Lithium Industry Keenly Awaiting Potential Chile Regulation Change

With both the United States and China adopting strategic initiatives to actively subsidize and promote the electric vehicle industry within their countries, the top producing lithium country poses impediments.

Last week, the top lithium mining companies urged Chile to overhaul regulation to allow them to increase output of a metal seen booming in coming years anticipating a larger scale adoption and demand of electric cars and lithium batteries.  Chile is currently the primary global source of lithium production derived from its continental brine deposits.  The Salar de Atacama is the location of the world’s largest lithium brine mine operated by Sociedad Quimica y Minera (NYSE: SQM).  This salar is also the site of a productive lithium mine operated by Rockwood Holdings (NYSE: ROC) the parent company of Chemetall, which is a diversified manufacturer and marketer of specialty chemicals. Chile has set output limits for lithium producers SQM and Rockwood Holdings.  SQM has the capacity to produce around 40,000 tonnes of lithium carbonate per year and already accounts for 31 percent of global lithium output.  As recent as late last month, the company said it is talking with several Japanese automakers about their lithium requirements.

The government wants the industry to grow; however, opposition has said the state should keep its tight grip over an industry that could bring billions of dollars in revenue in the future.  Mining Minister Laurence Golborne said he would like the lithium industry to grow in coming years, signaling reforms to current legislation that could open the industry to other players, including top copper producer Codelco.  The government is preparing a series of workshops and meetings to discuss these next developments in terms of lithium, supporting the idea of entry to an open market. This is coupled with the explicit support to reform public-law to remove the character “strategic reserve” of lithium.  This decision to open the private business of lithium is a measure that has been applauded by miners and experts.

The head of Chemetall, Monika Engel-Bader said Chile should do more for companies to secure new concessions and speed up permits, “For further growth we need long-term stability on mining rights”.

Patricio de Solminihac, Vice President of SQM, has said regulation thwarts key growth opportunities as demand for electric cars grows, “If we don’t continue to move forward, we will lose our leadership and a great opportunity.  Because of these restrictions we have not been able to convince the (car) industry that we are a reliable source in the long run.”

Historical Context

Interestingly Chile has always scored relatively high in the Fraser Institute annual Survey of Mining Companies, this year placing seventh overall as a top mining jurisdiction in the world; and the only Latin American nation listed among the top ten.  Legislation from the 1970s has restricted lithium concessions and declared the metal a strategic resource because of its possible military uses.

Current Administration

These recent developments follow closely news from last month that involved plans from Chilean President Sebastian Pinera to revive legislation to boost taxes on global miners.  Mr. Pinera is a self-made billionaire who favors the private sector as the motor of the economy and surprised the mining industry with plans to raise royalties to help pay for rebuilding cities ravaged by a massive earthquake towards the end of February. His plans were rejected by Chile’s Congress leaving a $1 billion deficit in government plans for reconstruction spending. Ministers had wanted to increase the 4-5 percent royalty to 4-9 percent based on the price of copper, a primary catalyst of Chile’s economy, and to enforce the scheme for three years. The government has promised tax stability until 2025, in order to appease concerned miners who had been promised no changes to the tax regime until 2018 when the royalty was introduced in 2005.

Experts have said the sliding-scale royalty scheme proposed by the government is unlikely to curb mining investment in Chile. The new royalty scheme was included in a $3 billion post-quake financing bill, which temporarily raised taxes on corporations. The bill was approved by lawmakers with the exception of the royalty reform. The South American country, which holds tremendous mineral wealth in addition to world class lithium deposits including copper, gold, silver, molybdenum, iron and coal, remains one of the best mining districts with which to do business, mining executives said.  Given the considerable amount of mining and resource exploration projects within Chile, the impacts of any regulatory change or policy direction will create significant implications for lithium investors as well as other mining and industry interests.

With help from assistant editor Vivien Diniz