One thing about Chile is clear – it is a mining country. Its economic success has been built on the back of mining, which has attracted hundreds of billions of dollars of foreign direct investment (FDI). Indeed more than 30% of the FDI that came to Chile between 1984 and 2013, was directed towards the mining sector.
The main attraction was copper, with Chile holding the world’s biggest reserves, but there are also significant amounts of gold, silver, molybdenum, lithium and potassium. This mineral wealth was paired with excellent investment conditions, which further encouraged FDI. Among Chile’s assets are prudent macroeconomic management, political stability, guaranteed rule of law, a transparent legal system and solid institutions. As a result mining has now grown to represent 20% of Chile’s GDP and 60% of export earnings.
But despite this success the sector now faces some challenges, explains Mining Minister, Aurora Williams. Unless something drastic is done Chile’s base copper production is set to decrease dramatically to 4 million tonnes in 2025 from 5.5 million tonnes today. The main problem is that Chile’s mines are getting older, meaning that a spate of new projects will be needed to boost production. In response the Government sponsored a law which will allow $4billion of capital contributions to Chile’s state miner, Codelco, between 2014 and 2018 to help it fund its ambitious investment programme. In total Codelco will be investing $25billion over the next four years as it looks to bring major new mines online and boost copper production to 2.5 million tonnes a year from its current level of almost 1.8 million tonnes.
The investment will fuel seven major projects. Ministro Hales, will be a new open pit mine, El Teniente is an existing mine that will have a new level added, Andina, is an existing mine that will have its life extended in two stages, Chuquicamata, the world’s largest open pit mine, will be converted to an underground mine, Radomiro Tomic, is a sulphides mine will be expanded and finally the Inca Pit will be turned from an underground mine to an open pit operation.
But while these projects will help to boost production, they will also bring a new set of challenges. In some cases these new mines will be deeper, which will involve longer hauling distances and transport and this will hit productivity. Another problem is that, in some cases, the best quality ores have been mined, which means Chile will have to start tapping lower-grade ores that require more mined material and processing to produce the same amount of copper. And this extra processing will exacerbate the industry’s existing water issues. Currently the consumption of fresh water for mining is mainly concentrated in the north of the country, a naturally dry and arid area. The majority of mining’s water use, about 80%, is for producing concentrates, something which is expected to increase towards 2023 as more lower grade ores need to be processed. The final issue worth mentioning is energy cost. At present Chilean mines pay around $150 per megawatt-hour (MWh), which is at least double the cost paid by miners in Peru, South Africa, Canada and the USA.
“Mining has now grown to represent 20% of Chile’s GDP and 60% of export earnings…”
It’s clear that Chile needs to find innovative solutions to these technical challenges. Indeed this could be an area where British firms could help given that at present innovation is a bugbear for the Chilean economy, which has the lowest research and development investment to GDP ratio in the OECD. To that end UK Export Finance, a government body, recently offered $1billion of loans and guarantees to British mining suppliers looking to work with Codelco. UK Export Finance CEO, David Godfrey, believes that “Chile is a natural partner for us in the UK”.
Of course the other major investment opportunity is in the mining projects themselves. Here the scale of the potential investment is huge, though how much is realised will rely on external factors, such as commodity prices, and the internal environment in Chile.