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Chile: Mining royalty and its consequences

By Juan Pablo Morey, FMN - Nueva Mente Fundación

Every mining operation or project faces difficulties inherent to the business, such as: discovery of the deposit, 
prices of volatile metals, extremely high initial investments with long periods without capital returns, problems 
with communities, environmental regulations, access to water resources (each more and more scarce) and no less 
important to deal with - unions that are often highly politicized with a clear left-wing tendency.

In order to start a mining project, it is necessary to move millions of tons of waste (mineral with no economic 
value) before starting with the processing of the valuable mineral The value chain of a mining project is immense, under a simplified view it begins with the exploration and drilling stage, later there are different stages of 
engineering, construction and assembly to end with the productive 
operation itself.

In each and every one of these phases, the supplier companies play an important role in the value chain for mining companies. Copper mining supplier companies can be classified into large, medium and small, being 9%, 17% and 74%, respectively. At the same time, small and medium-sized companies concentrate a sales volume of almost 
USD 14,000,000 of the total USD 42,000,000, using data from 2018.

The royalty is common for the mining industry, and is applied in countries as diverse as Australia, Peru, Ghana, 
Indonesia and South Africa, among others. In Chile, the latest version of the so-called mining royalty, or rather the specific tax on mining activity (IEAM) has been in force since 2010. In the first place, this new tax is 
unconstitutional, since any modification must be the exclusive initiative of the executive and this project is a 
parliamentary initiative. Modifying this royalty, which will go on sales, is a punishment for mining companies that have higher costs, which unbalances the field.

The existing royalty already takes over the price factor, since as the price increases the operating margin increases and therefore the tax (rate) that goes directly to the fiscal coffers increases. Only in 2011, with a price of 
approximately USD 4 per pound, mining companies contributed close to USD 1,000,000 to the fiscal coffers.

In short, the system proposed by Congress excludes the mines or deposits that are less profitable. With this 
mechanism, more will not be collected since there will be less mining.

Returning to the role of supplier companies, they will be affected since there will be considerably fewer new 
projects (greenfield or brownfield) with the consequent decrease in sales and probable bankruptcy. It would not be unreasonable to think that there would be an increase in the unemployment rate and quality of life of Chilean 
families that depend on this business.

Juan Pablo Morey is a Metallurgical Civil Engineer