Chile courts juniors to boost exploration

Santiago, Chile — Already home to most of the world’s largest mining houses, Chile is now seeking to raise its profile among the minnows of the industry to turn around a relative decline in exploration.

Chile, Mining Minister Karen Poniachik said in December, is on the brink of a second boom in mining investment at least as intense as the one at the end of the last century that left it the world’s largest copper producer.

According to figures from the Chilean Copper Commission, some US$17 billion will be invested between 2006 and 2012 in new mines or to expand existing operations.

A large part of the money will go toward maintaining production levels at aging stateowned mines likeChuquicamata and El Teniente, but other expansions, such as that of Codelco’s Andina mine, and new mines, like Antofagasta’s (ANFGY-O, ANTO-L) Esperanza mine, due to begin production in late 2010, will help Chile retain control of more than a third of the world’s copper production well into the next decade.

The country is also set to break into the top 10 of gold producers if both Barrick Gold’s (ABX-T, ABX-N) Chilean projects, Pascua-Lama and Cerro Casale, are developed.

But while Chile may be keeping up in the growing competition for investment in mine production, the country appears to have fallen behind in investment in exploration.

Nova Scotia-based Metals Economics Group’s (MEG) latest Corporate Exploration Strategies study showed that, in 2006, Chile slipped out of the top 10 recipients of ex-ploration investment for the first time in more than a decade.

Moreover, the study showed that while the sharp rise in exploration around the globe has been led by junior firms chasing new projects, most of them based in Canada and Australia, exploration in Chile is largely carried out by large producers to boost reserves at their existing operations.

“The figures from MEG were a real wakeup call,” recalls Juan Carlos Guajardo of Santiago-based mining think tank CESCO.

Having previously neglected exploration, the government, led by Poniachik, and the industry began to realize that losing access to new projects could see Chile lose ground in the future in reserves and production.

And with a mining industry dominated by giants (95% of Chilean copper comes from mines producing more than 60,000 tons a year), Chile is failing to develop the smaller projects that do not interest majors like Anglo American (AAUK-Q , AAL-L) or BHP Billiton (BHP-N, BLT-L).

Some of this movement away from Chile is unavoidable, says John Selters, president of the local chapter of the Canadian Institute of Mining, Metallurgy and Petroleum.

As other countries open up their mining sectors and implement similarly attractive investment regimes, interest from exploration firms inevitably drifts elsewhere, he suggests.

But Guajardo says that after resting on its laurels for several years, Chile needs to find new ways to get its rich bounty of minerals out of the ground and to global markets.

One necessary task is making sure that all investors, not just the big mining houses, are aware of Chile’s attractive investment conditions and rich geology, which includes iron, gold, lithium and molybdenum –and not just copper.

To this end, the government is preparing Chile’s first delegation to the Prospectors and Developers Assocation of Canada conference in March in Toronto, where the country has until now, neglected to establish a presence.

In addition, CESCO is organizing a major conference on exploration in Santiago on April 7-8 — the same week as the CRU World Copper Conference and CESCO’s Latin American Mining dinner, both major events for the mining industry — which Guajardo hopes will become an annual fixture.

As well as blowing Chile’s trumpet abroad, the government and mining sector are examining mining legislation to see what modifications could facilitate investments, especially by smaller companies.

One first step has been the creation of a register of competent persons, similar to that found in Australian and Canadian legislation, qualified to verify reports on mineral reserves for financing purposes whether in Chile or abroad.

According to Guajardo, this should create a channel for resources to flow from Chile’s welldeveloped banking industry to mining projects that previously lacked access to funds.

Given the lack of knowledge and trust between the two sectors, it will take time and a few pioneering projects for Santiago to become a centre for mining finance, as Lima has in recent years.

Further rule changes would help, for instance, loosening the listing requirements on the Santiago Stock Exchange, Selters says.

Another area of uncertainty is environmental permitting, says mining lawyer Cristian Quinzio.

Chile’s environment law differentiates between exploration work, which requires official approval, and prospecting, which does not, but the terms are not well understood by geologists or the regional governments which have to enforce it, he says.

