An Evolving Constitutional Landscape
Can Chile maintain its position as the premier mining jurisdiction in Latin America?
On March 11th, 2022, Gabriel Boric was sworn in as Chile’s president, one month after his 36th birthday and a decade after emerging as a student protest leader. The election of Boric’s left-wing Social Convergence party is the latest surge of the so called pink tide in Latin America, following leftist leaders rising to power in Mexico, Argentina and Peru in recent years.
Boric’s appointment, which came on the back of social unrest in 2019 that led to a 2020 national plebiscite that voted overwhelmingly to draft a new constitution, seems to have drawn the attention of mining industry commentators to a greater extent than the aforementioned appointments elsewhere in Latam. After all, as the world’s biggest producer of copper and second biggest producer of lithium, what happens in Chile impacts global industry. Considering the current focus on decarbonization, the role of Chilean metal production in the electrification transition has amplified this importance.
A number of legislative proposals raised concern in late 2021 and early 2022, including a bill that would create the heaviest tax burden among major copper-producing nations, and a proposal to nationalize ‘strategic assets’ such as copper and gold. At the time, click-bait headlines and a lack of nuance surrounding the reporting of the proposed changes created misconceptions about the gravity of what is happening in Chile, or rather what is likely to happen in the months and years ahead.
In short, the consensus on the ground in Santiago from investors, consultants and mining professionals alike is that radical changes are unlikely to occur. Chile is undoubtedly facing a critical period of sociopolitical evolution, but it remains the premier mining jurisdiction in Latin America.
That being said, the current period of inertia as the country prepares to finalize its new constitution not only causes uncertainty, but could represent an opportunity lost during a time of high copper and lithium prices.
On May 15th, Chile’s constitutional assembly rejected article 27, which planned to nationalize parts of the mining sector. Proposals, including general bans to mining activities in certain territories and a confiscatory royalty of 25% of sales, were also rejected. Article 25, which states that miners must set aside ‘resources to repair damage’ to the environment and harmful effects where mining takes place, did get a supermajority and will be in the draft constitution. However, this was the only one of the 40 proposals made by the Environmental Commission that was approved during the first votes in the general assembly. The final draft of the new constitution is due in July and citizens will vote to approve or reject it on September 4th.
“Mining is a long-term activity that requires very specific conditions, and we have been very clear about what those conditions are: fiscal stability, legal certainty and clear pathways to permitting. I’m convinced that the country will provide the conditions for us to materialize the great plans we have for Chile.”
Rag Udd, President Minerals Americas, BHP
Although no radical changes have been passed, increasingly stringent environmental standards indicate that project development will not be straightforward. In May 2022, Chile’s environmental agency (the SEA) rejected Anglo American’s application for a US$3 billion expansion of its Los Bronces copper mine. In June 2022, the SEA recommended the rejection of Rio2’s Fenix gold project, suggesting that more studies are needed to assess the project’s impact on three types of fauna. Both of these projects are expected to move ahead eventually, but are examples of the challenges faced by the industry, even by leading companies with strong track records in their respective spaces.
“Up to now (May 27th, 2022), what has been approved does not go against the development of mining activity,” commented Joaquín Villarino, CEO of Consejo Minero, Chile’s industry association whose members represent over 90% of the country’s mining production. “Recognizing that the mineral resources belong to the State is already part of the current constitution. Other measures approved related to sustainability and environmental protection are also items that we consider to be reasonable.”
Reasons for optimism, if conditions are met
There were clear reasons for the sector to temper its concern during CESCO week 2022, the key industry event in Chile’s mining calendar that brings together the region’s major copper players in Santiago. On March 28th, Patricio Vergara, vice president of mining resources and development at Codelco, the world’s largest copper producer, announced that Chile’s state-owned mining firm was preparing to offer the market some ‘non-core’ exploration assets to become eventual partnerships.
