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CHILE 2016MINING REPORT
Roundtable DebatesBusiness Leaders’ OpinionsSector Data Focus ReportsMarket AnalysisBusiness Intelligence
chILe 2016
MInIng RepORt
CONTENTs
InteRnAtIOnAL InVeStOR WOULD LIKe tO thAnK ItS KnOWLeDge pARtneRS:
5 BusINEss NETwORk:MEET THE BusINEss LEadERs
6 MINING IN NuMBERs
9 OVERVIEw: NEGOTIaTING TuRBuLENT TIMEsThough presently working to address a number of challenges, Chile’s copper sector, holding approximately 30 per cent of global copper reserves, has made great strides over the past 30 years in expanding and developing the industry.
13 ROuNdTaBLE: RIsING TO NEw CHaLLENGEs To confront the current global climate, the mining sector seeks to increase efficiency and to innovate in order to strengthen the industry for the future.
9
13
46 FOCus: REGIONaL MINING OPPORTuNITIEs The governments of Mexico, Colombia and Peru are all looking to boost investment in mining. Despite the challenges, the three nations hold large mineral resources and the long-term outlook is promising.50 BOB MusGROVEKinross Gold Corporation51 GasTóN RuBIOSalfaCorp
52 PERsPECTIVE: INNOVaTING THE INdusTRyIn 2014, key stakeholders devised a report into the long-term prosperity of mining. Proposals included public-private collaboration to address social, economic and environmental issues.
54 aNdRés aGuIRRE APRIMIN55 daLE CLayTONLiebherr Chile S.p.A.
56 FOCus: IMPROVING LaBOuR skILLsIt is estimated that Chile’s mining sector will require in excess of 27,000 more skilled workers by 2023. Significant efforts have been made to improve the quality of training programmes in order to meet this demand.
58 BusINEss INTELLIGENCE:HIdROMauLEWith its three run-of-river power plants, Hidromaule continues to innovate, providing a source of safe and sustainable energy.60 TOsHIHIRO sHIMazakI Mitsubishi Chile Ltda.The President of Mitsubishi Chile on the company’s presence across the value chain, the Chilean energy sector, and Mitsubishi’s value system.
Publisher and Editor-in-Chiefcory D’AbreoManaging Editorthomas Michael edwardsEditorsAlexis psarrashieke van der VaartAnna perkinsProduction and design Editor Izabela Austin Project CoordinatorsLeba SableAmérica novoaPhotographer Luis gómezCirculation ManagerLouise powell
this publication is copyright protected. copying any part of International Investor is unlawful without the prior written permission of capital Knowledge (hong Kong) Limited. no part of this publication may be repro-duced or transmitted in any form or by any means nor held in any information storage or retrieval system.No warranty: whilst every reasonable effort has been made to ensure its accuracy, neither capital Knowledge (hong Kong) Limited nor any contributor accepts any responsibility or liability for the accuracy of any part of the content in this publication. Readers should also be aware that external contributors may represent firms that may have an interest in companies, funds and/or their securities mentioned in their contribu-tions. no statement in this book is to be construed as a recommendation to buy or sell securities in any entity or enter into or exit an investment of any kind.
+44 (0)20 7193 [email protected]
52
35 NELsON PIzaRROCodelcoThe Executive President analysesCodelco’s investment programme and the challenge of reducing costs while raising productivity.
36 dIEGO HERNáNdEzAntofagasta PLC37 aLBERTO saLasSONAMI38 PaBLO BadENIERMinistry of the Environment
39 FOCus: GLOBaL COPPER TRENdsThe red metal is crucial to many sectors; despite falling prices and demand, it is expected to rebound with economic development.42 saLVaTORE BERNaBEI Enel Green Power Chile and Andean CountriesThe General Manager discusses the company’s regional growth and the challenges of fostering renewable energy sources in Chile.44 Maciej Ściążko Sierra Gorda SCMThe General Manager of Sierra Gorda provides an insight into consolidating the joint venture, the economic climate, and enhancing productivity through innovation initiatives.
39
46
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cover image: courtesy of nASA/gSFc/MItI/eRSDAc/JAROS, and U.S./Japan ASteR Science team
page 4 image: courtesy of Fernanda LeMarie - Ministerio de Relaciones exteriores, comercio e Integración
51
36
55
gastón Rubiogeneral Manager and VicepresidentSalfacorp
Diego hernándezChief Executive OfficerAntofagasta plc
Dale claytonManaging Director, MiningLiebherr chile S.p.A.
50
37
4238
54
pablo BadenierMinister of the environment Ministry of the environment
Andrés AguirrepresidentApRIMIn
Bob MusgroveVp of Operations, South AmericaKinross gold corporation
Alberto SalaspresidentSOnAMI
Salvatore Bernabeigeneral Managerenel green power chile andAndean countries
All individuals held the positions stated at the time of International Investor’s Roundtable event and interview process in chile.
International Investor would like to thank all the leaders from the public and private sector who have participated in and contributed to our work.
35nelson pizarroexecutive presidentcodelco
44
60
Maciej Ściążkogeneral ManagerSierra gorda ScM
toshihiro ShimazakipresidentMitsubishi chile Ltda.
Meet the BUSIneSS LeADeRSGain valuable market intelligence and an understanding of the opinions and business philosophy of those who are shaping the mining sector in Chile. Read International Investor’s interviews with business leaders.
mining business network
CHILE 5
15patricio MellerpresidentFundación chile
15Francisco costabalVp of Business Development andAdministration-South AmericaFreeport-McMoRan
15Francisco charlinLegal DirectorBarrick gold South America
15Marcelo AwadIndependent Advisor
14Fidel Báeztechnology and Innovation Managercodelco
14gustavo nieponicepartner and Managing Directorthe Boston consulting group
14Ignacio MorenoUndersecretary of MiningMinistry of Mining
6 INTERNATIONAL INVESTOR
sector data mining
MInIng In nUMBeRSInternational Investor’s summary of key data and quantitative dynamics of the sector. For more detailed information, please contact International Investor directly.
GENERAL MINING STATISTICS
Total mining exports 2014 (US$ in billions) 42.04
Copper production 2014 (tonnes in billions) 5.8
Share of world copper production 2014 (%) 31.2
Share of world copper exports 2014 (%) 37.6
Mining GDP as a proportion of total GDP 2014 (%) 11.2
Mining exports as a proportion of total exports 2014 (%) 55
Copper exports 2014 (US$ in billions) 38.7
Copper as a proportion of total mineral exports 2014 (%) 92
Copper as proportion of fiscal revenues 2014 (%) 8
National copper price per pound 2014 (US$) 3.15
FDI in mining sector 2014 (US$ in billions) 1.823
FDI in mining sector as a proportion of total FDI 2014 (%) 15
Direct and indirect employees in the mining sector 2014 858,000
Investment in exploration in Chile 2014 (US$ in millions) 707.4
Share of global exploration investment 2014 (%) 6.9
Global amount spent on mining exploration in 2013 (US$ in billions) 14.4Source: Banco Central de Chile, Consejo Minero, Cochilco, Instituto Nacional de Estadísticas
PRODUCTION AND RESERVES, 2014
Production (tonnes)
Share of global production (%)
Ranking in global production
Share of global reserves (%)
Copper 5.74m 31 1 30
Gold 44.16 2 14 7
Silver 1,426 6 7 15
Molybdenum 48.77m 21 3 16
Source: Consejo Minero
COST OF INVESTMENT PER UNIT OF COPPER PRODUCTION, 2003 - 2014*
US$
in t
hous
ands
per
ton
ne
*Cost of investment equates to the capital expenditure of the current project portfolio for each year divided by the annual production capacity of that portfolio
Source: Consejo Minero, from information by Sigumbox Inteligencia de Mercados
4,515 5,153
7,919 6,666
7,982
10,250
14,252 13,582
15,596
20,523 20,891 21,708
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
5,000
10,000
15,000
20,000
25,000
CHILE 7
mining sector data
COPPER PRODUCTION BY REGION, 2013
Tarapaca Antofagasta Atacama CoquimboValparaiso Metropolitan
52%
10%
10%
7%
7%6%
100%
Source: Cochilco / BBVA Research
MINE PRODUCTION OF COPPER AND COPPER PRICE, 2003-2015
Tonn
es in
mill
ions
(fi
ne c
oppe
r)
*Average annual period 2003 - 2005**Accumulated until April for Chile production, March for world production and showing average copper price to May
US$
per
pou
nd
Chilean Production Rest of the world Production Copper price
Source: Consejo Minero, from information by Banco Central de Chile
2003 - 2005* 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015**
0
2
4
6
8
10
12
14
16
18
20
0
50
100
150
200
250
300
350
400
450
500
126
305 323 315
234342
400361
332311
270
MINING SECTOR GDP AND ITS CONTRIBUTION TO NATIONAL GDP, 2003-2015
US$
in b
illio
ns
*Annual average period 2003 - 2005**In the first quarter of the year
Copper mining Other mining activities Contribution of mining GDP (%)
Source: Consejo Minero, from information by Banco Central de Chile
0
5
10
15
20
25
30
35
40
2003-2005* 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015**0
5
10
15
20
25
30
35
40
12.0
20.7 20.5
14.0 13.116.0
14.912.8 11.3 11.2 10.0
COPPER SHIPPING EXPORTS BY DESTINATION (US$ IN BILLIONS)
Europe Americas Asia Other continents
Source: Cochilco / BBVA Research
0
5
10
15
20
25
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
30
US$
in b
illio
ns
PARTICIPATION IN GLOBAL PRODUCTION,2000-2013
Chilean production Participation
Source: Cochilco / BBVA Research
31
32
33
34
35
36
37
0
1
2
3
4
5
6
7
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
30
Tonn
es in
mill
ions
%
COPPER PRODUCION FORECAST, 2014-2026
Tonn
es in
mill
ions
(fi
ne c
oppe
r)
Proceeding Probable Possible Potential
+26.5%
Source: Cochilco
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
+12.
