A peculiar paradox for Chile’s investors

Santiago, Chile — As copper prices boomed earlier this year, investment managers in the gleaming skyscrapers of uptown Santiago found themselves facing a paradox.

Although Chile is by far the world’s largest producer of the red metal — production is expected to hit 5.5 million tonnes this year — investors in the country have very few means of investing in copper mining, an activity which represented close to 14% of gross domestic product last year and more than half of Chile’s exports.

Until this year, the Santiago Stock Exchange was home to just two mining companies, but neither of these offered the exposure to metals prices that investors seek.

While SQM — inheritor of the country’s once-great nitrates industry — produces specialist fertilizers and other chemicals, the stock of the exchange’s only copper producer, Sociedad Punta del Cobre, is highly illiquid and tightly held by the business conglomerate that controls it.

History partly explains this peculiar landscape.

In the late 19th century, mining stocks formed the basis of the Valparaiso Stock Exchange, the first bourse in South America, but that activity declined as the country’s high-grade copper deposits were exhausted.

With local investors unable to raise the huge sums required to develop the new generation of giant low-grade projects, such as Chuquicamata and El Teniente, Chile’s mining industry came to be dominated by multinational mining firms and, following nationalization, the state.

It is not for lack of interest in copper among local investors.

The decision by Toronto-based Aur Resources (AUR-T, AURRF-O), which operates the Carmen de Andacollo and Quebrada Blanca mines in Chile, to list offshore earlier this year in Santiago has generated considerable local interest.

Andrs Verdugo, Aur’s vice-president for corporate affairs in South America, estimates that around 1% of the company’s shares are now held in Chile.

“The price and volumes are rising slightly: I would not say that the response has been overwhelming, but in line with the market’s understanding of the industry,” he says.

Neither is a lack of confidence in Chile’s institutions and financial system to blame for the lack of mining investment opportunities.

The country has one of the lowest risk ratings in the region, and numerous multinationals — including almost all of the world’s major copper producers — have set up shop in Santiago, attracted by the stable economy, clear rules and robust economy.

The trouble is, says Christian Moscoso, a mining engineer at the University of Chile, that Chile’s financial institutions and mining industry have developed almost in isolation of each other.

While local mining firms complain that Santiago-based banks are often unwilling to back new projects, local stockbrokers and analysts lack knowledge of the industry and standards with which to judge it.

This has led to a situation where large-scale mining, such as BHP Billiton’s (BHP-N) giant Escondida pit, is very well developed, but there are few medium-sized operations, says Moscoso.

But many believe that, given the attractive economic conditions, mineral resources and mining experience, the potential exists to develop a dynamic market for mining investment in Santiago, supporting exploration and medium projects not just in Chile, but throughout the region.

At least those were the findings of Atacama Resource Capital, a project bringing together expertise from the worlds of academia, finance and mining, plus Santiago Stock Exchange and the country’s securities regulator, to shed light on the problem.

But rules and legislation are needed, similar to those that exist in other mining countries like Australia and Canada to regulate the risky investment implied in mining.

New government

Moscoso, one of the project’s directors, says these concerns have found an audience with the recently installed government, which is keen to promote small business ventures.

New mining minister Karen Poniachik also sees the opportunity to revitalize spending on exploration in Chile, which has fallen relative to other destinations such as Peru and China and is needed to keep mining investment coming.

Earlier this month, a bill, which would create Chile’s first code on recording mineral reserves and designating competent persons to guarantee them, received unanimous backing of the senate’s mining commission and could become law next year.

Such a law, based on Australia’s JORC code, would be a first step to facilitating investment in mining companies in Chile.

But the law alone will not transform Santiago into a centre for mining investment to compete with Lima, let alone Sydney or Toronto.

The country’s banks and brokers lack personnel with in-depth knowledge of mining.

However, this should not be a problem if the financial community sees the potential for growth, Moscoso notes.

In Botswana, where a similar initiative to develop local investment in mining is also under way, banks transferred staff from London to lend support.

Greater access to information on mining property and better quality pre-commercial geological information is also needed.

A new head at the National Geology and Mining Service (SERNAGEOMIN), the country’s mining and geological service, has promised to tackle the issue, although it will require significant investment.

Chile’s law on mine concessions presents a more intransigent problem.

In order to exorcise foreign investors’ fears of nationalization, as happened in the 1980s, the country’s mining code allows companies to hold onto concessions for an indeterminate length of time without ever having to sink a dollar into the site.

Immobile market

This has created a highly immobile and largely opaque market in mining properties, with large mining companies, including state-owned Codelco, holding onto huge tracts of potentially valuable land.

Some kind of “lose it or use it” rule would create new opportunities for investment, but with mine concessions protected under the constitution and some powerful interests involved, such legislation seems highly unlikely in the near term.

State intervention in the mining sector is another barrier to overcome.

For more than 40 years, Chile’s mining development agency ENAMI has provided processing capacity and financial support to smaller mining operations, allowing entrepreneurs to ride out the often violent oscillations of the metals markets.

But it has also created a symbiotic relationship between the private and public sectors (Chile’s national mining association, SONAMI, holds two seats on ENAMI’s board of directors) and saved local miners from having to seek more demanding and dynamic private sources of investment.

As such, the day when Santiago represents a realistic alternative to Toronto or Sydney for promoters seeking financial backing is still several years off.

But, if more companies like Aur decide take the plunge, then Chile could soon be showing up on juniors’ radars — and not just as the site of their latest promising prospect.

— The author is a freelance reporter based in Santiago, Chile.