Miners in Chile to pay more taxes as long-awaited reform approved

LEGISLATION | Tax rate as high as 47% for top copper producers

BY CECILIA JAMASMIE

Chilean lawmakers have approved an amended mining royalty bill, in the works for almost two years, which will require companies operating in the country to pay more taxes and royalties to the government.

The bill, endorsed by the Senate on May 11, was approved by a vote of 101 in favour to 24 against on May 17. It now requires only the signature of President Gabriel Boric, who has publicly backed it, to become law.

The bill sets up a maximum tax rate of around 47% for companies that produce over 80,000 tonnes of fine copper a year, considered high by the industry.

It also imposes a flat-rate ad valorem tax of 1% on miners that produce more than 50,000 tonnes per year, as well as an additional 8% to 26% tax depending on the miner’s operating margin.

Depreciation, as well as supply and work costs, would be taken into consideration in calculating a company’s returns.

Mining companies in Chile, the world’s top producer of copper and the no.2 producer of lithium, currently have a tax burden of 41% to 44% which is what main competitors, such as Peru, impose on large producers.

The tax ceiling for units of giant mining companies, including BHP (NYSE: BHP; LSE: BHP; ASX: BHP), Anglo American (LSE: AAL) and Teck Resources (TSX: TECK.A/TECK.B; NYSE: TECK), was the focus of debate for months as the Boric administration attempted to increase its take of earnings, without undermining Chile’s competitiveness.

End to uncertainty

Mining association Sonami expressed relief that the measure ended uncertainty over the type of reform lawmakers would ultimately adopt.

“It puts an end to a period of almost five years of uncertainty for the sector, which hurt the country’s main productive activity,” Sonami president Jorge Riesco said in a statement.

The association described the final legislative language as “bet- ter” than what was initially proposed by the government, giving credit to Finance Minister Mario Marcel for introducing industry-friendly revisions.

The divisive bill has not satisfied everyone, with some criticizing the “ad valorem” clause. “It creates the obligation to pay the tax even when there are no profits,” explained mining law advisor and academic Maria Paz Pulga.

“If you sell in periods of low prices, you make a loss not only in terms of profit, but also because you have to pay the tax,” Puga noted.

The approved bill indicates that companies with negative operating profits will not be required to pay the ad valorem component of the tax.

Marcel applauded the vote result, highlighting that the higher level of government take required of miners would address various past abuses.

“With this legislation, we seek to avoid what happened many times with our country’s natural riches: they were exploited, they disappeared, which left very little for the country and its future development,” he said in a statement.

The new tax scheme, effective on Jan. 1, 2024, would inject about US$1.5 billion a year into the state’s coffers, according to official figures. From that figure, nearly US$450 million will be distributed to regional governments for social spending. TNM

Selective” participation

The minister explained that the government will only seek control of the operation — via different mechanisms, not just majority participation — in projects that are considered strategic.

Currently, the only strategic lithium area is the Atacama salt flat, Hernando said. In the others, each company will negotiate with representatives of either Enami or Codelco. The result of such negotiations will be presented to a committee integrated by the ministers of mining, finance, economy and environment, the vice president of Corfo and the country’s president.

Hernando said the new lithium strategy contemplates three options of public-private partnership.

In the first one, Codelco or Enami would conduct prospecting and then negotiate the terms of development with interested parties.

The second modality will see the state partnering with a private company for the exploration stage and will negotiate the next phase with that particular company.

The last option is for the government to grant exploration licences directly to private companies and evaluate results they present.

“Our strategy seeks to help the country create an ecosystem in which more value is added to its lithium industry, especially around issues [such] as technology transfer and worker training,” Hernando said.

China, Canada interested

According to official figures, around 50 interested parties, including companies and countries, have already approached Chilean authorities to express their interest in participating in the lithium business — including China and Canada.

The country’s Minister of Economy, Nicolás Grau, said that Chile’s lithium policy does not give preference to any country. Rather, it opens the possibility of exploring new salt flats to any interested company.

“The conversations we have had in recent weeks make us think that when the exploration permits begin to be tendered, offers will come from companies from a variety of countries. We want to promote that diversity,” Grau said.

The minister noted that potential partners have applauded the government’s initiative as it sets up a mechanism for their entry into the Chilean lithium market, which did not exist until the policy announcement in late April.

“Something that has been highlighted is that the environmental requirements the government is putting in place are in line with the growing demands of buyers and society in general,” Grau said.

“This will give projects developed in Chile better prospects in terms of social licence and acceptance of their production in international markets,” he noted.

The government will create a public research institute to develop new refining technologies, and insti- tute lithium waste and battery recycling.

While Boric’s plan relies on the wide scale deployment of direct lithium extraction technologies, both ministers said the state will not impose technological choices on private companies.

“Rather, we will regulate to achieve desired outcomes taking into account the surrounding biodiversity,” Hernando said.

The long-term plan is to consolidate areas of oversight currently held by different public institutions, with some authorizing sales quotas and water use, under the mandates of a state-run lithium company.

Not missing the boat While some experts reacted neg- atively to Chile’s new strategy, the majority of those interviewed said the announcement brings an end to a long period of uncertainty for the sector.

Shawn Doyle, a strategic lawyer and business advisor at Canada’s McCarthy Tétrault, considers the policy a positive turn of events for private capital keen to invest in the battery metal.

“It must be remembered that, as a result of policy paralysis, Chile has been effectively closed to new private investment in lithium for decades,” Doyle said.

Analysts from Fastmarkets believe that, if Chile fails to capitalize on the lithium boom, it would fall from the world’s second-largest lithium producer as of last year to fourth in 2030 after China, Australia and Argentina. They forecast the country’s share of production would shrink from almost a third to 12%.

Global demand for lithium, according to the government’s projections, will quadruple by 2030, reaching 1.8 million tonnes. Available supply by then is expected to sit at 1.5 million tonnes.

The country’s strategic Atacama region, which is also home to vast copper mines, supplies nearly one-quarter of the globe’s lithium.

World output of lithium carbonate equivalent was 737,000 tonnes in 2022. It is estimated to reach 964,000 tonnes this year and 1,167,000 tonnes in 2024, according to the Resources and Energy Quarterly Report by the Australian Department of Industry, Science and Resources in March. TNM