Chilean Mining Industry – The Year in Review
December for Ax Legal is always a month of reflection as we close out one year and start making plans for the next. As I review my LinkedIn posts from the last 12 months, it reminds me that this year was one to remember.
From a global perspective, it was a year of high inflation across the world, travel restrictions due to Covid were mostly eased, and geopolitical tensions took the main stage with Russia invading Ukraine and the US competing to secure rare mineral supply.
Latin America did not disappoint. Elections across the region meant that new left leaning governments took office in Peru, Chile, Brazil, and Colombia. The region fared worst then others in 2022 due to high inflation pressures. On the bright side, the region benefited from higher mineral, gas, and oil prices. It was needed to ease budget concerns after record spending during the pandemic.
The Chilean mining industry in particular had an interesting year. Below we have provided some of the highlights from 2022 with links to articles regarding the most important mining topics.
New Constitution for Chile – The first half of 2022 was spent discussing the proposed constitution which created a lot of uncertainty. There was first talks to nationalise key parts of the mining industry such as lithium extraction, but these were eventually watered down and the remaining articles in the proposed constitution included the expansion of protected lands, restricting private water rights and making combating climate change a state obligation. In September 2022, the country voted on the proposed constitution which failed to receive the general support and was rejected.
New Royalty – At the same time the country was discussing a new constitution, a tax reform was introduced proposing new royalty rates for the mining industry. The original proposal would have set Chile has one of the highest royalties in the world. The industry spoke out and the government introduced changes to make the royalty more competitive which are now being discussed in the Senate.
Sustainability – The Chilean mining industry has continued to make progress in 2022 with its sustainability goals. The positive results mean that 9 operations in Chile have received the copper mark, which is an independent third-party assessment to demonstrate the industry’s contribution to the United Nations sustainable development goals. There are 5 other Chilean operations that are in process. To be granted the certification, a copper miner must comply with 32 criteria relating to greenhouse gas emissions, safety and health, tailings management, biodiversity, business integrity, gender equality and human rights.
Water – Chile has signed 32 water scarcity decrees in seven regions of the country so far this year because of the ongoing drought affecting the country. The mining industry in particular, although not the largest water user, has been affected. In 2022, some mining companies were even reducing their production due to extreme water shortages.
Desalination Projects – Given the growing limitations of water availability, the mining industry is moving towards using desalinated water. In 2022, four new projects were added to an already growing list of projects. New announcements came from by Anglo American (500l/s), Albemarle (500l/s), Collahuasi (1050 l/s), and Codelco (1956/s).
Lithium Growth – Although Chile only has two producing companies, both have been able to increase production significantly from their existing operations. Albemarle inaugurated its US$500 million La Negra III/IV plant this last June which will help the company reach its goal of producing approximately 80,000MT of lithium carbonate per year. SQM has started increasing production to 180,000 mt/year of lithium carbonate and 30,000 mt/year of lithium hydroxide, a threefold increase from its output in 2018. Earlier this year, the company announced a new expansion which will increase production to 210,000 mt/year of lithium carbonate and 40,000 mt/year of lithium hydroxide starting in 2023.
Lithium Value Add – Corfo, the country’s development agency, opened a tender this year to invite companies to submit proposals on how they could add value to lithium products. This could include precursors and/or cathode material, lithium cathodes, lithium battery components, and lithium metal, among other applications. Qualified companies may apply to access the lithium carbonate and lithium hydroxide produced by SQM at discounted rates.
Gold Projects – After years of declining gold production in Chile, 2022 was a year of new projects. Goldfields Salares Norte project is nearing completion. Kinross’s La Coipa project also poured its first bar of gold in March 2022. There are several more projects in the pipeline that will start in Chile over the next few years.
Conclusion – Forecast for 2023
Growth 2023 – Industry association Sonami, expects the Chilean mining sector to grow close to 7% in 2023. There should be more projects entering construction compared to 2022, given the future global demand forecasts. The Chilean mining project pipeline has grown for the period between 2022-2031 to US$74b, a 6.9% increase from last year.
Political and Legal Risk – On the other hand, there is still political and legal risk that will temper enthusiasm. Uncertainty from 2022 will follow the country into the new year. There are two main areas where the risk presents itself –
- Mining Royalty – The mining royalty bill is still being discussed. Although changes were made to make it more competitive, recent assessment still peg the total taxation as too high. This latest proposal raises the effective rate to around 50%, while the rate in competing countries, such as Peru, only reaches 42%.
- Mining Code Reforms – Reforms to the mining code, particularly the mining concessions, will come into effect in February 2023. Changes were made to increase the cost of mining concessions and encourage more development. Companies would be obligated to present specific exploration and/or production projects to maintain them, and the change to the geo-measurement system to delimit mining properties. It is generally agreed that regulators and companies are not ready for the February 2023 deadline
Lithium Industry – The Chilean lithium industry will continue to grow with further project announcements from SQM and Albemarle. They will also look to reduce their water usage and incorporate new technologies in 2023. They may have competition soon though because the government has indicated that a National Lithium company will be created early next year.
The Chilean mining industry is facing challenges, but this is not new and has been discussed for the last few years. Copper grades are considerably lower than 20 years ago meaning that companies need to run more material to get the same amount of copper. Water and environmental pressures are increasing, in some cases reducing production for some mines.
These challenges are also giving Chile a chance to take the lead in many key ESG areas. While the rest of the world is talking about ESG, Chilean mines are actually solving real problems. It is showing the world that mines can be ran on renewable energy while reducing freshwater usage through recycling and the use seawater to process material. More importantly, the Chilean mining industry is showing that it can be done at a relatively competitive cost.
Chile has a large project pipeline that will be critical to the global supply of copper, particularly considering demand projections over the next 10 years. Whether Chile remains a jewel in the eye of the global mining community will depend on how the country navigates political risk from proposed royalty rates and constitutional changes. Uncertainty is not a good thing for investors so the country will need to do more improve confidence which will hopefully kick-start the project pipeline in time to take advantage of future demand.
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