Under the proposed plan, companies seeking to exploit lithium deposits in Chile, like those in Salar de Atacama shown here, will have to give the government a majority stake. |
Chile's plan to nationalize lithium reserves leaves current operators with limited choices and puts new foreign investment on hold as companies await details from the government,
Chilean President Gabriel Boric announced April 21 that the state will take a majority stake in all new lithium projects and in all new contracts for existing projects,
Chile is the world's second-largest lithium producer, and market participants eagerly sought to extract lithium ore and sell it to a growing global market for rechargeable batteries. But Chile's sudden move toward nationalization has suspended those plans as investors wait to find out how active a role the state will play in decision-making and how it will contribute to investments and expenses.
"This could delay the volume [output] that is expected from Chile because the state is not moving, and the private sector will not want to invest until all these rules are outlined," César Perez-Novoa, BTG Pactual's analyst for Chile, told Commodity Insights.
Under Boric's proposal, Codelco and state-owned Empresa Nacional de Minería (ENAMI), which partners with small miners, will also be in charge of expanding the state's lithium production and deciding which projects can be developed through public-private partnerships.
New lithium exploration contracts will be awarded through public tender, and private companies that win contracts will get first rights to partner with a state-owned company to extract the ore.
Market participants said Chile could still benefit from its vast lithium reserves if it establishes clear guidelines for the new policy.
"If you look at African nations, most of them impose high taxes and carry high interest in projects in their countries. But still, foreign investment is quite significant. ... So it's not necessarily the high tax or high government interest that drives away mining companies or explorers. It is the uncertainty that's problematic," said Siddharth Rajeev, head of research at Fundamental Research Corp.
Miners cautious
The new policy requires the country's two largest producers in the Salar de Atacama, North Carolina-based Albemarle Corp. and Santiago, Chile-based Sociedad Química y Minera de Chile SA (SQM), to partner with state-owned Codelco after their current contracts expire. Albemarle's contract expires in 2043, while SQM's contract expires in 2030.
Both companies have given limited comments on how the new policy will affect their investments in the country.
"We will continue to work with the Chilean government on the proposed national lithium strategy," Albemarle said in an email. "We share many interests, including how best to grow the lithium market and deploy new sustainable technologies."
SQM said in an email that it will be analyzing the new policy and hopes the new strategy will "boost Chile's productive growth."
Industry participants said such policy uncertainty makes investors take a wait-and-see stance, especially since the government has also delayed a vote on an increased copper and lithium royalty.
"All [this policy] does is bring risk to the companies that operate there. ... Ironically, on the inverse, it's good for the price of the underlying commodity because it takes trusted supply off the market," said Will McDonough, CEO of EMG Advisors, an asset manager focused on energy transition metal miners.
If the proposal for a new state-owned lithium company, which will handle value-added projects, is passed by Congress and enacted into law, Chile will still have to overcome numerous hurdles.
The state has limited experience in the lithium industry through Codelco, and even the Boric administration said the company will need partners with technical know-how, Willy Krach, Chile's mining undersecretary, said in September 2022.
"The private sphere will not look favorably at this news, considering it has greater knowledge and flexibility than the state, in addition to technical experience in the industry, which does not exist in the state," Carlos Araya, chairman and president of Chilean junior lithium miner Llamara Group, told Commodity Insights.
"It is not attractive to give your experience, technology and money to a less-prepared partner," Araya added.
Having the state control taxes and royalties but not taking administrative control in partnerships would be ideal, Araya said.
McDonough and Araya both said China-based companies will likely be the most interested in working with the Chilean government. Chinese companies "can zoom out and take that long-term view, and [US companies] haven't proven the ability to do that or the willingness," McDonough said.
Chile's Mining Ministry did not respond to requests for comment.
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