Permitting woes have Chile’s miners feeling ‘under threat’

A rash of permit rejections for mining projects by the new left-wing government has rattled nerves in Chile’s mining industry. 

First came the rejection of Anglo American’s (LSE: AAL) US$3-billion expansion of its Los Bronces mine in May this year. Since then, authorities have also scrapped Rio2’s (TSXV: RIO) US$200 million Fenix gold project and investments at Anglo’s El Soldado operation, as well as two smaller mines, Cerro Negro, and San Cayetano. 

Anglo and Rio2 are now studying appeals against the respective decisions. 

In addition, the Environment Ministry has ordered a revision of approvals granted four years ago to Gold Fields’ (JSE: GFI) Salares Norte project after two short-tailed chinchillas, an endangered Andean rodent, died while the miner moved them from the mine site, located in the northern Atacama region. With the project’s construction about three-quarters complete, the US$900 million mine is due to enter production early next year.  

These measures have raised concern that Chile’s government, led by President Gabriel Boric, may be taking a hard-line against an industry which the administration’s more radical members and supporters regard as not only harmful to the environment but prejudicial to the country’s economic development. 

“Mining companies are worried. They feel under threat,” says Santiago-based mining lawyer Cristian Quinzio. 

Chile is the world’s top copper producer and one of the biggest lithium producers. 

The Escondida copper mine in Chile. Credit: BHP

On the campaign trail last year, Boric vowed to put environmental protection at the heart of policymaking. Hours after taking office, he swore to block Andes Iron’s Dominga, a controversial copper-iron ore project located about 65 km north of the city of La Serena, near sensitive marine life populations. In June, under pressure from authorities over its poor environmental record, the state copper company Codelco announced the closure of its Ventanas smelter.  

However, measured objectively, the chances of approval have not fallen dramatically under the new administration, observers say. 

“The rate of rejection of investment projects under the new administration is no greater than previous governments,” notes Felipe Arevalo, an environmental lawyer at Philippi Prietocarrizosa Ferrero DU & Uría and based in Santiago. Out of the 153 projects voted on since the start of the year, just 34 have been rejected (although the size of Los Bronces tips the scales when measured by investment). 

But some recent decisions have raised eyebrows. 

Unpredictable rulings

While Los Bronces has long been in environmentalists’ sights (the proposed underground expansion lies partly beneath wilderness areas and glaciers), few expected that authorities would question a modest investment at Anglo’s El Soldado, a mine located about 125 km north of Santiago that has been in operation for more than four decades. 

Critics point to Chile’s permitting system, which despite successive reforms, remains highly politicized. While the independent environmental assessment service SEA recommends which projects should be approved based on technical criteria, the final say lies with regional committees of ministerial officials chaired by the presidential regional delegate who does not have to follow the service’s guidance. 

Both El Soldado and Fenix received the service’s backing. 

In addition, the authorities have raised legitimate concerns through their votes. The El Soldado project was rejected because the committee felt the company should have presented a more complete environmental impact study, which requires public participation, rather than the lighter environment impact declaration. 

But without a clear change of criteria by the authorities it is difficult for mining companies to know what standards they must meet to win approval for their projects. 

Sometimes committee members appear to have changed their minds just hours before a crucial vote, often after a phone call from Santiago. 

“It is worrying to us that a project that has a favourable assessment report, with a recommendation for approval without objection by the public services, is rejected,” said Anglo American’s CEO in Chile, Aaron Puna, following the decision on El Soldado.  

Underground at Codelco’s Chuquicamata deposit in Chile. Credit: Codelco

Rather than any explicit rule changes, observers say the new administration is much more sensitive to local social movements campaigning over water shortages, air quality and other issues, whose support they courted ahead of last year’s elections. 

“These people are (very) critical of the assessment process and its failings, regardless of whether a project is approved technically,” says Telye Yurische, an economist at the Chilean environmental think tank Fundación Terram. Some are now in government, such as Rodrigo Mundaca, a veteran campaigner on water access whom voters last year elected as governor of the Valparaiso region and so participated in the votes on the Cerro Negro and El Soldado projects.   

With Boric’s approval rating suffering because of rising crime rates, soaring inflation and the debate over the new constitution, authorities are also wary of any decision which could trigger social protests. 

Arevalo notes the government is not prepared to risk letting down supporters over a particular project. 

The setbacks come at a crucial time for Chile and its mining sector. On Sept. 4, Chileans will vote in a referendum on whether to accept a new constitution which would significantly increase environmental protection, strengthen the power of Indigenous communities in their territories, and remove a guarantee that investors will receive market prices for expropriated assets. 

“There is no statute of minerals. This increases uncertainty, reduces legal stability, and naturally can affect future investments,” Diego Hernandez, president of national mining association SONAMI told a recent seminar on the new constitution. 

New royalty regime

Meanwhile, the government is advancing a major reform of the tax system, including an onerous new mining royalty scheme. Under the proposal, mines producing more than 50,000 tonnes annually of copper would have to pay 1-2% of their mineral sales, rising to 1-7% for those that produce more than 200,000 tonnes annually, in addition to a sliding scale of 5-32% of their operating margins. 

As mining companies adjust to the new realities in Chile, they are likely to put new investments on hold. Freeport-McMoRan (NYSE: FCX) and BHP (NYSE: BHP; LSE: BHP; ASX: BHP) have already said that they are pausing major investments until they get clarity on the legal and fiscal regimes for their projects. 

The harsher permitting climate will only increase their caution. 

“The decisions we are seeing make investment difficult and have a direct impact, not only on how we are seeing the future of our operations, but also on how the global mining industry looks at Chile’s business climate,” said Anglo’s Puna. 

The impact is cumulative, notes mining lawyer Cristian Quinzio. 

“When all this comes together, it looks like an avalanche.”