VANCOUVER — As the world’s largest copper producer and a top-five producer of molybdenum and silver, Chile is a mining powerhouse. And with more than $70 billion in mining investment expected to lift copper production by 45% over the next 12 years, the country is sure to remain a dominant force.
That big-picture sheen, however, obscures some mounting issues facing explorers and miners active in Chile.
The biggest problems are a lack of power, insufficient water, a focus on mine-expansion exploration to the detriment of greenfield efforts, and stronger environmental rules that will cost miners more.
Chile ranks fifth in the world for mineral-exploration spending, with more than $1 billion poured into the ground last year. Development spending adds significantly to that and looks set to continue apace over the coming years.
For example, Codelco is investing $3.5 billion to expand its Chilean mines over the next six years, Antofagasta (ANTO-L) plans to spend $15 billion to double its production by 2020, BHP Billiton (BHP-N, BLT-L) is pouring about $5 billion into Escondida, and the partners behind the Collahuasi mine are looking to double its capacity through a $3.2-billion investment.
All those developments, however, will require power — and that could be a problem.
Chile relies on imported fossil fuels to generate around 70% of its electricity, a dilemma that has made electricity more expensive in Chile than anywhere else in South America.
In fact, Chilean electricity rates are among the highest in the world, with power rates having climbed 11% a year since 2000.
That is the main reason why, as copper mining costs around the world rose 30% between 2007 and 2012, they shot up 60% over the same period in Chile.
Adding to the power problems, Chile’s two main transmission systems are unreliable and aren’t connected.
Demand on the northern grid, which supplies most of Chile’s mines, is expected to climb 8.4% over the next 10 years, but no major new power plants are set to come online to serve the grid until 2016.
And regulatory gaps make it difficult to build new infrastructure to produce or transmit power.
The situation is getting serious, according to Antofagasta CEO Diego Hernandez, who spoke at the CESCO-CRU Copper Exploration Forum in Santiago in April.
“I think Chile can continue to have a huge advantage in mining,” he said. “We have the deposits, but if we don’t solve among other things the fundamental issue of making energy happen at a competitive price, it’s not going to succeed.”
One of those other things is water. Decreased rainfall and shrinking glaciers have created water shortages across the country, affecting all industries and even hitting households.
For the mining sector, though, the situation is more dire than most. Most mines in Chile recover copper via flotation, which requires a lot of water. But most of those same mines are in or along the edges of the Atacama desert, which is the driest desert in the world.
Mines historically have relied on deep aquifers, but local resistance from farmers has limited that practice of late.
Instead, miners are increasingly turning to sea water, piped for miles from the coast and desalinated using osmosis. Even the proposed Dona Ines de Collahuasi mine, which lies 180 km inland and 4,400 metres above sea level, is planning to pump sea water up to the mine site.
Pumping and desalinating water is expensive, elevating operating costs that are already high because of Chile’s pricey power.
Looking further down the road, at some point the deposits supporting Chile’s current mines will be mined out and the country will need new discoveries to develop. Such is the case around the world, which is precisely why grassroots exploration is so important.
However, juniors in Chile get a much smaller piece of the exploration pie than those in the rest of the world.
Last year junior explorers in Chile accounted for only 21% of total exploration spending. That’s almost twice the proportion three years ago, but it remains considerably below the global average of 39%.
Instead, Chilean exploration money goes to defining new ore for operating mines.
Of the total money spent in the country on exploration, a full 39% is directed to expanding the resources at existing mines, compared to a global average of 26%.
The country has many large deposits that need continued exploration, but those efforts take away from early stage exploration.
At the recent CESCO-CRU conference, Chile’s Mining Minister Hernan de Solminihac acknowledged that his country needs to bolster junior efforts. “In Chile, we still face the challenge of increasing this type of exploration,” he said.
The government is not standing still on this front. The national geological and mining agency, Sernageomin, is working to modernize Chile’s sparse and at times outdated library of geological knowledge.
By 2016 the agency plans to publish basic geology maps for 82% of the country’s mineral-rich north while also quadrupling its published databases of aeromagnetic-radiomagnetic and geochemical mapping data.
Sernageomin is also shortening the time needed to review and grant exploration concessions — from 60 days to just 32 days — as well as the timeline to grant mine concessions, which can now be managed in a few months instead of taking almost a year.
Other changes that could help encourage early stage exploration, however, remain in the starting gate. Chile does not offer any kind of exploration tax break — an incentive offered by many jurisdictions courting exploration.
The concession system also needs a revamp, as the rules allow companies to hold land indefinitely with no obligation to explore the grounds.
As a result, vast swaths of the country are controlled by a couple of companies that do little with the lands. In fact, 10 companies — including BHP Billiton, Codelco and Antofagasta — hold exploration concessions covering almost 40% of Chile’s exploration grounds.
This system hasn’t changed because of staunch opposition from the majors. But Chile’s mining sector is not only getting pressured to change from within — there is also increasing pressure on the sector from Chileans and from governments around the world.
Smog-filled cities and retreating glaciers are two catalysts behind a strengthening environmental movement in Chile.
That movement, combined with requirements related to Chile joining the Organisation for Economic Co-operation and Development, prompted the previous government to create three new environmental institutions: the policy oriented Environment Ministry; an independent agency responsible for assessing new projects; and an environmental enforcement agency with the power to search, fine and shut down mining operations, if necessary.
The enforcement agency Superintendencia del Medio Ambiente (SMA) recently made its first move, fining Barrick US$16 million for violating the terms of its environmental agreement for the large, development-stage Pascua-Lama mine (see story, page 11).
While the amount is relatively small for Barrick, it is nonetheless the maximum fine SMA can levy, and shows that the agency has teeth and uses them.
As for the new Environment Ministry, it is developing new laws to tackle Chile’s most pressing environmental problems. For example, new emission standards comparable with those in the European Union are coming into force, and these will impact copper smelters.
The ministry is also investigating how it might alter the free-market water code.
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