2%
-9.6
%
2025 2026
9
8
7
6
5
4
3
2
1
0
8 INTERNATIONAL INVESTOR
sector data mining
PROJECTED MINING INVESTMENT OUTLOOK PER REGION, 2015-2024 (US$ IN MILLIONS)
40% and greater20-30%10-20%0-10%
Percentage of total investment
TarapacaCommodity Status InvestmentCopper Probable 632 Potential 5,590Total Investment 6,222% of Total Investment 8.05
AntofagastaCommodity Status InvestmentCopper Proceeding 12,891 Probable 1,500 Possible 13,575 Potential 5,000Other Probable 665 Possible 503Total Investment 34,134% of Total Investment 44.16
AtacamaCommodity Status InvestmentCopper Proceeding 345 Probable 2,757 Possible 146 Potential 7,891 Other Probable 4,540 Possible 1,461 Total Investment 17,140% of Total Investment 22.18
CoquimboCommodity Status InvestmentCopper Possible 1,814 Other Proceeding 198 Possible 2,888 Total Investment 4,900% of Total Investment 6.34
ValparaisoCommodity Status InvestmentCopper Proceeding 1,530 Possible 6,611 Total Investment 8,141% of Total Investment 10.53
MetropolitanCommodity Status Investment Copper Proceeding 276 Probable 112 Possible 117Total Investment 505% of Total Investment 0.65
O'HigginsCommodity Status InvestmentCopper Proceeding 5,899 Possible 350Total Investment 6,249% of Total Investment 8.09
* Project status criteria have been defined by Cochilco and are dependent on stage of advancement, environmental permit progress and estimated start date.
Source: Cochilco
ANTOFAGASTA
El Abra
Doña Inés de Collahuasi
Chuquicamata
Cerro Colorado
Escondida
Caserones
Los Pelambres
El Teniente
AndinaLos Bronces
Mantoverde
Candelaria
Sierra Gorda
LA SERENA
SANTIAGO
COPIAPO
ARICA
IQUIQUE
VALPARAISO
RANCAGUA
mining overview
CHILE 9
negOtIAtIng tURBULent tIMeS
Decreasing mineral grades, uncertainty in demand, the availability of skilled labour, high energy costs and water access are weighing down on the industry and reducing margins. Although cost cutting is on the agenda, it seems productivity, not austerity, will be key to keeping operations sustainable.
MINING
chile produces over a third of the world’s copper output.
began arriving in Chile and with them came a number of important technological break-throughs, such as the flotation process and large-scale open-pit mining, which allowed for the exploitation of low-grade deposits in a cost efficient manner.
REDEFINING THE MODELPolitical and social instability in Chile during the 1970s led to the nationalisation of the copper industry, which in turn gave birth to Codelco (Corporación Nacional del Cobre de Chile), currently the world’s largest copper producer. Chile was not able to re-enter the global scene as an important mining destina-tion until the 1990s. Even though a significant portion of Chile’s current mining legislation was enacted during the 1970s (e.g. foreign investment contracts, updated mining code, tax benefits, etc.), most world-class deposits discovered from this period onwards were not developed until Chile returned to democracy in 1990 and a new wave of foreign investment began. While Codelco has remained state-owned since its creation, over the past 30 years the private sector has increased its participation and has contributed to the consolidation of the industry, increasing production by more than 20 times. In 1980, production from the private sector amounted to approximately 160,000 tonnes of copper, equivalent to 15 per cent of that year’s total production. At present, private sector copper produc-tion amounts to approximately 3.9 million tonnes out of a total of approximately 5.7 million tonnes. In the next two decades, it is predicted that over 75 per cent of investment will come from the private sector.
ADVANTAGES… BESIDES RESERVESEstimates suggest that Chile holds close to 30 per cent of global copper reserves. In ad-dition, the country currently represents one of the most internationally focused and open
HISTORICAL OVERVIEWChile has had strong ties to the mining industry since the sixteenth century when the Spanish conquistadores, following previous exploits in Mexico and Peru, set foot in the region looking for precious metals. Five centuries later, mining is one of the most internationally-competitive industries in Chile and one of the primary drivers of development. Throughout modern history, Chile has experienced periods of mining that have varied in intensity, but it was not until the 1830s that government took a more active role in terms of defining and designing an initial strategy focused on extractive activities. This early and important governmental work, specifically related to the development of the mining industry, set the foundation for Chile’s current infrastructure in terms of its highways, railroads and port facilities in order to expedite access to inter-national markets. As a result, by the end of the decade, Chile had taken its place as one of the world’s top copper producers.
On the non-metallic side, the Atacama Desert is abundant in nitrates and phosphates, which form part of the base substances used in fertiliser production and are used by the world’s leading agricultural producers. Following the War of the Pacific, the demand for Chilean caliche (the local word for nitrate) grew significantly, driven by low production costs and a seemingly endless supply. In the early 1900s, demand for nitrates once again spiked as it became a base material for manu-facturing explosives. By then, mining contrib-uted 40 per cent of Chile’s GDP and collected taxes amounting to one-third of total nitrate exports. However, this boom was short lived as synthetic alternatives that could be used to manufacture explosives were invented in 1918. Copper then replaced nitrates as the principal mining product as industrialisation moved across the globe after the end of World War I and the use of electricity became wide-spread. Thanks to these factors, demand for copper reached new highs. Foreign investors
overview mining
10 INTERNATIONAL INVESTOR
economies in Latin America. It is ranked as a middle-to-upper income economy by the World Bank and was the first South American country to join the OECD in May 2010. According to the Global Competitiveness Report, Chile is ranked 33rd in the world and first in Latin America, as well as being recognised as a leading nation in additional key economic development fac-tors, such as human development, income per capita, globalisation, economic freedom and low perception of corruption. These factors, coupled with a stable public policy environment, heavily oriented towards investment and development, represent an attractive value proposition for long-term in-vestors. This is supported by a fairly consistent inbound flow of foreign investors looking to establish operations in Chile, increase their existing footprint or use the country as a plat-form to branch out in the region. In the mining sector, Chile provides an accessible entry point to Peru, Argentina and Ecuador. Likewise, Chile has excellent relationships with the mining sectors in Mexico, Colombia and Brazil. Copper is not Chile’s only resource: gold, zinc, iron ore, nitrates, iodine and molyb-denum all benefit from the economies of scale provided by copper mining. Chile’s geography can accommodate an extensive and robust logistics infrastructure, including railroads, highways and port facilities. Moreover, the presence of hub cities allows for the chan-nelling of the ever-increasing amounts of re-quired staff and ancillary services. The skilled workforce is another distinctive advantage; however, this also has concomitant difficulties related to the challenges of talent retention.
ECONOMIC CONTRIBUTIONAlthough production, sales and revenue tend to be the focus of media attention when it comes to mining, there are other drivers that are just as important. In the period between
2010−2014, almost 15 per cent of Chile’s rev-enue came from mining, representing US$40 billion. Furthermore, during the same period, the industry contributed 13.2 per cent of the country’s GDP and 60 per cent of Chile’s total exports. One sector of the economy that has reaped huge benefits from mining is seaborne transport; more than 50 per cent of total cargo hauled relates to mining and mining-related products. Additionally, there are a number of other areas that have enjoyed unparalleled success on the back of the mining sector, in-cluding air traffic, in which domestic flights have increased tenfold in the last two decades, hotelling, services and utilities. When comparing average salaries to other industrial sectors in Chile, the mining industry currently has the highest average salary. A ‘mining job’ pays, including production bo-nuses and other benefits, on average 1.5 times more than a similar position in a non-mining sector. This fact has become controversial in the past few years as mining companies have become over-reliant on high commodity prices, making production the priority, with less attention being paid to productivity. However, now as companies face back-wardation scenarios, increasing costs and decreasing margins, the high salaries in the mining sector have attracted criticism from media, politicians and the general public. Yet, mining companies have found it increasingly difficult to negotiate with labour unions re-garding the reduction of benefit packages and the curtailing of bonus schemes. Nevertheless, remuneration packages in Chile exceed those offered in most developed mining countries in the world and, within South America, labour costs in Chile are significantly higher than those in other mining countries.
THE CHALLENGESThe huge pipeline of mining investment slated
for the next two decades engenders a number of significant challenges, many of which are related to energy, water and human resources.
ENERGYToday, Chile faces dire scenarios regarding current and future energy generation capa-bilities, not only in terms of fuelling new de-velopments and expansions, but also in terms of mitigating the spiralling costs currently being faced by the industry. In recent years, Chile has had a number of energy projects rejected or delayed due, in part, to the involvement of stakeholders that are more aware of and sensitive to environ-mental and social issues. However, the root cause of their rejection is not the involve-ment of stakeholders, but rather the lack of a clear political roadmap and the necessary policy framework to foster development of energy generation in Chile. Both the authorities and the industry cur-rently project a need for, at least, an addi-tional 2,000 megawatts installed during the period between 2015 and 2025 in both the Sistema Interconectado Central (SIC) and the Sistema Interconectado del Norte Grande (SING), Chile’s two major energy distribution networks. The country’s current megawatt-per-hour cost is the most expensive in the region and one of the highest in all mining countries. This is a huge disadvantage for the Chilean mining sector given that energy rep-resents approximately 18 per cent of the cash production cost.
