Photographer: Andrey Rudakov/Bloomberg

Iron Snafu Seen as Cautionary Tale in Mining-Friendly Chile

  • Finance minister resigned over controversy surrounding Dominga
  • Andes Iron can still appeal rejection of its $2.5b iron mine

Chilean authorities’ handling of an iron-ore project has stoked a political storm that cost the jobs of two ministers. The industry hopes it will help keep politics out of projects in the future.

In a country boasting strong institutions and clear rules of the game, the way in which the government blocked the $2.5 billion Dominga project even after it was backed by regulators is sounding alarm bells in the industry.

The company behind the project, Andes Iron, said ministers rushed the process to serve a political agenda -- former President Sebastian Pinera once held an indirect stake in the project, as did an entrepreneur now facing bribery charges. On Thursday, Finance Minister Rodrigo Valdes and Economy Minister Luis Felipe Cespedes resigned after President Michelle Bachelet signaled her support for rejecting the project on environmental grounds.

“A political committee just can’t have the final say in a project where 99.9 percent of the variables are technical,” Marcelo Awad, head of Chilean operations at Wealth Minerals Ltd. and former chief executive officer of Antofagasta Minerals SA, said by telephone. “This will set a precedent so this never happens again.”

The government is open to reviewing how environmental institutions work, Bachelet told executives Thursday in a speech at the annual dinner of mining association Sonami in Santiago. "The institution is perfectible," she said.

Located about 30 kilometers (19 miles) from the Humboldt Penguin National Reserve in northern Chile, the Dominga project raised environmental concerns when it was first presented in 2011. Yet, the local environmental authority recommended approval.

The project caught the Chilean public’s attention in February when Pinera’s previous involvement surfaced. The controversy grew when it was revealed that President Bachelet’s daughter owned land 12 kilometers from the project. 

“The stability of rules is key to investors,” Diego Hernandez, president of mining association Sonami, said in a speech Thursday. “Chile’s appeal as a mining country has progressively deteriorated and having abundant resources is not enough to attract investment anymore.”

Jobs Versus Environment

A month later, the local authority rejected the project on environmental grounds and last week the ministerial committee did the same after just two days of reviewing documents. Andes Iron has said it will appeal to an environmental court.

“This looks more like a political decision than a technical one,” Christian Duran, lead partner of mining at Deloitte in Chile, said by telephone from Santiago. "I hope decisions that generate such controversy don’t happen again and there’s more good sense in the future."

Underpinning the controversy is a debate over economic growth versus environmental protection. The decision on Dominga came as the biggest copper-producing nation starts to see signs of recovery after a painful commodities downturn.

Only days before the ministers’ rejection, BHP Billiton Ltd. pulled the trigger on a $2.5 billion expansion of its Spence mine and copper production was up in July from the previous year for the first time since January 2015.

“A sustained advance to faster levels of growth requires discipline and conviction in the government and the opening of new spaces where the private sector can use its initiative with clear and stable rules,” Valdes told reporters Thursday as he resigned. “But I didn’t manage to get everyone to share that conviction.”

China Talks

To be sure, it’s not the first time politicians have stepped in to block already approved projects. In 2010, President Pinera himself requested France’s GDF Suez to find a new location for a planned 540-megawatt power project.

Dominga was expected to extract 12 million metric tons of iron ore and 150,000 tons of copper concentrate a year. Andes Iron said the low-cost, high-grade operation would generate $500 million in earnings before items. The company said it was in advanced talks with a Chinese and Japanese group to finance the project when it was rejected.

“Dominga has been the last straw for a government struggling to understand that without growth there is no equality or wealth distribution," Francisca Perez, a senior economist at BCI, said by telephone from Santiago. "This is a call for attention that we should go back to what we’ve done well over the last two decades: being technocrats and planning for growth."

(Previous version of this story corrected second name of economy minister in third paragraph)

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