What’s next for the KGHM mine in Chile? Sasin is going overseas
There has been talk of the Chilean government’s attempts to use domestic copper mines owned by powerful mining companies from around the world since December 2021, when it won the presidential election there representative of the left, Gabriel Boric. He took office in March 2022. In the course of work on the new constitution, demands were made to nationalize the mining sector. This would mean nationalization of the copper mines, including KGHM’s Sierra Gorda plant. However, Polish analysts have never taken this risk seriouslypointing to the enormous costs of such an undertaking, difficult to bear for the Chilean budget. In September, the draft of a new constitution was lost in a referendum and the government will work on a new version of it.
Much more of a real risk is imposing a new levy on copper producers, the shape of which is just hatched in government offices. The largest mining companies with assets in Chile are alarming that their profitability and competitive position will deteriorate drastically once the regulations are introduced.
Under such circumstances a delegation from the Ministry of State Assets is planning a flight to Chile – Business Insider Polska learned. The ministry, led by Jacek Sasin, wants to talk to representatives of the Chilean government this year about the future of KGHM’s South American investment.
– The idea is to protect KGHM’s interests in this country against disturbing reports about the government’s plans for the mining industry – explains one of our interlocutors.
Hot discussions
In Chilean copper deposits not only KGHM operates, but also world giants, such as Australian BHP, Mexican Mexico Group, Swiss Glencore, Canadian Lundin Mining and international Anglo American. For everyone, the introduction of an additional tax would be a big blow.
The latest government proposals, presented at the end of October, assume, inter alia, the introduction of a 1% flat-rate ad valorem tax (on the value of assets) for mining plants that operate over 50,000 tonnes annually tons of copper. These also include the Chilean mine KGHM Sierra Gorda. Additional fees would depend on the operating margin of mining companies, and their rates would range from 8 to 26 percent.
Jorge Riesco, president of the Sonami National Mining Association, which brings together copper producers in Chile, assessed the recent proposals as worrying. Sonami’s calculations show that in practice – according to preliminary calculations – the total tax burden would remain in very high ranges, even above 55%.
If this project were approved, large mining companies in our country would be left with high tax rates far superior to other mining countries such as Peru and Australia, which would seriously affect our competitiveness, said Riesco. – It is worrying that we have failed to convince the authorities to ignore the application of the ad valorem levy, which is burdensome for the mining industry, which naturally does not tie the company’s operating result to tax burden – added.
KGHM has so far been protected against fiscal changes. – Due to the still dynamic political situation in Chile, it is difficult to estimate the potential impact of any new tax burdens on KGHM’s production assets in this country. It is worth recalling that Sierra Gorda, as relatively the youngest foreign mine in Chile, will benefit from tax guarantees in the longest period compared to its competitors for foreign investors in Chile – KGHM’s press office informs us.
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Polish giant under pressure
The purchase of the Sierra Gorda project was the largest foreign investment in the history of KGHM. In March 2012, the concern acquired for PLN 9.2 billion the Canadian listed company Quadra FNX Mining, which owned 55 percent. shares in Sierra Gorda. The remaining shares belonged to companies from the Japanese Sumitomo group. From February 22, 2022, KGHM has a new partner on the Chilean project, because The Australian group South32 took over all the shares from the Japanese.
Initially, the mine brought severe losses to the Polish concern. Only recently has she started earning money. – We have already learned how to do foreign projects. The study was a long one, and it didn’t look good at first. An example is Sierra Gorda mine in Chile – we finally turned this investment into a simple one and today the Chilean mine is finally financially supporting the parent company, and not the other way around – said in March this year Marcin Chludziński, the then president of KGHM, in an interview with Business Insider.
In the first half of 2022, the mine produced 80.9 thousand. tons of copper. Its revenues reached $ 824 million. (approximately PLN 3.8 billion), and EBITDA (operating result increased by depreciation) amounted to USD 491 million. (approximately PLN 2.3 billion). KGHM accounts for 55 percent. these values.
– Sierra Gorda is an asset that at the moment brings benefits to the concern. Having such a mine in times of energy crisis helps the group’s results a lot. The war in Ukraine has caused perturbations in the commodity market around the world, but the energy crisis mainly affects Europe. All mines have high fixed costs, and we have one today very high inflationrising costs of employee salaries, energy, services and corridor works. The profitability of Polish copper mines is therefore under enormous pressure – explains Łukasz Prokopiuk, analyst at DM BOŚ.
The expert notes that, unlike gas companies, fuel or coal, KGHM benefits little from the current crisis. – The increase in costs applies to everyone, but many companies simultaneously achieve record margins, such as coal producers. In the case of KGHM, despite record-breaking copper prices, the company’s results this year will not be record-breaking, but rather close to the results from 2021. This means that Polish copper mines are losing their competitive position against their competitors located in the USA, Australia and Peru, Chile or Russia. KGHM is therefore a victim of the energy crisis, not its beneficiary – concludes Prokopiuk.
The company notes that the market situation is very uncertain today. – Taking into account the ongoing armed conflict in Ukraine, the risk of another wave of the COVID-19 pandemic and the observed inflation, there is still uncertainty as to the directions of development of the economic and social situation in Europe and in the world. This may affect the results of the KGHM group in the coming quarters, emphasize the press service of the copper company.
Author: Barbara Oksińska, journalist from Business Insider Polska
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