WATERNorthern Chile hosts the vast majority of the large mining operations and is also where the Atacama Desert, one of the driest spots on Earth, is located. Traditionally, the commu-nities in this area have competed for water with the big mining companies and, in many
1. EVOLUTION OF COPPER PRICES, 2003-2015
Source: Cochilco
200
250
300
350
400
450
500
Dai
ly N
omin
al P
rice
of
Copp
er (
US¢
per
pou
nd)
0
50
100
150
Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15
November 2005: Price exceeds US¢200April 2006: Price exceeds US¢300
September 2008: Collapse of Lehman Brothers and deepening of financial crisisFebruary 2011: Price reaches US¢460.3
mining overview
CHILE 11
cases, this has resulted in conflict. The mining industry has always maintained that it uses water in an efficient manner and, in fact, only uses a fraction of the water consumed by the agriculture industry. Nevertheless, mining companies have un-dertaken significant efforts to implement new technologies in order to achieve more effi-cient water management. Several large mines in Chile have already begun to use seawater, both desalinated and raw, in their processes as a permanent solution. This tends to be a more expensive option, but the benefits are a constant and limitless supply. Mining in high altitude presents its own set of problems; however, one particular issue that has become more prominent over time is the impact of mining on glaciers and ice bodies. Barrick Gold, the Canadian-based company, was forced to cease activities at its Pascua Lama Project on the Chilean side. The original cessation was due to a court order demanding increased monitoring and mitigation actions regarding water damage and non-compliance with certain aspects stipulated in the project’s environmental declaration, one of them being the protection of ice bodies. Furthermore, and based on the market’s present situation and ongoing legal complications, the company has announced that the project will remain on hold until further notice. Similarly, other large players, both state-owned and private sector, are currently re-evaluating their higher alti-tude development or expansion projects due to their proximity to glaciers.
SUSTAINABILITYThe industry is facing mounting pressure from increasingly active stakeholders to commit to and implement measures in the area of sustainability. The need to build trust among stakeholders, whether they are governments, environmentalists, communities or others, is
growing in importance as the social licences needed to operate are becoming increasingly difficult to not only obtain, but also, and more importantly, retain. Annual reporting on sustainability has helped in this regard, but it is not enough. Active and permanent stakeholders are now a basic requirement and mining companies must be intelligent in conveying their com-mitment to actions focused on improving and protecting the social, environmental and eco-nomic legacy in the communities within which they operate. In many cases, it is also difficult to deter-mine which issues genuinely impact strategy versus specific actions. Additionally, such in-formation is not always reported on a timely basis. Stakeholders are no longer satisfied by publications issued by mining companies, and now have access to multiple sources and social networks; thus, inconsistencies and discrepancies are not tolerated.
HUMAN RESOURCESIncreasingly, mining companies have the option to automate processes in order to improve efficiency, but no matter how ex-tensive the effort, the availability of skilled and experienced labour will always be a key resource for any mining project, regardless of location. The industry is currently expe-riencing a strong deficit of professionals and experienced technicians, especially in remote mining locations. Whereas copper production has more than tripled over the last 20 years, the breadth and depth of the workforce has not increased at the same rate. Some initiatives have been put in place to overcome this deficit. A number of these involve mining companies encouraging and sponsoring universities and technical colleges to offer mining-specific programmes, in order to promote the field of study and increase
the number of skilled workers. Others are aiming to increase the number of women par-ticipating in the traditionally male-dominated environment. At present, of the 178,000-strong workforce in the mining industry (em-ployees and contractors), only 7.3 per cent are women. Through various cooperation pro-grammes, Chile expects to double that figure before 2018. Likewise, female representation in mining company boardrooms is also an issue. Countries with the highest proportion of female boardroom representation, such as South Africa, India, Russia and the United States have, on average, a 25 per cent female board composition. However, companies from Chile, Brazil, Peru, Mexico, and China have the lowest female representation on boards, with an average of less than 2 per cent. With countries across the globe recognising the benefits of having women sitting on boards, and diversity policies becoming common-place, the number of female directors across all industries, including mining, is expected to increase.
TIGHTER EQUITY AND DEBTThe era of cheap and easy access to financing is over. Until recently, mining companies had open and diversified access to financing mar-kets, both debt and equity. However, the sce-nario has changed dramatically: commodity prices have decreased, cost inflation has continued, there has been increasing pres-sure from social groups and a heightened risk of nationalisation. This has all contributed to a growing and negative sentiment within the mining sector. Global investors are now shifting prefer-ences to other sectors or even preferring fixed income investments, rather than taking equity stakes in the mining industry. Junior mining companies have largely been shunned. Even mid-caps and majors are facing ex-tremely challenging financing options, which has forced them to adopt more non-con-ventional funding sources that are normally available to juniors in both traditional and emerging markets, such as bonds, debt con-vertible into shares, future sales, and offtake and streaming agreements. The mining sector has proven itself to be resilient time and again. However, the debt crisis, severe austerity measures and the related impact on credit supply will con-tinue to undermine growth prospects in the coming years. Moreover, the current macro-economic situation will undoubtedly impact the development of the project pipeline with many projects being delayed, rescaled or even abandoned. Investors no longer have unbridled confidence in the sector and their priorities have changed.
2. ELECTRICAL ENERGY CONSUMPTION IN COPPER MINING AND PARTICIPATON (%) IN CHILE'S OVERALLCONSUMPTION*, 2003-2014
Source: Consejo Minero, with information from Cochilco, Comisión Nacional de Energía and Ministerio de Energía
Consumption in mining Participation in Chile's energy consumption
* Participation in the country's consumption estimated from electricity generation information
0
2,500
5,000
7,500
10,000
12,500
15,000
17,500
20,000
22,500
25,000
Gig
awat
t-ho
urs
0
10
20
30
40
50
60
70
80
90
100
14,98516,134 16,342 16,596
17,737 17,959
21,577 19,965
19,15218,977
22,524 23,128
14,98516,134 16,342 16,596
17,737 17,959
21,577 19,965
19,15218,977
22,524 23,128
33 33 33 31 32 32 34 34 33 33 33 33
2008 2009 2010 2011 2012 2013 20142006 20072003 2004 2005
overview mining
12 INTERNATIONAL INVESTOR
THE OUTLOOK FOR THE SECTORWhile emerging and developing markets were recently considered to be the world’s growth engine, this is no longer the case and devel-oping markets have been stuttering. For mining, the market that matters most is China. The Chinese government is focusing on reducing risks in its economy and making it more sustainable, following a political leader-ship transition in 2012. Unlike the situation in 2014, the outlook for the Chinese economy is less optimistic and miners are currently coping with actual declines in real growth rates. Since mid-2012, the industry has witnessed significant changes as companies struggle to contain costs and China’s growth estimates have come up short for the first time in more than a decade, even witnessing more than one correction in a 12-month period. The practice of chasing volumes and risky investments has now been replaced by spending discipline and strategies to maximise productivity on currently active mines. Analysts have been second guessing new production estimates on an almost monthly basis since the business climate changed and the sector has seen a 30 per cent decrease in the 10-year forecast for new copper production. Until recently, demand fundamentals for the industry were almost a certainty, which essentially indicated that there was a healthy correlation with supply. However, following the uncertainty in Chinese demand, combined with Asia’s projected growth figures, there is a growing consensus that there will be excess production over the next few years. To further evince this prediction, China has consumed an average of 10 million tonnes of copper per year since 2010, roughly 40 per cent of total global demand; however, an analysis of year-to-date behaviour in August 2015 suggested that the Chinese economy is likely to use in the region of 400,000 tonnes less than the figure fore-cast in early 2015. Moreover, while estimates of short-term demand emanating from major banking institutions differ, Goldman Sachs has taken a particularly bearish position, slashing its copper price forecast and predicting that Chinese copper consumption will not grow in 2015 or 2016. This uncertainty has not been buoyed by other events, such as the unexpected de-valuation of the yuan by The People’s Bank of China, a move that represented a direct hit to commodity-producing countries like Chile; or the various speculative actions by Chinese hedge funds that not only revealed the power these groups have to affect the copper price, but also drew renewed attention to the pau-city of data on copper stocks in China. Yet, the outlook is not completely pes-simistic. The Chinese Government has an-nounced it will spend around US$315 billion
to improve its power grid infrastructure be-tween 2015 and 2020, a boon for copper pro-ducers. Moreover, although disputed in some corners, China is still a developing county ac-cording to institutions such as the World Bank and the International Monetary Fund, due to its per capita income. With incomes set to climb along with development, the intensity of material use, particularly copper, will increase concomitantly until it peaks when incomes reach a certain level. The priority regarding organic and inorganic growth has been replaced by an awareness of the need for discipline and rational behaviour. However, these positive developments will take some time to manifest themselves and the current focus for the mining industry is on maximising returns from existing op-erations and ensuring that shareholders see these returns through tangible dividends. The practice of cutting costs has been required at regular stages in the sector, but now pro-ductivity and not just austerity seems to be the key to keeping operations sustainable. Thus, while the view that the position on the cost curve was a secondary consideration to maximising output held the industry in good stead over recent years, however, it is not a strategy to which Chief Executive Officers (CEOs) can adhere to any longer. Many of the current CEOs have inherited hubristic acquisitions executed by their pre-decessors, coupled with a heavily-populated pipeline of investments in capital projects. The cost blowouts on capital projects have raised the bar for shareholders’ expecta-tions and CEOs understand this situation. Management has been charged with reas-sessing the economics and risk analysis of their projects. Increasingly, the global ten-dency is moving towards project deferral with companies announcing plans to take a step back and reevaluate until the market condi-tions allow further progress. This does not mean that CEOs believe that ‘manage what we have’ is the correct strategy: rather, the question is how best to manage assets and investment through the current cycle. Very minimal resources are being invested in finding greenfield discov-eries as pressure mounts regarding share-holder returns. Mining companies with cash on their balance sheets will be looking to invest in distressed or underdeveloped assets, which will probably be outside Chile, where they are likely to come face-to-face with Chinese investors. That said, two major transactions took place in Chile in 2015: Antofagasta plc bought 50 per cent of Barrick Gold’s Zaldívar copper mine in a deal that included the right to act as an operator, and the British company, Audley Capital, purchased Anglo American’s Mantos
Blancos and Mantoverde operations. These transactions not only highlight the long-term stance that many important industry players are taking, but also reinforces the confidence in Chile as a solid destination for mining. Undoubtedly, the mining sector in Chile is in the midst of a period of uncertainty. Investors are likely to be far more selective during the next cycle, and a large proportion of Chile’s projected investment in the mining sector has already been subject to delays and reductions. It has been suggested that up to 80 per cent of these projects will not be initi-ated before 2020. During the last 30 years, the development of the mining sector in Chile has been largely independent of the political changes in the country. This no longer holds true; politicians are increasingly looking to the mining sector for additional resources to fund rapidly-increasing social expenditure. Major tax reforms in traditional mining countries, such as Australia, South Africa and Brazil, have paved the way for similar actions in Chile. Future governments will need to find a bal-ance between ensuring that all stakeholders are sufficiently rewarded, without damaging the interest in Chile’s leading industry. This is no small task in an industry with a 20-year in-vestment cycle that is measured on its annual contribution and returns.
