Chile Mining: Not in Crisis Mode… Yet

Chilean miners’ weakening competitive position has become a primary concern in recent years. Rising costs bound to energy, wages and sinking copper ore grades have hampered the industry’s efforts to maintain profit margins, especially in the face of a falling copper price.

Wages in the sector have risen more than 150% since 2000, while labor productivity has declined some 40%. The price of power, which represents about 20% of operating costs, has risen 151% on Chile’s central grid (SIC) and 113% on the northern grid (SING) since 2006, in part due to gas scarcity and use of diesel. Overall, Chilean copper miners’ C3 costs have grown 187% since 2004 from US$0.89/lb to US$2.55/lb and are now 5% higher than the world average, which Chile overtook in 2009.

After a wave of project suspensions and delays in the last couple of years, which can be attributed in varying degrees to socio-environmental opposition, lack of power supply and capital cost escalation in a time of market uncertainty (Andina 244, El Morro, Pascua Lama, QB2, and Relincho, to name a few), Chile’s mining project pipeline remains large but is less certain that it was a few years ago.

But three factors could help brighten the investment climate in 2015. One is progress on the energy agenda unveiled in May 2014 that seeks to increase transparency and competition and to reduce prices, and could provide greater certainty for would-be investments in generation capacity after a slew of project suspensions in recent years.

SIC-SING interconnection is also underway, of particular benefit to projects in Atacama and Coquimbo regions (III and IV), making them more profitable and thus more viable, says analyst Arturo Prado at IMTrust in Santiago.

While these initiatives are not likely to actually bring power costs down for another few years, the first signs of their future fruits will become apparent in 2015 as the plan begins to be implemented, giving miners more confidence as to future access to affordable energy and facilitating decision making. Even so, Chile’s copper miners are likely to continue to invest in their own generation initiatives in 2015 and beyond with a view to ensuring future supply at affordable costs.

Second is the September approval of a tax reform, which was heavily debated during 2014, injecting uncertainty into the business environment. The approval provides companies with greater clarity for decision making going forward though some unknowns will remain until the new policies are fully implemented, including the definition of a new statute to replace the DL 600 foreign investment provision, which will not likely be complete until sometime in 2015.

“The government has tried not to touch mining too much, since the industry ultimately is the main pillar of the Chilean economy,” says Prado. “Reforms have focused on other areas, though clearly the [higher] corporate tax rate will hit mining hard just like it will hit all companies.”

As for labor costs, slower economic growth and mining sector investment are leading to rising unemployment, putting downward pressure on wages, according to Prado. Combined with a more competitive energy scenario and greater legal and tax certainty, mining investment and foreign investment in general can be expected to pick up.

An area where Chile’s copper miners will perhaps not place enough emphasis in the coming year is efficiency through innovation and technology; especially considering the structural nature of copper ore grade declines. Though talk of productivity and the need to seek operational efficiencies will intensify, companies have not yet shown signs of embarking on the broad transformational changes that experts say is necessary.

“We are not in survival mode yet,” Gustavo Lagos, a professor at Universidad Católica’s mining center, said at a recent seminar in Santiago. “I believe the larger push for productivity in Chile will take place when we have a crisis and today we are far from that.

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