Does upside outweigh risks in copper-rich Chile?

Nationalization continues to be a hot topic in mining circles. 

As supply chains tighten and long-term demand drivers strengthen, resource-rich nations are looking to capture a greater share of their mineral wealth.  

All across South America, Africa and Asia, countries are pushing back against the long-established norms that allow multinational miners to grow rich on the local bounty.  

While nationalization seeks to work toward the public’s interest, rarely does it achieve this outcome. Just take Chile. 

In 2022, I wrote about the growing threat of nationalization in the world’s largest copper producing nation. At the time, Chile’s finance minister introduced a tax reform bill that raised copper mining royalties on companies that produce more than 50,000 tonnes a year. It also increased revenue taxes on the largest mining producers.

And most importantly, Chile set the constitutional groundwork allowing for the re-emergence of nationalization of the country’s copper industry. As I wrote at the time:

Unsurprisingly, it’s sparked an angry response from major mining firms, including Australia’s BHP. In partnership with Rio Tinto and Japanese based JECO Corp, BHP operates the world’s largest copper mine, Escondida. 

The mine, an enormous porphyry deposit located in Northern Chile sitting in the Atacama desert, provides around 6% of the world’s entire supply of copper. 

It’s a HUGE cash cow for the company…. But it’s also juicy low hanging fruit for a government looking to reap more from its copper riches.     

It forces BHP and other multinationals to re-think their long-term strategy in the country. 

It means a severe pull-back on investment, including exploration, in the world’s most important copper province. 

Ultimately, the political landscape in Chile places even greater threats to the future supply of this important metal. 

Since then, the world’s largest miner has dangled around $10 billion in investments to entice the government to step back from its nationalistic push and offer more stability in the country’s most important sector. 

That’s because BHP knows Chile will remain a major copper hub for decades to come. 

No doubt pressure is mounting on Chile’s government to back down. 

According to a recent Reuters report, the world’s largest copper producer (Codelco) sits on the brink of insolvency thanks to rising debt and missed output across its major operations in Chile. 

Codelco is a legacy of previous nationalization efforts in Chile, an amalgamation of government-controlled copper assets.  

For decades the company has reigned as the world’s largest and most important supplier of global copper. 

As a major contributor to the country’s GDP, the company’s demise is bad news for Chile’s copper-fuelled economy.  

It’s also exposing the deep problems that result from major government interference. 

No doubt, pressure is mounting on Chile’s left-wing government to step away from its radical policies. 

That could be good news for the multinational miners like BHP.  

But it also opens opportunities for the juniors looking to tap into the world’s largest underdeveloped copper projects.  

For the moment investors remain cautious — for good reason. 

In 2023, Chile’s government announced reforms that would bring its lithium mines under state control. 

However, the uncertain investment landscape in Chile could be about to take a U-turn. 

In recent months, Codelco has become the poster child for everything that is wrong with nationalization. 

That could be a good thing for investors looking to move ahead of any potential investment that floods back into the country should the government back down on its nationalization agenda. 

But there’s another important angle to this story. 

Declining output at Codelco… A warning for the industry

A recent government report showed production falling to a 25-year low at Codelco. That’s being driven by deeper ore and lower grades at its ageing operations. 

It means far higher extraction costs with less payback.  

Sky-high costs to bring new projects online are also impacting Codelco’s ability to maintain its long-term output guidance. 

It recently funnelled $15 billion into two new developments, El Teniente, which resulted in a mammoth 75% cost overrun and Chuquicamata, a sizeable 53% blowout. 

Codelco’s decline is a story worth following. Across the board, copper producers are battling with declining grades, falling output and rising costs. Don’t expect any sustained increase in copper supply over the coming years. 

But as I’ve written before: Falling global output is set to meet a once-in-a-century energy transition. 

No doubt, solar, wind, hydro and NUCLEAR will all have their time in the sun as investors and politicians squabble over the best option to adopt as we transition away from fossil fuels. 

The various commodities tied to these trends will ebb and flow as sentiment shifts from one energy source to the next. 

But there’s only one true winner in this race to reach net zero: Copper — the new crude oil. 

While copper doesn’t produce energy like crude, it is the only viable option (alongside aluminum) in energy transmission. 

It’s this ‘exclusive use factor’ that made crude such a pivotal commodity over the last century, dictating the fate of nations, economies and presidents. 

No other commodity has been so important to the development of modern civilization. 

But as the global economy moves toward electrification, copper is set to reign as the world’s leading energy commodity.  

— James Cooper runs the commodities investment service Diggers and Drillers. You can also follow him on X (Twitter) @JCooperGeo.