CHILE S MINING INDUSTRY ON A GLOBAL SCALE. PEDRO PABLO DÍAZ HERRERA AMBASSADOR OF CHILE TO AUSTRALIA Brisbane, 18th May 2011

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1 CHILE S MINING INDUSTRY ON A GLOBAL SCALE PEDRO PABLO DÍAZ HERRERA AMBASSADOR OF CHILE TO AUSTRALIA Brisbane, 18th May 2011

2 Chile-Australia AUSTRALIA CHILE Population 21,766,711 (July 2010 est.) 16,746,491 (July 2010 est.) GDP PPP (2010) billion 260 billion GDP PPP ( ) 3% 5.3% GDP PPP per capita (2010) 41,300 15,000 Work Force (2010) million 7.58 million Unemployment (2010) 5.10% 9% Inflation rate (2010) 2.9% 1.7% Exports (2010) billion billion Imports (2010) billion billion source: CIA factbook Figures in US$ 2010 INTERNATIONAL INDICES NAME SOURCE NUMBER OF PARTICIPANTS CHILE'S POSITION AUSTRALIA'S POSITION Economic Freedom Index 2010 Heritage Foundation, Wall Street Journal Quality of Life Index 2010 International Living Environmental Performance Index 2010 Yale University-Colombia University Human Development Index 2010 United Nations Development Program Gender Inequality Index 2010 World Economic Forum Travel and Tourism Competitiveness Index 2011 World Economic Forum

3 Content CHILE S MINING INDUSTRY ON A GLOBAL SCALE I. CHILE: A MINING COUNTRY II. III. IV. KEYS OF SUCCESS OTHER LEGAL ASPECTS CURRENT TRENDS 3

4 I.- Chile: A Mining country 1.1. Chilean mining industry: Its worldwide relevance. Metallic Mining / Industrial Mining Production (TT) (2009) Worldwide production ranking Worldwide production percentage Copper 5,389, % Molybdenum 34, % Rhenium % Silver 1, % Gold 40, % Naturals Nitrates 1,048, % Lithium Carbonate 25, % Iodine 17, % (Source: Cochilco & USGS). 4

5 I.- Chile: A Mining country 1.2. Mining activity development Chile s copper production versus worldwide copper production ( ). (Source: Cochilco) , , , , , , , , ,0 0, Worldwide Chile 5

6 I.- Chile: A Mining country Chile versus other copper producing countries ( ). (Source: Cochilco). 6

7 I Chile: A Mining country Copper production by company ( ). (Source: Chilean Mining Council). Others Spence El Tesoro Los Pelambres Lomas Bayas Collahuasi El Abra Zaldívar Quebrada Blanca Cerro Colorado Candelaria Michilla Compañía Minera El Indio Escondida Anglo American Sur Anglo American Norte Codelco 6.000, , , , , ,0 0, Main worldwide mining companies present in Chile: BHP, Xstrata, Anglo American, Teck, Barrick, Antofagasta Minerals, Freeport, Kinross in addition to Codelco. 7

8 I Chile: A Mining country Sites of the Future: Number of Copper Mining Projects by Country* Country Risk Level:** Low risk Medium Low risk Medium risk Medium High risk High risk Very high risk Sources: Brook Hunt, Codelco and AON Group. *: Include High Probably, Probable and Possible projects. **: Include factors like war, terrorism, strikes, sovereign non-payment, political interference, supply chain vulnerability, exchange rate, legal and regulatory, resources of water and food. Jorge Bande November 2010

9 I.- Chile: A Mining country 1.3. The Mining industry s contribution to the Chilean economy. Gross Domestic Product Exports Fiscal Revenue Employment Foreign Investment 9

10 I.- Chile: A Mining country Gross Domestic Product The mining industry s participation within 2009 GDP: 16%. Agriculture 3% Fishing 1% Mining 16% Manufacturing 13% Power, Gas & Water 5% Construction 8% Market, restaurants & Hotels 9% Transport 6% Communications 2% Financial Services 16% GDP participation by Area (2009) (Source: Central Bank of Chile). 10