That has led to situations like the possible revocation of a licence granted to local firm Minera Vilacolla to explore its Choquelimpie property, because it lies on a protected reserve.

The mining ministry is nowworking with Chile’s environment commission to clear up the confusion.

Another key issue for attracting exploration firms will be improving access to mining property.

But this will be a tougher nut to crack, given the powerful vested interests involved.

Published in 1982, Chile’s Mining Code established court-granted mining concessions that could be extended indefinitely through the payment of a token patent of around US$5 per hectare.

That gave mining companies the confidence to return to Chile in droves just a decade after U.S.-owned copper mines were nationalized in 1971.

But the same rules have allowed a handful of companies, aided by a small army of lawyers, to extend claims of huge swathes of mineralrich desert, Quinzio says.

“Mining property is highly concentrated: it’s like the days of the latifundio,” he says, referring to the extensive landholdings that controlled much of the Chilean countryside before land reform in the middle of the last century.

Figures published last year by national mining and geological services institute SERNAGEOMIN showed that just 10 firms controlled almost half of the country’s 91,000 sq. km of mining concessions, with major producers like Codelco, BHP Billiton and nitrates producer Sociedad Quimica y Minera (SQM-N) topping the list.

“We need to find mechanisms to make the market in property more dynamic,” Guajardo admits, but adds he is wary of tampering with the legal mechanisms that lie behind Chile’s mining boom.

The options are limited, says Quinzio, who is heading a working group of representatives from the private and public sectors to examine possible legal changes.

The mining sector opposes the idea of creating a temporary exploration concession, as other countries do, because it would give government agencies a degree of discretionary power over mining propertythat they have previously lacked.

Pushing up patents on concessions, as happens in Peru, is also out of bounds.

As part of the deal to approve the 2005 royalty tax on mine production, the government agreed not to change tax conditions, including mining patents, for another 12 years.

An easy path to releasing mining property to the market is by putting pressure on Codelco.

A 1992 law allowing the company to form joint ventures to operate new mines — which led to the El Abra mine, operated by Freeport-McMoRan Copper & Gold (FCX-N) — also permits the copper producer to hand over projects judged too small for its needs to third parties via mining development agency ENAMI.

During 15 years of operation, the mechanism has not worked well.

“Neither Codelco nor ENAMI have sufficient incentives to pass th
e property,” says Guajardo, noting that the savings for Codelco through reduced spending on patents are negligible compared with the risk of losing a major mineral find.

In this line, the law requires Codelco to have carried out basic exploration on any property it is planning to shed, but this is not a priority for the company, which is struggling to raise production from its existing mega-reserves.

However, pressure from the mining minister, who chairs the board at Codelco, has led to a commitment to shed 1,500 sq. km by 2011, admittedly a drop in the ocean out of 28,000 sq. km controlled by the state-owned mining firm, but a start in the right direction.

The first six properties are due to be handed over to ENAMI in the coming months.

Meanwhile, high prices for precious metals have led Codelco to establish a series of joint-venture operations with foreign mining firms to produce gold and silver, which it does not consider part of its core business nor its area of expertise.

In 2006, the company agreed to sell part of its Agua de la Falda project to Meridian Gold, now part of Yamana Gold (YRI-T, AUY-N) and, at the start of this year, optioned a stake in its El Anillo property (adjacent to Yamana’s El Penon mine) to Toronto-listed junior Fortune Valley Resources (FVX-V).

With the price of copper and other metals now falling, Chile will have to move fast to implement changes to keep exploration firms interested in the potential that lies beneath its arid surface.

Hopes of rapid reform may have been dealt a blow by President Michelle Bachelet’s decision to replace Poniachik as mines minister during a January cabinet shuffle.

New incumbent Santiago Gonzalez, a relative unknown in the mining sector, inherits an industry facing tight energy supplies, disputes over water rights and strikes by subcontractor workers — all more pressing concerns than the long-term issue of encouraging exploration.

But Quinzio, who has served alongside Gonzalez as a director at ENAMI, says the new minister is well aware of the range of issues facing the industry.

“It will be a question of priorities,” he says.

–The author is a freelance writer based in Santiago, Chile.