How mining suppliers see Chile's constitutional process

A few days before the referendum this Sunday on a proposed new constitution for Chile, the association of industrial mining suppliers (Aprimin) held a meeting to analyze the text regarding the sector. One of the issues raised was that the lack of articles and transitory norms are a factor of uncertainty.

If the draft is approved, the mining framework would depend on future laws or regulations approved by the government of the day.

Another factor analyzed was the replacement of the figure of a subsidiary State with a "business State" that would open the way for new state companies, reducing the role of the private sector.

Miners will also have to face changes to the mining code starting in 2023. BNamericas spoke with Sergio Hernández, head of Aprimin, about these issues and his vision of the constitutional proposal and the challenges that the changes bring for mining concessions.

BNamericas: What do you think of the constitutional proposal regarding mining regulations?

Hernández: The constitutional proposal reiterates that the State has absolute, exclusive, inalienable and imprescriptible domain over all mines, which is already considered in the current constitution. But it adds that this domain will be exercised over metallic and non-metallic mineral substances, generating doubts about how minerals can be exploited or sold in Chile. On the other hand, it says the State will regulate mining policies, which is a legal error and could be resolved tomorrow by someone.

Another illogical issue is the prohibition of mining in glacial areas and their surroundings. This precludes in advance the right of a miner to scientifically demonstrate that their projects will not only not affect the glaciers, but that they could also protect those areas from solar radiation through new technologies. This is absolutism and environmental fanaticism. The new regulations could harm the fight against climate change, since minerals are essential for decarbonization. Since there are no temporary regulations for mining, who will dare to invest given these uncertainties?

BNamericas: If approved, mining would be subject to regulations...

Hernández: Yes, but those regulations already exist in the current constitution and also in the [mining] constitutional organic law, which have the same hierarchical rank. If ‘approve’ wins, these norms will become of a lower hierarchy and could be easily changed, either through autonomous laws or regulations issued by the president.

Due to the long time it takes to have a return on mining investments, stability and certainty are required for many years. But it's all up in the air. The only thing that’s recognized is [copper miner] Codelco, which will be able to continue exploiting its nationalized deposits, although this state company also has projects with the private sector. There is no protection there either. Meanwhile, the current mining exploration and exploitation rights are secured and must continue to be respected.

BNamericas: One of the objectives of the mining code reform is to end the use of mining concessions for speculative purposes. What do you think about that?

Hernández: This reform was carried out at the end of president Piñera's government, without consulting the mining sector. It appeared in the middle of February, during the vacation period, and it surprised us all. It has always been said that an inactive mining concession, without generating production, should be released after some time to be placed on the market again. But there are problems with this, because there are many mining concessions that have an exploitation phase considered for later.

For example, Quebrada Blanca II has a 28-year-old deposit and is only starting to exploit it this year. It also has several concessions with resources or reserves for 70 more years that will not be exploited now, because they are waiting to finish one stage to start another. So, why would an asset be taken away from them, since they already know what the project they will develop later on will be?

These [speculative purposes] could be solved by requiring companies to state their intention to exploit in their mining plan. If they don't, perhaps only then could the concessions be reinstated or released. The problem is that there are many mining concessions that are being used to protect land for an industrial, residential or commercial project. There, the annulment of a concession could be decreed, because they harm the development of mining.

BNamericas: The mining royalty bill is still under discussion. How should the tax be?

Hernández: The royalty has existed since 2005 and is called a specific tax on mining, and it applies to the operating income of companies. The total tax burden of mining in Chile, considering the first category [corporate] income tax plus this specific tax, amounts to practically 40%. And there is still room to continue increasing the tax burden up to 46-47%, which was the reasonable proposal of the senate. In competitive countries like Peru, for example, tax burdens through royalties reach 44%.

But the finance ministry has proposed a royalty that reaches 56-58% to finance the country's social programs. This is excessive. Mining can give more, but the competitiveness of the sector cannot be lost so we can continue attracting new investments.

In addition, the deposits in Chile are older and we have lost a geological advantage over our competitors. Let's not add another disadvantage. There is the mistake of thinking that by increasing tax rates, tax collection will automatically increase. But it's not like that. By fixing rates on profits, if profits are lower, the collection will also be lower. There has to be a balance and that is with a tax between 46% and 48%. There is a contradiction between financing the essential rights of society and the certainties required by private initiatives. And this is the sector that collects the most for the State.

Regarding the ad valorem component, the problem is that it is applied to sales and is established in the same way for all companies. But there are companies with higher and lower costs. The deposits are also different, since they are determined by different geological elements, such as mineral grades, impurities, hardness, etc.

So, it cannot be compensated for in the same way. It could be solved by setting higher rates when there are higher profits, which is already done by the specific mining tax that sets progressive rates on the operating profit of the companies.