Chile Faces Hurdles to
Maintain Leadership Position
Overview of mining in Chile
The world witnessed unprecedented events in 2020, and Chile, the world's copper powerhouse, was no exception. Traditionally considered a model for political and financial stability in Latin America, the last two years have challenged this reputation. Nevertheless, the country's solid macroeconomic framework has allowed it to withstand the pressures, cushioning the effects of the volatile internal disturbances of 2019 and the pandemic of 2020.
In October 2019, the country experienced social unrest reflecting widespread frustration with persistent inequality. Yet mining investment in the same year recorded its highest level since 2015, standing at US$10.1 billion, while total production in 2019 amounted to 5.79 million tonnes (mt) of copper and 112,600 mt of lithium, according to the Chilean Copper Commission (Cochilco). In 2020, the country was exposed to volatile copper prices and export demand, as well as prolonged Covid-19 containment measures. On 25th October 2020, Chileans held a plebiscite, resulting in a landslide majority voting to draft a new Constitution, potentially adding uncertainty to the future evolution of the regulatory framework. Yet, these factors did not prevent copper output from maintaining stable levels, with 2020 production reaching 5.73 million mt according to Cochilco.
“The mining industry has been resilient. The sector's safety protocols were quickly adapted to minimize contagion risks. Some investments were delayed due to logistical challenges resulting from the lockdowns, most of which are resuming in 2021.”
Christoff Janse, Investment Promotion Officer, InvestChile
"The pandemic has affected practically every aspect of life in Chile. Curfews, temporary border closures and reduced business hours were implemented to lower infection rates," elaborated Christoff Janse, investment promotion officer at Invest Chile. "The mining industry, however, has been resilient. The sector's safety protocols were quickly adapted to minimize contagion risks. Some investments were delayed due to logistical challenges resulting from the lockdowns, most of which are resuming in 2021. "
The copper price was expected to enjoy an upward trajectory in 2020, but the reality was a rollercoaster of price changes. As the Covid-19 outbreak went from a public health emergency in China to a global pandemic, the copper price plunged to a three-year low in March 2020, before peaking to an eight-year high in Q1 of 2021. On the other hand, gold witnessed a bullish run as cases rose, reaching an all-time high in August 2020. Meanwhile, lithium, of which one-third of the supply is in Chile, faced downward pressure as a result of disruptions and uncertainty as electric vehicle (EV) sales decreased. "The pandemic ignited and exacerbated the upward cycle of commodity prices by triggering one of the most extensive expansionary monetary and fiscal plans in history," highlighted Juan Carlos Guajardo, founder and executive director of Plus Mining.
The pandemic and its consequences aside, Chile’s mining industry stands at a pivotal crossroads. The industry facilitated the nation’s rise and prosperity, but is witnessing lower productivity, dormant greenfield exploration, plus greater social pressure and environmental awareness, all of which are limiting its international competitiveness. The copper giant is aware of these challenges and is forging a new trajectory in exploration and production led primarily by innovation and constant collaboration between the stakeholders in the industry to facilitate its long-term growth.
“On the bright side, the pandemic could positively impact the mining industry's future efficiency. Mining companies realized that there is space to increase productivity as they were able to maintain output with less personnel on-site.”
Alejandra Fernández, Mining Director, Fitch Ratings
Fighting the outbreak
The Chilean government has fought to strike a balance between containing the virus and shielding the economy. Unlike in Peru, mining was declared essential to prevent closures to mine sites, since the industry contributes 15% to the nation's GDP and represents half of its export income. However, as the outbreak expanded in Chile, some major operating mines did close in Q2 of 2020, namely Codelco's Chuquicamata, after worrying levels of infection among staff members. The pandemic strained relationships between mining companies and workers' unions, as companies were accused of not taking adequate measures to reduce the risk of infection, whilst taking advantage of the crisis to reduce jobs. According to mining association Sonami (Sociedad Nacional de Minería), by July 2020, 35,000 jobs had been lost as a result of pandemic-related lay-offs. However, despite reductions in personnel, production did not suffer to a large extent. From January to May, copper production hit 2.37 million mt, an increase of 3.5% from 2.29 million mt in the same period of 2019. Only Anglo American reported a steep fall in output due to water shortages at Los Bronces.
Critical to the miners' pandemic response was minimizing physical presence at mine sites. Chile, as a hub for mining innovation, was well equipped to take this on and maintain production levels with half of the staff on-site. According to Philippe Hemmerdinger, president of the Asociación de Proveedores Industriales de la Minería (Aprimin), the mining suppliers' association: "Chile's experience with the social unrest in October of 2019 gave it a trial run at remote work, so companies were to some extent prepared for the Covid-19 outbreak. Operations were smooth as measures ensuring employees were trained and equipped for working at home were fortunately already in place.”