11 I.- Chile: A Mining country Fiscal revenue GDP (million US$) Mining revenue (US$) (Source: Ministry of Mining). % Participation in GDP 12

12 I.- Chile: A Mining country Employment Estimation: Each direct employment in the mining industry generates 6.5 positions in other areas of the local economy. Contractor Employees Direct mining employment (Source: Cochilco). 13

13 I.- Chile: A Mining country Foreign Investment Since 1974, the mining sector represents a 37.2% of the authorized Foreign Investment, and a 32.7% of the materialized Investment Foreign Investment Thousands of US$ (Source: Chilean Foreign Investment Committee) Mining National Total 0 Authorized Materialized 14

14 II.- Keys of success 2.1. Geological potential and exploration 2.2. Mining culture 2.3. New Mining Legislation 2.4. New rules on Foreign Investment 16

15 II.- Keys of success 2.1. Geological potential and exploration Geological potential Participation in world s reserve Worldwide Copper Reserves Copper Molybdenum Rhenium Silver Gold Natural Nitrates Lithium Carbonate Iodine 38% 12.8% 52% 17.5% 4.3% 100% 27% 60% United States Australia Canada Chile China Indonesia Kazakhstan Mexico Peru Poland Russia Zambia Other Countries (Source: USGS). 17

16 II.- Keys of success Investment in exploration Chilean investment in exploration represents 5% of the worldwide exploration budget in Other Countries 33% Canada 16% Australia 13% Peru 7% United States 6% Russia 5% Mexico 5% Chile 5% China 4% Brazil 3% South Africa 3% (Source: Metal Economic Group). 18

17 II.- Keys of success 2.2. Mining Culture General social agreement about the relevance of the mining activity on Chile s development and the need to promote its development. High quality of professionals and specialised manpower. - Mining School of Copiapó (1857). - Mining Engineering Career: international recognition. - Mining Law classes in Law and Business Schools. 19

18 II.- Keys of success 2.3 New Mining Legislation A. Legal framework B. Mining concessions C. Mining preparatory agreements D. Business structures E. Legal mining easement 20

19 II.- Keys of success A.-Legal framework Background Technology and foreign investment s contribution ( ): Development of the Large Copper Mining Projects by American companies. Economic Model changes ( ): protectionism and statism to mining exploitation and lack of confidence on foreign investment. Copper Chilienisation : modest compensations. ( ). Copper Nationalisation : without compensations. (1971). 21

20 II.- Keys of success Political Constitution of the Republic of Chile. ( PC ). The State owns all mines (as general principle). Ownership of surface lands is different from mining concessions. Surface lands are subject to obligations and limitations to facilitate mining exploration, exploitation and mineral processing plants. Minerals, with the exception of gas and liquid hydrocarbons and lithium, can be subject to mining exploration or exploitation concessions. Ownership over mining concessions is protected by the Property Right s Guarantee. 22

21 II.- Keys of success Constitutional Organic Mining Law Nº from 1982 ( COM ) An amendment requires a quorum of 4/7 of every representative and senator on exercise. Mining concessions rights and obligations. Mining exploration and exploitation concessions. Mining concession holder s right to impose a legal easement. 23

22 II.- Keys of success Mining Code of 1983 Further development of PC and COM s regulations. Mining concessions characteristics. Legal protection of mining concessions (required steps to keep the mining concessions in good standing). Mining corporations regulation. 24

23 II.- Keys of success B.-Mining exploration and exploitation concessions. GRANTING EXTINCTION CADUCITY CONTROVERSIES Granted on a first-come, first-served basis by a regulated judicial process, non-subject to a judge s discretion or an arbitrary decision by the Administration. 25

24 II.- Keys of success THE SAFETY OF A CONCESSION Constitutional's Guarantee of Property Rights. If an exploitation concession is expropriated, the indemnity s calculation process must consider the present value of future cash flows corresponding to the proved reserve base. Express causes of caducity and extinction regulated by law. Independent judicial system, that adheres to the rule of law and due process. 27

