The Chilean Parliament’s lower house approved last week a project that could impose a new royalty scheme on copper and lithium sales as international prices rise. The taxation reform will now be discussed in the Senate, where it is likely to go through several more procedural votes.

The proposed law has not been well-received by the representatives of large mining companies, Kallanish learns. The country’s copper industry fears that higher royalties could cool investment in Chile and limit global supply.

Meanwhile, lawmakers claim that the new taxation system will enable to finance the development and infrastructure of mining regions, as well as vital social programmes related to the post-Covid-19 recovery plan. The bill foresees 3% base royalty on copper and lithium sales. It includes a progressive tax on copper sales depending on the market price, with tax rates increasing to up to 75% if copper prices are above $4.0 per pound ($8,814/tonne).

With copper prices at $2-2.50/lb, a royalty of 3% would be applicable plus a 15% tax on additional income generated by the higher price. At prices of $2.50-3/lb, the additional rate increases to 30%; at $3-3.50/lb prices the rate jumps to 50%; at $3-3.5/lb the rate rises to 60%. The progressive tax could reach 75% on prices above $4/lb.

Chile’s National Mining Society (Sonami), which includes the country’s main miners, has described the legislation as an expropriation.

“The long-term vision of the mining sector has been lost,” comments Sonami’s president Diego Hernández. “By combining the income tax with the specific mining tax, companies will be paying 40% to 42% on their profit, which is close to the highest range in the world. Profitability would drop and that makes it unfeasible for at least 10 or 12 mines,” he explains.

According to preliminary lower house discussions, the bill could be implemented in the fiscal 2023/24 year. “This will discourage investment in the sector and over the next two years, companies will stop exploring, and continue producing as long as they can resist,” Hernández adds.

Most of the large copper miners in Chile currently pay a flat or unchanged royalty rate, regardless of the copper price, under agreements that run through 2023, according to the Chilean mining ministry.

Official government statistics show that miners currently pay corporate tax of 27% and a special tax of up to 14% depending on production rates. If copper production is lower than 50,000 t/y, miners will currently pay 9%.

The South American country currently produces 28% of the world’s copper, but it has been losing market share for more than a decade weighed down by the decrease in the mineral grade and the aging of the mines, according to Sonami data.

Goldman Sachs forecasts international copper prices are set to surge to $15,000/t, while Bank of America estimates the red metal is heading towards $20,000/t by 2025, as demand increases and supply tightens.