Chile’s recast mining royalty bill gets mixed reception from industry

The Chilean government has presented a bill to the Senate’s Mining and Energy committee that “significantly reformulates the mining royalty bill,” the finance ministry said in a statement on Tuesday.

Finance Minister Mario Marcel said recent discussions have helped “find an alternative that better balances out the goals of the collection with growth and the industry’s development.”

The bill proposes a flat 1% ‘ad valorem’ tax on copper mining exceeding 50,000 tonnes instead of on the price of copper as initially proposed.

That rate does not exist in the current regime, which was previously in the 1-4% range, depending on the copper price and mine size. The bill also provides that if the operating margin is negative, the levy will not be paid.

In addition, the proposed bill would impose a tax to be applied depending on the operating margin, which will fluctuate between 8% and 26% based on that margin. The current regime is 5-14%, and the previous proposal was for 2-2%.

To calculate the operating margin, companies can deduct expenses from productive work, inputs and depreciation.

The mining royalty is expected to help collect an estimated 0.6% of GDP, comprising 0.46% of GDP from the new structure and the other 0.15% resulting from growth in production and costs.

A significant part of the resources will be distributed to local and regional governments, with special priority given to those in mining regions.

Canaccord Genuity Capital Markets mining analyst Dalton Baretto flags the development as good news for Capstone Copper (TSX: CS) and Marimaca Copper (TSX: MARI; US-OTC: CROJF). In a research note on Wednesday, the analyst said he believes the companies would benefit significantly from the reduced uncertainty surrounding the proposed mining royalty bill.

Indeed, Capstone shares gained 14.5% in intra-day trading to a high of $3.44, giving the company a market cap of $2.3 billion, while Marimaca’s equity gain was more muted, adding 1.25% or 5¢ per share to close at $3.25, giving it a market cap of $286.1 million.

Industry concern

The president of Chile’s National Mining Society (SONAMI), Jorge Riesco, who is in London participating in the International Council on Mining and Metal activities, is less supportive of the royalty bill.

Riesco said in a statement that the mining royalty project parameters are worrying since the proposal maintains the rate ad valorem that would be applied to output over 50,000 tonnes, although setting it at 1%.

SONAMI argues that in practice, the total tax burden would remain in very high ranges, even over 55%, according to the society’s initial calculations.

“If this project is approved with these indications, the large mining companies in our country would be left with high tax rates and well above other mining countries, such as Peru and Australia, which will severely affect our competitiveness,” the SONAMI director said.

He warned the mining sector was at risk of losing critically needed investment in new copper mines as Chile’s global competitiveness erodes.

While the bill incorporated some industry proposals, Riesco asserted that the balance between economic growth and environmental protection was “totally misaligned.”

SONAMI calls on the Chile government to adopt more industry-friendly measures, such as streamlining permit processing, increasing the minimum levels of small-scale mining from 5,000 tonnes per month to 20,000 tonnes, and implementing a more accommodative regime, in which deviations from original project plans can be rectified using sworn statements, to allow their regulation.

Chile’s mining regulatory environment is in a state of flux. Early in September, nationals rejected a proposed new constitution for the world’s number-one copper producer, sending lawmakers back to the drawing board to create a more inclusive document prioritizing the country’s unity.

Chileans overwhelmingly rejected the proposed new constitution during a referendum on Sept. 3, handing left-leaning President Gabriel Boric’s industry-unfriendly policies a public reckoning. The proposed legislation was viewed as one of the world’s most progressive constitutions and represented a sharp shift from its market-friendly constitution dating back to the Augusto Pinochet dictatorship.

The new constitution was intended to significantly increase environmental protection, strengthen the power of Indigenous communities in their territories, and remove a guarantee that investors would receive market prices for expropriated assets.