The Finance Ministry estimates that the rise in copper prices since the start of the year could bolster public revenues by around $4 billion or 5.6% compared to its previous estimate, giving the government more wriggle room as it strives to protect families and businesses from a deadly wave of infections.
Around half will come from state copper miner Codelco, which reported profits of $1.6 billion for the first three months of the year, its best quarterly result in a decade, and an increase of 3,000% from the same period of last year. Taxes paid by privately-owned mines, which account for around 70% of the 5.8 million tonnes of copper that Chile produced last year, will provide the rest.
On March 24, deputies in Chile’s lower house gave their general backing to a constitutional reform that would impose a flat 3% royalty on the production of copper and lithium to finance environmental and social programs in communities near mining operations.
But under an amendment approved at the committee stage on April 26, the royalty would rise to a marginal rate of 15% when the copper price rises above $2.00 per lb.; 35% above $2.50 per lb., and 75% above $4.00 per lb.
If approved (it requires two-thirds majorities in both the lower and upper houses), mining companies would lose more than a fifth of their gross revenue to the royalty alone when prices are at current levels.
Aging infrastructure, falling ore grades and rising labour costs mean Chile’s copper mines are not as competitive as they were at the start of the last super-cycle
It is not just profits that are at stake. Aging infrastructure, falling ore grades and rising labour costs mean Chile’s copper mines are not as competitive as they were at the start of the last super-cycle, warns Gustavo Lagos, a professor of mine engineering, at Santiago’s Catholic University.
Around fourteen of the country’s large copper mines have production costs above US$2.50 per lb. With a royalty, many could be forced to close when prices slip again.
“Many low-grade operations will be put out of businesses, destroying jobs,” Manuel Viera, president of the Chilean Mining Chamber, said in a statement.
The full impact of the new tax would not be felt immediately. According to the Mining Council of Chile, most privately owned mines are covered by tax invariability agreements signed with the Chilean state.
Most of these are due to expire in the coming years, but some newer mines, such as Teck Resources’ (TSX: TECK.A/TECK.B; NYSE: TCK) Quebrada Blanca 2 which is still under construction, are protected until early next decade.
But the tax would not only threaten existing operations but also the pipeline of new mines Chile needs to develop to prevent production declining over the coming decades.
Many of these offer relatively low grades and must overcome significant environment challenges before they can be brought into operation. The need for desalination plants and pumping systems to supply water will add to capital and operating costs.
Add a punitive tax, like the one lawmakers are proposing, and many mining companies will prefer projects further up the Andes, in Asia or Africa, some people say.
But in Chile’s increasingly fraught political scene, few lawmakers are looking to the long-term, and are instead focusing on November’s presidential and legislative elections, says Lagos.
Following the collapse in support for President Piñera following the social unrest in late 2019, the legislative agenda has increasingly been dominated by the opposition-led Congress, which has wrong-footed the government with a series of headline-grabbing initiatives designed to help Chileans survive the pandemic.
Since last July, they have approved three constitutional reforms allowing Chilean workers to withdraw 10% of their pension savings (up to a maximum of $6,225 each time). So far savers have withdrawn a total of $36 billion (which could reach $50 billion in the coming weeks), bolstering household consumption and wealth but leaving millions without any savings for their old age.
Another constitutional reform at the committee stage would impose a one-time 2.5% levy on millionaires to finance basic income for vulnerable households. Not content with that, the deputies also added a temporary hike in corporate taxation for large companies and a cut in sales tax for basic household items.
After initially ceding ground, President Piñera promised this year to take a firmer stance against populist measures by challenging them on constitutional grounds (under the Constitution, only the executive can propose tax-raising measures).
But this legal ace-in-the-hole has failed. With unions promising a general strike if the third pension withdrawal was blocked, the Constitutional Court (led by one of Piñera’s former top advisers) refused on April 28 to even hear the president’s challenge, forcing him to sign the bill into law.
The political instability comes just as Chile embarks on a key political process — the debate over new constitution. On May 15th-16th, Chileans will head to the polls to choose members of the 150-member constitutional convention who will debate the contents of the new charter of the new.
Although companies were initially calm about the constitutional convention, thanks to a clause requiring a two-thirds majority to approve each clause of the constitution, lawmakers’ increasingly radicalism is giving cause for alarm.
Adding to the concerns is the next presidential elections, which remain wide open. A poll on April 29 by the respected Centro de Estudios Públicos found Pamela Jiles, a populist proponent of the pension withdrawals, as by far the country’s most popular politician.
Following the events of recent days and weeks, the government has now opened talks with more moderate members of the opposition, led by Senate Chairwoman Yasna Provoste, with the aim of agreeing to a more centrist agenda for its remaining ten months in office.
The deal is likely to include a universal basic income as well as new taxes to fund it. While hopeful that the royalty as currently envisioned will not come to pass, mining companies are realistic that taxes are going to go up.
“We expect that there would be new taxes at some point and that they will be reasonable and not as huge to the industry,” Lundin Mining (TSX: LUN) CEO Maria Inkster told analysts and investors on the company’s latest results call.
(This article first appeared in The Northern Miner)
