Productivity, cost concerns 
weigh on Chile’s miners

Productivity concerns, high costs and unmet landowner expectations are some of the problems foreign mining companies face in Chile — a country responsible for a third of the world’s copper and lithium production last year.

“We have been in Chile since 2002, and we noticed a decrease in productivity over this period, probably associated with the rising copper price and possible complacency, and just getting not as competitive as one should be,” Amerigo Resources’ (TSX: ARG) CEO Rob Henderson said at the Mines and Money Americas conference in Toronto in late September.

Amerigo’s Minera Valle Central operation makes copper concentrates by processing fresh and historic tailings from state-owned Codelco’s El Teniente mine near Rancagua, Chile.

Spot copper has gone from US70¢ in 2002 to US$4.50 per lb. in early 2011. It was recently trading at US$2.15 per lb.

“On our mine site, we have probably twice as many workers as we would get away with in Canada, or even South Africa,” Henderson revealed.

The industry is aware of the productivity issue, Henderson stated, adding there is “no simple shortcut to fix it.”  He proposes that investments in automation could become part of the solution.

Responding to Robert Friedland’s comment that Chilean mines are “old ladies” with declining grades, Henderson noted that despite El Teniente being in production since 1904, it still has another 70 years ahead of it. “Chile is endowed with spectacular assets. Some of the mines there are geological freaks.” Keeping the mines going, however, would take significant investments.

According to the Wall Street Journal, Codelco, the world’s top copper producer, just announced it would delay $2.3 billion in investments. It proposed to invest $25 billion over five years to fund various projects to keep output at its aging copper mines. However, it cut that commitment to $20 billion, and then to $18 billion.

On Oct. 6, Amerigo reported a strike by its 216 unionized employees over wages, noting the action would lower its copper output.

Jim Steel, Eloro Resources’ (TSXV: ELO) senior vice-president of mining — who has 30 years of experience in mining exploration, production and mining finance, and has worked in several Latin American countries — highlighted the ease of connecting with government officials and establishing a business in Chile, compared to Peru.

“On our mine site, we have probably twice as many workers as we would get away with in Canada, or even South Africa.”
Rob Henderson
CEO, Amerigo Resources

“Setting up a company in Chile takes a week, and it takes three months in Peru and involves two sets of lawyers, and notaries.

“In our early-stage efforts within Chile, Chile is far more expensive than Peru. But there is a benefit in that you can get stuff done,” Steel said. “But we’re not in a position of hiring anybody yet, so we don’t know if we would have to hire twice as many people as we would anywhere else.”

Commenting on the regulation landscape in Chile, Cesar Lopez, founder of Santiago-based law firm Lopez & Ashton, and executive chairman of private firm Southern Pioneer Resources, said Chile’s mining legislation is well defined and that foreign capital is regulated and protected by the central bank.

The judicial courts regulate the granting of mining concessions, where you could apply to get either an exploration or an exploitation concession. An exploration concession can be held for two years and renewed, while an exploitation concession can be held indefinitely as long as annual fees are paid, Lopez said.

While Chile has tightened its environmental restrictions, Lopez said he has not experienced “any big surprises in terms of new developments or last minute changes.”

As an operator, Henderson said he noticed an “increased scrutiny” from environmental regulators, who are becoming more diligent. “I don’t have any qualms about what they are doing. It’s appropriate … and they are applying the law where it should be applied.”

Henderson, however, shared his concerns about Chile’s energy cost. When energy prices spiked in 2009–2010 to 30¢ a kilowatt-hour, Amerigo bought a 20-watt generator to supplement its power. “We figured that self-generation at 20¢ was better than buying it from the grid at 30¢,” Henderson said. While prices have since fallen, they still fluctuate from 5¢ to 20¢ in the southern hydro-based grid, he said.

Comparing lithium salars in Chile with those in neighbouring Argentina, Lopez said lithium in Chile as opposed to Argentina is a strategic mineral and requires a “special operations contract” with the government.

Despite this, he says the Chilean government has encouraged foreign investments in its lithium sector.

The Cauquenes tailings deposit, part of Amerigo Resources’ MVC operation, which produces copper concentrates from tailings from Codelco’s El Teniente copper mine in Chile. Credit: Amerigo Resources.

China’s Tianqi Lithium Industries is set to buy a 2.1% stake in Chilean rival’s Sociedad Quimica y Minera (SQM) for nearly $210 million, Lopez said, adding that Julio Ponce’s close to 30% stake in SQM is up for sale for $3 billion, which has up to three Chinese firms interested.

While the costs of exploring for lithium in both countries are relatively the same, Steel said it is “really expensive” to acquire lithium concessions in Chile, explaining it could cost up to $6,000 per hectare, due to unrealistic landowner expectations.

Exploring for lithium would be “cheaper, easier and faster in Argentina, also because of the access,” Steel said, adding that many salars in Chile lack road access.