Chile Proposes Huge Royalty Increase
Chile’s Chamber of Deputies or lower house of parliament approved a bill (79-47) that would impose an additional tax on the sales of copper and lithium. The bill now advances to the Senate. The move was opposed by Chilean President Sebastian Piñera, other conservative policymakers and industry groups. Chile is the world’s largest copper producer and it has vast reserves of lithium. The mining business continued to operate during COVID-19 and provided much needed support for Chile during the pandemic while most of the economy was locked down. Now, copper prices have climbed to levels greater than $4.50/lb, lithium demand is expected to ramp up considerably and politicians want to rewrite Chile’s mining tax laws. This short-term thinking would be expected in some parts of the world, but not Chile.
The new mining tax is really a progressive royalty that ranges from 3% to 75% based on the price of copper. At today’s prices, copper producers would pay an additional 22.7%. Even in a lower pricing environment, the new tax scheme could be devastating. Miners would pay 15% on sales when the price of copper is $2/lb to $2.5/lb. Sadly, the public has been misled into believing Chile has no mining royalty, but the country does. It’s called the Specific Mining Tax, which increases from 5% to 34.5% as profits increase. If the Specific Mining Tax is not repealed, the new tax would have a compounding affect.
The president of Chile’s National Mining Society (SONAMI), Diego Hernández, regretted the decision. “This is very negative news for [the mining] sector, because in an issue of such importance for Chile, the electoral climate facing the country has prevailed and the national interest and the strategic vision for the country’s development have been forgotten. There has been no serious, informed debate here,” he said. In a past life, Hernández was CEO of Codelco, Chile’s national copper company. “This tax will immediately discourage investment and seriously jeopardize the competitiveness of our industry at a key moment for our country, especially in the post-pandemic economic recovery period, in which mining was called to play a fundamental and irreplaceable role.”
Likewise, the Association of Industrial Suppliers of Mining (APRIMIN) expressed disappointment, saying that this initiative is considering only the current prices for the minerals, without visualizing the serious long-term consequences for the industry, the suppliers and the country’s economy. “There is no doubt that the application of a royalty such as the one approved by the Chamber of Deputies and the exaggeration of its rates on sales, constitutes a disproportionate tax that will strongly reduce the investments that generate employment and well-being for thousands of families and the rest of Chile,” said Sergio Hernández, executive director of APRIMIN. The association estimates that mining generates 234,000 direct jobs, and three times as many indirect jobs.
One country’s loss is another country’s gain. The capital flight from Chile will likely benefit copper miners in Peru and North America. This scenario, however, will not likely play out as long as the Piñera administration remains in power. Elections are slated for later this year and Piñera’s current term ends in March 2022.
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Steve Fiscor, Publisher & Editor-in-Chief, E&MJ