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Country Report: Chile

RI Country Report: Chile

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This video was created with the generous support of Far West Mining (TSX: FWM)

Resource Intelligence Country Reports: Chile

The balance between opportunity and risk is the hallmark of a successful investor. In mining, project risk can be increasingly quantifiable to all investors by using our RIQ calculators to determine the value of a project based on their assumptions and discounts.

But what about country and jurisdictional risk? Horror stories abound. Investors naively believe rule of law is universal. It is not. Neither is infrastructure. Nor water. Nor power. Nor workers. Conversely, other investors overestimate risk based on fear of the unknown and miss out on winners. Neither is a winning strategy.

Our objective with Country Reports is understanding location risk. Our sources are international organizations such as World Bank; OECD, CIA World Book, and the Frazer Institute.
Today, come with us to Chile as we explore one of the world’s misunderstood treasure troves. Or as the OECD Secretary-General Angel Gurría describes, a “beacon in Latin America”

Politics and Mining Policies

South America is in a pro-business renaissance. Neighboring Chile are democratically elected, pro-development, international leaning governments: Peru, Argentina and Brazil. Free trade is blossoming on the continent, and externally with North America, Europe and Asia.

Chileans prize their democracy. Politically, both the center-left coalition and the new majority right of centre coalition are supportive of the mining industries. The former was in power for 20 years.

Vital to all industry, Chile respects the rule of law. In the 1980s, mining law was radically changed to encourage foreign investment in Chile’s mining sector. Today, domestic and foreign companies are treated equally. Permitting is fast and final — think months rather than years. Policy is clear and transparent. Property rights are respected and inalienable. And miners are welcome.

Exploration companies are generally granted generous concessions to allow them to recoup their initial capital expenditures in the form of tax cuts and rebates. It works; in 2009 there were 597 mining companies in Chile from the world’s largest to explorers. Exploration companies in Chile enjoy lower taxes than in Canada, Australia and China.

Today in Chile, environmentally sound mine reclamation is a fact of life. A company must take a cradle-to-grave responsibility from exploration until mine closure and beyond.

Geography

Most mining in Chile is concentrated in four regions that span the arid northern part of the country. These areas of little vegetation are easier and less expensive to explore. Additionally just 1/10 of the country’s population lives in these desert dry areas, but more than 2/3’s of the mining concessions are located here.

In part this also explains why Chile experiences so few Aboriginal issues. These are inhospitable areas, but they are rich in strategic and precious metals.

The Antofagasta region alone accounts for approximately 1/4 of the country’s mining concessions.

In these northern provinces of Chile investors will find the biggest mining companies in the world: Antofagasta PLC, Codelco, BHP, Xtrata, Anglo American, Quadra Mining and of course many junior mining companies at various stages of development.

Antofagasta is home to the world’s largest producing copper mine – The Escondida Copper Mine is capable of producing 1 million tonnes of copper annually. That’s about 7.1% of global production from 1 mine!

The world’s largest open-pit mine is also located in Atacama. When Chuquicamata workers last went on strike, Codelco – the state owned company that owns this behemoth mine – reportedly lost $8 million in revenues daily.

North of Atacama is the Tarapacá Region with many familiar mines including Collahuasi, Cerro Colorado and Quebrada Blanca, all of which are close to the border with Bolivia.

Geological Potential

Chile’s geological Potential is huge. In 2009, mining represented 16.4% of Chile’s GDP, a number that has only grown in recent years.

Chile produces about 35% of the world’s copper and has the largest reserves in the world not only of copper, but also of rhenium and nitrates. It has the third largest reserves of molybdenum. And Chile also produces significant quantities of gold, silver, zinc, iron ore, lithium and coal.

These deposits are found in a variety of forms, but the largest deposits are usually found in IOCGs or Iron ore – copper – porphyries and hydrothermal gold deposits.

The Chilean IOCG Belt is a ribbon of wealth that contains some of the largest mines in the world. Candelaria is here with (470Mt @ 0.95% Cu) and Manto Verde (350Mt @ 0.75% Cu). It stretches for 1,200 kilometres from just north of Santiago in the south to the city of Antofagasta in the north along the coastal cordillera of Chile.

Infrastructure

Chile is modern. Chile’s population is largely urban, Santiago accounts for 40% of the population. Banks, internet all the amenities exist – as Santiago is the copper capital of the world.

Mining spending and taxes have been reinvested wisely to spur further growth. There are 80,000 km of highways. Rail links towns to ports to cities and highways. 95% of Chile’s exports leave the country through its maritime ports, and because the country is so narrow, each port is close to resources and refineries saving millions in transportation.

Power is essential to mining operations anywhere and in Chile, power is available to 97% of the country.

Today, water supply is of the defining factors in mine development globally. Chile is not an exception. Northern Chile is a vast desert area. Therefore every potential investment must be assessed by its ability to access and pay for its water. Desalination – or removing salt from sea water – appears to be one answer, and numerous “desal” projects are in progress.

Economic outlook

Chile retains an open economy and liberal trade regime, including a floating exchange rate, inflation-targeting and importantly a legislated 1% structural fiscal surplus rule.

Chile is in surplus, both in trade and in operating budgets. It enjoys high employment. Growing incomes, productivity and low taxation.

The surplus acts as a hedge against the vagaries of global commodities prices and provides a buffer to economic crises. For example, despite the global recession, when Chile suffered an earthquake 8 times greater than Haiti, Chile had approximately $11 billion dollars of its own money on deposit to respond and rebuild.

It’s public policy like this that has led to Chile’s standing as the most resilient economy in Latin America. Chile is the only country in Latin America to be awarded an “Aa” rating by Moody’s, and the only country in South America to meet the membership requirements of the OECD.

Chile is a world leader in international trade accords. It has 20 preferential and free trade agreements with 56 countries.

Chile is an outstanding destination for mining – and many other pursuits. It is modern, progressive and economically responsible. Mining companies are respected. Permitting is fast and transparent. Taxes are fair. Rule of law is respected by all levels of government. And given the geology and its rich history of discovery, we suspect that more bonanzas beckon.