Chilean presidential election makes copper miners nervous

Many Chileans will cheer if Michelle Bachelet romps home as expected in a run-off presidential vote this month, but copper mining companies – the mainstay of the economy – are breaking out in a nervous sweat at the prospect.

The industry, which accounts for a third of global copper production and reserves, and a fifth of Chilean economic output, has seen production costs double over the past five years because of higher wage costs and energy bills and lower ore qualities.

And the new government is likely to add higher taxes to these woes.

Ms Bachelet, a centre left politician who has made free education one of her main campaign platforms, plans to raise corporate income tax from 20 per cent to 25 per cent.

In addition, Chile may bin a law that protects foreign investments in the sector from higher royalty fees, which may deter some projects.

In addition to a 30 per cent slide in copper prices since they peaked two years ago – analysts at Goldman Sachs predict prices will fall a further 12 per cent in 2014 – and a global copper surplus, Chile’s loss of competitiveness has helped reduce a pipeline of about $100bn of potential mining investments down to just $30bn, according to Joaquin Villarino, president of Chile’s mining council.

Two of the biggest bugbears in the industry are wage and energy costs. Big mining companies now pay similar wages to those in the US, even though they have less than half the productivity levels.

Since Argentina ceased to supply the country with natural gas in 2010, power costs have also rocketed, with costs in one project almost tripling over the past year alone according to a senior industry executive. Meanwhile, both generation and mining projects have been delayed – often by rogue environmental lawsuits, even though the projects may have been approved by the government and local communities.

“The next government needs to address these issues. If it doesn’t, then in the next three or four years it will start to have problems,” said Diego Hernández, executive president of Antofagasta, Chile’s largest private sector mining company. “Chile has lost competitiveness and we need to recover that.”

Some of the mining companies’ concerns may simply be a case of special pleading and fear of the unknown; Antofagasta’s share price has lost 4 per cent since Ms Bachelet won the first round of presidential voting on November 17. At the December 15 run-off, she will face Evelyn Matthei, the centre-right candidate, who has called for the continuation of Chile’s “successful economic model”. Pollsters suggest Ms Bachelet will win hands down.

But even if that turns out to be the case, there are other problems to address, especially at Codelco, the state-owned mining company. Since its 1976 nationalisation, Codelco, which owns almost a tenth of global copper reserves, has reinvested less than 5 per cent of its profits while private mining companies usually reinvest about 50 per cent.

As a result, Codelco is in urgent need of recapitalisation if it is to complete a $25bn, six-year investment programme that will enable it to maintain today’s production levels for another 30 years. Codelco wants a third of that investment funded by the government, with the rest borrowed from international markets.

“It is important that we make these investments now. They have been sitting on the shelf for many years and they cannot be postponed any longer,” said Iván Arriagada, Codelco’s vice-president for finance and administration.

On the other hand, if Codelco, which is already criticised for inefficiency and overstaffing, begins to falter that will put more pressure on the private sector as a source of government income. The government’s revenues from mining taxes are split evenly between Codelco and the private sector, although Codelco only accounts for 30 per cent of production.

“There is a direct link between the weakening of Codelco and the attack on private mining,” said one industry source. “Codelco needs to flourish in tandem with the private sector or the whole model will be out of balance.”

This article was amended to correct the misattribution of a quotation.