➥ This feature was produced in conjunction with PwC
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ROUnDtABLe: RISIng tO neW chALLengeS The Chilean mining industry has long been described as the backbone of the economy. Nonetheless, collaborative thinking between the main players is needed if the country is to confront new challenges and secure growth over the coming decade. Special attention must focus on increasing public trust in the sector and assuaging wider concerns relating to energy and water supplies.
AGENDA
■ Community relations ● Clarifying the regulatory framework ● Creating shared value and partnerships ● Educating and training communities
■ Human capital ● Increasing productivity ● Competing for the next generation
● Improving mining environments ● Learning and technology centres
● Closing the skills gap ● Intelligent recruitment practices
■ Innovation ● The role of the State ● Beyond traditional innovation ● Improving the incentive to innovate
● Partnering with suppliers ● Applying innovation to the energy issue
■ Investment and project development ● Changing landscapes
● The end of the EPCM model ● New strategies and disciplines
● Project delays: navigating uncertainty ● The permitting process: ILO 169
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PARTICIPANTS
Maciej was appointed General Manager of the Sierra Gorda Joint Venture in October 2013. Prior to this, he held the title of VP of Technical and Project Services on the same project. Maciej holds a masters degree in economics from the University of Economics in Katowice, Poland. Prior to joining KGHM, he worked for KOPEX in a number of mining-related roles, which saw him involved in the execution of several projects in different parts of the world.
dIEGO HERNáNdEzchief executive officerantofagasta plc
saLVaTORE BERNaBEIGeneral ManagerEnel Green Power Chile and andean Countries
Maciej ŚciążkoGeneral Managersierra Gorda sCM
GusTaVO NIEPONICEPartner and Managing directorThe Boston Consulting Group
As the leader of BCG’s mining practice for Western Europe and South America, Gustavo has more than 15 years of consulting experience in the mining industry, supporting clients in the Americas, Europe and Asia-Pacific. He has led projects on growth strategy, project excellence, operational and organisational efficiency, value management, and pricing/logistics. He holds an MBA from Stanford University and an industrial engineering degree from Universidad de Buenos Aires, Argentina.
Diego holds a degree in civil mining engineering from Universidad de Chile, and is a graduate of the École Nationale Supérieure des Mines de Paris. Diego has held different executive positions in Rio Tinto and Vale in Brazil; and at Anglo American, Collahuasi and BHP Billiton Base Metals in Chile. In 2010, he was appointed Executive President of Codelco. Diego is currently CEO of Antofagasta plc, a copper mining group with interests in energy, transport and water distribution.
Salvatore holds degrees in industrial engineering and business administration from Politecnico de Milano. At Enel Green Power, he is responsible for the development of renewable energies in Peru, Colombia, Ecuador and Chile, the latter accounting for four operating plants that deploy wind and hydropower, and four plants under construction. He previously worked as operations and maintenance manager, as well as engineering manager for Spain and Latin America at the same company.
Ignacio is an economist with a masters degree in business ad-ministration from the University of Montpellier, France, and a degree in management science from the University of Bradford, UK. He has over 18 years of experience in the mining sector and has held high-level positions at various organisations including the Banque Nationale de Paris (BNP), Cochilco, the Centre for Metallurgical Research Mining (ICMM), the Chilean National Mining Company (ENAMI) and Minera Cerro Dominador.
IGNaCIO MORENOundersecretary of MiningMinistry of Mining
Fidel received a civil engineering degree from Universidad de Chile, an expert engineering degree from École des Mines de Nancy, France, a mineral economics degree from Institut National Polytechnique de Lorraine, France and completed an executive programme in operations management at the University of Western Ontario. He began his career with Codelco in 1980 and has since held several leadership positions within the company. Fidel assumed his current position in 2013.
FIdEL BáEzTechnology and Innovation ManagerCodelco
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MaRCELO awadIndependent advisor
FRaNCIsCO COsTaBaLVice President of Business development and administration-south americaFreeport-McMoRan
Francisco obtained degrees in business administration and economics from Pontificia Universidad Católica de Chile. He was appointed VP of Business Development and Administration for South America at Freeport-McMoRan in June 2010. Francisco has served in the areas of finance, administration and operations at Codelco, Sociedad Minera Pudahuel, Cerro Colorado and Minera Spence, and is currently the second VP of the Chilean Mining Council Executive Committee.
Marcelo sits on the boards of several businesses, including investment group Bethia Holding, as well as heavy equipment, construction and drilling services companies. Prior to his 16 years with Antofagasta Minerals, where he acted as president and CEO, Marcelo worked for 18 years at Codelco in progressively senior positions. He has also served as director of the London Metal Exchange, and the Harvard Business Review Magazine ranked him in the top 100 CEOs globally.
PARTICIPANTS PaTRICIO MELLERPresidentFundación Chile
Francisco has a law degree from Universidad de Chile and a masters in tax planning from Universidad Adolfo Ibáñez. He became legal director of the Pascua Lama project in October 2013. Francisco has 24 years of professional experience and over 18 years in the mining sector, working for Antofagasta Minerals in its projects and operations in Chile and abroad, including the Reko Diq project in Pakistan and the Twin Metals project in Minnesota, USA.
Patricio graduated as a civil engineer from Universidad de Chile and holds a PhD in economics from the University of California, Berkeley. He is the executive director of the leading Latin American think tank CIEPLAN, and chaired the Presidential Council for Equity during the first government of Michelle Bachelet. In 2005, he served as director of Codelco. Patricio has authored publications on issues such as the Chilean economy, mining industry and international trade.
FRaNCIsCO CHaRLINLegal directorBarrick Gold south america
ROUnDtABLe pARtneRS
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Ignacio Moreno, Ministry of Mining: It is my pleasure to chair this Roundtable. The topics under discussion today cover the challenges that Chile’s mining industry will face over the course of the next decade. On the agenda, issues related to energy and water supply fea-ture highly, as do subjects such as human capital and inward investment, but I think a pertinent place to begin is the topic of community engagement, which I personally believe is the most pressing concern. It is becoming increasingly difficult to obtain a social licence to operate (SLO), and it is clear that industry and government actors have not been able to success-fully explain to Chile’s citizens why mining is so crucial for the economic growth of the country. Thus, it is vital that an evaluation of the current framework is under-taken in order to bridge the gap.
In the past, projects started with the design and engineering phases, followed by the environmental permitting process. Only then would companies start to build a relationship with communities in the area. As a result, if there were any objections or disputes, in many cases it was too late, or required significant work, to make changes to the project. I believe mining companies and authorities must now begin community relations at the genesis of the project in order to foster healthy relationships. I would like to begin by asking for your experiences regarding this issue, and your opinions on the challenges faced.
Francisco Costabal, Freeport-McMoRan Inc. (FCX): It seems to me that certain issues in terms of commu-nity and stakeholder engagement have detracted from the main discussion. Due to the lack of clear regula-tion, especially surrounding the application of the International Labour Organization Convention 169 (ILO 169), regarding indigenous and tribal peoples, there is
no framework within which mining companies have the certainty needed to move forward. It could be argued that the business of community en-gagement has been very lucrative for some consultants who claim to represent the communities in question. Despite the efforts made to mitigate the environmental impact of projects, as well as increasing the social benefit that companies generate through their opera-tions, frankly speaking, in many cases the focus is still on monetary recompense. We have even experienced situations in which unrelated parties have attempted to obstruct development, seemingly, in order to benefit financially. Again, this has been exacerbated by the lack of regulatory clarity. It is also possible to identify some flaws in the indus-try’s approach. Too often, there has been the expecta-tion at the beginning of a project that problems can be solved with money. This has proved to be an unsus-tainable policy as, when you assume that role from the outset, the compensation figure can only increase. If this approach is continued, there will come a time when it will be impossible to develop projects.
