Chile Mining Industry – The Year in Review

As 2023 closes, it is a good time to reflect on what is happening in the main Latin American mining markets. This year has had a little bit of everything in terms of news – positive developments around technology adoption, political changes, and setbacks for the industry as a whole due to range of factors.

What has become clear is that Latin America will increasingly be leaned on by the world to ramp up production so that the global economy has the critical mineral it needs to decarbonize.

For the mining industry, this is unique challenge. The industry is expected to exponentially increase production to meet the projected demand for critical minerals, but it must be done without harming the environment, improving the lives of communities, providing tax dollars to governments, all while reducing emissions from the very operations that they are trying to grow.

We have provided a brief overview from the year with our thoughts on what this might mean for 2024.This edition covers Chile with future post about Peru, Brazil, Argentina, and Ecuador.

Chile Project Pipeline

• Chile has the biggest mining project pipeline in the Americas, mostly focused on copper. It currently sits at over USD$50b and involves a number of greenfield and brownfield projects that are at various stages of development.
• State copper commission, Cochilco, believes there will be an investment of USD$10.7b in 2024 which will mainly be focused on brownfield projects.
• Codelco is still having difficulty completing its projects portfolio on time and budget but expect them to push forward as they need to maintain production levels. The company has gotton some bad publicity with output dropping to the lowest in a decade. 
• You can review our overview of Codelco’s project portfolio.

What to Expect for 2024?

• Do not expect many announcements for greenfield projects in 2024. Most projects advancing though the environmental system are brownfield projects focused on continuation and optimization.
• Our prediction is that Codelco will have mixed results next year for copper production. Investment will be focused on its current project portfolio that is in development. We expect that the company will stabilize copper production towards the end of 2024 as projects are completed.
• Expect some investment decisions on new projects to be announced towards the second half of the year if copper supply is constrained and there are no major political risks or legislative changes in Chile. The projects announced will be aiming to start construction in the 2025 to 2030 period.

Water and Energy

• The Chilean mining industry has continued to make progress in 2023 with its sustainability goals. 
• The copper mark, which is an independent third-party assessment for sustainability. 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.
• Currently, Chile has over 80% of its production certified with the copper mark which is more than any other mining jurisdiction in the world.
• Chilean Mining operations are continuing to sign agreements to power their operations from renewable energy. It is expected that by 2030, close to 50% of power used by mines will comes from renewable sources. Many mines have power purchase agreements that cover 100% of their energy.
• Check out our overview from last year which can be found here. Without a doubt, the trend  towards renewables has continued, if not accelerated in 2023.
• Desalination continues to be a huge topic in the Chilean mining industry. You can check out the project pipeline here. 
• There is currently a combined capacity of 8,200 liters per second and 75% of that is already going to the mining industry. It is projected that this will rise to 25,000 liters per second if all the projects materialize between now and 2028. 

What to Expect for 2024?

• Expect that mines will continue to move towards renewables and desalination. Many will talk about the responsibility to the environment, but the reality is that the change is happening faster then expected because it makes financial sense. Renewables in Chile are cheaper than diesel or coal. Future copper that can be marketed as “green” will receive premium prices. The cherry on top is that it helps the environment. We are finally at a place where renewables make financial sense. 
• We expect the uptake of renewables to be faster than the government project as there is new capacity coming online at an incredible pace and now Chile has the largest pipeline for BESS systems to be built in all of the Americas. Long duration battery storage will be the next needed technology.
• Expect every new project in Northern Chile to be using desalination or salt water in their operations. New projects will not be built without either of the two providing water. 
• We expect that companies will try to share desalination infrastructure to reduce capex prices. Renewables will be used to power pumping stations and desalination plants. Third parties will build plants and pipelines and then sell to operations as offtakers.

Lithium Industry.

