Land claims that do not expire, water scarcity and restrictive regulations are hindering junior exploration in Chile.
Given Chile’s extensive mining history and relative political stability, it should come as a surprise that, in 2016, junior mining companies were responsible for only 7.8% of the country’s exploration, while major companies already residing in Chile represented the lion’s share of 80.9%. Chile has high-quality infrastructure, significant port accessibility, legislative transparency and, according to Transparency International, very little discernible government corruption. If this is the case, one would expect Chile to have garnered greater interest from exploration companies around the world.
Land Claims and Mining Licenses
The predominant explanation for an apparent lack of exploration activity in Chile is that land claims and mining licenses do not expire, provided that the holders of the concessions pay annual taxes. For the major mining companies that hold the majority of Chile’s explorable land, this is a negligible expense. “There is very little turnover of ground compared to other jurisdictions where licenses have limits,” said Craig Mackay, managing director of Golden Rim Resources. “There are certain groups in Chile that hold very prospective licenses but are under no pressure to conduct meaningful exploration work. This keeps a lot of ground from the active exploration companies.”
According to COCHILCO, the top ten holders in 2015 accounted for 40% of Chile’s total exploration concessions. While it has been reported that the government is considering changing the mining code to incentivize concession holders to explore or release land, such an outcome is unlikely because any type of legislative change may deter investment from foreign majors. The government is likely unwilling to trade major investment money for junior investment money. According to Diego Hernández, president of SONAMI: “Guaranteed land claims is one of the biggest factors that attracted international investment to the Chilean mining industry in the first place. Ideally, we would like to have more medium-sized exploration companies enter Chile, but any changes that are made must be done cautiously so as not to drive away existing investment.”
For mines entering the production or development phases, water scarcity continues to be the most pressing issue in Chile. While Chile evidently has plenty of access to water on its coast, transporting water to high-altitude mines has proven very costly in terms of the amount of energy it requires. Underground water is also becoming increasingly scarce and energy-consuming to extract, driving both producers and service providers to devise new water recycling tactics. “Kinross has taken measures to be more efficient with water usage and is using less water to produce the same amount of ore,” said Jose Tomás Letelier. “We recycle a high percentage of the water we use, we have improved our piping, and we have lowered evaporation rates, which is a common issue at such high altitudes.”
As a result of the declining underground water supply, mining companies have been investing in desalination plants. Escondida, for example, recently constructed the largest desalination plant in Latin America, as well as one of the largest in the world. “The plant’s capacity is 2,200 liters per second, and it has a 175-kilometer pipeline,” said Mark Venning, business development director of Black & Veatch, the engineering firm tasked with building the plant. “The contract will enable us to build a 1,400-liter expansion. This will supply the water for Escondida and reduce or eliminate its consumption of groundwater.”
In recent years, some companies have resorted to using sea water without desalination treatment for their operations, but they eventually learned that this solution can be incredibly corrosive and, consequently, expensive. “If you just use salt water, you reduce your recovery rate, and your plant lasts a fraction of the time,” explained Venning. “When comparing the cost of using fresh water to the amount of increased capital that ends up being spent on a plant using salt water, it is easy to see which solution is more viable.”
Employment and Regulations
Even if the land claims are secured and the water situation is resolved, it is still important for investors to understand how smoothly their operation will be able to continue. While government expropriation of private mining assets will likely never be an issue in Chile, as it is in Bolivia, Venezuela and Thailand, for example, mining companies in Chile have had their fair share of hiccups.
In early 2017, Minera Escondida faced a 43 day, 2,500-employee strike, which was Chile’s longest since 1973. As a result, Escondida’s Q1 output dropped by 63% compared to Q1 2016 output. Antofagasta Minerals also faced strike threats at their Centinela and Zaldívar mines in July 2017. Because of Chile’s strong labor union presence, strikes do not simply end once the employees go back to work. “Labor unions are more powerful now than they used to be, and recent strikes have had severe consequences,” said John Byrne, managing director at Boyden Executive Search. “In the case of Minera Escondida, in 16 more months, both sides will need to meet again to negotiate.”
The verdict is still out regarding whether or not Chile’s regulatory environment is a substantive deterrent to investment. The general consensus is that the permitting process that was introduced by the current government administration in 2014 is quite time-consuming. According to Pascual Veiga López, president of APRIMIN: “Environmental regulations are affecting more than we had initially expected. Unfortunately, in Chile, getting environmental approval does not guarantee that you can go on with a project and it is not always clear which entity gets final approval of a project. Chile has always been respectful of environmental laws, but the processes take too long.”
The Chilean government, however, appears to understand how important a smooth permitting process is to stimulating the mining industry. According to EY, after considerable pressure from the private sector, the government is working with the private sector to overhaul the existing environmental permitting process. “Chile needs to find a way to make regulations more similar to those of the world’s most competitive mining jurisdictions, but without jeopardizing what the regulations were originally meant to protect,” said Diego Hernández. “An environmental permit that normally takes four years to obtain should only take two years to obtain.”
While efficiencies are being created to combat water scarcity issues, and a robust, albeit bureaucratic, regulatory process is necessary for a mining economy of Chile’s scale, land claim and mining license legislation appears likely unchangeable in the short-term. Because land availability is scarce compared to Chile’s actual exploration potential, junior companies wishing to enter Chile would be practically better off acquiring projects from or joint venturing with existing juniors in the country.