Despite record high metal prices, which translate into healthy margins and positive cashflows, miners are still navigating through uncertainty in Chile as long-term planning has proven to be a difficult task.

Chile’s mining sector has not been alienated from the socio-political turmoil the country has faced since late 2019. The exit referendum for the new constitution is set for September 4th this year, which is likely to be an inflection point that will define the political agenda for years to come. While mining has not been a central focus point of the constitutional debate, the Convention teased the idea of nationalization of the mining industry but it lacked support within the Convention. The final draft of the proposed constitution eliminated the most controversial mining-related articles, although the mining code and the mining concessions system will likely change, and more complex consultation processes with indigenous groups, among other issues, could have an impact, particularly for new mining projects.

In parallel, the royalty bill is still in discussion. The original bill introduced and approved in the Lower Chamber was modified in the Senate’s Mining and Energy Commission early this year. The initial bill was extremely aggressive, and we estimated that it would have meant that all of Chile’s copper production would turn to negative cashflows by the end of the decade. This was moderated in the Senate, introducing a new royalty scheme that would have an ad valorem component and a margin-related component. With this, we estimated the average total tax effective rate could increase by approximately 5% with respect to the current scheme. This modification, however, was perceived as too moderate and did not have the necessary political support in the Lower Chamber to be approved. With this in mind, the new Government that took office in March this year stated that it will be presenting a new royalty bill as part of their tax reform, which should be released by the end of June this year.

The green economy will sustain the copper consumption growth in the next decade. CRU expects that the supply gap for primary copper by 2035 will reach over 7 million t/y. This means that the world will need a significant number of new mining projects. When we look at potential future production capacity, Chile has the potential to add 4.4 million t/y of production capacity between probable, possible and speculative projects. These projects would translate in approximately US$41 billion in investment.

As the last committed projects will soon reach production, miners will have to take new investment decisions within the next couple of years. Will Chile remain in copper’s pole position and bring to fruition its greenfield and brownfield projects? The reality is that even in the event that we don’t see drastic changes in legislation and the constitution, it will still take time for the dust to settle. This means it will remain difficult for new investment decisions to be made, particularly for capex-intensive greenfield projects.

The forecast increase in demand for copper and growing supply deficit presents a unique opportunity for Chile. To capitalize on this, more certainty is needed to establish a framework for long-term investment. The new constitution represents an inflection point for the country and its mining industry that will dictate project development and economic progress in the years ahead.

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ABOUT THE AUTHOR

Francisco Acuña – Principal Consultant: Francisco joined CRU Consulting in 2019 and has worked on a variety of commodity types, including: base metals, precious metals and battery metals; and is engaging new business development with mining & financial institutions across the Americas. His main focus has been the copper mining sector, and regularly participates as keynote speaker in international events. Francisco holds a Chemical Engineer degree from University of Concepción, Chile and a M.Sc. Industry, Trade & Development from University of Manchester, UK