Chile: Mining sector to perform well but environmental regulations pose risks

09 July 2018

Sebastián Piñera’s return to the presidency will ensure a business-friendly policy agenda and Chile’s economic outlook is likely to improve. The mining sector expected to experience robust growth but contracts may be altered or revoked due to environmental regulations.

Security Environment

Opposition candidate and former president Sebastián Piñera secured the most votes in Chile’s second-round presidential election in December 2017, receiving a 54.6% share of the vote. Piñera returned to the presidency on 11 March 2018, and will seek to implement a pro-business policy agenda. Piñera’s proposed pension reform may provoke protests in urban centres, although any incidents would be unlikely to destabilize Piñera’s administration or de-rail his business friendly policy agenda.

There is an elevated risk of strikes and protests in Chile’s mining sector, particularly when mines face contract renewal negotiations with workers. In February and March 2017, a 43-day strike over contracts by 2,500 workers forced Anglo-Australian mining firm BHP Billiton to suspend operations at its majority-owned Escondida site. It is estimated that the halt in production cost BHP Billiton and its partners almost USD 1 billion.

The strike ended without resolution, as workers invoked the right to extend their previous contracts by 18 months. Violent protests in relation to labour disputes can cause property damage for private companies. An estimated 300 protesters attacked installations and cut power supplies at the Escondida mine during strike action in February 2017.

Trading Environment

Chile’s economic outlook is expected to brighten in the coming months. Growth is forecasted at 3.0% in 2018, up from 1.5% in 2017. Stronger economic prospects will be driven by the mining sector, as recovering copper prices support production. Sovereign creditworthiness will be supported by rising business confidence under a Piñera presidency, given his preference for market-friendly reforms. Piñera is also expected to maintain a policy of fiscal consolidation, although public pressure for greater public expenditures may see spending creep up. Chile’s general government debt is forecasted to reach 30% of GDP in 2019, from 21% in 2016. However, debt remains low when compared to similarly rated peers and the budget deficit is expected to gradually narrow in the coming years.

The deficit is forecasted at 2.6% of GDP in 2018, from 2.8% in 2017.

Currency inconvertibility and transfer risks facing companies in Chile are generally low. The Chilean peso is freely convertible and the government has very few restrictions on repatriating profits or accessing foreign currency. In the short-term outlook the Chilean peso is expected to modestly depreciate against the dollar, as positive sentiment toward the country in the wake of Piñera’s election is likely to wane. However, there is unlikely to be a significant volatility that would pose a risk to investors in the mining sector.

Investment Environment

Chile is the world’s biggest producer of copper, and a supportive business environment has facilitated its position as a top investment destination for global mining firms. Copper prices are forecasted to average USD 7,000/tonne in 2018, from USD 4,870/ tonne in 2016. The sector is also attracting renewed foreign investment.

In August 2017, BHP announced a USD 2.5 billion expansion of its Spence mine. Contracts are largely respected in Chile, although there is a risk that the government will alter or revoke contracts in the mining sector in response to pressure from environmental activities. In January 2018, Chile’s environmental regulator ordered that Barrick Gold close the Chilean part of its Pascua-Lama mining project, which straddles the Argentina-Chile border. The project had been marred by allegations of environmental mismanagement from the local community.

Stringent environmental regulations will weigh on cost competitiveness of the mining sector in the medium term outlook. The country’s environmental regulator, the Superintendencia del Medio Ambiente, has been pursuing mining companies who fail to adequately manage scarce water resources. In August 2016, Kinross Gold halted operations at the Maricunga mine after the government shut down the mine’s water system, citing environmental damage.

Chile: Mining sector to perform well but environmental regulations pose risks
** Underwriters remarked that they are more cautious on risks in the mining sector.

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