In Chile’s Big Mining Shake-up, Radical Moves Remain a Long Shot

(Bloomberg) -- Chile's mining industry may be facing its biggest shake-up since nationalizations of the 1970s as an assembly dominated by leftists and independents drafts a new constitution. But there's reason to think the most radical proposals won't fly.

On Tuesday, the assembly's environmental committee approved a proposal to nationalize copper and lithium mines. Last week, the same body voted in favor of annulling mineral operations that infringe on indigenous lands. Either of those measures, if implemented, would disrupt Chile's economy, global metal markets and the transition to clean energy. 

While an industry group called the nationalization approval “barbaric,” the market reaction was subdued, with some mining stocks paring gains and the peso retreating. That's because motions presented in the environmental committee -- which is stacked with young activists -- face a sterner test on the assembly floor, where they require two-thirds majority from a more ideologically diverse group. 

“The most radical proposals will face a complex scenario in the plenary,” said Claudio Fuentes, a political analyst and professor at Universidad Diego Portales. “The committees don't represent the composition of the full assembly.”  

Broad Base

And even if radical measures do make their way into the draft charter in coming weeks, the document must still win popular support in a referendum in the second half of the year. A rejection of the draft by Chilean voters would end the process and extend the status quo. That offers motivation to draft a document that's palatable to a broad base. 

At first glance, left-winger Gabriel Boric's landslide victory in December's presidential runoff suggests constitution writers have carte blanche to enshrine their environmental and social views in the new magna carta. 

But Boric defeated his conservative rival only after moderating his approach following a second-place finish in a previous ballot. The 35-year-old president-elect then appointed centrist central bank boss Mario Marcel as his finance minister. All that indicates that there may be a behind-the-scenes push to temper the more radical factions of the constitutional assembly.

Another downside in seizing assets from private companies is the hundreds of billions of dollars of compensation. Those payments would imperil efforts to boost social spending and reduce inequalities, goals that sparked the constitutional process in the first place. If Chile opted not to pay, it would find itself in international courts.

Serious Risks

One of the arguments for nationalization -- to manage the price of copper -- may not hold up under greater scrutiny as the constitutional process advances given the metal is priced in global markets.  

Still, the risk of upending some of the world's biggest copper and lithium mines -- and the foreign and local private companies that operate them -- is far from zero.

“I'm afraid it involves serious risks because there's a lot of reformist spirit and little willingness to listen to the technical arguments of the mining business,” said Juan Carlos Guajardo, who heads consulting firm Plusmining.

If seizing asset and annulling concessions seem like a long shot in a nation known for its clear, stable and investor-friendly rules, other less radical proposals setting time limits on concessions may have a better chance. 

The copper industry has been pushing hard to retain the indefinite concession model, arguing it is critical for long-term planning that underpins investments.

Permits for new projects may become harder to obtain as the new constitution prioritizes the environment, including scarce water reserves, and communities over economic development.  

For the time being, companies including Freeport-McMoRan Inc. and Lundin Mining Corp. are holding back investment decisions until there is greater regulatory clarity. Adding to the uncertainty is a congressional bill that would raise mining taxes. 

Copper and lithium supply chains are also keeping close watch on the constitutional process. Chile has the biggest reserves of both metals and almost $70 billion worth of possible mining projects this decade, investments that are crucial if the world is going to wean itself off fossil fuels.

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