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Countries seeking more cash from mining put pressure on energy transition costs

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Trucks moving material around an open-pit copper mine on the outskirts of Calama in Chile's Atacama Desert. Chile produced about 26.4% of the world's mined copper and 30.7% of the world's lithium chemical supply in 2021.
Source: Oliver Davis/Moment via Getty Images

Mining companies enjoying a period of high commodity prices and heightened demand are facing a flurry of tax hikes from governments strained by pandemic-fueled budget shortfalls.

Political leaders have proposed to increase royalties and taxes in at least eight mining-heavy jurisdictions worldwide, leading some investors and companies to pause mining expansions and new projects needed to meet demand projections. It is a trend that could keep supplies tight and prices high for the minerals critical to the world's energy transition, according to some industry experts, while others say it is too soon to tell given the tax proposals have yet to be adopted.

"When [mining] costs go up, pricing for the raw materials is going to have to go up," said Chris Berry, a battery materials expert and president of consultancy House Mountain Partners. "What does that mean for the energy transition? It's going to be more expensive and maybe take a little bit longer than we had originally hoped."

'A big wave'

Countries with substantial mining activity have proposed tax changes in the last year, including in South America, central Asia, Africa and the Asia-Pacific region.

In the weeks leading up to Gabriel Boric's victory in Chile's 2021 runoff presidential election, the left-leaning politician outlined plans to rein in the mining sector and raise fees. Boric has opposed Andes Iron SpA's Dominga iron ore-copper project. On the campaign trail, Boric proposed to start a state-run lithium company and increase mining taxes and royalties to bring in cash for public services while safeguarding the environment.

The Chilean Senate is considering a modified version of a bill passed by the House in 2021 that would impose a 1% sales tax for copper companies producing less than 200,000 tonnes per year and up to 3% for companies with output exceeding 200,000 tonnes per year, BNamericas reported Jan. 27. Lithium producers would be subject to a 3% tax on annual sales, with some exclusions.

Chile is the world's No. 1 copper producer and holds some of the largest known lithium resources and reserves in the world. The mineral-rich nation produced about 26.4% of the world's mined copper and 30.7% of the world's lithium chemical supply in 2021, according to S&P Global Market Intelligence data.

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Bids to change tax or royalty structures are also underway in Peru, Brazil and Panama.

"South America is a real question mark right now, and it's because of what I would call this leftward-lurch in a number of economies there," Berry said. "It does just give you pause."

Copper company Minera Panamá SA, a subsidiary of First Quantum Minerals Ltd., agreed to pay higher royalties equivalent to about $375 million a year for its 90%-owned Cobre Panama mine, Reuters reported Jan. 18. The royalty hike was announced in January, coming after several months of discussions with the government over the company's contract. When talks launched in September 2021, Panamanian President Laurentino Cortizo announced intentions to boost royalties and address environmental conditions at the mine. The operation contributes to about 3.5% of Panama's GDP.

"The regulatory and fiscal roller coaster is what is a significant concern," Damien Nyer, a partner at the international law firm White & Case, said in an interview. "You certainly can see that it has a direct impact on investment."

U.S. mining company Freeport-McMoRan Inc. Chairman and CEO Richard Adkerson said on a Jan. 26 earnings call that the unknowns around Chile's tax and royalty structures led the company to slow down development at its El Abra copper mine in the country and await further clarity.

Meanwhile, on the opposite side of the world, Kazakhstan President Kassym-Jomart Tokayev recently called on his government to draft a proposal for increasing tax revenue from the mining sector in the country on the heels of social unrest sparked by rising fuel prices. Kazakhstan is the world's leading producer of uranium, a radioactive metal used to make nuclear fuel.

"I am ordering the government to come up with a plan [to bring] additional revenues to the budget," Tokayev said in an address to the parliament, according to a Jan. 11 Reuters report. "In exchange, we can provide large incentives for the exploration and development of new deposits for large mining and other companies."

'Super-charged' battery metals

"Resource nationalism is a cyclical phenomenon," Nyer said. "When you take the long view, you see that over the decades, it keeps on coming back."

Yet what is notable about the latest round of proposals is that it has coincided with a long-term trend of an energy transition that is "super-charging battery minerals," said Nyer, who specializes in disputes between states and foreign investors in the natural resources sector.

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The world is moving away from fossil fuels in favor of electrification, and it is a shift that will require a lot of mining. Producers have doubled down to capitalize on high prices during a period of tight supply as demand for electric vehicles skyrockets.

Lithium carbonate prices hit a record high at the close of 2021, while copper prices hit a five-month high in October 2021. And in mid-January, nickel prices rallied to more than $22,000 per tonne, a price not seen since 2011.

Global battery demand could increase over sixfold between 2020 and 2025, while sales of passenger plug-in EVs are projected to hit 9.5 million units in 2022, according to a Market Intelligence forecast. The expected demand increase combined with the fiscal pinch felt across the globe has political leaders clambering for more revenue from mining companies.

The tax and regulatory uncertainty could worsen supply shortages already looming over key metals needed for the energy transition by slowing down production or new projects, according to Aline Soares, a senior analyst at Market Intelligence specializing in copper.

In response to the political turmoil, developers have started to assess more stable regimes to pitch new projects. Soares said mining companies have started to look toward new countries such as Ecuador or Argentina to diversify supply.

"We have miners building projects in places that several years ago, given the level of prices, they wouldn't have built," Soares said. "More risk has been accepted."

Early innings

For now, the majority of the proposals pitched by governments to hike taxes or nationalize the mining sector have not come to fruition. The terms of several bills have softened more in miners' favor after debate in divided legislative bodies.

Peru's Congress voted down a proposal to amend the country's tax code in December 2021, marking a setback for the newly elected President Pedro Castillo, who built his campaign platform on taxing the mining industry more. Peru's former Finance Minister Pedro Francke said the administration would take up the issue of tax reform again, Reuters reported. Peru is the world's No. 2 producer of copper.

The proposals to increase royalties and taxes or nationalize mining industries in South America have also not changed the outlook for the metals and mining sectors, according to Barbara Mattos, senior vice president at Moody's Investors Service.

"I don't think there are any major changes in companies' strategies that are specifically related to these potential tax increases," Mattos said. "It's an additional factor that would need to be taken into consideration when thinking about the return on investments on these specific strategies, but I haven't yet seen any broad movement of investments."