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Chile’s royalty false polemic (from IKN624)

Part of the Regional Politics section of The IKN Weekly, out last night:

Chile’s royalty false polemic

Let us set aside the fact the The IKN Weekly has been covering this issue as it came up toward passage through the lower house of Chile’s parliament, but from those previous notes (see IKN Weekly Regional Politics issue passim) let’s rescue the main silver lining, that the original 3% to 10% sliding scale of royalties was altered for a flat 3% number. But a commentary is needed here, I was impressed in the way the business and mining worlds reacted to the news out of Chile last week was as if the debate had happened out the blue.

By the time the commission proceedings (through April) and the debate (last week) was done, the Lower House had passed a law project that requires a new 3% royalty with the terms, specifically on sales, that have the sector up in arms. The law project would apply to any company selling more than 12,000 tonnes of copper or 50,000 tonnes of lithium, small miners thereby excluded. The project now passes to the Senate and while the politics then get murky, there’s a decent chance it passes as stands. There have been rumours of all sorts of pacts between opposition politicos and the Ministry of Energy and Mining, or moves to take the project to the Supreme Court as unconstitutional, but even if Chile’s Upper House follows through on this bout of resource nationalism, it’s all bound to be vetoed at Presidential level by Piñera. That delays things for so long, perhaps 2021 and perhaps not, but the upcoming election is almost certainly to vote in a Left wing Presidency as from 2022 and from that moment, the Presidential Decree signature is a snap.

As for reaction from the mining industry, “up in arms” does the job well. This desk could choose from dozens of English or Spanish language reports, op-eds and interviews out of the country in the last four days, all pushing the same line that this royalty will “Kill The Chile Mining Industry”. From the wide choice, two Spanish language examples (translated), with the first (9) quoting local star economist Ricardo Lagos (intelligent, respected and very saltwater) who this weekend said, “The royalty approved by the Chamber is not viable for Chilean mining”, considers Chilean miners pay State burden at standard world levels already and that (quote) “If a law such as this is eventually passed, it will obviously shut down a significant part of the mining sector.” That’s an easy call, any theoretical textbook will tell you that and Lagos knows a safe statement to defend when he sees one. Meanwhile Cristián Sandoval, president of the “Pampa Norte” arm of BHP in Chile that combines the Spence and Cerro Colorado mines, gives a typical example of the other main line of criticism being used this weekend in Chilean mining circles in the title of this note (10), “Our margins simply are not that which the legislators imagine”. The argument has merit of course, with Sandoval explaining that if this royalty happens the Cerro Colorado mine “would not be viable” and the recently completed expansion of Spence wouldn’t have happened if the project had already been law. Here’s a quote:

“BHP complies completely with the law, with transparency and responsibility. Compared with other mining jurisdictions, Chile is a country with a high tax burden. Investments compete with each other at a world level, we can’t deny reality. Raising taxes disproportionately, such as the approval (of the royalty project) in the (Lower) Chamber, makes us less competitive and that’s a fact.”

Well put, but the penury argument is difficult when copper is doing what it’s doing at the moment. It’s one thing for a company to plead its economic model, quite another for a politician to hear that the average AISC for a pound of copper in large mine Chile is U$1.45, then look at a price chart for the metal. Margins, indeed.

The fact remains, South American economies have been hit hard by Covid-19 and its consequences, they have literally lost a lot of money, reserves, GDP, GDP-Debt Ratio, measure it as you will but the region is impoverished. There is no way these countries will watch private mining companies enjoy a full-scale economic bonanza on their soil without them paying a share to their respective States in the future. Resource Nationalism is here and not going away, the fact Chile ranks high on the list of world level mining friendly countries and is also first to pull the trigger regionally on higher burdens for mining has made extra headlines. But that’s all, Chile is the first of many and frankly, if it’s kept at just 3% by the time 2022 comes and goes, Chilean mining companies will think they’ve got a good deal compared to others. Peru, for example. This is a false polemic, because a) the royalty won’t happen in reality until the next government 2) it won’t be anywhere near as burdensome under the new copper price deck and 3) once the rest of the world has taken its turn, Chile will be back at the top of the league table for risk perception in mining.

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