On April 11th this year, Chileans will vote for the first time in history for a Constitutional Convention, composed of 155 elected members that will have the responsibility to propose a new constitution for the country. This is the result of months of social distress that started in October 2019 and culminated with a plebiscite one year later. The overwhelming result of which was a decision to write a new constitution.

The Latin America region has been characterized by constitutional changes that often have come in the form of authoritarian governments and have cemented the basis for political instability, lack of rule of law and an overall detrimental scenario for investment, which has a particular impact for capex-intensive and long-term industries such as mining. Chile’s constitutional process, howeber, has moved forward within the legal framework set out in the current constitution and therefore maintaining the tradition of transparent electoral processes, well-functioning institutions and rule of law that have characterized the country over the last three decades.

While on the Chilean political spectrum there are those that support radical views that favor the idea that natural resources should only be extracted by state-owned companies and that this constitutional process could be an opportunity to nationalize the resources, this is a very unlikely outcome as the new constitution will require the approval of two thirds of the Convention’s members. Furthermore, mining has been a cornerstone of Chile’s economy, and the benefit of a booming mining sector has percolated through the different layers of the economy and has not been characterized by major social conflicts.

The Convention will not be an isolated event, and alongside its development there will be other significant political milestones including the upcoming presidential election at the end of this year. The mining sector does not appear to be a central topic for constitutional changes, however, one could predict that it could built momentum in the policy and legislative discussions that will naturally occur in parallel. A very likely outcome is that Chile’s fiscal expenditures will see a relevant increase in the upcoming years as social programs including healthcare, education and pensions are central themes to the constitutional process. It is reasonable to expect new programs will be put in place or major reforms will come in effect that will require additional fiscal collection. As the most relevant industrial sector in the country, it is fair to expect that mining will likely be in the center of the discussion and will feel pressure for changing the current mining tax regime or implement a new royalty scheme.

An unexpected catalyst has been the spectacular copper price rally that has peaked at 10-year highs. The positive perspectives for copper demand and prices in the mid- and long-term have exponentially accelerated the political agenda to implement a new royalty regime. In late March 2020, a 3% ad valorem royalty legislative proposal was approved in the lower house and will move forward the legislative process.

The short-term impact for a new royalty or tax will mean that mining operations could lose their competitiveness in terms of economic viability. Valuations for mid-sized projects could be significantly reduced resulting in suspension or nullification of the investment decision.

It is fair to assume that we might see changes in the upcoming year. Endogenous factors, such as the results of the constitutional convention and presidential elections, are the key drivers that could shift the outcome one way or the other. Exogenous factors have also been shown to have a relevant impact (namely the copper price volatility). Finally, the response that the mining sector takes to either oppose or collaborate in this process, and how that is conveyed to the different stakeholders, will likely have an impact too.

This can be a turning point for the industry in Chile, but it could also be the consolidation as a tier one mining jurisdiction that demonstrate how institutionality and rule of law can lead to structural social changes while maintaining the incentives of the mining sector for sustaining Chile’s development and growth.

Image courtesy of LuisValiente from Pixabay