Peter Beaven, the president of mining company BHP Billiton Cobre, has raised concerns about high production costs and the fall in productivity in Chile, the world’s biggest copper producer. Accounting for 13% of GDP and 60% of total exports in 2012, mining remains by far the biggest destination of foreign direct investment (FDI) in Chile, attracting US$15bn in 2012 (49% of the total).
Beaven made his remarks on 11 June, when presenting the 2012 sustainability report for BHP Billiton Cobre, which operates the Cerro Colorado copper mine in the Tarapacá region and the Spence and Escondida copper mines, both in Antofagasta, which in total produced 1.31m tonnes of fine copper in 2012 (out of the country’s total of 5.4mt).
The Billiton executive told reporters that in the period 2007-2012 average production costs in Chile rose 45%, compared with 25% in other mining countries. He claimed that since 2004 productivity had dropped 30%. He highlighted the lack of water and insufficient energy supplies among the causes.
These concerns were also highlighted at the April 2013 copper conference jointly organised for high level mining executives in Santiago by Chile’s Center for Copper and Mining Studies (CESCO), an independent non-profit organisation, and the London-based consulting company CRU. The likes of Diego Hernández of Antofagasta Plc highlighted that electricity costs in Chile had risen 11% a year since 2000, making it one of the most expensive places in the world to secure energy for mining projects.
The government led by President Sebastián Piñera has recognised these problems. After the conference, Mining Minister Hernán de Solminihac admitted to reporters that on government estimates the mining industry will need 68% more energy by 2020 to satisfy demand. Energy Minister Jorge Bunster also noted that hydroelectric energy accounted for 34% of the energy matrix, down from 65% in 1996. The issue has accrued electoral importance ahead of the November 2013 general elections, with all of the main presidential candidates urging the need to change the energy matrix by 2030.
A survey published on 23 February by Canada’s public policy think tank, the Fraser Institute, threw up other investor concerns. Chile fell to 23rd (out of 96) among the world’s most attractive jurisdictions for mining exploration in 2012/2013, down from 18th (of 93) in 2011/2012. While Chile remains at the forefront among Latin American jurisdictions, with a mining project portfolio for 2012-2016 exceeding US$104.3bn - US$58.2bn of which corresponds to foreign companies - the Fraser Institute attributes this slide in Chile’s rankings to “worsening perceptions amongst survey respondents for its legal system (-15%); regulatory duplication and inconsistencies (-14%); and uncertainty regarding the administration, interpretation or enforcement of existing regulations (-14%)”. De Solminihac has since said that the government is preparing new legislation that aims to remove some of the obstacles to investment, such as the duplication of approvals in the public sector, although the November election could delay this.
Against this backdrop of concerns about the operating environment, the Piñera government continues to take a firm stance against those foreign companies who fail to adhere to local regulations. This was most recently evidenced in the case of the Canadian mining giant, Barrick Gold, which is developing the Pascua-Lama gold mining project straddling the Chile-Argentina border.
Approved in 2006 by the Ricardo Lagos administration (2000-2006), as of December 2012 the construction work was approximately 40% complete, at a cost of US$4.2bn, with the first gold production targeted for the second half of 2014. However, on 9 April, a local appeals court ordered a halt to the project on the Chilean side. This was in line with a request filed in October 2012 by representatives of a local indigenous community (Diaguita), which claims that the project threatens their local water supply and endangers three glaciers, Toro 1, Toro 2 and Esperanza.
On 24 May by Chile's environmental agency, Superintendencia del Medio Ambiente (SMA), followed up the court ruling with an administrative fine of some US$16m, for “deviations from certain requirements of the project's Chilean environmental approval”. On 30 May, during a visit to Canada, President Piñera reiterated that Barrick must comply with all the necessary environmental regulations prior to resumption of the project.
On 7 June, Barrick presented the SMA with a plan to complete the water management infrastructure – in line with the agency’s demands — and said it would be ready by December 2014. The SMA responded that Barrick had yet to provide all the information needed before the plan can be authorised.
- Another environmental time-bomb
Another major mining project under scrutiny by environmentalists is the proposal by Chile’s state copper company Codelco to expand the Andina copper mine in Valparaíso. The US$6.8bn project, which Codelco describes as its “most important structural project”, would triple output of concentrate at the mine to 350,000 tonnes of fine copper a year, equivalent to US$10bn in revenues for the state in its first 15 years of operation. However in April, Codelco’s executive director, Thomas Keller, was forced to come out and publicly defend the project in the face of public criticism and environmentalists’ claims that it would affect 26 glaciers and put at risk water supplies in the Valparaíso and metropolitan Santiago regions.
- Pascua Lama
As of 31 December 2012, the Pascua-Lama mine had proven and probable reserves of 17.9m ounces of gold, 676m ounces of silver contained within the gold reserves, and a mining lifespan of 25 years.
- FDI
According to the latest report on foreign direct investment (FDI) by the UN’s Economic Commission on Latin America & Caribbean, released in May, FDI in Chile rose 32.2% year-on-year to a new record high of US$30.3bn in 2012, making Chile the second largest recipient (after Brazil) of FDI in Latin America and the Caribbean for the second year running.
After mining, the financial sector was the second largest recipient of FDI inflows in 2012, accounting for 18% of the total. In 2012, foreign banks accounted for 40% of the local financial system’s assets, led by Spain’s Santander (with 18.6% of the market) and BBVA (7%), Canada’s Scotiabank (4.9%) and Brazil’s Itaú (4.2%). The US was the biggest origin of investments in Chile in 2012, accounting for 19% of total inflows, followed by Spain (18%) and Canada (12%).
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