Miners Urge Chile Not to Squander Wealth in Development

The world’s biggest copper miners are urging Chile not to squander its mineral potential amid mounting environmental opposition, power shortages and rising labor costs and taxes in Latin America’s wealthiest economy.

Chilean mine workers produce less than half of their North American counterparts, while getting paid more, Peter Beaven, BHP Billiton Ltd. base metals head, told executives and officials who gathered in Santiago this week, including Mining Minister Aurora Williams. Chile needs a more skilled workforce and cheaper electricity to boost its competitiveness, he said.

Williams earlier told executives that the government is no longer focused merely on growing the economy as it seeks to rectify one of the most unequal distributions of wealth in the 34-nation Organization for Economic Cooperation and Development by raising taxes and social spending. Chile has been rocked by protests in the past three years as students demand better and cheaper education.

“Without copper mining, we wouldn’t have achieved what we have,” Antofagasta Plc Chief Executive Officer Diego Hernandez said at the event. “We’re paying developed world wages and getting developing economy productivity.”

Now their taxes are set to rise as well. President Michelle Bachelet sent a tax reform bill to congress this month that would raise revenue by 3 percentage points of gross domestic product to pay for increased spending on education. The changes include an increase in the corporate tax rate to 25 percent from 20 percent over the next four years.

Projects Shelved

As costs rise, the mining industry has revised or postponed about 40 percent of the $110 billion of projects under consideration in Chile, according to data compiled by industry group Sonami. Chile has the world’s largest copper reserves, followed by Peru.

The country’s copper exports have stalled over the past three years at about $3.5 billion a month, or one third of the world’s supply of the metal.

Peru, now the world’s third-largest copper producer, said output jumped 20 percent in January to 111,855 metric tons. Peru’s economy will grow 5.5 percent this year on the mining boom, even as growth in the region slows, the World Bank said.

Peru has “definitely got more attractive in many ways whereas in Chile power and water are now major issues,” said George Cheveley, a portfolio manager at Investec Asset Management Ltd. who helps manage $3.5 billion in commodities and natural resources stocks. “Chile is still a very good place to invest, but Peru has improved quite a bit.”

Power Constraints

Environmental and community groups have managed to stop coal-fired power generation projects belonging to Empresa Nacional de Electricidad SA, GDF Suez and Brazilian billionaire Eike Batista. Power project obstacles have prompted miners including Antofagasta, BHP and Codelco to invest in their own sources of energy to avert a power crunch in years to come.

“Power costs are much higher than the rest of the region and other mining jurisdictions,” Felipe Diaz, vice president of Latin America project finance at Sumitomo Mitsui Banking Corp. said in an interview. “We don’t see that being resolved in the near future.”

The cost of mining has more than tripled in Chile since 2003 to $2.23 a pound of copper in 2012, according to Chile’s Mining Council, which represents large miners such as Anglo American Plc and BHP. While the increase reflects the global average, Chile was 5.7 percent less competitive than the world average from 2009 to 2012, compared with the period of 2003 and 2008 when it was 11.5 percent more competitive, the council’s data show.

Growth Focus

To be sure, miners prioritized growth over cost efficiency to boost output amid surging demand from China, said Juan Carlos Guajardo, head of copper study group Cesco, which held a dinner for executives in Santiago yesterday.

“The industry put too much attention on growth during the boom period and relaxed some controls in management,” Guajardo said in a Santiago interview. “It’s necessary to balance the need of growth and efficiency. This is a challenge for management.”

Falling ore grades and inefficiencies, particularly among contractors, are contributing to Chile’s slide down global competitiveness rankings, Beaven said. Chilean mine workers get paid more than U.S. counterparts and produce about 30,000 tons of ore a year, less than half counterparts in Canada and the U.S. Chile can boost productivity with training, Beaven said.

“If we don’t have a skilled workforce, we aren’t going anywhere,” he said.

Melbourne-based BHP is spending more than $3 billion to boost productivity at Escondida, the world’s largest copper mine that it owns in the Atacama Desert.

More Equality

President Bachelet took office last month on a promise of improving education and boosting social spending to reduce inequality in the South American country. Chile has the highest income per capita in Latin America based on purchasing power parity, with $19,105 last year, according to the International Monetary Fund.

“In Chile today the government has stopped thinking that economic growth is the only compass dial,” Williams said. The government is still committed to helping the industry by lowering energy costs and redesigning new investment-friendly laws, she said.

Mining has grown in importance in Chile as prices more than tripled since 2003. The industry accounted for 18 percent of GDP on average between 2004 and 2011, compared with only 7 percent between 1996 and 2003, according to the Mining Council. Mining accounts for about 60 percent of exports, it said.

Codelco Funding

Bachelet is committed to seeking new finances to underpin investments needed by state-owned Codelco, the world’s largest copper producer, Williams said.

Codelco, which hands all of its profits to the government, needs yearly injections of fresh capital to carry out needed investments of more than $4 billion a year, Chief Executive Officer Thomas Keller said yesterday.

Without the investments, Codelco will lose its No. 1 ranking and output will fall to less than half at aging mines.

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