The news has slipped past most investors, but the copper mining interests of BHP, Rio Tinto and South 32 looks like they will escape any punitive new taxes from the leftist government of Chile.
A major tax reform package died in the Chilean parliament in early March when it didn’t get the necessary votes for approval.
And on Tuesday Chile’s Finance minister made it clear that other parts of a mining royalty bill still before the parliament will be watered down after criticism from the country’s mostly copper based mining sector.
BHP controls Escondida, the world’s biggest copper mine. It lies in northern Chilean in the Atacama Desert, where much of the country’s huge copper wealth is found. Rio Tinto owns a minority stake in Escondida, along with Japanese metal smelters.
BHP also has two other copper mines in Chile – Spence and Cerro Colorado (grouped together as Pampa Norte). South 32 also owns a stake in a Chilean mine – 45% of the Sierra Gorda mine in the north.
The mining royalty bill is part of the government’s ambitious tax reform package meant to finance key elements of President Gabriel Boric’s progressive agenda, but lawmakers shelved the tax reform bill earlier this month.
The government’s tax bill was rejected on March 8 after it fell short by one vote to win approval. it only gained 73 votes, failing to reach the necessary 74 votes for approval as three lawmakers abstained.
The rejected tax bill had aimed to generate revenues of 2.7% of GDP over four years via measures including a wealth tax, changes to corporate taxes and administrative measures.
The bill was recently revised, reducing its envisaged revenue benefit by 0.5% of GDP. Overall, the rejected bill represented the majority of total expected revenues from the revised tax reform, with the mining royalty bill, which is still being debated in the Senate, providing the rest.
Now the mining bill is being wound back, according to Finance Minister Mario Marcel.
He said on Tuesday that certain limits that do not alter the bill can be modified during the legislative stage.
“One of them is to make up start-up expenses as a cost for the calculation of the adjusted mining operational taxable income,” Marcel said, adding this change would leave the mining operational income calculation “as it currently works with the specific tax.”
Another adjustment would be to establish a limit to the potential tax burden for the combination of various taxes, which would give “greater security or predictability to collection.”
On top of these changes, Marcel said companies with operating losses would be exempt from the ad valorem component and “when there is a very low or close to negative profitability, the same ad valorem component is also adjusted.”
With the latest adjustments, the royalty would have a fixed “ad valorem” component of 1% on copper sales and a part between 8% and 26% that depends on the mining operating margin.
Marcel clarified that although the project initially included lithium, it has since been left out since current contracts with a state development agency have better collection rates. That will benefit SQM, the world’s most profitable lithium producer.
Chile, the world’s largest copper producer, hosts a number of mining giants like BHP, Antofagasta, Glencore and state-run Codelco.
The industry has criticised the initiative, saying it could affect investment at a time when several deposits are facing a drop in mineral grades and require an influx of capital to maintain their production levels.
Codelco, the state-owned copper giant (and the world’s biggest copper producer) needs to invest more than $US40 billion in coming years to upgrade its mines, smelters and refineries.
Fitch Ratings says the defeat of the wider bill and mooted changes to the mining royalty bill will add to the financial pressures on the Chilean government which has yet to see any wins on its broad agenda.
President Gabriel Boric “has yet to deliver on his reform agenda amid ongoing political gridlock,” Fitch pointed out in a report on the tax law changes.
“The government has announced that it is in internal discussions to determine how to advance its agenda. In relation to tax reform, the authorities have indicated that the rejected bill will not be revived, but they plan to consult with economic, social and political groups and present a new bill to Congress after the election of members of the new constitutional council in early May 2023.
“We think the government’s proposals would probably need to be further diluted to gain enough support for approval,” Fitch added. Good news for BHP and the other miners.
On the ASX, BHP shares rose 0.7% on Wednesday to $43.84.