The following day, during the opening keynote presentation at CRU’s World Copper Conference, Minister of Mining Marcela Hernando, stated that it was not in the government’s plans to nationalize mining in Chile or expropriate assets, adding that the government does not want to scare off investment. She underlined the will to work with exploration companies that “have placed their trust in our country”, and praised the way foreign companies treat their workforces. This was a far cry from the impending communist revolution portrayed in a number of media outlets and a timely reassurance for those in attendance.
Minister Hernando was previously mayor of Chile’s biggest mining region, Antofagasta, and chaired a mining committee in the lower house of congress for over three years. “She has a lot of experience and knowledge about the industry. Importantly, she is very open and in previous interactions has always listened to the concerns of the mining sector,” commented Marcelo Awad, executive director of Wealth Minerals, who was CEO of Antofagasta PLC during Hernando’s time as mayor of the region.
During her interview with Global Business Reports, Minister Hernando affirmed the importance of maintaining Chile’s leadership position in mining, “with an attractive proposition in terms of legal and social stability.” She also underlined the need to promote a fair mining industry that treats its communities well and provides a fair contribution to the State.
“The wording and harmonization of the final text of the constitution is still being refined, and must be approved or rejected by the plebiscite on September 4th. However, the nationalization of copper, which was the main threat to the industry, was ruled out by a large majority.”
Philippe Hemmerdinger, President, Association of Industrial Mining Suppliers (APRIMIN)
The importance of establishing a clear legal framework was emphasized by BHP’s president of minerals Americas, Rag Udd, who announced that the world’s largest mining company intends to invest more than US$10 billion in Chile, but only if certain conditions are met. “Mining is a long-term activity that requires very specific conditions, and we have been very clear about what those conditions are: fiscal stability, legal certainty and clear pathways to permitting,” explained Udd, before affirming his conviction that the country will provide the conditions for BHP to materialize the plans it has for Chile.
Joshua Olmsted, president and COO Americas at Freeport-McMoRan, acknowledged the “huge opportunity” for continued investment in the Chilean mining industry, but also made clear this is dependent on how legal frameworks progress over time. “Uncertainty in the last couple of years has caused a number of us to step back and see how this plays out before we make any major decisions on future projects,” reflected Olmsted, hinting that Freeport would probably be moving faster with the expansion of its El Abra project if there was more clarity around the fiscal and regulatory issues in Chile. He concluded: “We are hopeful that the process with conclude in a manner that will be beneficial to all parties.”
On the topic of how Chile’s mining sector strike a balance between attracting sufficient investment for growth and creating more local benefits for Chilean communities, Iván Arriagada, CEO of Antofagasta PLC, stated: “I believe the two come hand in hand – with greater growth, including that fueled by investments, we will be able to give back more to our communities.” He noted that Chile is experiencing change with a new government and new constitution, and in both cases an emphasis is being placed on a more progressive social agenda and potentially higher taxes for the mining industry.
“I think that mining, and business more broadly, can play a significant part in this new social pact to create a balance that allows businesses to continue to grow and invest in the country, which, in turn, allows them to return more benefits to the communities,” added Arriagada.
Analyzing the type of government Boric intends to run, Michael Cullen, managing director Latin America for FTI Consulting, suggested: “Chile’s new president will try and implement something along the lines of Scandinavian welfare state politics rather than old-school communism.” Cullen observed that the government’s ministerial appointments have alleviated market fears, most notably finance minister Mario Marcel, who previously successfully ran the Chilean central bank from a fiscal management point of view.
Diego Hernández, president of Chile’s National Mining Society (SONAMI) and former CEO of Codelco, is optimistic that a compromise will be reached because of mining’s importance to Chile’s development, representing 14% of GDP in the last 10 years, 20% of the economy once the service sector and salary recirculation are considered, and 60% of the country’s exports.
The statements made by Minister Hernando and Codelco executives in recent months indicate that the government understands the financial realities of governing a country, particularly in a post-Covid landscape, are very different from populist rhetoric used during a campaign trail.
