Chile's reported intent to nationalise its copper and lithium industries has spooked investors, with some mining companies' share prices falling.

Such emotion is understandable in an industry where asset expropriation has historical precedent, not least Chile's nationalisation of copper in 1971 under Salvador Allende's government.

However, an objective analysis beyond the excited rhetoric suggests nationalisation is not guaranteed. Let's step back and take a cold-eyed review of what is actually happening in Chile.

Chile’s copper and lithium industry

Chile's Atacama desert, or Salar de Atacama, forms the western peak of the South American "Lithium Triangle", a polygon that includes Argentina's northwest corner and Bolivia's southwestern regions.

These countries hold almost 60% of the world's 80 million tons of identified lithium resources. Of the three, Bolivia has 21 million tons, Argentina 17 million, and Chile 9 million tons.

Chile also holds 21% of global copper reserves and is the world's largest copper producer, accounting for 27% of annual global production. While Salar de Atacama also punches above its weight in copper production, its neighbouring northern region Antofagasta hosts Escondida, Chile's largest copper mine.

With the global transition to renewable energy, copper prices are trending strongly, and lithium prices have surged dramatically in the past twelve months. Given Chile's important role in the global supply of both commodities, it's understandable that markets have shuddered at the mention of nationalisation and potential supply disruption.

Constitutional change in Chile

To understand why the spectre of nationalisation has been raised within Chile, we should understand the process of constitutional change currently in play within the country.

Under the conservative government of Sebastián Piñera, Chile implemented a market-oriented economic model which fueled strong economic growth.

However, with the 1980 constitution supporting privatised social services, a free-market economy, and the inability of workers to unionise, discontent grew within a population that saw divisions deepen between rich and poor.

Street protests began and grew to the point that Piñera declared a state of emergency, bringing in the military. That action sparked a popular uprising which Piñera only contained by agreeing to a referendum on rewriting the constitution.

The results of that referendum were 78% in favour of a change. A subsequent referendum saw Chileans vote in 155 members of a constituent assembly tasked with devising and presenting a new constitution to the government.

The government imposed important limits on the constitutional assembly. Their newly drafted constitution must respect the Republic of Chile, democracy, and the rule of law. It must also respect existing international treaties.

The deadline for submitting the new constitution was originally April 2022; however, one extension of three months was granted to the process, with 4 July the new due date.

Once the government receives the draft constitution, the constitutional assembly will be dissolved, and the draft published for review by the people before a national vote on 4 September.

The vote will be a yes or no majority decision on whether to accept the document as the new constitution. If voted down, the current constitution remains.

The constitutional convention

The 155 person constitutional assembly members were divided into seven thematic sub-committees to aid the drafting process. These covered:

  • The political system
  • Principles of democracy, nationality, and citizenship
  • The form of state, centralisation, decentralisation, and equality
  • Fundamental rights
  • The environment
  • The justice system
  • Knowledge systems, science & technology, culture, art, and heritage

Each sub-committee must suggest articles to the main constitutional assembly for consideration and a vote by all 155 members on whether to accept the articles into the final constitutional document.

Nationalisation

The nationalisation proposal which shook the investment world emerged as an article from the sub-committee tasked with the environment. The article proposes the nationalisation of the whole mining industry within Chile.

It would appear that article 39 did not receive the wholehearted support of the 19 member environment sub-committee, with 13 voting for it, three against, and three abstentions.

It's worth noting that the environment sub-committee has tabled 39 articles to date, including the latest on nationalisation. However, the main constitutional assembly has accepted only six of the previous 38 articles for inclusion into the final draft constitution.

Unsubstantiated reports claim that the environment sub-committee has a strong left-wing bias, with many of its articles considered too radical for serious consideration.

A new government

Further fuel to the nationalisation debate was the recent election held in Chile in December 2021, which removed Sebastián Piñera as president. Left-wing legislator Gabriel Boric won 56% of the vote to become Chile's new president.

Boric had plugged into the community's dissatisfaction by promising to bury Chile’s neoliberal economic model and raise taxes on the super-rich to fight inequality, increase social services, and protect the environment. He also promised to nationalise the lithium mining industry.

However, Boric will not get a free hand. During the election, the right-wing parties gained a large presence in the parliament and the senate. Political pundits believe Boric will need to seek the support of the right-wing opposition to fulfil much of his political programme, moderating his ambitious plans.

Tying it all together

Despite the dramatic press headlines of recent weeks, there is no certainty to a nationalised copper or lithium industry in Chile. While it seems likely the country will gain a new constitution, there is a robust process to moderate the articles it contains.

Besides this, the original terms of the constitutional reform required adherence to international treaties.

There is no doubt that Gabriel Boric will seek to flow funds to correct the inequalities he championed throughout his election campaign.

However, unless environment article 39 is accepted by the constitutional assembly, Boric will struggle to gain support for a nationalisation bill. Such action will immediately stop the $70 billion mining project spend projected  for the next decade.

More likely to occur is a greater cost to mining companies seeking to do business in Chile. Politicians are promulgating a new royalty scheme to raise taxes from corporate sales revenues and profits. If introduced, Chile will become a country with the highest global taxes on mining, restricting future investment and growth.

However, we spoke with Alex Black, President, CEO, and founder of mining company Rio2 Limited, whose Fenix Gold Project in Chile gives him insight into the region. Black had this to say on the taxes issue,

"What's happened there is that some members of Congress tabled a proposal for mining taxes to go up in Chile. It was ridiculous because it was like an increase to 80%, a punitive rise in the taxes. That's gone nowhere. That's revolving around Congress, and eventually, Congress will say, 'This is what we think could happen.' They will put that forward."

Conclusion

Many of the old hands in Chile's mining associations and institutions slam talks of nationalisation as retrograde and clearly wrong. While many have left-of-centre political views, as young men and women, they lived the pain of Allende's attempt to nationalise copper in 1971.

With today’s increased globalisation and Chile's heavy dependence on global powers, they understand such a plan will stifle exports and add further to Chile's economic woes.

Black believes that the average Chilean will hear the discussion on nationalisation and think,

"That's not what we want. We need an engine room for this country, which is mining, to continue generating revenue for our welfare programs and our education and health programs because if we don't have that, we don't have anything, and we need foreign investment".

There is no doubt that mining companies in Chile face strong headwinds for the next four years; however, before surrendering to the panic-inducing headlines, we should ponder Gabrial Boric and Chile's political and economic realities.

Chile needs foreign investment into its mining industry. And it is likely to fall into line with tax regimes in other mining jurisdictions like Australia, US and Canada.

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