“The secret is to design a tax that increases revenue but does not harm business”
Chilean President Gabriel Boric’s program calls for an end to the “profiteering” and “extractive” model of mining to adopt a system that ensures revenue on a sustainable basis.
Although Mines Minister Marcela Hernando has said the government is not considering the nationalization of mining, some members of the convention drafting a new constitution have pushed in this direction, supporting initiatives that reduce the participation of private actors and increase the role of the state.
Meanwhile, congress is discussing a new ad valorem mining royalty for copper and lithium, as Chile is a major producer of the two metals critical to the clean energy transition.
The political context, as well as the downward revision of Chile’s GDP growth forecast to just 1.5% in 2022 by the IMF and the United Nations Economic Commission for Latin America and the Caribbean, have put the sector mine on alert.
BNamericas spoke with Diego Hernández, head of the national mining association Sonami, about the efforts being made in certain political spheres to change the current mining model, the foundations of sustainable mining, technological innovation and the challenges is facing the lithium industry.
Numerical: What do you think of the profit and extractivism arguments that are used in mining discussions by certain sectors?
Hernandez: The notions of extractivism and profit are slogans created by the extreme left and by environmentalists to discredit our activity. The contribution of mining to the national economy goes far beyond simple production. In percentage terms, Chilean mining has contributed about 13-14% to GDP on average over the past 10-12 years. And if we consider that this 13-14% does not include the wages of the workers, which is called the indirect GDP induced by mining, and which [state copper commission] Cochilco’s estimates would be at least 8% higher, so we’re talking about a minimum 20% contribution from the mining industry to the national economy. Finally, the discussion around extractivism or profiteering indicates more about who will get the mining revenues.
Numerical: About the need to create a new mining tax to meet Chile’s social needs, such as the royalty bill [applied on sales] currently under discussion, how to design a good tax to avoid a negative effect on mining?
Hernandez: Taxes can always be improved. Mining already pays 40% income tax to the state, and if it goes up to 45%, we will continue to work anyway. But if it goes much further, it will clearly discourage investment and business, losing not only the private sector but also the state. So the secret is to design a tax whose rates allow to increase revenues but without harming activity.
The royalties bill that was approved by the lower house and is currently being debated in the upper house has been an outrage because it includes tax rates that the industry has not could resist. I believe that the current specific mining tax, which is a royalty, and which applies a rate based on the operating margin, starting at 5% and gradually increasing, is the smartest tax and it could still be improved .
Numerical: Some politicians have justified the royalty bill on the grounds that mining companies do not provide reliable information on their sales and profits.
Hernandez: Companies provide information and are audited according to international standards. Therefore, it is an unacceptable argument, especially from state officials. The ad valorem tax is regressive for mining. Half of the mining companies in Chile are in the fourth cost quartile, so if an ad valorem tax were applied, these companies would be punished, making them less competitive or they would be forced to shorten projects, which, given the ore at the current low grade, their businesses will not be able to survive. Today, there are mining companies operating with copper grades of 0.35%. Thus, the State must protect mining and national production as much as possible for the benefit of the national economy, investors, workers and the State itself. Therefore, the tax should not prioritize increasing tax revenue in the short term, but securing mining activity in the long term.
Numerical: The constitutional convention proposed changes to the mining regulatory framework, such as the creation of an administrative authorization model to replace the current mining concessions. What do you think about it?
Hernandez: This is our greatest concern, as it threatens mineral rights, which are the main basis of mining activity. To make investments in the sector, which is capital-intensive, legal certainty and an adequate duration are needed, allowing the investment to be recovered. We are talking about long-term projects of 12 to 15 years from the start of production, so investors should be sure that the rules of the game will not be changed.
The proposed administrative authorization is temporary and would make mining precarious. I have not heard any valid argument why an administrative authorization is preferable to the current concession regime in Chile. Moreover, the current concessions are granted by the courts, so the possibilities of arbitrariness or corruption are minimal. On the other hand, we have cases where the administrative authorities have been arbitrary when making decisions about mining projects, in particular with regard to environmental issues. [Hernández mentioned some cases, like the closure of the Mina Invierno coal mine in southern Chile and the rejection of a project at El Soldado copper mine by mining and geology service Sernageomin].
BNamericas: How has Chilean mining reacted to the incorporation of new technologies and the realization of the 4.0 mining roadmap?
Hernandez: Chilean mining is already using technologies, but the sector is at a stage where copper, our main ore, is losing share. We had more than 30% of world production and today we are around 27%. Indeed, mining has not been able to grow at the same rate as demand and supply have increased.
We have a large portfolio of projects that could be executed in the next 10 years of around 70 billion dollars, but to develop these projects two aspects are necessary: 1) take into account the long payback periods, therefore extended terms are necessary to be profitable and recover investments. 2) to ensure profitability, the only way of which is to increase competitiveness and productivity through technology.
The technological path is a long process, but great progress has already been made. We have autonomous mining fleets and at least three or four companies have already centralized the monitoring of their operations through centralized commands, such as GIO at Antofagasta Minerals.
Further progress has been made in the use of renewable energies, notably solar and wind. But challenges remain to be met, such as improving the distribution network through battery storage to ensure a permanent supply, as these energies are by nature intermittent. Added to the energy problem is the increasing use of desalinated water. The use of clean energy and desalinated water has made Chilean mining more competitive, no longer depending on the variation in prices of raw materials or fossil fuels, and this has been achieved through technologies.
Numerical: What do you think of the Chilean government’s proposal to create a national lithium company?
Hernandez: The nature of this company is not yet defined, if it will only be intended to promote production or if it will also carry out mining operations. Even though lithium has a great opportunity with renewable energies and electromobility, it is still quite marginal compared to copper. Lithium exports in 2021 were just over US$800 million, with Chile the world’s second largest producer [the first is Australia]and copper exports exceeded $53 billion.
The problem with lithium in Chile is that it is considered a non-concessionable mineral and the state owns it. No rights are granted to private parties to explore or exploit lithium. The main lithium reserves in Chile are located in the Atacama salt flat which is under the control of [development agency] Corfo, which is state-owned. So, instead of moving forward, we are paralyzed because apart from SQM and Albemarle, there are no more projects. We want [at Sonami] for lithium to be a concession ore to receive medium-sized mining projects, given the great opportunity for lithium in the market. But it must be considered that there are already alternative technologies being analyzed that would use raw materials at a cost much lower than that of lithium. Therefore, lithium will continue to be important for the next 10 to 15 years, but that may not be the case in the long term.
BNamericas: What do you think of a possible inter-regional agreement to boost the lithium industry in the so-called lithium triangle [Argentina, Bolivia and Chile]?
Hernandez: Developed countries are pushing for larger supplies of lithium, especially for battery development. Developed countries have the greatest interest in us organizing and working together, as lithium-producing countries, to provide a common solution to the global demand for lithium. But the triangle has not yet been able to develop its extractive industries or organize itself to meet the growing demand that exists.