technical and financial services. This enables mining SMEs to access international metal markets and attain competitive economies of scale.
Physical assets offered by ENAMI include a smelter and five processing plants, while purchasing agencies, technology transfer facilities and other technical support are also available.
Around 2,000 small-scale private sector producers of copper and precious metals are supported by ENAMI, which purchases ores and concentrates from these and medium-scale producers. These are then processed in ENAMI’s physical facilities before being exported – mainly as cathodes and refined copper.
Tax and investment
Chile has a two-stage corporate income tax structure. Declared profit is subject to first-stage income tax at 20% and second-stage corporate income tax at 35%, with an imputation credit for the first stage on profit distributed to non-Chilean resident shareholders. A withholding tax of 35% can be applied to non- Chilean residents.
In addition, mining companies also pay a specific income tax on mining activities to the Government. This is levied on operational income from mining and is progressive, from 5–34%. For copper, for instance, annual sales of more than 50,000t attract an effective 14% rate, while sales of 12,000–50,000t of copper are charged from 0.5–4.5%. For sales of less than 12,000t there is no levy.
Chile’s government is under pressure to increase company tax rates, as the country is planning infrastructure projects worth more than US$60bln. These include transportation and power transmission, which may in turn benefit mining operations.
In addition to copper, Chile produces a wide range of metals, each with its own successes and controversies. For example, substantial coverage has been devoted to Barrick Gold, which in October 2013 ceased work on its Pascua-Lima gold-silver project on the Chile– Argentina border following investment of US$5bln.
At the time, the company explained that work would restart only when ‘conditions improve’ – taken to mean higher gold prices and more favourable environmental conditions.
The project is underpinned by a deal between Barrick Gold and the local Diaguita community, which itself succeeded in obtaining a halt on further work on the project. In the latest developments (correct as Materials World went to press), the two sides struck an agreement that could lead to a social licence for Pascua-Lama. Under the terms, six months of negotiations will witness the mining company supplying project details to the Diaguita, at Barrick Gold’s expense. As a result, the re-start of production, which was originally expected to commence in 2014, has been delayed until mid-2016. In the first five years of the project, annual production of some 850oz of gold and 35Moz of silver are anticipated.
Sustainability and infrastructure
Chile’s Government is committed to a sustainability agenda. In 2013, the country signed a memorandum of understanding (MoU) with the USA to protect Chile’s environment and promote sustainable development, building on the Environmental Cooperation Agreement of June 2003. In 2008, Chilean mining benefited from a MoU with Canada for sustainable development.
More crucially, mining companies spent US$11.9bln on water infrastructure in 2013, according to consultant Global Water Intelligence (GWI). It is these questions of water and also of energy supply that must be resolved if Chile is to remain a key player in the global mining industry.
Of the challenges the country’s mining sector faces, the most striking is that of the Atacama, the world’s driest desert, which occupies the northernmost 1,000km of Chile’s coastline. One illustration of the extent of this challenge is Antofagasta plc, which processes copper at the Esperanza mine. Seawater is integral to this process. However, Antofagasta’s CEO, Diego Hernandez, confirms that no underground water exists to supply new projects. Instead, water would be sourced from the sea that would require desalination, which – according to a BHP Billiton estimate – would triple the cost of the process.
Added uncertainty comes from a cross-party initiative that wishes to nationalise Chile’s water resources. Although this failed in 2010, it is believed that more senators are now in favour. Key to approval of this is support from the conservative Alianza party, although a pro-nationalisation spokesman told GWI that this was not automatic. What the effects of such a measure would be, should it even go ahead, have yet to be seen.
Power supply is another challenge, with the country’s mining accounting for 85% of the Northern Grid’s capacity. KPMG’s review of Chilean mining states that power generation and transmission have not developed sufficiently to cope with future demand, and that large deficits are possible from 2024. In addition, the role of renewables will decrease, as the previous Government target for almost 20% of domestic power to be produced via renewables by 2024 has now been reduced to 10%. Electricity, at US$250/MWh, is also 20% higher in Chile than prices in Argentina, Colombia and Peru, adding a further obstacle towards the country becoming competitive in the sector.
Chile is without doubt a key member of the global mining community, and not just because of copper. While precious and non-precious metals as well as potash, lead and gold reinforce Chile’s importance, supporting infrastructure is just one of several challenges the country’s mining sector must continue to battle.
Each year, the Canada-based Fraser Institute surveys the opinions of more than 4,000 senior mining executives, who are are invited to evaluate mining administrations from a range of perspectives. One such criterion is the Investment Attractiveness Index. The 12 most favourably regarded administrations are:
• Western Australia
• Three US states
• Three Canadian administrations
In terms of overall economic freedom, Chile ranked 11th, highest of the Latin American states and ahead of Peru (22nd) and Panama (67th). The two other major South American economies were Brazil (102nd) and Argentina (137th).
Case study: Mandalay Resources
TSX-listed Mandalay Resources operates within three regions of Chile:
• Compañia Minera Cerro Bayo works underground silver/gold mines in Region XI in southern Chile, having been 100% purchased by Mandalay Resources in 2010. Silver/gold concentrate is predominantly transported to Japan and South Korea. A increase to 1,200t of ore per day was achieved in late 2012.
• The Challacollo silver/gold feasibility project sits near Chile’s port of Iquique, close to the Peruvian border. It comprises 98 individual mining concessions over 20,803ha and is also 100% owned, final closing having been completed in February 2014. First mining in the area goes back to 1770.
• La Quebrada is a silver-copper project currently under exploration. Lying in Region IV 415 km north of Santiago, it has received permission for its third phase of drilling.
Greg DiTomaso, Mandalay’s Head of Investor Relations, is keen to support mining in the country. ‘Chile is our favourite jurisdiction anywhere in the world. We enjoy working there and get excellent clarity regarding tenure and taxation. There is also a predictable mining code.’
While DiTomaso does not regard the aforementioned issues of recent price changes, transportation and water as serious problems, he does concede that the company’s power requirements are a challenge, observing that 30% of its costs in Chile come from this source, even after harnessing its own diesel power.
He adds that Mandalay is committed to corporate social responsibility (CSR). ‘We stepped things up this year and last – we are now more robust in our approach. We try to be as proactive as possible in trying to identify problems, and have mining procedures in place.’