Uncertainty looms for Chilean miners regardless of new constitution vote

The mining industry in Chile, the world’s largest producer of copper, will probably continue to face uncertainties regardless of the outcome of a national referendum on September 4 on the adoption of a new national constitution, key stakeholders told Fastmarkets on Wednesday, August 31

Market participants’ opinions were divided on whether the proposed new constitution would be negative for the industry, with some believing that change was necessary and others saying that it could be “dangerous.”

The new constitution was drafted by an assembly formed in May 2021 after the population voted for changes in October 2020. Demonstrations had been breaking out across Chile since late 2019, with widespread social unrest mainly provoked by the high cost of living.

Most market participants agreed that the new constitution would not be a catastrophe for the mining sector, depending on how much further legislation were to go. But there were worries about a reform of mining royalties to be carried out soon.

Market participants overall thought that Chile would continue to be an important copper producer and to present a positive environment for mining companies to invest in. One source told Fastmarkets that mining conditions in Chile would probably continue to be better than in neighboring Peru, for example.

Beyond this, market participants noted that mining was having to adapt globally to changing attitudes relating to indigenous, social and environmental rights.

Fastmarkets spoke to the industry about key talking points related both to the constitution and to Chile’s broader political environment.

Mining specifics

Only a few articles in the proposed new constitution have specific relevance to mining.

Articles 127 to 132, for example, say that the Chilean state must lead an ecologically responsible administration. The language of this section has the potential for broad interpretation and application.

Due to the articles’ non-specific nature, it would, in the opinion of a range of Chilean mining sources, lead to legal challenges against mining projects and would increase the “judicialization” affecting the mining industry.

One of the most significant changes that the industry would face was that the new constitution would hold miners directly responsible for any damage caused to the environment by their projects and that they would need to use their own assets to resolve any such problems.

Some sources, however, said that such provisions would be sensible and necessary to protect Chile’s natural habitats.

“The new constitution is actually quite modern by today’s standards, and [would] change the whole environmental scenario,” according to Felipe Román Briones, president of the mining workers’ federation, FMC. “It demands that the relationship between companies, communities and the environment be less brutal.”

The inclusion of an increased ability for indigenous communities to create their own laws could also lead to increased pressure and uncertainty for mining companies, which was a concern for a number of Chilean trader and analyst sources.

A broad range of sources also raised concerns that the constitution would limit mines’ access to water resources. Mines could pursue ocean water desalinization as a solution, but this would increase input costs, and by extension reduce the advantages of mines being opened in Chile.

Environmental protections would also be brought in, particularly in areas important to the water cycle, with glaciers specifically given protected status.

Market participants suggested that such alterations would have repercussions for any future expansion along the Chile-Argentine border, an area where authorization for Barrick Gold’s Pascua-Lama mine has been denied.

Sources broadly raised concerns about existing mines near glaciers. Anglo American, whose Los Bronces mine is in close proximity to a glacier, said that “at this stage, we would prefer not to comment on the political developments in Chile.”

Other market participants said that the new constitution would make it easier to change the mining code, thus making the industry less stable in future.

Uncertainty if constitution passes

If the new constitution were to be adopted, industry sources believed that the enactment of its provisions would be a long-winded process, because new laws would have to be created to effectively regulate many of its articles.

Some market participants also said that such uncertainty could be particularly likely if the referendum were to approve the new constitution with a “modest majority” rather than an overwhelming one.

Other market participants said that no rejection would be final, with expectations that new drafts of the constitution would be produced.

In 2020, a national referendum saw 78% of voters support the replacement of the current constitution. More recent polls showed that only 17% of voters believed that the old constitution should be retained in the event the referendum result was a ‘no’ vote.

“We have had this constitution since [the times of former dictator Augusto] Pinochet, and I think Chileans are well aware that the country can be different,” Briones told Fastmarkets.

“We believe [the new constitution] won’t be rejected. Change is necessary,” he added. “The country has enjoyed several years of healthy growth [in gross domestic product], but with no distribution [of the benefits] among the population… and it’s time that more profits from mining went into investing in Chile itself.”

The majority of sources Fastmarkets spoke to said that economic inequality was a driver of political dissatisfaction in Chile.

Beyond the constitution

Although a number of market participants had worries with regard to the new constitution, few of their fears would be alleviated if the constitution were not accepted. A new constitutional process would heighten uncertainties for longer, they said, while sentiment had already taken a hit in the past six months.

One Chilean trader said that “the government is not giving certainty about the future for private companies in Chile” whether or not the new constitution was accepted, thus making new investors more cautious.

Sources also highlighted that rejected expansion projects, royalty proposals, and a general increase in anti-mining sentiment were here to stay, regardless of constitutional changes.

On top of that, continuing discussions on tax reform could lead to royalties and taxes on miners reaching an effective rate of 55-60%, from 40-42% at present, according to private mining association Sonami.

The majority of market participants thought that royalties were unlikely to change on any current projects, potentially disincentivizing new projects in turn. One source said that “Chile needs private investment” to grow and sustain its mining industry.

Chile-based mining intelligence firm Plusmining believed that the impasse regarding the constitution was the result of a changing political and societal environment. Younger generations were more environmentally-driven and, by extension, have become increasingly opposed to mining in their nation, executive director Juan Carlos Guajardo said.

He added that “whatever happens on Sunday in the plebiscite, a lot of work will have to be done to restore political stability in the country.”

Falling output in Chile

Chile has the world’s largest national copper output, and produced 5.62 million tonnes in 2021.

But its production has been diminishing, with volumes last year representing a 1.84% annual decrease from 5.73 million tonnes in 2020, and the lowest level since 2017. Lower copper grades in mined ore, and drought issues, were the main factors behind this decline.

The mineral-rich country has been losing efficiency since the turn of the millennium, as a result of a depletion of reserves, lower recovery rates and overall cost inflation, especially in labor and services - according to local copper commission Cochilco, a mining ministry entity. Average copper mining grades were 1.41% in 1999 but were now around 0.60%.

In the first quarter of 2022, Cochilco estimated that Chile had an average cash cost for copper of $1.54 per lb, a significant increase from $1.31-1.37 per lb in 2016-21. Sonami said that this put most of the operations in the country in the third quartile of the global cost curve.

“The next two years of legal uncertainty we could face while the constitution doesn’t change, or until a new one goes into effect, will freeze large investments,” Sonami president Diego Hernández told Fastmarkets.

“Whoever is operating in Chile right now would continue to do so,” he added. “In future, discussions about new projects would be much more difficult – be they greenfield or brownfield.”

The constitution would also change labor laws in a way that some sources said could negatively affect mining output.

Sources in the mining industry said that improved labor rights would make it easier for strike action to be taken, increasing workers’ ability to disrupt production.

“Mining is the most unionized industry in Chile, so they wouldn’t need higher adherence,” Hernández told Fastmarkets. “What might happen is that we could see strikes outside of collective negotiation periods, and broader sectoral deals with unions could hinder smaller miners [and make operations] unfeasible.”

But FMC’s Briones said that the union was in favor of the new constitution because it would be more beneficial for workers and for sustainable mining. Other sources corroborated this view and said that changes to rules affecting trade unions were necessary.

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