An Australian company spun off from mining giant BHP Group is making a sizable bet on Chilean politics.
South32 agreed to purchase a 45% stake in the Sierra Gorda mine for US $ 1.55 billion. The deal comes as Chilean lawmakers are evaluating a new royalty that would create one of the heaviest tax burdens among major mining nations. Companies like BHP have said that the royalty, which has already been approved by the country’s Chamber of Deputies and is now in the Senate, would hold back future investments.
South32 negotiated compensation from the seller Sumitomo in relation to possible changes in the Chilean tax regime up to an agreed limit that was not disclosed.
However, the Perth-based company’s foray into Chile can be seen as a gamble that the royalty bill will be moderated to keep the industry competitive. That position was expressed last week by the executive president of Antofagasta Minerals -a company linked to the Luksic group- Iván Arriagada, who said in an industry forum that a deeper discussion in the Senate committees has led to a more moderate view.
You may also be interested: Polish KGHM and mining royalty: “It seems that this project will be significantly modified”
Tax reform does not emerge from a vacuum. Chilean politicians seek a larger share of commodity windfall gains as voters turn away from conservative parties after inequalities sparked a process to draft a new constitution before the presidential elections next month. All of that can lead to stricter regulations around water, mineral and community rights.
South32 believes that the auspicious prospects for metals in a global shift to cleaner energy outweigh Chilean political risk. Companies such as Freeport-McMoRan and Lundin Mining have said they will delay investments in Chile until there is greater clarity around regulations.
The Sierra Gorda joint venture, in which KGHM Polska Miedz also has a stake, has performed better after years of losses due to low prices and irregular operations. Sumitomo had noted that last year it considered exiting the joint venture.