Miners hopeful for softer policies in Chile after constitution rejected

Mining companies hope Chileans' rejection of a left-leaning constitution Sept. 4 will force the government to adopt a more market-friendly approach over new policies and taxes, though some fret about further delays in regulatory certainty amid growing hunger for Chile's massive copper and lithium reserves.

The constitution included tougher environmental, consultation and water use provisions and was defeated with 62% of voters in opposition. Analysts cast the surprisingly wide margin as a stinging defeat for President Gabriel Boric's government and a sure sign that Chileans considered the constitution as leaning too far to the left.

Miners warned that the stringent rules in the regulations, especially if paired with a proposed new tax on copper mining, would keep foreign investors from sinking money into the country. The defeat means the government will need yet more time before it can develop policies driving further development of the country's deep lithium and copper reserves. The ongoing uncertainty may hold back investments, as miners consider regulatory stability crucial to decisions over new projects and expansions.

Chile is second in global 2021 lithium production and reserves, behind Australia and Bolivia, respectively, but it has struggled to grow production. It is also the top producer of copper, a key energy transition metal set to be in short supply. Chile accounted for 27.3% of global production of the red metal in 2020, according to S&P Global Commodity Insights data.

Observers still believe the defeat of the constitution will be a net benefit for the mining industry.

"It was very positive for mining and for investors in general that this draft of the constitution was rejected," said Daniel Weinstein, a Chile-based mining lawyer and partner at Urzua Abogados. "This will make the government realize Chileans are more pragmatic and that people have realized. ... If you don't have growth, and you don't have investments, you will not have money to finance social rights."

In the wake of the "No" vote, Boric shuffled his cabinet, installing new ministers widely considered to be more moderate in their politics. The move suggests Boric, who was elected in 2021 after a wave of protests and demands for a new constitution, is willing to dull the far-left edge of some of his government's proposed policies.

"The margin it was rejected by was perhaps the wake-up call," Paradigm Capital mining analyst David Davidson said in an email. That "tells me he is looking for a way forward." Paradigm Capital is a research and financial institution that focuses on small-cap companies.

Copper tax in the balance

The fate of Boric's tax bill, which would hit the copper mining sector with much higher levies, will test whether sentiment has truly shifted. The proposal introduced earlier in 2022 includes a tax based on the value of mined copper along with a 2%-32% tax on operating profits, depending on the value of copper, for larger producers.

"I'm pretty sure that the government will be more open, now, to moderate the proposed royalty and taxes so that Chile will have more investment in mining," Weinstein said. The proposed tax on copper miners would set their effective tax rate as high as 59%, much higher than peers in Peru, Canada and Australia, among other countries, the lawyer added.

Steve Cochrane, president and CEO of Lithium Chile Inc., took a similar view, saying in an email that the vote forced the Boric government to scramble to establish new policies. The Alberta-based exploration company holds extensive lithium concessions in Chile, and Cochrane was in the country during the vote.

"The message was clear that Chileans did not want a leftist agenda. The one common comment that I heard while I was there is Chileans didn't want to be another Venezuela," Cochrane said. Venezuela is seen by some as an example of a country that sacrificed economic growth by adopting populist socialist policies.

Cochrane said the mining industry is "cautiously optimistic" about the result and its implications for investment in Chile, and the CEO expects new taxes and royalties would be palatable to the mining sector.

Larger mining companies with operations in the country avoided commenting on the constitution's rejection.

"Chile is an important part of [Teck Resources Ltd.'s] copper growth focus, and we will continue to monitor the constitutional reform process as it advances," a spokesperson for the British Columbia-based company, which has major mining operations in Chile, said in an email.

More delays

Despite its vast reserves, Chile has been unable to establish policies that would allow greater access to some of its minerals.

"The rejection of Chile's ... proposed new constitution prolongs rather than resolves uncertainties stemming from constitutional reform, although it may ease concerns among Chilean corporates around potential future proposals," Fitch Ratings said in a Sept. 6 press release.

There is no deadline for when a new constitution might be adopted, making it tough for miners to quickly pull the trigger on new investments.

"Right now, it's very difficult to give a timeline because I think the government realizes changes are necessary, and, now, naturally, some conversations between lawmakers and trade associations will start," Weinstein said.

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