Facing headwinds, Chilean miners mount aggressive expansions

Already the world's largest producer of mined copper and the second-largest producer of lithium — two metals that are critical in the global race to reduce carbon emissions and limit the effects of climate change — Chile foresees major expansions in the coming years to meet soaring worldwide demand.

Those ambitions, however, could clash with political and environmental realities as miners in Chile and other South American countries struggle to achieve drastic rises in production levels.

Clean energy technologies' share of demand for lithium could surge by upwards of 90% over the next 20 years as the world strives to meet the emissions-reductions targets outlined in the Paris Agreement on climate change, according to the International Energy Agency. Copper is projected to increase by 40% or more. Some analysts predict that both commodities could face a supply deficit in the next decade.

In late 2020, Chile's Mining Minister outlined expectations for $74 billion in mining investments in Chile within 10 years. Mining accounts for about 10% of the country's total GDP, according to the International Trade Organization.

Already, several mining and chemical companies have undertaken expansions or launched new projects in the region. Producers with operations in Chile have focused on expansions of existing operations so far, as opposed to pouring money into exploration and development of new assets, according to analysts.

But significant obstacles loom, including shifting political winds in Chile and across the region. And if planned expansions falter, the fallout could slow the world's transition to renewable energy.

Economic impacts

Discovering new resource deposits or building a mine can take substantial time and resources, and new mining projects in the region face rising political and environmental resistance, according to analysts and company officials.

Left-leaning and independent candidates scored sizeable victories in Chile's most recent elections, casting doubt on the center-right coalition's popularity just months before Chile's presidential election in November. Recent electoral wins for progressives could bring regulatory changes to mining sectors, including proposals to hike miners' royalties or taxes . The Chilean Senate moved to postpone a vote on the proposal, BNamericas reported Aug. 4.

Chile's Finance Minister, Rodrigo Cerda, said raising royalties on miners would have "significant economic impacts," The Rio Times reported July 8. "It could have a knock-on impact against future investments that could generate jobs in the sector and higher tax revenue," Cerda told the Chilean Senate's mining committee.

"We will have to be very careful and wait and see what exactly is going to happen," Barbara Mattos, senior vice president at Moody's Investors Service, said. "Because remember, mining is a very important industry for Chile. It's important that they don't kill the industry."

Expansion ambitions

Already, "we pay the highest commission per kilo of lithium carbonate sold worldwide, more than 300% higher than in other countries," a spokesperson for Albemarle Corp., one of the leading lithium producers in Chile, said. "This commission can be up to 40% of the product's sale price and is calculated on the final price to the customer."

Both Albemarle and Sociedad Química y Minera de Chile SA, or SQM, ran into disputes with Chilean regulators in recent years over permits, water and royalties.

Nevertheless, counting on stability for the industry, both companies are moving forward with ambitious expansion plans, according to Sharon Mustri, a battery metals analyst with BloombergNEF.

Both North Carolina-based Albemarle and Chile-based SQM secured contracts with Chile's regulatory agency that will likely be upheld, Mustri said. And although increases in royalties remain a wildcard for lithium producers in the country, they would probably not erase the companies' competitive advantages in the global lithium market, Mustri added.

"Chilean brine is the cheapest way to extract lithium," Mustri said. "This brine has very little contaminants and very high lithium concentration compared to other brines."

Albemarle's contract with Chile gives the company authority to produce lithium in the country until 2043, the spokesperson pointed out.

Across the border

New lithium miners flocked to Chile and neighboring Argentina to take advantage of the rise in demand for the white metal, while many well-established lithium giants chose to expand operations in the region.

In April, Chile's lithium exports shot up 117% month over month, according to S&P Global Market Intelligence analyst Alice Yu. Exports stabilized in May and June after being "pulled back by a more balanced market," according to Market Intelligence research.

In 2020, almost three-fifths of the globe's processed lithium exports came from South America, with the overwhelming majority produced in Chile and Argentina, Panjiva data showed. Processed lithium includes lithium carbonate, oxide and hydroxide.

Chile's lithium chemical supply is projected to reach 149,374 tonnes in 2021, an increase of 31.4% year over year, according to Market Intelligence data. Between 2021 and 2025, analysts forecast that the volume will increase by over two-thirds, reaching 248,940 tonnes of lithium carbonate equivalent and accounting for 27.4% of the global lithium chemical supply.

But there could be a limit to the amount of growth possible in Chile's lithium sector in the near term. In Chile, lithium is classified as a strategic mineral, and companies must work with Chilean development agency Corfo to extract the mineral.

"Existing producers have production quotas in place with Corfo, which effectively caps maximum capacity," Yu said.

Regulatory hurdles, the threat of higher royalty burdens, and rising environmental and social concerns could make neighboring countries more appealing for lithium production, some analysts said.

One of those concerns is water consumption: To extract lithium from the vast Atacama salt flats, producers pump vast amounts of salty water to the surface, collecting the lithium-rich brine in large evaporation ponds. But the Chilean Atacama desert is one of the driest places on Earth, and water is in short supply. Requests by lithium companies to expand operations and use more water have stirred up protests from surrounding communities and environmental organizations.

Across the border in Argentina, a flurry of development activity is occurring in the region into which the Atacama salt flats extend.

Lithium Americas Corp. partnered with Ganfeng Lithium Co. Ltd. to bring the Cauchari-Olaroz lithium project near the border of Argentina and Chile into production by mid-2022 and recently said it would launch an expansion of the project in tandem with phase-one development. At least half a dozen other companies are developing lithium projects in Argentina, according to Market Intelligence data, including Lithium South Development Corp., Livent Corp., Orocobre Ltd., PepinNini Minerals Ltd., Lake Resources NL, Argosy Minerals Ltd. and Lithium Power International Ltd.

The copper rush

Chile also accounts for about 28% of global production of copper, another critical mineral for the renewable energy transition. Output is expected to reach 5.9 million tonnes in 2021, a 3.0% increase year on year. By 2025, analysts expect the country to contribute 6.7 million tonnes of copper.

That still may not be enough. Many mines in Chile are aging and producing lower-grade ore, and the country will likely be unable to keep up with the anticipated surge in demand for the versatile metal, according to analysts.

"There are few notable late or feasibility-stage greenfield exploration projects," Market Intelligence mine economics analyst William Mason said. "Currently, the strategy for most miners is to expand. It's cheaper to expand your brownfield operations than to explore for a whole new deposit."

Teck Resources Ltd. is undertaking a brownfield expansion of its 60%-owned Quebrada Blanca copper mine. BHP Group's Spence, Codelco's Salvador and Antofagasta PLC's Los Pelambres operations are also copper sites undergoing expansions.

"We have some big projects that will contribute to the supply, but looking at Chile's overall copper output from 2025 onwards, I would say that it will not be enough to satisfy all the demand that we estimate from renewable power generation and distribution, [electric vehicles] and the infrastructure needed to enable their deployment," Market Intelligence copper analyst Aline Soares said.

Panjiva is a business line of S&P Global Market Intelligence, a division of S&P Global Inc.