“It is important to note that of all monetary flows in this industry, 90% stays in Chile via investment, taxes, royalties and salaries. Only 10% of the wealth created is withdrawn as dividends for shareholders.”
Joaquín Villarino, CEO, Consejo Minero
Although the most extreme constitutional proposals put forward to alter Chile’s mining industry have been rejected, one of the dangers is that the public discourse surrounding such radical ideas will influence a general public that does not fully understand the reality of mining. “I am going to reference German sociologist Niklas Luhmann, who suggested that a group of people with beliefs and a series of myths or values often end up deciding for an entire population,” said Manuel Viera, president of the Chilean Mining Chamber, who also acknowledged that Chile has been by nature a very conservative country.
David Alaluf, general manager of Endress+Hauser Chile and professor at the University of Santiago, voiced his concern that the current discourse surrounding Chilean politics is contributing to an uncertain climate for investors: “I am worried that new laws will be influenced by social networks instead of being based on technical fundamentals.” However, Alaluf praised the appointments made by the Ministry of Mining, citing the selection of subsecretary Willy Kracht as an example of the type of experienced mining professional the government should look to hire.
If radical proposals are unlikely to pass, what then are the main risks that Chilean mining has to navigate in the months ahead from a constitutional standpoint? Two of the potentially more problematic focuses of the new constitution revolve around decentralization and the environment, particularly water rights. The empowerment of regional authorities, while attractive in theory, often leads to extra avenues for corruption and cumbersome bureaucracy, as seen in the years following the Peruvian decentralization process in 2005.
María Paz Pulgar, counsel – natural resources, at Philippi Prietocarrizosa Ferrero DU & Uría (PPU Legal), observed that the environmental threshold for mining projects is significantly stricter today, communities have become more involved, and the perception and reception of the industry has changed. “Private water rights are strongly contested due to the alleged rights of indigenous communities which is aggravated by the drought Chile has experienced for the past years,” she said, adding that this has led to proposals for new norms that aim to protect the environment and water supply, but would result in the detriment of the development of investment projects.
Although outright expropriation of water rights is unlikely, potential changes to the legislature surrounding water could still be impactful for mining, especially considering the amount of operations located in the Atacama – the world’s driest desert. “In Colombia, for example, rivers have the same rights as human beings, and considering how delicate this subject is in mineral rich parts of Chile, radical constitutional changes could be taken that could have a bigger impact on mining operations than the royalty bill,” stated Daniela Cuellar, senior consultant at FTI Consulting, who mentioned FTI is watching this space very closely for its mining clients.
Another potential risk, or at least a challenge the Chilean mining sector has to deal with, is the inertia brought about by ongoing political and constitutional discussions. Chile is not used to experiencing the volatility of countries such as Argentina, Brazil or even Peru. This is causing things to move more slowly, as the country becomes familiar with operating through periods of change. For instance, some equipment suppliers mentioned that their sales to development projects such as Quellaveco and Marcobre in Peru were moving faster than development projects in Chile. It is an interesting comparison, because even though the majority of mining analysts believe Chile is still the premier jurisdiction in Latam for mining investment, the country must adapt to what is perhaps a ’new normal’ of volatility (on both a global and regional level) to ensure development happens at the required pace.
Gabriel Boric is part of a new generation of leaders that want to make tangible change for a greener, fairer and more inclusive country. To achieve this, he has an enviable natural resource endowment that will not only play a leading role in the energy transition, but also has the potential to fund the initiatives that will enable change. “Governments should be focused on creating long term sustainable value rather than focusing on the short term,” concluded Eduardo Valente, lead consulting partner at EY Chile.
At such a crucial time for the country the hope is that a constitutional framework will be established that can foster mining development for the years to come. As the world transitions away from fossil fuels and if copper really becomes the new oil, the opportunities awaiting Chile cannot be understated.
Image courtesy of Freeport McMoRan