Chile losing its competitive edge in exploration

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    Copper Mine

    At the World Copper Conference in Santiago Chile, analysts and junior miners expressed alarm over the lack of new discoveries and a decline in greenfield exploration over the last decade. While Chile has a reputation of being a low-risk mining country, it is losing its ability to foster new exploration.  Major areas of concern include the difficulty of junior companies to gain concessions and a lack of geological information. 

    Chile’s copper decline

    Chile is world-renowned for having the world’s largest copper mines, producing 5.83 million tons of copper in 2018 (27.7% of global production). Nevertheless, the country is at a critical moment as copper producers are facing declining grades and a move to underground operations. Large expansion projects such as Codelco’s US$5.56bn Chuquicamata underground plan, and Antofagasta’s US$1.3bn Los Pelambres project, are currently needed for many of Chile’s existing porphyry copper mines to maintain production. 

    Even as expansions projects are underway, analysts are worried that there has been a significant lack of greenfield discoveries over the last decade, with BHP’s Spence discovery in 1996 being the last notable discovery. 

    Anthony Amberg of Los Andes Copper noted at the World Copper Conference, that while Chile has an incredible endowment of copper projects, many of the exciting South American prospects over the last 5 years are found in neighboring countries.  

    A stable, but skewed mining jurisdiction. 

    In 2018, a Fraser Institute report placed Chile in 6thplace for most attractive destinations to invest in mining partly due to its high score in policy perception, and trust in the legal system. CEO and Director of Coro Mining, Luis Albano Tondo, explained that “Chile, for copper, is the best jurisdiction in the world for exploring, with a regulation that is very well understood.” 

    Chile’s Deputy Mining Minister Pablo Terrazas confirmed this sentiment, highlighting a 19 percent growth in exploration investment in 2018. 

    While this figure is encouraging, a closer look reveals that 88% of exploration budget was spent by majors, with only 4.5% spent by juniors. 

    The reason for such an imbalance between the majors and juniors is related to Chile’s mining legislation. Compared to many countries who have a “use it or lose it” exploration licensing policy, it is extremely easy in Chile for existing miners to hold licenses for an indefinite period.

    Jose Silver, country manager and chief legal counsel at Hot Chili, an Australian junior, explains “There is no spending commitment, and exploration licenses are given for 2 years but can be converted into exploitation licenses. You can then hold them forever as long as you pay the mining taxes, called “patentes” in Chile.”

    Silver believes that the current mining legislation is only good in the sense that it is a very stable law, with little change over the past 40 years. “Existing miners only have to pay an annual cost and no commitments. This is one of the reasons why existing miners can block new players getting into the Chilean market. The fact that Chile´s laws give major miners an extremely upper position in the industry against the new comers, is producing a small junior market. Therefore, exploration in Chile is still low.” 

    Amberg, of Los Andes Mining, said “Most of the productive areas are completely claimed, there is no free ground available. For the incumbents that is a very nice situation, basically because they control the area, but what we are not seeing is any turnover”.

    Silver adds that “For juniors, saying this with experience in the Chilean market, this is one of the most difficult hurdles to overcome.”

    Joint venture partnerships

    Chile’s mining legislation has created an environment that requires new entrants to form complicated joint venture (JV) partnerships with existing majors. 

    “If you are coming into Chile looking for porphyries, you will have to do a JV with someone. And then you almost immediately lose a significant percentage” said Amberg. While majors such as Rio Tinto have formed JVs with established Chilean majors, Amberg hasn’t seen many junior companies coming in to JV with the existing majors. 

    Hot Chili, an ASX listed company, was able to gain a foothold by partnering with Chile´s largest iron ore miner, Minera del Paclico. Since entering Chile, they have discovered and delineated the Productora copper deposit. 

    “Existing miners in Chile are usually hard to negotiate with, although after a long negotiation, and after trust is built, a JV could happen.” says Silver. 

    However, he additionally noted that the JORC compliant independent technical report for Productora described that the deal “was not fair for the company, that it was too expensive, but that such a deal was reasonable considering (the circumstances)”. 

    Geological Survey

    Along with favorable mining legislation and fiscal policy, a country’s geological survey is an important component to entice exploration. 

    However, Chile does not have a central repository of geological information that gathers information submitted by miners and explorers. In many other countries, the submission of geological reports is required by law.  

    “There is a lack in Chile of geological information. We do not even have basic geological mapping over the whole of Chile” says Amberg. 

    Chile has essentially lost decades of geological information that may be difficult, if not impossible, to retrieve from past or current miners and explorers. 

    However, the law has recently changed, and companies will have to start submitting geological data which will become publicly available, although it is unclear at what point in time.  

    Slim prospects for major reform

    At the World Copper Conference, Chile’s Deputy Mining Minister Pablo Terrazas stressed the need to have “new projects, new deposits, new discoveries” to meet the expected copper supply deficit and future demand.

    Rather than offering major reforms, Terrazas merely stressed the need for discussions between government, majors, and juniors as well as new solutions regarding financing for exploration projects.

    According to Amberg, Chile needs a mining reform to see some turnover in concessions to create space for new companies to enter and conduct exploration. 

    However, he admits that “It´s going to be a very difficult thing to do; politically it is very difficult, and it will have to be over multiple governments to implement any change.”

    Silver believes that Chile needs a “use it or lose it” policy together with a “real mandatory centralized database of geological information per project” to encourage new companies to explore in Chile. 

    Even as the call for reform rings strongly, the government is not expected to make any significant changes to the mining law.

    Marcelo Olivares, a board member of CESCO (Copper Mining and Study Center) argues that the existing ownership system in Chile must be accepted, as it is unlikely to change in the near future.

    Written for MiningIR by Luke Viljoen

    Luke Viljoen is a project manager in the extractives sector with several years broad experience in exploration and mining across Africa. He specializes in helping companies solve complex issues in challenging environments. Connect with Luke on LinkedIn or email him directly on lukejv{at}gmail.com

    Disclaimer
    MiningIR host a variety of articles from a range of sources, our content, while interesting, should not be considered as formal financial advice. Always seek professional guidance and consult a range of sources before investing.

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