• This year the lithium debate was finally concluded with the announcement of the National Lithium Policy. For an overview you can see a blog we wrote earlier in the year.
• What it means is that the government will create a national lithium company. In the short term, Codelco and Enami will be responsible for entering into projects with private industry.
• For its part, Enami has already created a new subsidiary called Enami Litio. This new entity would be managing the US$1.5bn Altoandinos project that comprises the La Isla, Aguilar, Las Parinas, Infieles and Grande salt flats.
• The La Isla salt flats have the greatest geological potential with grades of up to 1,080ppm at a depth of around 27m. The Aguilar salt flats have maximum grades of 814ppm.
• Enami is advancing preliminary environmental study and reviewing direct extraction technologies. They have signed agreements for 38 technologies and are now performing laboratory tests with the brines to understand how they react with the different technologies.
• In November 2023, French company Eramet made a significant investment in Chile. The company acquired a package of mining concessions for US$95mn to explore an area covering 120,000ha, including 40,000ha of salt flats. This demonstrates that the new lithium policy will not drive away investment.
• One of the most exciting developments has been investment decision by several Chinise companies to build battery manufacturing plants in the country. For example, BYD announced they will spend USD$290m to build a lithium cathode factory in Chile. The plant will produce 50,000 tonnes per year of lithium iron phosphate (LFP) for cathodes, using lithium carbonate as an input. It is scheduled to start operating in 2025 and generate 500 jobs, 

What to Expect for 2024?

• The Chilean lithium industry is stalled but now that the dust has settled with the lithium policy debate, there is more activity as investors become comfortable with how things will work in Chile. We expect this to continue into 2024 with more announcements.
• Expect the government to be flexible with the agreements they enter as they understand the importance of showing that they can work with international investors. We expect to see a major agreement with Enami and Codelco to be announced in the first 6 months of 2024.
• We expect that there will be more battery manufacturing announcements as Corfo enters into more agreements to promote value added processes. The challenge will be ensuring that these are not just announcement but real investment that are brought online within the specified timeframes. Could Chile be a new major manufacturing hub given its open economy and access to lithium? 
• We expect to see an American or European company enter the mix considering their need for critical mineral and batteries. Chile will need to show that it is not just supplying China and that it is taking a neutral stance.

Chile Government and Politics

• President Boric is still adamant on raising funds for social programs by increasing revenues from the mining industry.
• The good news is that the mining royalty after much debate was finalized in 2023. It is watered down from the original proposal and much easier to swallow by the mining industry.
• With the royalty out of the way, it will surely reduce the negative sentiment that has been building up as the debate has been publicized across the world.
• Fitch estimate that with the new royalty will reach on average 43% to 44% of pretax earnings compared to what historically been about 37% of pretax earnings.
• Modifications to the mining code come into effect in January 2024. The new changes will increase the fees for mining concessions substantially, require companies to provide geological information as a condition to request extensions of exploration concessions, and switch from using the geodetic coordinate system to Sirgas Datum.
• The modifications have already been delayed from last years start date and there is still some debate happening. The goal of the changes is to encourage exploration and reduce the amount of land holdings that are owned by a small group of miners who are not actively exploring them.  Oh, and to raise money for the government. 
• The main challenge for the government will be streamlining the environmental evaluation system which is slowing the growth of the industry due to permitting times.

What to Expect for 2024?

• We expect the government will want to minimize any bad publicity by not announcing any major changes. After years of debate over mining royalties and modifications to the mining code, there was a lot of pessimism by investors about Chile which delayed investment decisions and limited investment in exploration. The government wants to get back to looking stable and safe. 
• We expect that there will be deals in early 2024 for mining properties since smaller land holders will want to get rid of concessions due to the increase in mining concession fees. We expect majors will be open to partnering with companies on concessions they may be holding to encourage exploration and reduce fees they will pay for their land holdings.

Conclusion

The Chilean mining industry is facing technical challenges. 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.

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 solving real problems related to energy and water. This result is that copper produced now and, in the future, will be done in the most sustainable way possible.

In addition to technical challenges the industry face, there has been many political risks due to conversations about royalty increases, changes to the mining code, and a new constitution for the country. 2023 was the year that the country concluded many of these topics and now the focus can move from uncertainty to action.

Whether Chile remains a jewel in the eye of the global mining community will depends on whether it can bring back confidence to investors. The good news is that as we finish the year, there are some positive developments happening that are creating some optimism both locally and internationally.  

In our view, the country will be in a good place after 2024, if it can minimize bad publicity, streamline environmental approvals, sign some deals for new lithium projects, and get the copper project pipeline moving forward with hopefully some new greenfield project announcments.

Ax Legal is an advisory firm that works with foreign companies in Latin America. Our team of legal and commercial advisors have a distinguished track record of helping foreign technology and services companies to grow and operate in Latin America. Over the years, we have worked with starts up, mid-size businesses, and publicly listed companies. The one common factor that connects our clients is that they are leaders in their field, providing innovative technologies and services to the industrial sectors.

To better understand how we can support you in the Region, please contact Cody Mcfarlane at cmm@ax.legal