Mining survives in Chile

The Chilean government recently proposed a bill to impose a government royalty on mining companies primarily producing copper in Chile, over and above corporate income tax. Fortunately, the bill did not pass, though it may yet be re-introduced.

Thus far, there have been no royalties on mining in Chile, a situation that renders the country attractive to exploration companies. However, backers of the bill represent a common view — that mining companies are profiteering from a non-renewable resource, which is transported away by foreign mining companies with little benefit to Chileans. The problem with this argument is that it discredits the benefit that Chileans are receiving from their natural resource and the risk undertaken by the mining industry, which allowed for the benefit.

Today, finding a site to evaluate for mineral potential means having to go to some of the most remote areas of the planet, or using advanced technology to evaluate an area for unexposed mineralization. Over the past 40 years, in response to rising demand and a dearth of easy-to-find mineral deposits, various technologies have been developed to guide the geologist in exploring areas where mineralization is not exposed.

Mineral exploration is risky insofar as it depends on complexities in nature and the fact that pockets of concentrated metal are rare. Mineral value cannot be quantified until core samples are taken and their mineral content evaluated. Today geologists interpret layers of expensively acquired scientific data and geologic observations. They evaluate hundreds of targets in order to find an area with enough potential to risk the expense of drilling. Several studies conducted over the past 30 years indicate that for every 500-1,000 properties where core samples have been drilled, one mineral deposit with sufficient value to mine is discovered. What this means is that most mineral exploration companies never find a mine with the venture capital money they raise and spend.

The risk does not end with discovery however. Once a mineral resource is identified, many other factors must be considered. For example, the company conducts a feasibility study to determine the costs of construction, including roads, power, and water supply; there are also the costs of mining, milling, and refining the ore and transporting the metal to the consumer; and there may be a cost for removing rock that is barren in order to gain access to the mineral-bearing rock. Political risks and environmental costs must also be considered.

Over the past 25 years, mining companies have had profits of about 5% on average, which are net of costs and payments on loans. These profits are really the returns on the large investments necessary to put the mines in production. A profit margin of 5% means that to get the metal out of the ground, it costs on average 95% of the value of the metal produced. By far the largest shares of the costs are related to labour, power and services. The goods and services needed by a new mine are vast in scale and varied; they include work for mechanics, computer technicians, drivers, engineers, and cooks. And once the debts are repaid, the profit is subject to the existing corporate income tax rate. For example, BHP Billiton, one of the largest mining companies in the world and operator of mines in Chile, paid US$1.9 billion in taxes to the Chilean government over the past 15 years. The owners of the company keep any profits that remain. What’s more, in 2001, BHP Billiton paid US$751 million in dividends to the owners of the company (298,000 shareholders), which includes pension funds that represent innumerable people.

The mines that are easy to find in Chile have already been found; new ones will be increasingly expensive and difficult to find and develop. The Andes mountain range presents difficult challenges to mineral exploration and development, in particular extreme elevation and poor infrastructure.

Had the bill passed, it would have added a new cost to the already-high cost of exploration and development — it would have served as a dis-incentive to the driving force of the market-entrepreneurship, which is based on real judgments and risk-taking. The beneficiaries of the royalty would have been the state and the privileged groups to whom the state would have dispensed the proceeds.

Now that the threat of the imposition of the royalty seems to have passed, Chileans should focus on creating new wealth with their copper by making copper-based goods, not court economic hardship by discouraging risk-takers from finding mines.

— The author is a professional engineer registered in British Columbia and a graduate of the University of British Columbia’s geological engineering program. He is the senior geological engineer and a director of Vancouver’s Almaden Minerals. The article originally appeared in the October 2004 issue of Fraser Forum, a monthly magazine published by the Fraser Institute. For more information about the Fraser Institute, visit www.fraserinstitute.ca