Diego Hernández, Antofagasta plc: It is clear to all market actors that community issues are incredibly im-portant and that an SLO is necessary to move forward with a project. We do not need to be convinced; we are all doing it. However, the regulatory framework must be en-hanced. There are certain areas that are not regulated and areas that require more balance. For example, mining companies are required to be totally trans-parent when issuing quarterly financial results, but the same standards are not applied to the stakeholders rep-resenting the communities, who are often not clearly defined. Moreover, while in most instances NGOs are established and well known, that is not always the case and it is unclear how they are financed or by whom. Finally, the legal side of this problem must also be addressed, as there are a minority of practitioners that see this as a business. This is important because the legislation on environment and permitting in Chile is still relatively young. Thus, loopholes and unregulated areas can be exploited in order to stop projects or chal-lenge permits.
Ignacio MorenoUndersecretary of MiningMinistry of Mining
Industry and government actors have not been able to successfully explain to Chile’s citizens why mining is so crucialfor the economic growth of the country
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last for more than 30 years and, therefore, it is impera-tive that a plan outlining the company’s vision for the project’s stakeholders and the local environment in the long term is developed and adequately communicated.
The position at Enel Green Power is that early stake-holder engagement is an extremely valuable decision that allows the company to lower management and reputational risk. The industry is already beginning to change the paradigm and, moreover, it is extending the definition of ‘stakeholder engagement’ to include steps that will endure beyond the life of the project. Importantly, it is essential to reconcile the interests of the company and the stakeholders in order to reach a common perspective, as it will necessarily result in mutual benefits and the perpetuation of a reciprocal atmosphere. This objective can be furthered by a com-mitment to generating shared value, which, from the perspective of Enel Green Power, translates into en-suring that we leverage our projects to create multiple drivers for local development. For example, developing and including local communities in the project supply chain, as well as contributing to environmental conser-vation and the enhancement of living standards through the use of innovative solutions and by opening new, more accessible markets.
Gustavo Nieponice, Boston Consulting Group (BCG): I strongly agree that ground rules must be enforced to clarify the role played by the government, especially on the issue of taxation, and which establish how com-munities will benefit from projects directly. On the issue of direct benefits, another important ob-jective should be to maximise the involvement of local communities on the business side. Mining companies have very structured processes in place for contracting
This atmosphere of uncertainty is not conducive to the advancement of new projects. It is illogical for a company to invest US$250 million in a project when there is a possibility it could be stopped by a legal technicality. We have to build an ecosystem in which all parties are confident their counterpart is working in good faith. In order for that to happen, we must learn more about ourselves as businesses, as well as the stakeholders, so we can build sustainable relationships. One aspect that could be addressed immediately is the level of centralisation in Chile, especially in relation to the tax system. Other than by entry-level employment, in terms of wealth distribution, the local communities are not compensated for the negative impacts of a project. Additionally, mining companies have to make a concerted effort to incorporate people from the local area, not just as contractors or untrained workers, but via quality jobs.
Salvatore Bernabei, Enel Green Power Chile and Andean Countries (Enel Green Power): It is essential to establish a common vision and clear rules for the market actors, institutions, communities and organisa-tions that are involved in the stakeholder engagement process. This is a vital step that will increase the suc-cess of projects and lead to the development of the kinds of long-term relationships with local stakeholders that are required to move forward. At present, we have a real opportunity to implement best practice in all sectors whose operations can po-tentially have an impact on social and environmental issues. Internationally-recognised criteria and prin-ciples already exist relating to these areas, which can enable companies and other organisations to undertake internal process assessments. These would allow for a full evaluation of the long-term benefits of investment that includes interaction with the local communities and the local environment surrounding a particular project. Once best practices have been completely integrated, I would anticipate a reduction in conflicts, a stimulated investment environment and a clear pathway to a sus-tainable industrial presence in all sectors. The quicker these changes are put into practice, the more it does to establish trust between stakeholders and investors. A mining or power generation project can
Diego hernándezChief Executive OfficerAntofagasta Minerals
Mining companies have to make a concerted effort to incorporate peoplefrom the local area, not just as contractors or untrained workers, but via quality jobs
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and procurement. While the majority of local suppliers and companies are unable to comply with many of the guarantees and prerequisites that are stipulated, they are perfectly capable of delivering the level of service required. In this respect, companies should incorporate increased flexibility into their processes, in order to create a lasting and meaningful development for the community as local businesses gain valuable experience fulfilling new contracts.
Francisco Charlin, Barrick South America: I think most would agree that the Pascua-Lama project might not be a paradigm for success in terms of acceptance by communities and creation of value. However, the posi-tive aspect of our experience is that we can take the opportunity to analyse what went wrong and ensure improvements are made in the future.
The mining landscape has changed, communities are becoming more empowered and, due to the de-centralisation of media sources, information can be disseminated freely, in many instances without proper scrutiny or any assessment of veracity. As others have highlighted, there has also been an increase in the number of actors who spuriously present themselves as representative of communities for personal gain and can affect the development of mining projects. As a result of our experiences, we found that com-munities often do not understand the nature of projects that have been in the area for 20 years, or what impact these projects will have on their area and their lives. Working on this basis, we entered into a Memorandum of Understanding with 12 Diaguita communities, part of which was an agreement to finance a comprehen-sive and independent due diligence on the project. The communities hired the head of the Patagonia Sin
Represas movement to coordinate the effort and evalu-ated a range of issues related to the project such as water, glaciers, air pollution, and the effect on indig-enous territories. As Salvatore highlighted, projects are more flex-ible in the early stages. Thus, it is imperative to make contact with affected parties as early as possible. However, it is also vital that communities develop an understanding of the real impact of the project. We discovered that one way this can be achieved is by fostering active participation. For example, we created a participatory water sample system and invited the communities to take the samples and see the results. Open dialogue between the parties is clearly im-portant, but it must take place in parallel with a real willingness to make changes where possible. There is no perfect paradigm: all we can do is try to navigate our own course, but State support is key to the process and, ostensibly, the capability or budget for a research function in this area is currently non-existent. The con-sultation process is severely limited if communities lack the access to technical experts and lawyers that are required for an independent assessment.
Maciej Ściążko, Sierra Gorda SCM: In 2014, during the construction phase of Sierra Gorda, we had problems at the port of Antofagasta in relation to a storage and transportation project. At the time, I was amazed when it transpired that the local community were completely unaware of the Sierra Gorda project, what we were producing or what was being transported. Clearly, we must take some responsibility, as a company, for failing to carry out adequate communication processes to inform the community, but it is difficult to know how to proceed when there are some parties that attempt to speculate on the back of corporate social responsibility initiatives. In this respect, as others have suggested, regulation is needed in order to clarify which actors are truly committed to helping the community. Community concerns have changed the mining landscape beyond recognition. The majority of a board meeting 20 years ago was dedicated to mining opera-tions and budgets, but now 90 per cent of the time is taken up by community issues and discussions about the social licence to operate. It is a huge difference and it
Maciej Ściążkogeneral ManagerSierra gorda ScM
The majority of a board meeting 20 years ago was dedicated to mining operations and budgets, but now 90 per cent of the time is taken up by community issues
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requires a complete recalibration of mind-set in order to move forward. However, I think there is a great potential for syner-gies between market actors regarding how to proceed and overcome these issues, which has not yet been explored. At least from the perspective of Sierra Gorda, it seems that we have constantly been in fire-fighting mode and have not had the opportunity to develop a sustainable strategy for engaging with this new reality in the long term. Nevertheless, we are beginning to make headway.
Patricio Meller, Fundación Chile: Worryingly, the State is largely absent in the mining regions, i.e. social expen-diture is lower in these areas, especially for education, health and housing. The implicit argument is that the large mining companies operating there should invest to make up the shortfall. Given that mining companies generate a significant proportion of the country’s fiscal revenue, perhaps they should be pressing the govern-ment for greater symmetry here. Another issue is related to the actual, calculable benefit of investment projects to a particular area. In my opinion, the traditional approach to CSR is no longer valid. Certainly, we have to increase community involvement and create more adequate feedback loops, but it is the long-term legacy of a project that is impor-tant. It is insufficient to just produce figures regarding the number of jobs generated in the short term and move on. Finally, there are approximately US$50 billion worth of projects that have been stopped for reasons related to the community or the environment. This should also be a major source of concern for the government, given their efforts to attract foreign investment. Under the current scenario, everyone loses. In the U.S., a dedi-cated task force has been established and given special resources to address the issues that are stopping proj-ects. I think it would be wise if the Chilean Government followed the same path and sought to involve the pri-vate sector, especially regarding mining.
GN, BCG: Regarding the absence of the State in mining regions. One significant problem associated with these projects is salary inequality between those employed
by the mining sector and those in other sectors, such as agriculture, for example. If we are not able to have basic conditions of education, health and security for the people that are not employed in the mining proj-ects, it creates a tension within these communities that can be very corrosive. Industry and government must come together to create the basic living conditions for those not participating directly in the projects.
FC, FCX: The communities that surround mining projects are difficult to engineer, so to speak. In our experience, we train and develop labour competences in these com-munities, but when these people gain employment in the mining sector, due to their improved salary, they can afford to relocate to towns that offer higher standards of living. Those who remain in the mining communities have no other option. Thus, a comprehensive approach is needed.
