Chile’s national lithium strategy brings risks and opportunities

On 14 June 2023, the Chilean government presented its National Lithium Strategy. State-run mining companies are already negotiating its presence in ongoing contracts, while new bids for private companies to exploit lithium reserves will be open in 2024 first semester.

Two months ago, President Gabriel Boric announced his lithium policy in a televised address. On that occasion, Boric added symbolism to his announcement, citing nationalisations in the copper industry by leftist governments of Eduardo Frei Montalva and Salvador Allende in the 1960s and 1970s as milestones for the country. International media coverage was mostly negative at first, framing the new policy as ‘nationalisation’. Most local pro-business lobbies and the right-wing opposition criticised it too, calling it over-regulation.¹

The government will create a state-run lithium company and it is renegotiating standing deals with private companies so that the government has a majority stake in projects labelled as ‘strategic’. Furthermore, the government will work so that more lithium is manufactured in the country and less water is generally consumed in lithium mining.

Despite the regulatory challenges, Chile’s new strategy might also present opportunities for investors in a market that currently has only two private companies – Chile’s SQM, which is partially Chinese-owned, and US firm Albermale.

What has been announced for the government so far?

According to a document released by the government, the new policy will aim to:²

• Produce more lithium through joint-ventures with private investors.
• Observe sustainability requirements agreed upon with local communities and environmental regulators.
• Foster added value in the lithium supply chain through steps like producing lithium cathodes or lithium-ion batteries.
• Promote research and development by creating a Public Institute of Lithium and New Technologies in the northern port city of Antofagasta.

Let us break down the regulatory and political risks and opportunities hidden behind the official jargon.

New and renegotiated exploration contracts

Chile has approximately 60 salt flats beyond the one where exploration is currently permitted, and the government’s new guideline states that more will be opened for exploration, after a period of analysis and consultation with local communities. Those salt flats that the Chilean government considers that can be exploited will be granted to private concessions in 1H24.

This year, the national government will grant concession to lithium mining to the state-run companies Codelco and Enami.³ Copper giant Codelco already started negotiations with SQM and Albermale about participating in the ongoing exploration in the Salar de Atacama.⁴ SQM’s leases 75% of the salt flat under a contract that ends in 2030, while Albemarle leases 25% of the salt flat under a contract that ends in 2043. Boric said the flat is strategic, so the government will aim to become the largest shareholders in exploration.

Mining litigation expert Daniel Weinsten told Southern Pulse that the renegotiations might be complex and could take years. In the meantime, he said new companies have opportunities to invest in what has been a considerably closed Chilean lithium market.

Chile has the best conditions in the world for lithium production due to the purity of the lithium extracted and the short distance between the salt flats and the ports. Joaquin Baraño of think tank Pivotes.cl told Southern Pulse that overly strict regulation could hamper new business.⁵ Baraño believes it would be wisest to move quickly and try to take advantage of the current high lithium prices. Today’s prices are approximately US$38 000/t, down to the US$59 000 peak reached last year.⁶

The role of state-run mining companies

Boric’s goal of creating a national lithium company requires 66% support in both houses of congress. The government’s failure to pass tax reform shows it does not have these votes, and opposition leaders have already signalled they will not support this initiative.

The state copper company Codelco created two new branches for lithium exploration and exploitation: Salares de Chile and Minera Talar.⁷ The state-owned mining company Enami will pursue partnerships for the Cinco Salares project, and it has created the subsidiary Enami Lítio.⁸ Marcelo Mena, the environment minister during Michele Bachelet’s centre-left administration, told Southern Pulse that Codelco is capable of representing the Chilean government in carrying out its lithium strategy before there is a new state company.

Still, mining industry expert Enrique Reichard, who has experience in the private sector and at Codelco itself, told Southern Pulse that the company would have a long learning curve in lithium. It also carries productivity problems typical of a state-owned company, such as an inflated number of employees.

In recent years, Codelco has suffered financial losses due to a drought, project delays, and the low grade of copper. Codelco has held a concession to explore lithium in the Salar de Maricunga since 2016, but has yet to begin doing so. Some more optimistic sources pointed out that Codelco has a competent team of executives and experts who may be able to implement the company’s new role as a lithium producer too.

Potential of value-added products, including car batteries

On 21 April 2023, Chile’s economic development agency Corfo announced a deal with China’s BYD to build a US$290 million lithium cathode factory in Antofagasta.⁹ According to current lithium contracts in Chile, 25% of the lithium produced in the Salar de Atacama is sold to Corfo at reduced prices. It will become the raw material for the partnership with BYD.

Our sources are sceptical about the production of electric vehicle batteries in Chile. Lithium makes up only 3% of a vehicle battery, which importing cobalt from the Democratic Republic of Congo and nickel from Indonesia would be necessary.¹⁰ Furthermore, Chile does not currently have a specialised labour force for battery production. As a point of comparison, today’s leading lithium producer Australia has recently announced a similar policy to manufacture its rare minerals, and might face similar obstacles to set its domestic industry.¹¹

Risks associated with environment and local communities

The government’s goals of using less water in lithium mining and preserving the biodiversity of the salt flats will require legislative approval and thus support from the opposition in Congress.

Former Corfo vice-president Luis Sandoval noted in an interview that environmental, territorial and health permits for large projects in Chile take five years on average and that many new regulations have been added in recent years. A delay on defining environmental regulations could delay the start of new lithium projects.

Local communities affected by mining in northern Chile and environmentalists argue that government institutions are weak to oversee large companies.¹² Former Minister Mena said that the Supreme Court has already annulled projects in which indigenous communities were not previously heard according to the due process.

Southern Pulse’s analysis

Chile’s National Lithium Strategy does not resemble 20^th century left-wing expropriations in the region, such as what Hugo Chávez did to foreign oil companies, Cristina Kirchner did to oil firm Repsol, Evo Morales did to foreign energy companies.¹³

Boric’s lithium policy is rather a continuation of the centre-left Bachelet reforms, which aimed to develop the northern region and to create more high-quality jobs.¹⁴ It looks more like a Keynesian industrial policy than a populist takeover.

One indicator of Boric’s moderation was that he disregarded calls by lawmakers from the left wing of his coalition for 100% government control over all lithium mining. Instead, the new policy presents chances for new companies to invest.

The biggest risk for Chile’s lithium sector is missing out on a far bigger lithium export boom due to the number and nature of regulations that could delay new projects.

References

Available on request.

Read the article online at: https://www.globalminingreview.com/special-reports/14082023/chiles-national-lithium-strategy-brings-risks-and-opportunities/