Chile’s recent political shift to the left may have massive consequences for the mining industry, and its parliament is in the process of ratifying new tax legislation that may impact the global mineral supply. The proposed law is a ‘Mining Royalties Law’ that would lead to a massive tax hike on the sale of copper and lithium.

According to some estimates, Chilean mining companies could see an 80% increase in tax rates and a subsequent 50% drop in profit margins if copper prices remain constant. Chile is also the leading copper producer and 2nd largest lithium producer in the world, so this decision will have massive impacts on global copper supplies and prices as well. According to a recent study in 2020, it accounts for over 28% of global copper production. As such, this new legislation could have massive impacts on the price of copper globally.

Why is this legislation coming into play?

Since the mass protests of 2019, economic inequality has been at the top of the agenda for many domestic politicians. This was furthered by the impetus for economic stimulation, and the current left-leaning opposition party has been particularly keen on initiatives to help Chileans recover from the pandemic. The rise in copper prices has been of particular concern to many parties in Chile, and as such, forced the hand of many of the members of Chile’s congress to consider heavily taxing the mining industry. Miners in Chile currently pay a flat tax rate regardless of the price of copper. However, the new legislation would change that and perhaps increase the tax rate based on the current global price of copper.

The bill was recently approved by the Camara Baja (Lower house_ of Chile’s National Congress in May. According to Juan Carlos Jobet, the current Minister of Mines and Energy, “companies would pay up to 75% in royalties and taxes on sales exceeding 12,000t/y of copper and 50,000t/y of lithium.” The upper house is still debating the bill and should be approved shortly. If passed, these changes could have permanent consequences for the domestic mining industry since it aims to change the constitutional framework that outlines the government’s mining sector policy.

Why is this significant for the copper industry?

Chile’s mining industry has been one of the country’s major sectors for quite some time now, accounting for 14% of its GDP. Both copper and lithium are key minerals necessary for a global energy transition away from fossil fuels, and as such have seen massive stock price hikes worldwide. As the global economy begins to open up again following the COVID-19 pandemic, copper demand has surged as production has gone down. Global Copper supply is also projected to remain somewhat constrained because of few mass mining projects and increasingly strict regulations from domestic authorities. The passing of this new legislation in Chile may only increase the price of copper and will affect the prices on a global scale.

However, there is a saving grace for foreign-owned mines in Chile since the new royalties will not apply till roughly 2023. From 2024 onwards, though, new investors would be affected by the royalty regime and may begin to look towards other investment options. An independent industry research firm recently said that:

 “There is a clear risk that the amendments could compromise the continued appetite for long-term, large-scale investment in the Chilean copper sector.”

What is the future of this bill?

The short answer is that the future of this bill is still up in the air. The conservative coalition, more likely to oppose the bill, only has 18 out of the 43 seats (42%) in parliament. The bill’s passage only requires a 2/3 majority, and many political onlookers view this as a possibility. However, some critics have claimed the bill is unconstitutional, and this bill does have massive opposition from the Chilean right.

However, as elections are coming up soon in the country and the public appears to be voicing support for restrictionist policies, this legislation could likely be passed in the coming years. If so, many investors may begin to shy away from investing in Chilean mining, and mining production may shift to other regions in the future. 

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.