Chile: Uncertainty hits the stalwart of Latin American mining
Prior to October 2019, the pervasive view held amongst Chileans and outside analysts was that Chile was immune to political destabilization and unrest. Although populism was spreading across Latin America and several other parts of the world, Chile was viewed as a consistently strong economic performer with relatively moderate politics.
At the sustainable mining conference in Santiago in September, the most profound challenges facing the Chilean mining industry were outlined: weakness in the price of copper and lithium, water scarcity, declining ore grades, social license, high energy and labor costs to name a few. One concern absent from that list was internal stability.
For the past three decades, Chile has been viewed by investors as a bastion of calm in an otherwise politically precarious region. Chile achieved its status as a leading mining jurisdiction not only because of its high quality and easy to exploit resource base, but also because its policies toward mining were regarded as best in class from an ease of doing business perspective.
In light of October’s protests that have shocked the country, questions have been raised regarding Chile’s ability to maintain its status as Latin America’s most stable and successful country. The civil unrest was seemingly triggered by increased metro ticket prices, but at its core the disorder is fuelled by a gathering sense of economic inequality.
Since 1990, the country’s restored democracy has maintained the broad outline of free-market policies installed by Pinochet’s dictatorship, which have enabled consistent economic success. The poverty rate has fallen from over 40% in 1990 to under 10% today, according to World Bank figures. The middle classes now form a majority, income inequality is below the Latin American average and Chile received the region’s highest score on the United Nations Human Development Index, which is predicated on a blend of life expectancy, education and national income per capita.
In the context of the region, this performance is strong. However, compared to its OECD peers, Chile ranks highest in economic inequality. UN reporting found that the richest 1% of the population earns 33% of the nation’s wealth. This fact is one of the principal reasons why there is such widespread anger. Poor and middle class people, who rely on public transit, feel that the burden of state funding is being unfairly placed on them at a time when middle class wages are stagnating and low skilled jobs are being replaced with technology.
Much of Chile’s economic success has come on the back of a robust mining sector that has been and will continue to be the lifeblood of the economy. Chile is the world’s top producer of copper, and exports of the metal account for between 10-15% of the nation’s GDP. It also possesses the world’s largest lithium reserves, based off of a U.S. Geologic Study (USGS) report.
It is unclear what, if any, backlash there will be long term on heavy industries such as mining. The protests have caused disruption to the typically efficient operational environment throughout the country, but strikes within the mines were limited to a few union groups and interruptions were overall minimal. However, the protests effectively shut down many of the country’s key roads and ports, which were therefore unable to function at their full capacity. Inevitably knock on effects were felt throughout the mining supply chain as worker travel was limited and logistics networks were disrupted.
It is not just those who have taken to the streets armed with clanking pots and pans that are disappointed in the pace of economic growth in 2019; mining companies also had high expectations going into the year. However, predictions of demand outpacing supply for copper and lithium have not materialized thus far. The demand shortfall for these commodities can be blamed on a variety of global economic factors, but the most salient are the China-U.S. trade war and economic stagnation in Europe.
These have taken a toll on global manufacturing activity, and, given copper’s critical end usage in everything from car-making and earth-moving to advanced electronic components, a slowdown in manufacturing was bound to put downward pressure on the commodity price. Adding to the pain was the fact that Chilean copper production fell 2.5% in the first half of 2019 on the back of declining copper grades according to a study by the International Copper Study Group (ICSG).
Given these dynamics in the market, it is a testament to the dynamism of the Chilean economy and sound management practices in its mining industry that the economy is still projected to grow at a rate of 2-3% in 2019. Although growth thus far has been below expectations, it is still far better than that of its regional peers: Argentina, which is in recession, and Brazil, whose economy has stagnated.
Chile’s history of churning out successfully run local businesses devoted to the mining industry is undoubtedly a positive driver of wealth creation. In describing the advantage Chilean companies have over large global enterprises, Ivan Rayo, general manager of Chilean engineering consulting firm JRI, said: “Being a Chilean company means that our clients benefit from increased flexibility. For example, many operations are struggling to stay profitable with a depreciated copper price. Local businesses excel in responding quickly to adjust costs and implement solutions.”
