The draft proposal of the new constitution is now complete, and enters a phase of fine-tuning.
On May 14 Chile’s Constitutional Convention plenary settled on the final version of the proposal for a section in the forthcoming new constitution dealing with environmental and natural resources issues. This is the section that is expected to have most impact on the mining sector, and as the dust settles the overall verdict among sector specialists is that it is fairly similar to the existing regime.
To the great relief of many in the mining industry the final proposal did not include clauses directly calling for nationalization or expropriation of mines and deposits, and the plenary rejected a controversial clause, Article 27, that called for property titles to be temporary and subject to secondary laws that would establish the conditions for their revocation or renewal.
However, some of the approved articles remain open to interpretation, such as Article 22, which states that “exploitation, exploration and use of [mineral] substances will be subject to a regulation that takes into account their finite, non-renewable nature, of public, intergenerational interest, [as well as taking into account] environmental protection.”
“This could mean nothing, just like many other things in the current legal system that today are merely declarations of principle, but tomorrow the idea of having to leave mineral resources for our children – intergenerational – could open the door to dictating laws that establish production quotas,” Chilean mining lawyer Daniel Weinstein told Chile Explore Report.
Also, many in the mining sector were hoping that the environment committee would submit the articles in the form of a Mining Statute, which as part of the new constitution could be relatively immune to future modification. However, many of the issues in the final proposal are dependent on secondary laws that in the future can be modified by bills in the traditional manner, reflecting the prevailing political will at any particular time.
“This leaves the door open to regulating key matters, such as property, indemnification for expropriation, the concessional system etc. by a simple law,” Weinstein noted, adding that “the most important matters did not make it to the final draft, and with the plenary rejecting the core proposal of the Mining Statute, constitutional regulation of the mining sector was basically reduced to just a few articles.”
“It is not clear what the implications of this void in the constitutional regulation will be for the future of mining activity. In theory, laws not included in the draft constitution can be established or amended by a simple majority of congress. Therefore, there could still be a law declaring that copper can only be exploited by the government, for example. And the protection of title holders’ rights could be amended or abolished by occasional majorities in congress,” Weinstein affirmed.
Representatives of the small miners’ association Sonami, the mining council, the mining chamber and Weinstein himself have publicly indicated that this aspect
contributes to legal uncertainty that Chile can ill afford in the global economy.
To a great extent, mining firms weigh up projects around the world primarily in terms of geological potential versus legal certainty, Weinstein pointed out. “Chile’s geological potential is not that great, because it has been extensively explored, but until now it has had the advantage of legal certainty,” he said, adding that issues like the lack of a permanent statute and the ongoing discussion to modify the royalty regime could tip the balance.
One strategy open to mining companies is to use international investment treaties as a hedge to decrease the uncertainty, Weinstein suggested, adding that some juniors have asked him for advice in this regard.
Among the approved articles in the draft constitution were proposals to the effect that the state would commit to protecting the interests of small and artisanal mining operations; that the financial burden of repairing damage to the environment from mining activity will fall on the company responsible for that activity; and clauses banning mining altogether in glaciers, protected areas, and areas subject to laws protecting water resources.
The environment sub-committee within the Convention was the final committee to submit its proposal, and the entire draft constitution will now be studied by a “harmonization” committee to ensure that all the proposals are legally sound. Two other committees will determine how best to transition to the new set of rules.
ROYALTY, PATENTES STILL UP IN THE AIR
While the new government has agreed that the attitude within the Constitutional Convention goes against its pro-mining stance, it has also stressed that it is unable to meddle in the process to draft the new Magna Carta.
In a recent article, mining undersecretary Willy Kracht nevertheless clarified that the government, and the sector itself, will be involved in the discussion to modify mining norms in line with whatever guidelines are laid out in the new constitution.
What is not clear is whether the new constitution will have an impact on the recent law raising the cost of permits (patentes) or on eventual modifications to the royalty rules, should the ongoing royalty discussion lead to a law ahead of the new constitution being passed.
“It would be naive to think that, as the draft constitution barely changes the current state of things, changes will not happen [later on],” according to Weinstein.
Given that one of the accepted articles highlights the state’s obligation to support small miners, the February change to the mining code that raised the patente fee to 3/50 UTM (US$4.1) per hectare from today’s rate of 1/50 UTM per hectare could be a sticking point.
Although all parties agree that the measure should
With the core proposal of a Mining
Statute rejected, the door is open to
regulate key matters by simple law
prompt a number of firms to sell off properties that are being held speculatively, Weinstein thinks this is not an issue for most of the majors, which can easily afford to continue renewing their unused permits. On the other hand, much like the point about legal certainty, the new patente rate could be enough to tip the balance for exploration juniors, not only local firms but also those registered abroad. “I’ve advised a number of small firms and they are very worried about this,” he said, adding that the royalty issue too could be enough to force firms registered in Canada to prefer North American projects which can be dealt with through local offices and legal advisors.
The government has also expressed an interest in encouraging exploration in Chile, and for Weinstein that means creating an environment that is attractive for future entrants, rather than setting policies based mainly on the majors that are already operating here.
This echoes the point made recently by Scotiabank analyst Jorge Selaive, that the government’s plans for financing pension, health and education reform were drafted using an out of date copper price (the September 2021 reference price set at US$3.31/lb), which makes royalty modifications appear necessary when in fact the current high prices are sufficient.
This could be why Cochilco recently updated its copper price estimate to US$4.40/lb for 2022 and US$3.95/lb for 2023. However, it remains to be seen whether the government will adapt its copper reference price to Cochilco’s recommendation.
One other issue on the horizon is a US-Chile tax treaty that has been pending since 2010. US mining firms recently called for the US senate to finally sign the agreement, possibly spooked by Chile’s royalty discussion. However, Weinstein thinks this could have more to do with double taxation, with US taxes being applied to their operations in Chile, as the mix between royalty and other taxes remains undefined both in the royalty discussion and the new constitution.