However, implementing an overall approach is some-what hampered by the complexity of the permitting pro-cess. Community development issues have been assimi-lated into the approval process and are measured under the same high-level standards as the environmental aspects, which are audited in relation to compliance, i.e. the project either complies to an agreed standard or it does not. However, it is far more difficult to measure or prove an increase in a development issue to which you may be committed, such as educational standards or labour competence, for example. I would prefer to commit to providing a certain amount of money for the investment in the surrounding area, but transfer the decisions regarding expenditure to the community itself. If the investment is led by a company, there is always the perception that ownership lies with the company and, by extension, that the com-pany is responsible for any problems that arise. Clearly,
Francisco costabalVice president Business Development and Administration South AmericaFreeport-McMoRan
Implementing a comprehensive approach [to community issues] is somewhat hampered by the complexity of the permitting process
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the company will provide support and guidance, but the community must be made to feel that they are taking control of their own future.
SB, Enel Green Power: It is vital we change the percep-tion that ‘the company’ is ‘the other’. If we create re-lationships based on partnership and trust, there will be a solid foundation on which to move forward. Building trust is a matter of best practice, applied consistently over the years, and a matter of assessing and meeting the real needs of the stakeholders.
Writing a cheque and expecting the community to make investment decisions creates the impression that the issues are solely related to money. This must be avoided. As part of an environmental permit process for one of our projects, we committed to building a museum, the Centro de Interpretación del Desierto, in the Atacama region. In the brief, we stipulated that the items used to furnish the building should be sourced lo-cally and in a manner that would drive sustainability and development for the community. Thus, we brought in an expert in utilising recycled wood to teach community members how to build the furniture from the wood pal-lets used in industry, which then furnished the museum. Of course, there are all manner of different solutions, but a monetary-based relationship is not sustainable. Fundamentally, we must clarify how value is as-sessed because it is a difficult concept to measure; ‘value’ is not the same as ‘money’. This axiom should be the starting point for any discussion and needs to be recognised by both the community and the industry.
GN, BCG: Building relationships with stakeholders is a significant concern across many global economic sec-tors. Market actors participating in the oil and gas
industry in Africa and Asia are creating governance bodies to manage community investment and ensure adequate oversight. The governance bodies are formed of government officials, market players and community representatives. As well as empowering the community, creating this kind of member organisation has the ad-ditional benefit of clarifying and giving legitimacy to those involved, especially on the community side.
IM, Ministry of Mining: The discussion relating to the SLO and community involvement has highlighted the need to train local workforces, which bring us neatly on to the broader issue of human capital. One of the difficulties that Chile’s mining sector must address is the lack of technical professionals available. I would like to open this question up to the table and delve into the various approaches to resolving this issue, as well as find out more general views regarding the ac-tions required by public and private entities to improve human capital in the country?
FC, FCX: Primarily, there must be an accurate assess-ment of people needed and the various competences that are required. Then, the question is one of produc-tivity. We developed a study with the Cámara Chilena de la Construcción (CChC), the trade association for the construction industry, which studied the productivity of our workers. It revealed that in a ten-hour working day, approximately three hours is spent on lunch and getting to and from the mine face, nearly a third of the day. This leaves approximately seven hours and during this time we found only 49 per cent consists of ‘effective work’, 37 per cent of which is actually adding value. Accordingly, the most important issue to understand is what is happening during the 51 per cent period in which the employee is not carrying out ‘effective work’. The primary breakdown of this 51 per cent shows that ‘authorised detention’ amounts to 19 per cent of that time and 32 per cent is the period during which the employee is not adding value. The secondary break-down points to the causes of this lack of productivity. Non-mine transportation makes up 14 per cent; 13 per cent represents the initial journey to the mine face, including safety procedures; 12 per cent represents non-planned sequence issues; and 11 per cent amounts
Salvatore Bernabeigeneral Managerenel green power chile and Andean countries
It is vital we change the perceptionthat ‘the company’ is ‘the other’. If we create relationships based on partnership and trust, there will be a solid foundation on which to move forward
Enel Green Power Energy has neverbeen so natural
Using innovation and committed to local communities, Enel Green Power, in partnership with Minera El Abra, has built an o� grid renewable energy hybrid plant (solar and wind with a batteries system) which makes the dream of havingelectricity 24/7 come true for a local community living over 3,600 meters above the sea level on the border with Bolivia, in Ollagüe, Chile.
www.enelgrenpower.com
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to delays or stoppages without reason. It is perfectly possible to break these issues down further to gain a deeper understanding. These are simple examples of productivity lapses relating to regulation and lack of planning that could be solved fairly easily. However, we must remember that planning and execution is the responsibility of both the worker and the company together and, in fact, we have several initiatives underway to improve in these areas, which we hope will lead to a substantial increase in productivity.
GN, BCG: At BCG, we carried out various different studies that produced very similar results. On average, during a 12-hour shift, approximately 25 per cent equated to value-added work. Best practise would be 50 per cent added value time, which would be doubling normal productivity. The study also concluded that very small changes, such as adding one hour to a shift, could have a dramatic effect on productivity and offer huge potential savings for a company. As Francisco suggested, many instances of productivity loss can be attributed to organisation and management, rather than to the workers themselves. Furthermore, communication between the various different areas is key to improving efficiency. Often, departments, such as operations and maintenance or mine and plant, do not talk to each other and this causes problems. The key driver that would improve productivity in these cases is improved management, especially middle management functions. The discus-sions regarding productivity always tend to focus on technical competences, but more emphasis must be placed on providing business management training as part of the technical qualifications to those destined for management positions. Another element is technology. Although not a so-lution to every problem, it allows some functions to be taken care of remotely, and certain activities to be automated altogether. Rio Tinto and BHP Billiton, working in the Pilbara in Australia, have moved several operations to Perth, reducing the number of fly-ins and fly-outs. This type of restructuring cannot be put into effect from one day to the next, but it is also something that merits long-term consideration.
DH, Antofagasta plc: One issue is being able to attract good people to mining jobs and a solution to this is of-fering the ‘fly-in, fly-out’ option, whereby employees are flown to and from the area to coincide with their particular shift pattern. It is enthusiastically taken up by all areas of the company, but especially appeals to young people.
However, it also causes significant problems. It has an adverse effect on the local communities and compromises the quality of life in large mining towns because, although that is where the money is earned, it is not where the money is spent. This is becoming an increasing concern.
PM, Fundación Chile: It is not clear how this dilemma can be resolved. By offering the ‘fly in, fly out’ option it is clear that local resentment is fomented and an obvious divide is created. Moreover, adjusting the work schedule in order to attract talent just makes matters worse and effectively cancels out the benefits of any regional CSR initiatives. Yet, this problem is perpetuated by the preferences of the workers, as well as by the companies. The quality of life in mining towns must be raised; otherwise, we will not be able to reverse this trend. One possible way to further this aim would be to establish world-class training centres in the mining towns. Chile accounts for one third of the world’s copper production, yet the country has not developed the kind of training capacity that should correspond to this figure. Moreover, the mining sector uses the most advanced technology of all the economic sectors in Chile, but we do not see the kind of technology transfer to other sectors, or to society as a whole, that you would expect. Calama, in the Antofagasta Region, could be home to the best institute for technicians and professionals
gustavo nieponicepartner and Managing Directorthe Boston consulting group
Many instances of productivity loss can be attributed to organisation and management, rather than to the workers themselves
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in the world. If an institute of robotics, automation and remote control, for example, were to be located in Calama it would attract students from all over the globe and the area would significantly benefit. However, these kinds of initiatives require a joint effort from the Chilean Government and the mining industry.
SB, Enel Green Power: It is clear mining towns must be transformed into more attractive prospects. However, a remote location does not preclude the creation of an inviting environment. For example, Dubai and Abu Dhabi are cities in the middle of the desert that were created from nothing and are now globally important economic locations, which draw in huge numbers of people. Regarding project site living arrangements and the fairly high employee turnover rate: at Enel Green Power, we realised that treating salary as the only possible vari-able for employee decisions regarding accommodation is not a sustainable approach and that in order to find a workable solution we must improve the quality of life at these sites in collaboration with the workers. Thus, we polled employees to ask how they felt life on the site and the surroundings could be enhanced and made an effort to incorporate their suggestions. Of course, this is only one factor, but it is a good start.
MS, Sierra Gorda SCM: We must weigh up the relative benefits of improving life at the camps versus those of following a reasonable working roster i.e. seven weeks on, seven off, rather than, for example, four on and two off. In Indonesia, we set up beautiful camps with swim-ming pools, churches, mosques and golf courses, which reflected the length of time the workers spent there, but in Chile the fly-in, fly-out rosters are far more agree-able, so it is not as necessary.
Fidel Báez, Codelco: From Codelco’s perspective, in terms of laying the foundations for the future, one of the biggest challenges is competing for talent with other industries. The millennials are more interested in being close to the city and the concomitant ambience; a mine site does not offer this kind of environment. We are addressing this by incorporating new technology where possible and implementing certain changes to make the sites more comfortable places to live, but it will take
significant changes and an incredible amount of work to make mining sites as attractive as the city. Additionally, with new technology comes a require-ment for new skills and Codelco has been working with the Consejo Minero, or Mining Council, on the Consejo de Competencias Mineras to more closely define these new skills, and to influence the curriculum for mining-related careers set by the technical institutes and uni-versities. We must ensure that the needs of the industry are being met by the next generation of graduates. We are also getting involved in recruitment specifications, via the universities.
MS, Sierra Gorda SCM: From memory, the last time youth unemployment was measured in Chile by the World Bank, which was in 2013, statistics showed that it was three times the total national unemployment figure. Furthermore, this gap has been fairly consistent for some time now and points to the fact that there are serious dif-ficulties in mobilising young people once they graduate.
