For countries to reap the rewards of their natural resources, they need to make sure there is a favourable climate for miners and businesses operating within their borders. For Ecuador’s new president Guillermo Lasso, that means welcoming mining companies with open arms as they work to build a sector that is critical to Ecuador’s national economy. Chile hosts some of the biggest mining companies in the world, including BHP Group Ltd. (NYSE:BHP), Anglo American Plc (LSE:AAL.L), Glencore Plc (GLNCY), Antofagasta Miners (LSE:ANTO.L), and Freeport-McMoRan Inc. (NYSE:FCX).

Walking a Tightrope

Recent discussions by lawmakers in Chile could throw the country’s status as a mining hotspot into question. If investors or companies get spooked by the new tax, it could hamper efforts to invest in new projects or expand the ones currently operating in the region. Particularly for proposed royalty deals on copper and lithium sales, the ongoing discussions now could throw a wrench into the works of years of planning and investment. 

Foreign investment in the country is an essential source of stimulus and job creation. The mining industry contributes massively to the national economy, and it has made Chile the biggest copper-producing nation in the world. With the new bill approved just last week imposing higher taxes on sales, and cash generated based on the current running price of copper, those contributions could begin to dry up. 

A Painful Tax

Initially, lawmakers wanted to impose a 3% flat royalty for mining companies extracting copper and lithium. The valuable metals have seen steady price increases over the years, and with the coming electrification of the global economy, this trend shows no signs of abating. 

A new version of the bill proposes a marginal rate of 15% on sales with copper prices between $2 and $2.50 per pound and up to 75% on any revenue generated from fees about 4%. This sliding scale has miners concerned about the future of their operations in the country, as copper’s price seems to have no slowdown in sight. If the bill were approved today, with current copper prices, the royalty rate would be 21.5%. Miners would be able to discount refining costs and some other tax write-offs for any copper sold as refined cathode, but the cut would be almost prohibitive for them.

“You can absolutely try and take more from the golden goose…”

This proposed tax would hit the biggest mining companies the hardest, with the bill affecting miners that produce more than 12,000 tonnes of copper and 50,000 tonnes of lithium per year. One of the companies that would be affected is speaking out against the proposed bill, as it would cut into the country’s status as a mining partner for some of the largest mining companies in the world. According to Ragnar Udd, President of BHP Minerals Americas, “You can absolutely try and take more from the golden goose but you just need to be very clear on what the implications are on that long term. The sort of reforms that are being put forward at the moment will be really quite damaging to the industry.”

“These are tax levels akin to expropriation…”

Even though the proposed tax has miners worried for the future of their operations, it is unlikely that the bill will be passed, especially in its current form. He believes the current system is fine, under which miners are charged a variable rate of up to 14% on operating profit. This rate only applies to large producers and does not affect the less competitive mines, giving them a shot at growth and keeping the country competitive for international investors. 

For now, worry and outright opposition are the state of play, as one prominent mining group president has already touched on. Resistance is strong, and this is unlikely to let the bill pass as is. Sonami president Diego Hernandez issued a statement calling the project unconstitutional. He made it clear that the consequences of the proposed bill on the industry and the country would be severe and damaging. With this bill, Sonami (an organization representing copper miners in Chile) predicts that 12 of the 15 biggest miners operating in the country would end up operating at a loss. 

Diego Hernandez himself has made it clear that the bill is unacceptable: “These are tax levels akin to expropriation and this is going to inhibit investment immediately.”

The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a licensed professional for investment advice. The author is not an insider or shareholder of any of the companies mentioned above.