Mining Investment Climate
Clarity is needed to stimulate a virtuous cycle of investment
For many years, Chile’s position as the top mining investment destination in Latin America was clear, particularly for major developments. Moreover, mining has been the main driver of the country’s socioeconomic development for decades. The historic stereotype of predatory international mining companies pillaging developing countries’ resources and disappearing with the profits is far removed from how modern mining has operated for many years, particularly in mature jurisdictions such as Chile.
“It is important to note that of all monetary flows in this industry, 90% stays in Chile via investment, taxes, royalties and salaries,” observed Joaquín Villarino, CEO of Consejo Minero, the Chilean industry association covering the country’s major mining companies that represent over 90% of the country’s mining production.
For many years, the taxes and royalties paid by Chile’s mining sector have been the go-to source of income that its government has used to fund other parts of the economy. Eduardo Valente, lead consulting partner at EY Chile, gave the example of the government mechanism to stabilize fuel prices for the population, which the State intends to fund with revenue attained from the copper industry in 2021. “If you do not create the conditions for investment, there will no longer be revenue to be used in other segments of the economy,” stated Valente. “If the Chilean government invests in copper, companies can grow, will pay more taxes, and the government will have more revenue to invest in other sectors.”
“As of December 31, 2021, there were 40 TSX and TSXV mining companies in Chile (up from 34 in 2020), with 106 mining properties (up from 100 in 2020). In 2021, C$282 million equity capital was raised on TSX and TSXV by companies with mining projects in Chile (up from C$87 million in 2020).”
Guillaume Légaré, Head – South America, Toronto Stock Exchange and TSX Venture Exchange
Porphyry copper projects are massive operations that generate tax wealth and employment for decades, as well as immense downstream value. If Chile were to develop its known reserves, even without exploration success, the country could increase its copper production by around 2 million t/y, and its lithium production by around 1 million t/y. “The revenue from this production would generate vast wealth for Chile that would dwarf the extra taxes being discussed on current mines, in addition to creating thousands of jobs and indirect benefits for millions of Chileans,” reflected Marcelo Awad, executive director of Wealth Minerals.
Philippe Hemmerdinger, president of the Association of Industrial Mining Suppliers (APRIMIN), emphasized the importance of the US$120 billion invested into Chilean mining in the last 15 years from the perspective of the country’s vast ecosystem of suppliers and those who live from this chain. Underlining the need to foster competitiveness, he said: “We have to remember that we live in a global village, and if Chile has a tax level that does not allow the mining sector to be relatively profitable, we will not receive investment.”
The uncertainty that the noise surrounding constitutional and royalty reform creates is perhaps more significant than the actual reforms themselves, which are not expected to be drastic. The likes of BHP and Freeport have been clear in their communication – there is capital to be invested, but only under the right conditions.
In addition to the major producers active in Chile, the international investment community is watching what is happening closely. Michael Scherb, founder and CEO of Appian Capital Advisory LLP, discussed his company’s view of political risk: “We view politics very much like we view commodity prices – a pendulum on a clock swinging back and forth, side to side, but rarely in equilibrium down the center.”
“BioLantánidos is the first RRE project ever developed in Chile, and its sale represented a 4x multiple for Mineria Activa’s investors who trusted us with this innovative project, which is the first of many RRE projects we will see in the coming years.”
Pedro Pablo Lizana, CEO, Mineria Activa
Scherb commented that if politics moves against foreign investment in the mining sector, investors will simply choose to put their capital in a different country, but political moves to the left wouldn’t necessarily stop Appian from investing in a country.
Randy Smallwood, president and CEO of Wheaton Precious Metals (WPM), weighed in on the subject: “We are happy to take on geological, metallurgical, mining, engineering and even community risk to some extent, but we will not take on political risk ourselves.”
WPM’s global portfolio of streams is Americas-centric, including two investments in Chilean developments in 2021 for Rio2 Limited’s Fenix Gold project and Capstone Copper’s Santo Domingo project.
Martín Valdes, partner and head of Fund VII at Resources Capital Funds (RCF), acknowledged that in light of the constitutional reform, the investment community sees Chile with different eyes than it used to before 2019. However, he observed that investment is still coming into the country and affirmed that investors believe that Chile will remain an attractive mining destination. Valdes sees plenty of upside left in the copper space when considering current valuations: “Despite high copper prices, copper producers, developers and juniors are currently trading around 0.6 or 0.7 times P/NAV, so I believe there is still value in this space. RCF is also interested in the gold sector considering everything going on in the geopolitical space.”
Michael Scherb commented that while Appian always tries to be counter cyclical to the market, and the level of bullishness surrounding copper is slightly worrying, it is potentially a unique occasion. “We don’t see where the supply is coming from, we don’t see the ability to easily ramp up brownfield deposits, and we don’t see a lot of exploration success. At the same time, we do see demand getting stronger,” said Scherb, reflecting that even if Chinese construction was to slow down, Appian’s view is that the energy transition would more than make up for this. He added: “If a way to economically process low-grade ores was found, that is one of the only areas I see that could dramatically affect copper.”
Pedro Pablo Lizana, CEO of Mineria Activa, the mining arm of Activa, LarrainVial’s private equity fund, believes there should be no shortage of transactions in the coming months and years considering the current prices and outlook for copper, highlighting Mineria Activa’s Pampa Camarones project as an example of green mining: “Pampa conducts its operations with solar energy and sea water. This company is a perfect example that, even in the light of climate change challenges, opportunities arise: it is possible to conduct mining operations that produce copper under green conditions.”
Image courtesy of BHP