Chile Mining Report Q4 2008

Operations at state-owned Codelco, the world's largest copper miner, were disrupted in April and May by a 20-day strike by subcontracted workers over pay and working conditions. The strike, which affected three of Codelco's divisions, was resolved on May 6 by a government deal, which includes a CLP500,000 (US$1,067) bonus payment for workers and an agreement by Codelco to hire many subcontracted workers as permanent employees. While the current unrest appears to have passed, future industrial action remains possible. At the end of April, two weeks into the strike, Codelco announced lost production of 19,000 tonnes of copper worth an estimated US$100mn.

Chile's copper production will increase by 5.5% this year to around 5.9mn tonnes (up by 300,000 tonnes) according to forecasts announced in April by Chile's copper industry association, SONAMI. Output in 2007 grew by 3.8% to 5.588mn tonnes. SONAMI also expects continued growth to take production to 6.1mn tonnes in 2009. SONAMI forecasts average copper prices in 2008 of US$3.30/pound which is lower than the US$3.52 averaged in Q108 and expects this gradual decline to continue, with prices between US$2.0 and US$2.50 per pound by 2012. However, these price forecasts are heavily dependent on the performance of the US economy. Copper output fell 5.6% year-on-year (y-o-y) in April to 435,132 tonnes, largely as a result of the strike action at Codelco.

Chile is the global copper capital, accounting for about 35% of the world copper output. Besides copper, the Chilean geology also hosts other significant metals and minerals including gold, silver, molybdenum, lithium, zinc and iron ore. In fact, gold exploration and mining in the country has also picked up steam in recent times, widening the prospects of the Chilean mining industry. Moreover, the country's mining industry highlights its importance for Chile's economy by contributing in double digits to its GDP.

Chile has not only made a mark by fully leveraging its natural resources to its advantage, but also by gradually establishing firm rules and standards for protecting its environment and human rights in the context of democratisation and globalisation. However, it must still overcome challenges such as guaranteeing energy and water supplies to the mining industry. That said, the overall economic environment of Chile is notably conducive for business: lower labour costs, investor friendly laws and free-trade agreements (FTAs) with major economies around the world. In particular, attractive foreign investments have helped the Chilean mining industry gain a strong momentum over the last few years.

A new Chilean mining law is on the anvil that seeks to further streamline the processes for better management of natural resources. Under the new law, mining and exploration companies will have to declare their reserves and resources, and report drilling results. The law also aims to facilitate funds for mining projects across the country. Besides the mining law, the Organic Constitutional Law on Mining Concessions (1982) and the Mining Code of 1983 are the two key mechanisms governing mining activities in the country.

Industry Forecast Owing to its rich geology, the Chilean mining industry is expected to continue deriving benefits from high metal prices. According to this report, the industry is forecast to grow at an average of 3.8% per annum over 2008-2012.

At the present time, the ongoing economic crisis gripping world markets is continuing to play out. BMI is choosing to wait until the Q109 reports to carry out a comprehensive review of its mining sector reports, in light of the current economic difficulties.