SANTIAGO, May 20, 2010 (Dow Jones Commodities News Select via Comtex) -- To finance its $8.4 billion earthquake-reconstruction bill, the Chilean government has turned to several sources, one of which wasn't greeted with a lot of enthusiasm among miners: Temporarily raising the copper royalty.
The fifth-strongest earthquake on record and the tsunami it spawned hit Chile in late February, killing more than 500 people and leaving damages totaling $30 billion.
The administration of conservative President Sebastian Pinera, which took office just days after the 8.8-magnitude earthquake, recently announced several tax increases to partially finance the $8.4 billion it needs to reconstruct the country.
Under the existing copper-royalty legislation, which went into effect in 2005, miners pay a tax of 4% on their copper sales. This tax is in effect until 2017.
For 2010 and 2011, the new proposal has a variable tax rate, between 3.5% to 9%, depending on the copper-mining company's sales margins and on copper prices. It then reverts to 4% from 2012 to 2017.
The government hopes to obtain $600 million to $700 million from the royalty increase, but the exact amount will depend on how many companies switch over to the new tax scheme, Finance Minister Felipe Larrain recently said.
The royalty change isn't mandatory, but the government hopes that most mining companies will voluntarily adopt the tax increase to help reconstruction efforts.
Mining-sector participants disagree on whether the two-year tax increase will put a damper on investments.
Chilean authorities expect mining-industry investments of around $43 billion in the 2009-2015 period, with $39 billion of the total earmarked for copper projects.
If the investments materialize, the country would increase its current annual copper output by 38% to around 7.4 million metric tons of copper in 2020.
Chile is already the biggest copper miner in the world, accounting for a third of global output, and the mining industry represents about 10% of gross domestic product.
The Consejo Minero trade group--which represents the largest copper, gold and silver mining companies in the country, most of which are units of international mining giants--recently said the tax modification will dry up this investment pipeline.
"Any tax change that modifies the rules of the game could have an impact on these future mining-sector investments," the group said.
Analysts, meanwhile, said the temporary increase won't curb future capital expenditures.
"The government's argument is that this [tax increase] is due to the extraordinary situation of financing reconstruction," said Juan Carlos Guajardo of the Center for Copper Studies think tank, known as Cesco.
He noted that the only mining projects that could be put on hold due to the tax increase are those that produce copper at marginal costs. "For the bigger and more efficient projects, the tax factor won't have a big weighting on the investment decision," he said.
The lower house of Congress this week approved the modifications to the copper royalty and they now move on the Senate, where the government is confident they will be approved.
Mining Minister Laurence Golborne on Wednesday said he expects most of the mining companies to voluntarily adopt the temporary increase.
"I think the country approves of this bill and we're going to get the support we need from mining companies as these shouldn't back down from such an important task as reconstruction," Golborne said.