Another locally run business, PerfoChile, has 35 years experience as a drilling services provider. General manager Osvaldo Morales outlined his approach to weathering turbulent times: “We have focused on building our cash reserves over time in order to invest through good and bad economic and political climates.”
Although mining is not experiencing its best year, companies continue to invest. Almost US$34 billion has been earmarked for investment in the Chilean mining sector over the next five years, according to the Ministry of the Economy. A report by Consejo Minero revealed 43 mining projects will be built or will begin production by the end of 2023. The biggest project is Teck Resources’ Quebrada Blanca phase II, which involves US$4.2 billion in investment over the next five years to extend the life of the copper mine in the Tarapacá region. Antofagasta Minerals, meanwhile, will invest US$3.7 billion to expand its Centinela copper mine, with construction starting in 2021. The third biggest project is Nueva Unión, a joint venture between Teck and U.S.-based Newmont GoldCorp that needs US$3 billion over five years for construction of a copper-gold mine.
These new investments are needed to offset a potential decline in production from some of Chile’s largest and most reliable sources of copper. After 104 years of production, Codelco’s Chuquicamata, the largest open pit mine in the world, closed its surface operation and commenced its underground phase, and there is uncertainty surrounding the mine’s ability to maintain current production levels, particularly in the near term. Codelco is expected to invest $5.58 billion according to Consejo Minero in order to achieve a production level of 140,000 mt of ore per day, with an approximate mine life of 45 years.
During the 2015-16 downturn in copper prices, companies were devoted to adopting more efficient practices in order to lower their breakeven cost of production, and that trend continues today. By focusing on efficiency, companies can remain profitable while also positioning themselves to capitalize on opportunities when the market recovers.
A healthy industry is one in which companies offer products and services to suit client needs in a variety of economic climates. Ricardo Capanema of Solvay, a chemical solutions provider, described how customer demands differ in high and low commodity price environments: “In times when the commodity price is low, our customers look to us to provide chemical solutions to improve the efficiency of their process and lower cost of production. In contrast, when commodity prices are high, that behavior changes, and businesses want us to find solutions that increase throughput and production.
Another strength of the Chilean mining industry is a specialized and technologically savvy workforce that is capable of facilitating the development of suppliers with aspirations to meet world-class standards. Chris Knowles of McLanahan, a minerals processing company based in Australia, said his company chose to move into Chile because: “It has a strong history in mining and minerals, good infrastructure and highly technically skilled workers… Australia and Chile share a strong connection through their minerals technology, and there is a free trade agreement that increases the ease of doing business in the Chilean market.”
Felipe Cabrera, who heads Emerson’s innovation center in Santiago, described their experience moving into the Chilean market: “We listened to the big mining companies, and they stressed their need to increase productivity, reduce costs and lessen environmental impacts. Emerson then developed technology and sensors to solve these challenges for them. We were given the opportunity to pilot our technology in Escondida and Minera Los Pelambres. Now we are selling it all over the world.”
Many of the top technology providers believe Santiago can be a global hub for mining innovation, and this development is being encouraged as an important driver of economic diversification in Chile.
At the end of the day, it is important to keep in context the sheer size of opportunity the Chilean market represents. It holds 22% of the world’s copper reserves, 11% of the molybdenum reserves, 5% of the silver reserves, 7% of gold and 48% of the world’s lithium reserves, according to Invest Chile. Furthermore, the quality of these reserves is often described as best in class. In light of the civil unrest, political sensitivities have become a more important part of the discussion regarding mining in Chile, but given the role the mining industry can play in delivering a better future for Chileans, it is important that it prevails in the face of any populist backlash.
Jorge Maldonado, general manager of Superex, a leading company in sonic and diamond drilling, summed this sentiment up: “Sometimes Chile forgets how vitally important a strong mining sector is to the health of its broader economy. We must not miss our opportunity to lead in mining.”
(By Jason Spizer)