On July 13th, foreign media reported that Chile has passed a bill to increase mining royalties, and copper miners are promoting incentives to continue investing in the production of metals required for the renewable energy revolution by reducing energy costs, accelerating license approvals, and other incentives.
Starting from 2024, mining royalty fees will increase from the current 5% to 14% to a range of 8% to 26% of operating profit margin. For profitable miners, a 1% Ad valorem tax will be levied based on the sales volume.
The Mining in Chile Commission, which is composed of large private enterprises, estimates that this will eventually increase the average tax rate by 44.7%, exceeding the upper limit of 38% to 44% in competitive countries such as Peru and Australia.
We hope that this competitive disadvantage can be compensated for in some way by other public policies that encourage investment, "said Jose Thomas Morel, head of the research department of the association
The latest tipping point between the mining industry of the world's largest copper and lithium producer and the left-wing government led by Gabriel Boric is the increase of royalties. When Borich took office, he promised to have the country's mining industry help pay for expanded social projects. Industry lobbying has indeed led to a reduction in the initial plan to increase royalties, and some miners have stated that they will continue to invest.
Mark Henry, CEO of BHP Group, the second largest company in Chile, said that although they were a strong left-wing government, they contacted the industry, tried to understand and strive to achieve a balance between public demand and maintaining industry and national competitiveness. BHP initially said that royalties would prompt a review of its $10 billion investment plan in Chile.
"BHP will continue to invest."
Other large miners hold a hesitant attitude, with some mining executives questioning whether the industry can achieve an investment plan of approximately $70 billion without additional stimulus measures. As Chile's aging copper mine production decreases, analysts point out that more mining investment is needed to achieve the government's desired revenue growth, even with higher royalties.
Industry experts are closely monitoring whether Chilean miner Antofagasta has decided to invest $3.7 billion to expand the Centinela mine by the end of the year.
Antofagasta did not respond to a request for comment. In June of this year, Chief Executive Officer Ivan Ariagada told local media that the company was reassessing the project because the new royalties "did indeed affect competitiveness".
Ariagada said, "Some edge projects will have to be re-evaluated to determine if they are feasible
Free economic zone McMoran, one of the world's largest copper producers, said it would shelve Chile's investment decision due to political uncertainty.
Boric has promised to provide investment incentives. The government is in negotiations with mining companies and other interested parties. The miners have not yet provided a detailed list of the incentive measures they are seeking.
Morel said that the government should accelerate and simplify the approval process, where projects require hundreds of permits, each of which takes several months to obtain approval. He said that the government should also help miners navigate thorny environmental and indigenous regulatory issues, which may lead to lengthy court cases.
Energy costs are another concern. The energy consumption of Chile's mining industry accounts for approximately 15% of the country's total energy output, and the Chilean Copper Commission states that energy accounts for approximately 11% of miners' costs. The industry hopes that the government will pass regulations to reduce the energy costs of miners.
Raising mining royalties is part of a broader tax reform plan that Congress vetoed in March. The Boric government hopes to increase the state's total copper revenue to 0.45% of GDP, which is approximately $1.35 billion per year, and use this funds to promote projects such as childcare, safety, healthcare, and education.
Gustavo Lagos, a professor in the mining department of Catholic higher education in Santiago, said that the new royalties may not reach the target, because most new projects focus on making up for the decline in production rather than increasing supply.
Lagos said, 'I think there will be investment, but I don't think production will increase even more. Our production in Chile will be difficult to exceed 6 million tons, which is the ultimate determining factor for revenue.'.
Due to natural decline in mineral grade, delayed project initiation, accidents, and other issues in Chile's oldest mineral deposits, copper supply in Chile has decreased. The total production in 2022 was 5.33 million tons, lower than the record high of 5.83 million tons set in 2018.
The government is holding negotiations with business groups and other political actors to try tax reform again, which miners hope may increase their chances of receiving incentives.
A mining executive said that the government may further compromise in an attempt to boost future investment. Due to the sensitivity of the issue, this executive requested anonymity.
The executive said, "Projects that have not been implemented will develop to the point of negotiating with the government, and they will say, 'I am working on this project, but I need another guarantee'