PM, Fundación Chile: This unemployment problem among the under-25s can be addressed if they are pro-vided with the right skills. Fundación Chile, the Consejo de Competencias Mineras and VetaMinera are setting out standards in order to match up supply and demand, ex-amining what type of competences different mining jobs require. One area of focus is standards, but the most important focus should be on imparting the knowledge that is required to actually undertake these jobs; this is where we are failing. The higher education system in Chile is not leaving young people equipped to enter the labour market. The programmes I mentioned are trying to close that gap by attempting to align what is taught to young people more closely with, in this particular case, the needs of mining companies.
IM, Ministry of Mining: Would you say that this gap between supply and demand stems from a difference
Fidel Baeztechnology and Innovation Managercodelco In terms of laying the foundations for
the future, one of the biggest challenges is competing for talent with other industries
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in working culture or from a disconnect in expectations between the generations?
Marcelo Awad, Independent Advisor: Rather than fo-cusing on enticing young people to work in the mining industry by improving particular conditions, we need to make a broader assessment of the issues. I would suggest that this new generation of professionals has a different attitude towards the work-life balance. Thus, we need to adjust to this new reality and a paradigm shift is necessary.
Whilst these young employees are extremely produc-tive during the agreed working hours, they set clear limits regarding what is acceptable. For example, even in Santiago, an employee from Generation Y may comply with three requests to work late in a week, but if it becomes the norm they calmly outline the terms of the contract and explain that if it continues they will look for other employment. This is the new reality. There is now a greater culture of awareness regarding work-life balance and, moreover, the jobs market is far more fluid; people do not expect to work for the same company their whole career. The key point is that we must create conditions that nurture their productivity because we owe it to these people to harness their talents. It will pay off in the long term.
SB, Enel Green Power: I think it is clear that Chile should not only be the world’s leading copper mining country, but also the country with the best formative training for professionals that will work in the industry. Due to the enormous volumes involved in mining, any operation, if not carried out properly and efficiently, has the potential to seriously impact the companies’ results across the board. From technical functions to procure-
ment and contract management, it is employee quality that has the capacity to directly affect performance and, thus, excellence in training is one way to positively influence this variable. Employee quality can be developed in a number of ways. Either with the State playing a leading role, sup-ported by the mining companies; or mining companies could create their own universities providing specialist training. If Chile does not take advantage of this op-portunity, its claim to copper industry leadership will not last. For mining-related activities, the country must strive to host the best university, the best master programme and the best vocational training facilities. Human capital development is one very important ele-ment that allows an industry to be sustainable. All sec-tors should be working, either alone or with the State, to achieve this objective.
IM, Ministry of Mining: Clearly, another dimension to this issue of human capital productivity has to do with the contractors that work on mining projects. I am on the board of directors of the Empresa Nacional de Minera (ENAMI), the state-owned mining company that supports the small- and medium-size mining en-terprises. In the middle of 2014, the company took the decision to reduce the number of contractors and hire employees for crucial areas directly. The aim was not only to gain more control over these important areas, but also to reduce costs and difficulties with striking contract workers. Two issues that were negatively im-pacting the company’s results. What are your views on the issues here?
FB, Codelco: We have a demonstrable record of better productivity when using our own workers, with whom we are able to achieve approximately 65 per cent of productive work time over a 12-hour period. When contractors are involved, the scenario becomes less favourable, with only 30 per cent productivity over the same timeframe. We have studied the work patterns of contract workers and have found that a lot of time is lost due to management issues, particularly related to coordination and poor logistics. For example, delays in contractors entering the mine, while they wait for other workers
Marcelo AwadIndependent Advisor
There is now a greater culture of awareness regarding work-life balance and, moreover, the jobs market is far more fluid; people do not expect to work for the same company their whole career
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to exit. We have projects underway to monitor and im-prove this. In terms of the bigger picture, and in order to address this disconnect, we are also looking at ways of changing the mentality of contractors themselves. The question is related to cost versus productivity and to what extent the benefits of bringing in contrac-tors outweighs the issues related to managing their operations on site. Major improvements are possible, but companies must take greater responsibility in terms of coordinating and motivating contractor workers.
DH, Antofagasta plc: At Antofagasta Minerals, we are studying the scope of the contracts and reassessing our relationships with contractors. The key is to buy ser-vices, not people. There are many scenarios in which contractors are more effective because they are able to achieve economies of scale. For example, a company that offers blasting services uses specialised equipment and, therefore, provides a far more competitive option. However, that is not the case with every service and we must look closely at each different situation.
To return to the topic of training and human capital briefly, one crucial step is to systematically train our man-agement level staff how to manage contracts, because this has now become a function of an engineer working in production, and it is currently learned on the job. There is no perfect model for contractor usage because the question must be addressed on a project-by-project basis, but successful ones can incorporate a high number of contractors, as long as they are focused on service provision. Unsuccessful models see labour hired indiscriminately, with no thought given to how much manpower is actually required for a particular job. To some extent, this comes down to managerial re-sponsibility again and this is something we can improve. GN, BCG: I agree. Frequently, contract management is often viewed within mining companies merely as an
operation, rather than a business function. This way of thinking must change in order for the process to become more efficient. When the procurement department responds to the requests from operations, they are rarely asked to ac-count for their decision-making: for example, whether a particular contract structure or scheme of payments is the most appropriate to cover the activities in question. The ability to evaluate these decisions requires certain skillsets, on both the operational and the supply side. For example, how to articulate the services needed in order to produce the required result or how to undertake a suf-ficiently detailed Request for Proposal to ensure the con-tractor fully understands what is expected. As has been posited, it comes down to equipping employees with the managerial capabilities necessary for them to be able to think about contracting services in business terms.
IM, Ministry of Mining: Let’s move on to another im-portant issue: innovation. In this area, over the last ten years, the State has been fostering innovation programmes and the development of mining suppliers, through clusters and certification initiatives, for ex-ample. We now have a small, but interesting, network in Chile that is increasingly able to export technology and innovation to other mining countries. I suspect that we are very close to achieving a new milestone in the mining industry in terms of innovation. It is a significant issue for the country and an important avenue of further development. What are your opinions on this and how are you addressing the question of in-novation within your own companies? Patricio, will you start us off?
PM, Fundación Chile: The pertinent question here is related to development and whether copper mining can transform Chile into a developed nation. Currently, copper mining companies are seen as cash cows pro-ducing two important outputs: Chilean pesos for the fiscal revenue and American dollars for the balance of payments. However, it is the responsibility of the mining companies to change that perception, otherwise they can only expect further rises in the royalties they pay. One way to change this image would be to dem-onstrate value, other than purely monetary value, by
patricio MellerpresidentFundación chile
The pertinent question is... whether copper mining can transform Chile into a developed nation
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driving the kind of innovation that will allow Chile to achieve developed nation status. At Fundación Chile, we are discussing a strategy for development, centred on the usage of copper as the platform for technological innovation. Mining companies have to be the main agents of these initiatives and must be fully involved in the transfer of modern technology. Of course, we are all aware of the Proveedores de Clase Mundial programme that focuses on elevating local sup-pliers to compete at a global level and it is these kinds of rational frameworks that we need to advance. Moreover, Chile’s 30 per cent share of world copper production is contingent on its reserves, which are in fact 30 per cent of total international reserves, so maintaining its status requires the production of ap-proximately eight million tonnes of copper annually until 2030, which is not a minor undertaking. In order to achieve this, mines will have to be deeper and com-panies will have to deal with low ore grades and greater mineral complexity. Additionally, serious issues relating to water and energy must be solved. Lastly, and most importantly, we are reaching a scenario in which 50 per cent of the country’s copper reserves are located in the area of Central Chile, which includes Santiago, where middle- and upper-class Chilean citizens reside, meaning that copper mining must now compete with politically influential demographics, rather than just agriculture, for territory. These are contentious issues that remain, as yet, unsolved. We need the entire country, led by the mining in-dustry, to start considering these problems, and inno-vation will be the vehicle that provides the solution. From my point of view, this issue is more important than those related to communities because it is about the development of the country.
IM, Ministry of Mining: I think the mining sector is in-vesting more in innovation than any other part of the Chilean economy. One problem certainly lies in the communication effort to inform the citizenry about its actions. Another problem is related to timeframes: involving universities in this process is difficult, for ex-ample, because, although they have strong capabilities, the institutional pace is very different to that of the mining industry. Furthermore, the award process re-
lating to State funds for mining-related research is out of touch with the requirements of the industry. It can take up to two years, which is too long to offer timely solutions to challenges that are immediate in nature. The relationships between industry and the universities must be improved.
GN, BCG: Government participation is crucial in this respect. They must oil the wheels in order to facilitate innovation within the sector. As an example, the Deep Sea Mine Tailings Placement proposals could have a significant impact if carried out successfully. It will, of course, be subject to further environmental approvals and regulations, but active backing is vital for ensuring that potentially beneficial proposals are given the best possible chance of succeeding.
FC, FCX: I would go as far as to say that there is cur-rently a negative incentive for innovation in this country, stemming from a lack of support from the government. There is also a cultural dimension to the problem; namely that we tend not to protect our inno-vative solutions in mining. Companies are slow to obtain patents and enforce industrial property rights, and in-novative solutions are often shared very freely within the industry. This means that spending a great deal of money on developing solutions will not necessarily pay dividends in terms of marketing potential or additional benefits further down the line. As a result there is little motivation to undertake these activities.
