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Now that Chile has passed an increase in
mining royalties, copper miners are pushing for incentives to keep investing in
production of the metal needed for the renewable energy revolution, with steps
such as cuts in energy costs, speeded-up permit approvals and other incentives.
Beginning in 2024, mining royalties will
rise to a range of 8% to 26% of operating margin from the current range of 5%
to 14%. There will also be a 1% ad valorem tax based on sales for miners that
post a profit.
Chile’s Mining Council, which comprises
large private firms, estimates this will ultimately boost the average tax rate
of 44.7%, exceeding the top of the range of 38-to-44% in competing countries
such as Peru and Australia.
“We’re hoping that this competitive
disadvantage is somehow compensated with other public policy actions that
encourage investment,” said the association’s head of studies, Jose Tomas
Morel.
The elevated royalty is the latest
flashpoint between the mining industry in the world’s No. 1 copper and No. 2 lithium
producer and the leftist government of Gabriel Boric, who came to office
promising to get the country’s mining industry to help pay for expanded social
programs. Industry lobbying did prompt a cut in the original royalty rise plan,
and some miners have said they will continue to invest.
“Despite being a strong left-wing
government, they engaged the industry and sought to understand and work towards
an outcome that struck a balance between public needs and what was required to
maintain the competitivity of the industry and the country,” said Mark Henry,
CEO of BHP Group, Chile’s No. 2 player which had initially said the royalty
would prompt a review of its $10 billion investment plan in Chile.
“BHP will continue to invest.”
Other big miners were more tentative, and
some mining executives are skeptical the industry will follow through on an
estimated $70 billion in planned investment without additional stimulus. With
Chile’s aging mines producing less copper, analysts noted that the more mining
investment was needed to produce the government’s desired revenue increase,
even with the higher royalty.
Industry experts are closely watching
whether Chilean miner Antofagasta’s decides to invest $3.7 billion to expand
its Centinela mine towards year end.
Antofagasta did not respond to a request
for comment. In June, CEO Ivan Arriagada told local media the company was
reevaluating the project because the new royalty “does impact competitiveness.”
“Some projects on the margin will have to
be reassessed to determine whether they are viable or not,” Arriagada said.
Freeport-McMoRan, one of the world’s
largest copper producers,has said it will put Chile investment decisions on
hold due to political uncertainty.
Boric has pledged investment incentives.
The governmentis in talks with mining companies and other interested parties.
Miners have yet to provide a detailed list of incentives they are seeking.
Morel said the government should speed up
and simplify the permitting process in which projects need hundreds of permits
with each taking months to approve. He said the government should also help
miners navigate thorny environmental and indigenous regulation issues which can
lead to lengthy court cases.
Energy costs are another concern. Chile’s
mining industry consumes about 15% of the country’s total energy output, and
the Chilean Copper Commission says energy represents about 11% of miners’
costs. The industry would like the government to pass regulations cutting
energy costs for miners.
Declining production
The mining royalty increase was part of a
wider tax reform plan that congress rejected in March. Boric’s government hopes
to boost total copper revenue for the state up to 0.45% of GDP or about $1.35
billion a year, using the funds to boost programs such as child care, security,
health care and education.
Gustavo Lagos, a professor at the mining
department at Catholic University in Santiago, said the new royalty might not
hit its target since most new projects are focused on compensating for
declining production rather than adding supply.
“I think there will be investment, what I
don’t think is that production will grow more, it will be difficult for us to
go above 6 million (metric) tons in Chile and that is what ultimately determines
revenue,” Lagos said.
Chile’s copper supply has fallen due to the
natural decline in mineral grades of its oldest deposits, delays in project
start-ups, accidents and other problems. Production in 2022 totaled 5.33
million metric tons, down from a record 5.83 million in 2018.
The government is holding talks with
business groups and other political actors for a second shot at tax reform, and
miners hope this might possibly boost their chances for incentives.
One mining executive, who asked not to be
named due to the sensitivity of the issue, said the government might compromise
further to try and boost future investment.
“The (projects) that are not carried out
are going to come to a point where they are going to negotiate with the
government and say ‘I’m doing this project but I need another guarantee,'” the
executive said.