This smooth transition and implementation of remote control and autonomous mining techniques during 2020 allowed production volumes to be maintained. "The Chilean mining industry was already leading the way to develop more autonomous mining before the pandemic," highlighted Dale Clayton, managing director of Liebherr in Chile.
While the health crisis did not impact production to a large extent, it resulted in the delay of mining projects worth billions, since 23 projects were postponed, according to Cristián Cifuentes, strategies and policies coordinator at Cochilco. Codelco, which is in the midst of an ambitious 10-year, multi-billion dollar investment drive to open new projects and overhaul older mines, reduced its investment portfolio by US$650 million. However, it bounced back rapidly, restarting operations at full capacity and resumed the expansion project at El Teniente by Q4 of 2020, to be completed by 2023. Meanwhile, Vancouver-based Teck Resources delayed the expansion of its Quebrada Blanca Phase 2 by six months in July of 2020. "The mining industry scaled back on investments, reducing maintenance, and sustaining capex following the obligation of limiting personnel on mine sites and cushioning the impact of the outbreak on cash flows. Most companies also reduced dividends," highlighted Alejandra Fernández, mining director of Fitch Ratings in Chile.
Other crucial projects that were delayed include seven desalination projects, one of which was planned for BHP's Spence copper mine in Antofagasta, the others were to be developed by Antofagasta Minerals, Mantos Copper, Codelco, Capstone Mining, Teck Resources and Freeport McMoran. According to Cochilco, desalination and seawater use will likely increase by 230% by 2030, as miners battle water shortages. Anglo American, for example, developed a water reuse system at Los Bronces allowing recycling of more than 70% of available water. Meanwhile, lithium giant SQM is reducing freshwater consumption across all operations by 40% by 2030.
“The ability to sell minerals in the future will likely depend on the extent of greenhouse gases used in the process, which will only push mining companies more towards ensuring sustainability, increasing the popularity of green copper.”
Eduardo Valente, Lead Consulting Partner, EY Chile
The mining industry is aggressively asserting and promoting sustainability across the entire value chain. Mining operators across Latin America are altering their community engagement strategies from mere transactional handouts to proactive engagement and long-term strategies that are inclusive of the local, national and broader communities. In the case of Chile, conflict with local communities is mostly a result of environmental issues. To obtain a social license to operate, companies must invest in the use of renewable energy sources, reduce freshwater use and eliminate toxic waste.
Investment in renewable energy sources is set to swell. BHP, for example, is switching to green power for its Chilean operations, thus reducing costs by 20% at the Escondida and Spence operations. Likewise, Iván Arriagada, CEO of Antofagasta PLC, explained: "Antofagasta has set a goal to reduce its forecast greenhouse gas emissions by 300,000 mt by 2022, supported by a series of initiatives including the transition of all our mining operations' energy supply to renewables by 2022".
According to data from Cochilco, renewable energy use in the copper industry is expected to grow to 49% of power used by 2023. "I am confident that, in the upcoming years, the industry will undergo revolutionary changes that aggressively promote the use of clean energy sources and the reduction of carbon footprints. I foresee an industry that is carbon-negative in the future, and one that produces net zero emissions over the next decade," commented Eduardo Valente, lead consulting partner at Ernst & Young in Chile. "The ability to sell minerals in the future will likely depend on the extent of greenhouse gases used in the process, which will only push mining companies more towards ensuring sustainability, increasing the popularity of green copper," he concluded.
Meanwhile, sustainability in the equipment space is driving innovation, as providers are replacing diesel engines by battery-driven electric machinery for underground and open-pit operations.
The road to recovery from the outbreak of the virus has begun in Chile, as the Chilean government moved decisively and rapidly to secure enough doses to vaccinate its population twice. By February 2021, Chile was able to vaccinate 16% of the population within just 21 days, which testifies to its organisation and resolve to move past the outbreak. After two consecutive years of uncertainty, 2021 presents an exciting year for mining in Chile amid bullish commodity prices and a recovery from the Covid-19 outbreak. Chile is forecast to produce 5.99 million mt of copper in 2021 according to Cochilco, and is welcoming major expansion projects such as BHP's Spence, Codelco's El Teniente, Teck Resources' Quebrada Blanca Phase 2 and the construction of Gold Fields' Salares Norte, as well as a more active junior segment, mid-tier operators and a revived exploration sector.
Image courtesy of Freeport-McMoRan