Chile to redraw constitution following voter defeat

Chile’s national mining association SONAMI has welcomed the weekend rejection of the proposed new constitution for the world’s number-one copper producer, sending lawmakers back to the drawing board to create a more inclusive document prioritizing the country’s unity.

Chileans overwhelmingly rejected the proposed new constitution during a referendum on Sept. 3, handing left-leaning President Gabriel Boric’s industry-unfriendly policies a public reckoning. The proposed legislation was viewed as one of the world’s most progressive constitutions and represented a sharp shift from its market-friendly constitution dating back to the Augusto Pinochet dictatorship.

The new constitution was intended to significantly increase environmental protection, strengthen the power of Indigenous communities in their territories, and remove a guarantee that investors would receive market prices for expropriated assets.

The country’s chamber of mines, SONAMI, has welcomed the development, labelling it as a demonstration of civic maturity. “The triumph of the rejection option provides a valuable opportunity to make a new constitution, prioritizing the unity of the country,” said the organization’s new president Jorge Riesco in a statement. He was elected as the organization’s president on Aug. 31.

“We value that citizens have granted this new possibility, which will allow us to establish advances in social matters based on conditions that allow and ensure free entrepreneurship and economic growth so that the changes are sustainable,” he said.

Financial services firm JP Morgan said the referendum result could “force a more moderate and gradual reform impulse.” Analyst Diego Pereira wrote in a note to clients that he expected positive market momentum, thanks to less uncertainty and lower risk premiums ahead.

“We believe both real and financial investors would prefer that if the current constitution has to be reformed, it’s done by the Congress or a committee of notables.”

After acknowledging defeat, President Boric pledged to adjust his government team and work with Congress to draft a new text. Centre-left and right-wing parties have also agreed to negotiate, with SONAMI intent on supporting the process by again making available all experts, white papers, and documents it had prepared as part of the initial constitutional reform process.

Sweeping reform

Chile had been gradually estranging the mining sector since the election of President Boric’s left-leaning government earlier this year.

First came the rejection of Anglo American’s (LSE: AAL) US$3-billion expansion of its Los Bronces mine in May. Since then, authorities have also thrown out Rio 2’s (TSXV: RIO) US$200-million Fenix gold project and investments at Anglo’s El Soldado operation and two smaller mines, Cerro Negro, and San Cayetano.

Anglo and Rio2 are studying appeals against the respective decisions.

Further, 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 being moved by the company from the mine site. About three-quarters built in northern Chile’s Atacama region, the US$900-million mine will enter production early next year.

The new tax reforms introduced earlier this year added to Chile-focused miners’ discontent. The industry argued that, as they stood, the reforms would add uncertainty to investment decisions needed to help fill a global supply gap as copper demand rose on the back of the clean energy transition.

President Boric said late on Aug. 30 that he was open to discussing changes in the country’s tax law that would affect the mining sector as lawmakers are scheduled to vote on the proposed reform on Sept. 13.

The bill included a 1% to 2% tax on sales for companies that produce 50,000 to 200,000 tonnes of copper a year, and 1% to 4% for those that produce more than 200,000 tonnes. Miners producing more than 50,000 tonnes annually would also be subject to a 2% to 32% tax on operating profits, using a sliding scale of copper prices between US$2 and US$5 per pound.

These measures have raised concern that Chile’s incumbent government was taking a hard line against the industry. The administration’s more radical members and supporters see mining as environmentally harmful and harmful to the country’s economic development.

Rating agency Fitch said in a recent note that total taxes for a mining company operating in the South American nation would increase by about 20 percentage points, or close to 60% of pre-tax profits, compared with the current royalty average of about 40%.

“If the bill is approved in its current form, Chile will have one of the heaviest tax burdens in the world, imposing an additional levy on an already challenged industry,” Fitch analysts wrote.

Disenfranchised

Copper is a critical metal in the global quest to achieve carbon neutrality due to its use in the batteries that power electric vehicles, wind turbines and solar panels.

Chile is the world’s largest copper producer, churning out 5.6 million tonnes of copper yearly. However, analysts suggest that Chile has the potential to generate 7 to 8 million tonnes of the red metal if projects currently in the pipeline get the go-ahead.

BMO Capital Markets recently wrote that Chile’s longer-term outlook was muddled, and the country was headed towards two “lost decades” in terms of copper output growth, with the current year set to be down on 2004 production levels.

“Following the steady ramp-up in the 1990s and early 2000s, output levels have stagnated, with the projections of 6 million tonnes of copper per year never coming to pass,” wrote analyst Colin Hamilton in a second-quarter report to clients.

“And this is not for a lack of investment, with a number of large new mines coming to market over this period. Rather, it is a function of decline at existing assets. Most notably, SX-EW production in Chile continues to trend inexorably lower and is now about 500,000 tonnes below peak levels seen over a decade ago.”

Hamilton continued: “The ability of the supply side to keep up with copper’s demand trajectory is naturally being questioned, amid lower grades, challenging permitting, high capital expenditures and depletion at existing assets. Thus, in our view, the potential for Chile’s output to keep undershooting expectations is more important from an investment thesis standpoint than the short-term production issues.

“Given at the same time we are upping global renewable energy expectations as energy independence moves to the top of the policy agenda, even greater through-cycle substitution may be needed to balance the copper books later this decade,” wrote Hamilton.

For now, while the industry waits to see what the Chilean government’s next move entails, miners continue to work with increased risk and uncertainty. As mining companies adjust to the new realities in Chile, they will likely put new investments on hold.

Freeport McMoRan (NYSE: FCX) and BHP (ASX: BHP) have already said that they are pausing significant investments until they have clarity on their projects’ legal and fiscal regimes. The harsher permitting climate could only reinforce their hesitation.