Chile’s November Elections: Outlook for the Mining Sector

Chile, the world’s largest copper exporter, will hold presidential, congressional and regional elections on 19 November 2017. Although the country’s political landscape has significantly shifted this year, the mining sector will remain at the heart of Chile’s economy through at least the medium term, regardless of the elections’ results. The media has mostly focused on the presidential race, as the next administration will play a decisive role in shaping the country’s economic outlook over the next four years.

A candidate needs to receive over 50% of the votes in order to win the presidency on 19 November. If that threshold is not met, the top two leading candidates will face each other in a run-off on 17 December. (In either case, the next president will take office on 11 March 2018.) Under Chilean law, presidents cannot serve consecutive terms. Thus, outgoing center-left President Michelle Bachelet is not a candidate, and indeed her Nueva Mayoria congressional coalition has completely unraveled.

Three main contenders have emerged in Chile’s new political landscape. Right-wing former President Sebastian Pinera – who served from 2010-2014 – is backed by the conservative Chile Vamos coalition. Senator Alejandro Guillier is running as a center-left independent, with Bachelet’s support (although that no longer carries much weight). Lastly, journalist Beatriz Sanchez is running under the recently formed Frente Amplio (FA), a small left-wing coalition that is gaining momentum. Pinera has a substantial lead in the polls, with more than 30% of voting intentions, compared to Guillier’s 15% and Sanchez’s 10%. While Pinera is unlikely to attain an initial majority, he is likely to win any run-off, particularly with low voter turnout (as is widely expected).

Proposals for the mining sector

The three main candidates strongly disagree on how to manage the mining sector. Pinera, who has proposed modifying Chile’s environmental laws to boost economic development, is investors’ clear favorite. Among other incentives, the billionaire former president favors streamlining the permitting process for new mines.

Meanwhile, Guillier is trying to gain traction with a pro-business tone, albeit one advocating for inclusive economic growth. His administration would assertively promote domestic value-addition in the mining sector. Indeed, Guillier’s campaign is even considering modifying FTAs that he claims incentivize the export of Chile’s raw ore rather than refined copper products. He has also pledged to accelerate the environmental permitting process for mines.

By contrast, Sanchez has promised to raise $1.8-2.5bn from new mining taxes in order to overhaul Chile’s pension system. Openly skeptical of foreign mining firms, she wants state-owned copper company Codelco to play a larger role in the sector. Political risk in Chile would significantly rise for foreign mining investors under her presidency.

The Dominga controversy

The government’s recent controversial rejection of the Dominga mining project serves as a cautionary tale for the sector’s possible future under another leftist president. The proposed $2.5bn iron and copper mine and associated port would have brought much-needed investment and jobs to the Coquimbo region, but it posed significant environmental risks to a nearby natural reserve, as well as health risks to the local population. (Notably, most of these risks stemmed from the port, not the mine.)

Although municipal authorities approved Dominga, the project did not pass the regional government’s environmental impact review, and the federal government subsequently confirmed that decision to reject it. However, the issue was so divisive that it split Bachelet’s cabinet; she sided with the ministers of environment and health against the ministers of energy and mining. Bachelet’s top economic team then resigned in protest, publicly doubting the administration’s commitment to economic development and alleging political interference in what should have been a purely technical matter.

Pinera has severely criticized the administration’s dysfunctional behavior regarding the project, and Guillier has acknowledged that Dominga has been poorly managed. In our view, Dominga would almost certainly be approved with minimal or no adjustments under Pinera, and would have perhaps a 50-50 chance under Guillier, pending modifications. The project would have no virtually no chance of proceeding under Sanchez.

Other factors affecting the mining sector

Of longer-term concern, productivity has been declining at many flagship mines, as much of the top-quality ore has already been extracted. Meanwhile, the mining sector faces persistent water shortages in the arid north, as well as recurring labor unrest as contracts are renegotiated.

On the positive side, international copper prices have slowly been rising, largely due to renewed demand from China. This may spur firms to reactivate moribund projects and increase investments – provided that the level of political risk is acceptable (i.e., under Pinera or perhaps Guillier, but not Sanchez). Higher prices will also aid Codelco, and by extension the Chilean government, which draws 20% of its revenue from copper.

Additionally, regardless of the election outcome, the sector will benefit from cheaper, more abundant power, particularly near northern mining operations. Indeed, Pinera, Guillier and Sanchez seem to be in broad agreement on the need to expand the country’s renewable energy generation. In a turnaround that was nothing short of extraordinary, in 2014 Chile went from facing a long-term energy crisis to having an abundance of renewable energy by 2016. Chile now has approximately two and a half times as much installed solar capacity as the rest of Latin America combined. Concentrated in the extremely sunny Atacama Desert (in the north), these mega-scale projects increasingly outcompete thermoelectric plants without any subsidies.

Source: Chilean National Energy Commission, Association of Chilean Generators

Wind and geothermal power have also been growing rapidly throughout Chile, and renewable energy sources now comprise 45% of the total installed power supply. The sizable project to connect the country’s northern and central electricity grids is well on track to finish by the end of 2017, which should lower rates and improve reliability for all end users. Additionally, cheap energy somewhat ameliorates the high cost of desalinating seawater and transporting it to remote, high-elevation mining operations.

Overall assessment

Shortly before the Dominga debacle, the government forecasted that Chile will receive $65bn in mining investment over the next decade – almost one third higher than its previous estimate. However, the real total will depend to a large degree on political risk. In our view, the only way to fully counteract Dominga’s chilling effect on mining investment would be if Pinera were to win the presidential election. Since that is the most likely scenario, and copper prices continue to rise, we believe that the outlook for Chile’s mining sector is notably positive for the next few years.