23 Dec Iván Valenzuela, director of Cesco: “A new smelter is possible due to profitability, it is necessary for the next mining cycle in the market, and it is crucial for Chile to be in line with the new market requirements”
During the seminar “New smelting capacity for Chile” organized by Cesco, the director of the center, who has also led the Institution’s Smelter Commission, delivered an analysis of the sector and a proposal to increase the country’s smelting capacity.
In the last 30 years, Chile has seen its refining capacity diminish, reaching less than 40% of the country’s copper production. This situation becomes more critical for Chile, considering the greater demands on the part of the market for new processes and products that aim at a green economy, in the context of two great threats to humanity: global warming and the overexploitation of natural resources.
To analyze this scenario is that the Center for Copper and Mining Studies (Cesco) organized the seminar “New smelting capacity for Chile”, an instance where the proposal prepared by the Center’s Smelter Commission, made up of academics and specialists, was presented, and which is led by the director of the institution, Iván Valenzuela.
“The keyword is decoupling, that is, fewer inputs per unit of product, and decarbonization”, Valenzuela said during his speech. “The initiative that we are promoting, apart from many local advantages, plays in our opinion, a role in this great crusade.”
The state of Chilean foundries
The director presented the analysis that the Commission has made concerning the export of concentrate where, if the current trend continues in the next 15 years, this product will have more than 80% participation in the total copper production in Chile.
“The trend to export concentrates is linked to the golden age of copper mining in the 90s and early 2000s, where we experienced growth rates in production over 9% per year”, said Cesco’s director, who added that these rates would be difficult to repeat, given the geological, social, environmental and political conditions in which the industry operates today, which has had marginal growth in copper production since 2006.
“In our view, trying to do more of the same to try to obtain the copper growth rates of the past is utopian. Therefore you have to think differently. The great challenge, difficult but inescapable, is how to generate more value per unit of copper produced”, said Valenzuela.
Cesco’s director explained that in the last 30 years the country’s smelting capacity has been maintained, even though the capacity to produce concentrates and the export of concentrates more than tripled in the same period.
Valenzuela added that almost all Chilean smelters have kept their production constant, but have experienced higher cost growth than the market. “We analyzed within the Chilean smelters and there are clearly two groups, one with a higher cost and the other with a lower cost, which indicates that the issue is not Chilean genetic, but has to do with management capacity and specific management of the activity”.
The Commission’s analysis
Valenzuela explained that when Cesco’s Smelter Commission began to meet, at first there was some skepticism about the economic viability of a new smelter. “It is assumed that the sector is not attractive, precisely from the result of some of the companies that have been poorly managed. Our interest was to separate both factors because we believe after this analysis that the smelting business is challenging, but it can be profitable, and it is a key lever for future and sustainable mining”.
To carry out the economic analysis, the Commission characterized a standard foundry, with 1.5 million tons of concentrates, an investment of about US $ 1,500 million and, according to the experts’ model, with smelting and refining costs of less than 17 cents, and an IRR greater than 13%.
“Evidently, these are not mining returns, but the focus of this activity is not raised for mining investors. And the risks of a smelter and refinery are also different from mining risks”, explained Valenzuela, who added that there is interest in the world to develop this type of project, where three smelter initiatives have been announced in India, Indonesia, and Peru.
Regarding the environmental contribution, this new smelter would have a capture of SO2 and emissions of around 99%, which generates a significant effect on the emission of greenhouse gases. “Here it is calculated that transporting concentrate, versus transporting cathodes, has a significant effect on global warming due to the use of fossil fuels. Furthermore, Chile’s energy matrix is cleaner than the average of the countries to which we sell concentrate, therefore, for both elements, there is a significant environmental contribution to decarbonization”.
“We are talking about qualified employment, treatment of complex concentrates, paying when processing them here, fewer penalties”, said Valenzuela. “In Chile, smelters and refineries recover very few by-products, and this is an important element that we see in all smelters in the world. It also allows us to innovate in metallurgy. Perhaps most importantly, without modern physical facilities, it is impossible to think about recycling, circular economy, and urban mining. Processes that will be dominant in the coming years”.
Finally, the Commission identified contributions at the reputational level, since the image of mining must be improved with tangible facts. “Also in this account of why it is necessary, we see a strategic contribution in a new smelter. We have to prevent Chile from being pushed to a point of no return in the value chain”, said Valenzuela.
Taking into consideration the analysis of the Smelting Commission, Valenzuela explained some of the causes that have made it difficult to install new smelting capacity in Chile. “There are cultural reasons. In Chile we have a historical matrix based on the production of primary resources”, said Valenzuela. “It is a cultural issue that is linked to a concept of value, which is karma repeated for decades by everyone, that what leaves the country the most value is the concentrate, and everything that comes after concentrating is losing value. And that is karma that has been installed with great force in many social and political agents of our country”.
Another factor analyzed has been the good profitability that companies have obtained due to the quality of the mining resource in Chile, which has discouraged them from integrating the value chain in the country. “To this is also added a lack of strategic political vision for the country, and an over-confidence in the market. In this case, we believe that it can be very good for a company not to worry about smelters issues because it still obtains a reasonable sale price abroad. But it is very different if we do that analysis and that evaluation for Chile”, said the Cesco director.
The executive also explained that during the Commission’s work, they realized that the vast majority of investments made in this sector in the last 30 years responded almost directly to environmental regulations, rather than to strategic business and market needs. In this sense, the Commission defined that it will be key to advance the concept of non-integrated foundries, with different, more sophisticated, and more complex commercial procedures, where by-products, recycling or scrap metal are worked.
The steps to follow
“The proactivity of the political authorities is key. First, to show the country’s need for this investment, and second, to generate the necessary coordination for its implementation”, said the Cesco director. “This is a country issue that goes beyond governments that last four years. A new refinery smelter should be operational by 2027 since by then a new environmental regulation should come”.
Under the premise of stricter regulation in the future, the Commission identified that it will be highly probable that some of the existing smelters will have to close, so it would be imperative to have a new one. And the decision should be made in the short term, given the time required for this type of project to obtain the necessary permissions to be completed.
“One of the critical issues is that of environmental permissions”, Valenzuela explained. “This supposes an early involvement of the communities, in such a way that the permits are approved in the corresponding instances, in reasonable terms. If we have to wait 10 years for the approval of an environmental permit, the opportunity for the country will have passed”.
As part of the Cesco Smelter Commission’s proposal presented by Valenzuela, there is a roadmap where the first step is to create the governance of the project that transcends the presidential term. Secondly, validated technical tables should be created that allow defining and targeting the type of investment; and thirdly, a bidding process should be carried out for potentially interested parties. “This project does not necessarily have to be financed by the State or by state companies. We believe that to the extent that a reasonable package is built, there will be people interested in participating in this process, in the main copper-producing country in the world”.
“In summary, a new smelter is possible due to profitability, it is necessary for the next mining cycle in the country, and it is crucial for Chile to be in line with the market requirements in traceability, energy-saving, and recycling”, concluded Valenzuela.