25 II.- Keys of success D.- Business structures General principle: Any kind of companies Contractual mining companies Mining Joint Ventures 30

26 II.- Keys of success 2.4 New rules about foreign investment Clear and solid foreign investment legal framework. -Framework of both constitutional and legal status. -Non-discriminatory treatment Principle. -Non-discretionary Principle. -Liberalisation of the formal exchange market. -Right to repatriate funds and remittances of revenue from abroad. 31

27 III. Other legal aspects Taxes Different tax provisions subject to scale and volume of mining industry: Small mining companies: to an overall income tax at a certain fixed rate. Mid-sized mining companies: taxed on a presumptive basis. General system; Corporate income tax (called First Category Tax), 20% rate in 2011, 18.5% rate in 2012 and 17% rate in 2013 and thereafter. Additional Tax, 35% rate, on dividends or profit remittances to foreign shareholders. The aforesaid First Category Tax can be deducted as a credit from the Additional Tax. 34

28 III. Other legal aspects No specific restrictions or limitations are imposed to the importation of machinery and equipment or services required for mining activities. 36

29 III. Other legal aspects Restrictions imposed to the use of foreign employees No less than 85% of the workers of one employer (with more than 25 employees) must be Chilean, though certain exceptions may apply. Foreign workers are required to obtain visas to work in Chile and individual employment contracts of foreigners must include certain mandatory clauses. 37

30 III. Other legal aspects Environmental review and permitting process for a mining project. The holder of a mining project must submit an environmental assessment of the project to the SEA (Environmental Assessment Service) which can adopt two forms, depending on the environmental impacts: An environmental impact study (EIA), which could take about 9 to 15 months. An environmental impact statement (DIA), which could take between 4 to 8 months. 38

31 III. Other legal aspects International treaties that apply to the mining industry or mining investments. Agreements for promotion and protection of investments. Chile is a member of the WTO. Chile signed the Kyoto Protocol, the Washington Convention and the Stockholm Convention. Chile has a mining treaty with Argentina. Chile has also signed many double taxation treaties (i.e. Canada, etc), and free-trade agreements (i.e. Australia, Canada, U.S, etc). 40

32 IV.- Current Trends 4.1 Joint Mining National level - Same mineral deposit: different mining operations. - Agreements between private parties: avoid eventual conflicts achieving joint exploitation synergies. The case of Codelco Andina and Anglo American Los Bronces. 42

33 IV.- Current Trends International Level: Mining treaty with Argentina Exploration and exploitation of border line mineral deposits. Power to create operational areas: easier processes for immigration, employment and environmental matters. Use of both countries natural resources, goods and infrastructure. 43

34 IV.- Current Trends 4.2 Mining industry and communities. Social License. Corporate Social Responsibility. ILO Convention

35 IV.- Current Trends Social License Institutional mechanisms and legal instances for community participation. Communities with geographical, economic, cultural or ancestral traditions, should be rewarded if a mining project is implemented. 45

36 IV.- Current Trends Corporate Social Responsibility Mining Royalty(2005): The society was not receiving the benefits from the economic success of mining activities. New company s behaviour: 3 P PEOPLE PLANET PROFIT 46

37 IV.- Current Trends ILO CONVENTION 169: Related to aboriginals and indigenous tribes in independent countries, ratified by Chile in Protection of lands, territories and indigenous tribes ancestral resources. Consult Participation Rights. 47

38 IV.- Current Trends 4.3. Access to geo-scientific information related to mining concessions, surface lands and water rights. 48

39 IV.- Current Trends 4.4. Water for mining. Projects in dry areas are using sea water. For fresh water, state is investigating the basins, to make feasible new water rights 49

40 IV.- Current Trends Energy for mining. Demand for energy is growing dramatically, as the mining and other industrial areas need it. Mining companies are seeing investment opportunities in the energy sector. Incentives for non-conventional renewable energies ( NCRE ). 50

41 The 2010 Corruption Perceptions Index 52

42 Thank you! 53