Are we facing a stagnation in mining investments?

Mining investments in Chile are seen as crucial for the country’s economic growth. However, after the inauguration of Teck’s Quebrada Blanca Phase 2, no new projects of this magnitude are visible on the national horizon. Our senior analyst, Cristian Cifuentes, was in conversation with Nicolás Vial from Reporte Minero to discuss these issues.

Is investment stagnant, and is it a local or global phenomenon?
First, it’s important to understand that there is a current situation where various countries are defining policies for critical minerals, which might lead to the development of projects in the medium term. However, we’ve observed at CESCO that some analysts are already talking about the risk investor sector, those who have financial resources for both exploration and production projects, allocating their resources to other sectors such as EV production, AI development, and technological advancements, leaving behind raw material extraction for decarbonization. The lingering question in the sector is: are there no projects, or is there no financing to develop them?

Chile is not far from this scenario of financial complications. While Cochilco estimated a substantial project portfolio last year, with a significant percentage of that investment volume expected to materialize before 2026, what we are seeing now is that many of those projects are changing their start-up dates, being postponed, or even exiting the analysis period.

But that’s also nos positive, it’s very negative…
Certainly, but it’s essential to understand that the commodities market, specifically copper, operates under a supply and demand structure, and prices react accordingly. What we perceive at CESCO is that some companies are waiting for this market reaction to see how prices behave. All of this is understood in the context that the copper price had high expectations but has been declining by 2% to 3% recently

This scenario has led companies to be more cautious when deciding whether to develop projects or not, coupled with slow growth in China, and all of this compounded by what I mentioned earlier: a lack of financing.

Where should this financing come from?
Currently, there is a trend towards mergers and acquisitions. In fact, we have observed that we are reaching levels similar to those in the previous supercycle. There have been many news reports on this lately: Newmont acquiring Newcrest, attempts to acquire Teck a few months ago, or more local instances like CODELCO’s acquisition of Lithium Power in Australia, facing significant opposition from the company’s partners. Ultimately, this has been the mechanism not only to obtain financing but also to increase the market cap of companies and improve their market share, which, in turn, enhances the companies’ image in the eyes of financiers and facilitates obtaining financing.

This scenario could accelerate decisions on projects such as NuevaUnión, for example, since Newmont’s acquisition of Newcrest forces it to make global-level decisions, now with even greater financial backing to start implementing investment decisions.

Regarding financing, are there other factors that could affect future investment projects? There is always talk of a term coined some time ago that some like and others do not: permitting. Is this also affecting, from the perspective of investors here in Chile, the absence of these “new” projects?
A few months ago, the consulting firm S&P published a study indicating that the longer investment projects take, from exploration to startup, reaching a global average of 15.7 years, with Chile having an average close to 17 years. What has become a kind of “bottleneck” for effective and rapid project development has perhaps been the issue of permits.

However, it is essential not to confuse the effectiveness of inspection and permit acquisition processes with efficiency. Certainly, it’s excellent news that President Boric has declared a priority for reducing uncertainties in terms of permits. But it should be clear that this is not an exclusive reality of Chile. For example, in the United States, significant analyses have been conducted, and authorities have been asked to focus on reducing permit times. They indicate that any industrial project in the United States takes 4 to 5 years to obtain environmental permits. While Peru and Argentina have developed efficient processes for project development, they still have certain cumbersome stages that hinder project development, especially if the investor is new to the country and does not fully understand the supervisory institutions. In Chile, efforts have been made in this regard since the end of the second government of President Bachelet, and at the beginning of the second government of President Piñera, with analyses by various state entities such as Sernageomin, Cochilco, the Ministry of Mining, the DGA, the Navy, identifying some “bottlenecks,” and the OGPS was created to accelerate project development, etc. There are still pending issues, but we believe that dialogues are open, and significant consensus is foreseen.

In terms of these projects or in the search for them, the focus often stays on large projects. Are there perhaps medium-sized projects that could somehow support this situation? For example, what is being done in some countries with junior companies, where venture capital is raised to facilitate exploration. Could something like this happen?
There is a significant paradigm in the mining sector that spoke of scale theories, indicating that it is more convenient to develop large-scale projects than smaller ones. However, it is a fact that in recent years these “mega-projects” have become even riskier. Perhaps political uncertainties or other specific issues can be blamed, but there are structural issues in project development, particularly in the early stages of engineering. There is a 2019 McKinsey study indicating that only 20% of mining projects in the last 10 years maintain the same CAPEX as in their feasibility study. This means that there are technical and financial aspects that structurally affect cost overruns. Laws, deposit size, deposit type, and financial pressures for faster results can affect engineering stages.

All of this has led project developers to look at smaller mines, which can grow organically, positioning them better to deliver maximum value to shareholders and suffer less when cycles change. In addition, their impact on the environment and neighboring communities is much smaller.

But this is not without problems: while in recent years many specialists have encouraged the development of medium-sized projects, even from the public sector, today we are facing difficulties in obtaining financing in this sector, which is related to higher demands, for example, requiring ESG standards in their companies. Unfortunately, medium-sized mining companies do not have sufficient resources to develop internal capabilities that allow them to advance in measurements that respond to these standards. In summary, it is observed that this sector is somewhat “helpless” for its development: large mining has its financial backing, and small mining has ENAMI, with its purchasing power plus the support provided by the Ministry of Mining through the PAMMA.

To conclude the conversation, does CODELCO’s situation have much to do with what we have observed in the challenges of project development?
CODELCO is not exempt from the same problems as large mining. Its standards, projects, and operations are those of large mining; however, it operates under more complex rules, mainly due to the unavailability of its own capital for development, as any large mining company does. In summary, the structural problems of project development in large mining hit CODELCO harder, without a doubt.