Chile's mining industry facing a new era

As Chile’s constitutional convention prepares its final proposal for a new Magna Carta, and the government seeks to create a national lithium company and a mining royalty bill is being debated, BNamericas spoke with Willy Kracht, Chile's mining undersecretary.

BNamericas: What’s your opinion of the investments for [state copper miner] Codelco announced by President Boric in his first state of the nation address?

Kracht: One of the first things we must value is that mining appears in the speech. We want Codelco to be an example for the rest of the industry. The incorporation of technologies is very important, and we also have the challenge of reducing emissions. We’re interested in Codelco setting the example, showing the way to reduce emissions. State-owned companies must be pioneers in showing that it’s possible to achieve a reduction in emissions. As a ministry, it’s up to us to generate the conditions to facilitate this transition.

BNamericas: What was missing regarding mining in President Boric's speech?

Kracht: It’s important to talk about strengthening the capacity of smelters, which is linked to decarbonization. We want copper produced in Chile to have a low carbon footprint. We should consider that an important part of the copper produced in Chile is exported as concentrate, mainly to Asia, to be smelted. In a way, we can’t control emissions where the copper is processed. From that point of view, it’s important that we improve our smelting capacity to export more copper cathodes than concentrate. That’s in the government program, but in a space of two hours [of the president's speech] it’s not possible to cover all the topics. For us, as a ministry, this is something very important.

BNamericas: About smelters, do you think it’s better to modernize those that exist, or would it be better to install new smelters that use clean energies?

Kracht: Technologies in Chile are old, hence, operations require investments to be able to comply with current regulations. That’s something that cannot be neglected. So the option of investing in those that already exist is an issue that must be there. About installing new smelters with modern technologies, we should also consider more competitive costs… because smelters’ operating costs in Chile are very high. From that perspective, we want a new one, which can replace [state company] Enami’s [Paipote] smelter. It’s extremely important that we can show that’s possible to install greater smelting capacity with current technologies, without involving sacrifice zones [areas of very high pollution].

BNamericas: About the national lithium company, it has been said that you’re evaluating the development plan, including the governance of salt flats and that the private sector would be involved. How is this going?

Kracht: We’re working to strengthen the institutional framework of the project. By institutionality, I mean the role that will be played by the general water authority, [mining and geology bureau] Sernageomin and other public bodies. We’ll address governance in the broadest sense of the word. This is not something that we can do only via the ministerial and intersectoral working group, but rather we need to have dialogue with the communities. First, we’re organizing the institutional framework, but soon we’re going to talk with the communities. The other thing is strategic partners. In copper there’s knowledge. If someone wants to develop a copper project in Chile, there are research centers, we know where to find people with knowledge. 

In lithium it’s not the same. Companies operating in lithium in Chile have a lot of internal development and despite relations with research centers, this doesn’t allow us to say that we know how to operate in lithium. So, considering the interesting window of opportunity, as lithium is seeing high prices today and we don't know what's going to happen in 10 more years, we don't have time to develop the necessary knowledge. So we say let's look for strategic partners, who already know how the lithium business is. 

The national lithium company will be different than Codelco, because Codelco is 100% state-owned and oversees the entire process. We are open to joint ventures with private parties, where we take care of the entire processing chain. This implies that the State could have various strategic partners at different stages of the value chain. A strategic partner [for example] that helps us in exploitation and production up to lithium carbonate. Eventually, there might be a partner to support us with the development of battery materials. But I don't know if we’ll ever get to develop batteries here, that's not so obvious, because lithium is like 10% of the battery, so the battery manufacturing part is not necessarily efficient. But this doesn’t imply not aiming for added value. When we say we want strategic partners, we don’t mean that they have the knowledge, come to produce and when the boom is over, everything is dismantled. We’re interested in keeping the knowledge here.

BNamericas: When you talk about strategic partners, apart from private companies, you also refer to alliances with foreign countries? 

Kracht: We’re talking about companies, which could include state-owned companies from other countries.

BNamericas: Regarding the supreme court ruling to annul the lithium tender bill [of the previous government]. What do you think about this case? 

Kracht: We dealt with this issue before starting this government. At that time, we raised objections to the ways in which this tender was developed. It seemed important to us that a series of elements be included, such as the contracts for the operation of the Atacama salt flat, in relation to the territory and communities, and the allocation of resources to invest in research and development. By offering a right to operate in any salt flat, this presented a difficulty to the development of the national lithium company. Because it could happen that we had interest in working in a particular salt flat, but that place was claimed through rights acquired in the tender. Our research into strategic partners was limited as it wasn’t clear if we could talk with those companies involved in the tender, because they were in a process. So the court ruling formally ended the tender and liberated the companies, opening up for us the possibility of going out and looking for strategic partners.

BNamericas: On the mining royalty bill, which is part of President Boric’s tax reform, what’s your opinion? 

Kracht: Although it’s a matter that has been discussed at the finance ministry, we have been participating in providing the specifics of the mining business. One of the aspects to be considered is the cost structure, given these are different between companies. A copper mine in the second region [Antofagasta] or in the fourth region [Coquimbo] will have totally different costs. From that perspective, a flat tax rate that is applied in the same way to the entire industry is not optimal. In other words, the royalty must consider the cost structure’s heterogeneity. It’s a tax that’s needed to allow for more collection, but doesn’t discourage investments, and at the same time doesn’t stop current operations. If you have a tax that’s too high, the operation’s high costs mean it would not be able to continue. And if you set a low tax rate, it would not be efficient either. We believe in a mixed structure in which there is an adequate ad valorem factor, that would not drown the industry, and a progressive tax structure that takes care of the cost heterogeneity. The royalty must provide higher remuneration, but not put the current and future development of the industry at risk.

BNamericas: About investments in mining, is the sector paralyzed by the uncertainties caused by the discussions on a new constitution for Chile?

Kracht: We’ve seen that the investments are more related to operational continuity or expansion of projects. We know that there’s caution in decisions to start new projects and it seems natural, because the country's long-term rules are being discussed. This is an industry where investments are large and long term, therefore, clarity on the rules is required. We see a pause, but we speak of a pause and not that they’re going somewhere else. If the new constitution is approved in September [in the exit referendum], we’ll work on adapting the new regulations to the mining code with dialogue with the sector. We’re interested that the rules from this new constitution are clear. This dialogue must be expeditious so that this pause in new investment projects is reduced as much as possible. This gives us a certain sense of urgency.

BNamericas: This pause is due more to the constitutional debate, or there are other factors as well?

Kracht: Yes. I think it’s natural that this type of pause occurs while we offer signals regarding the institutional framework.

BNamericas: About employment, some studies support the need for experts in technology and cybersecurity in mining. Is there any ministerial program that seeks to improve human capital in mining?

Kracht: The State has training programs for specialists. There is an important nucleus of specialists being trained and who have already returned from their postgraduate degrees. The human capital formation, I would say is more or less covered. What we have to do is generate the forms of insertion of that human capital. In mining, one of the most interesting initiatives is the pilot training centers. There’s a lot of applied science, proof of concepts at laboratory level and field tests on a small scale. The pilot centers try to generate the conditions so that the technologies that are being developed in the research centers can be scaled up to carry out industrial tests that later allow them to be incorporated into mining. These initiatives aim to close a gap in technology development. 

We also identified the importance of cybersecurity. We’re witnessing a process of digital transformation with large data handling, remote operations, that is open to vulnerability in terms of cybersecurity. So that’s an issue that we’re going to address as a ministry and as a government that doesn’t only affect mining, but also the entire country.