SB, Enel Green Power: We need to recognise that the solution to the innovation issue lies beyond traditional innovation, which is focused on the product: developing equipment that aims to raise productivity or lower costs, for example. We must expand the scope to in-clude a broader area and look at new markets. In terms of copper, this could mean endeavouring to create new applications for the metal. My perception is that mining companies are already looking to augment the established copper usages and find applications that can directly benefit society. It is incredibly important to keep pushing this forward. However, the search for new markets should extend to innovation relating to other mining products, such as
Francisco charlinLegal DirectorBarrick gold South America
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lithium. Chile is now the second largest global producer of lithium after losing the lead to Australia in 2014, but this market still represents a phenomenal opportunity for the country. The world is changing and technology is evolving rapidly. For example, we are seeing the growth of the electric car industry and, in fact, the manufac-turer Tesla Motors is building a ‘Gigafactory’ in Nevada to produce lithium-ion batteries that will require a significant proportion of total global production every year when it comes on line. We have to be open-minded and look beyond the classical notion of innovation, even beyond the metals themselves, and keep track of what is happening in the rest of the world.
IM, Ministry of Mining: In terms of raising the bar, how can we convince multinational mining organisations to have confidence in Chilean capabilities and set up in-novation centres in Chile? What are your own strategies in this regard?
DH, Antofagasta plc: Large mining companies are now outsourcing most of their innovation needs to specialised centres, rather than developing initiatives in-house. At Antofagasta Minerals, we have created a steering committee, led by a vice-president, to foster innovation within the company. The committees are made up of the second- and third-level employees in order to directly involve our younger staff and stimulate fresh ideas. We fund the development of six or seven projects proposed by committee members, which have a budget, a defined scope and a timeframe. As well as the areas of technological innovation and application, we are also examining the ‘soft’ innovation aspects, such as organisation of work and productivity. According to our charter of values, we aim to be an innovative company and we have proven our innova-tive capabilities in the past with initiatives, such as the use of seawater for leaching and flotation. Rather than establishing a research centre for innovation, we are concerned with creating a sustainable framework for in-novation throughout the company, while simultaneously being open to innovative partnerships and initiatives.
FB, Codelco: We redefined our innovation strategy in 2010. Broadly, it falls into the categories of core busi-
ness and support areas. In terms of the latter, in order to face new challenges we use the markets. If the solution already exists in some form in the market, we adapt it to meet our specific needs or, if it is not, we motivate the market to help us define what is required. In the case of the core business strategy, we are open to funding re-search into innovation to meet challenges and engaging in joint ventures with research centres, universities or other mining companies in order to share the risk, but we are always pushing for new solutions to problems.
Essentially, we are involved in many different inno-vation-producing scenarios. This could take the form of bilateral agreements or collaborations with multiple companies, but could also be related to solutions that have been engineered by specialised centres, such as the International Centre of Excellence in Mining and Mineral Processing.
IM, Ministry of Mining: To return to the issue of con-tractors, what role can they play to elevate innova-tion? APRIMIN, the association for mining suppliers, have claimed that it is difficult for mining services and supply companies to provide new and innovative solu-tions within the kind of short-term contracts that are prevalent in the industry. They want to be given the opportunity to drive the innovation agenda and work on new solutions with mining companies.
DH, Antofagasta plc: The programme Proveedores de Clase Mundial is one answer to this. It has put in place a long-term approach under which the criteria is not just to purchase at a lower cost, but rather to foster an environment in which the companies within the programme can develop a solution and are supported throughout the process to the implementation stage.
It is difficult for mining services andsupply companies to provide new and innovative solutions within the kind of short-term contracts that are prevalent in the industry
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Despite this, the number of companies that are able to practice real innovation in Chile is very small and their capacity must be increased.
FB, Codelco: From our experience, although the sup-pliers are open to making changes and increasing in-novation, it is necessary to review their incentives to do so. Due to the fact that we pay the unit cost, it leaves no clear motivation for suppliers to produce new tech-nology or find ways of making it cheaper. Sometimes that lack of motivation is the result of uncertainties that surround the introduction of new processes. For example, if a supply company knows that they can already deliver the solution to a requirement for a certain quantity of cable per year, they do not see a reason to innovate. Therefore, a more detailed analysis of the situation and the procedures that are in place to stimulate innovation should be carried out. It is impor-tant that we stipulate new, clear criteria that incentiv-ises suppliers to do better.
MS, Sierra Gorda SCM: The principle that innovation is necessary to create a sustainable business applies to contractors and mining companies regardless of their size and nature. Innovation has such a broad scope. In the mining industry, due to its cyclical nature, innova-tion is not always directly related to current produc-tivity, but it is inextricably linked to securing the com-pany’s business in the future. It also has a bearing on all other aspects, including fundamental problems such as energy and water. The same goes for contractors, regardless of the length of their contracts; in order to run a competent business, they have to innovate.
SB, Enel Green Power: Linking innovation to energy issues, it is imperative that mining companies innovate to stabilise the future cost of their energy and miti-
gate potential price volatility by diversify their energy mix. To this end, some mining companies are already installing solar thermal plants, for example. Renewable energy is booming and this has reduced costs, making the industry more competitive. In the last ten years, sector growth has averaged about 25 per cent per year, globally. It is now worth US$300 billion per year. There is no doubt that it will continue to grow and the price will continue to reduce. However, innovation should not only be about diver-sifying the energy mix; but it should also look at other processes for which energy is required. I do not think it is outside the realms of possibility to power the enormous mining dump trucks with an electrical engine, which would be able to accommodate an interchangeable bat-tery large enough to store enough energy for a full day’s work. This is just an idea, but it highlights a mindset and the kind of 360-degree innovation that could contribute to the increasing competitiveness of renewables. Globally speaking, there is a trend towards renewable energy and international agencies are predicting that it will account for 50 per cent of the worldwide market by 2030. If mining companies in Chile have the foresight and resolution to champion this technology, it could be extremely beneficial for the industry and the country. Speaking now as a stakeholder in Chile, it is clear that different possibilities must be explored. The de-velopment of the country is dependent on mining and, without energy, mining cannot grow. It is not contro-versial to suggest that a significant number of projects have been stopped, at least in part, due to the high cost of energy. The good news is that the cost of renewables is decreasing and they can be a solution.
PM, Fundación Chile: I agree, but currently every com-pany is seeking the energy mix with the lowest cost, on the basis of current prices, rather than looking to the long term. In other words, they disregard the fact that the cheapest solution now might be the most costly three years down the line. This is certainly related to the energy and water problem as a whole. There is failure of coordination among mining companies, who are all confronting their problems, especially with regard to water and energy, in an isolated manner and independent from the rest of
There is a trend towards renewableenergy and international agencies are predicting that it will account for 50 per cent of the worldwide market by 2030
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the sector. Economies of scale are the key to this issue. Instead of one company building a desalination plant for use solely on their particular project, I would presume that if this plant was built as a result of a joint venture, it would engender significant economies of scale and benefits. This kind of collaboration may also facilitate a joint approach to community relations, which would be most welcome.
FC, FCX: I agree that there is room to take greater advantage of economies of scale; however, I have an il-luminating example case. In Copiapo, we ended up with four desalination plants each within a ten-kilometre radius of the other. In fact, there were discussions going on for five years between the players in the area to engage a contractor to build one large desalina-tion plant that would provide enough water to meet the combined need of all the projects based there. However, the business model was always that the water company would make the investment and the mining companies must agree to a 100 per cent take-or-pay structure. This meant that all the risk was taken on by the mining companies and the situation proved to be unworkable because each company had a different approach. Meanwhile, the only certainty was that all the projects needed water and the underground water was running out rapidly in the Atacama Region. Thus, in order to secure the water we needed for the project, the best option was to build our own desalination plant and mitigate the risk.
DH, Antofagasta plc: Engaging a contractor to build a large desalination plant can be problematic for various reasons and may restrict the options for a collective and mutually beneficial project. As opposed to the power situation, where there is no alternative but to go to market and enter into a long-term contract with a take-
or-pay structure, this type of contract is not always pru-dent for acquiring water, and desalination plants have other recurrent issues that must be considered. For example, unless it is a new project that only uses desalinated water, it is normal that the mine only needs desalinated water to complement its under-ground supply. Therefore, as there will be a seasonal difference in the amount of water required, it renders a 100 per cent take-or-pay model unviable. Furthermore, the contractor will be trying to recoup the investment made as soon as possible and is likely to be in a worse financial position than the mining company, which means the latter will pay a financial inefficiency there. Essentially, no contractor will be prepared to build a large desalination plant without the security of a long-term take-or-pay contract, which may not make busi-ness sense for the mining company.
IM, Ministry of Mining: This brings us smoothly to our final topic: investment in the sector and project development. It is a major issue for the government going forward and, clearly, the private sector is also concerned about increasing CAPEX and resolving the difficulties related to permitting, as we have discussed. Codelco have decided that an EPCM system is no longer viable and will develop projects in other ways due to the need to reduce CAPEX costs. We have repre-sentatives from across the spectrum here: do you share this point of view and what kinds of internal policies are you implementing in order to develop new projects in the coming years?
DH, Antofagasta plc: During the 1990s, we saw the pro-liferation of the EPCM contract model. The copper price was fairly volatile during this period and the model was quite successful. Many projects came in on time, on budget and were able to reach nominal capacity. The effectiveness of the model was also improved as time progressed, but it began to reduce around 2006, when the copper price increased and project demand increased exponentially. During the boom years, mining companies required rapid completion and were, consequently, willing to pay a premium to ‘fast track’ the project. This caused prob-lems related to scheduling and huge budget overruns
There is failure of coordination among mining companies, who are all confronting their problems, especially with regard to water and energy, in an isolated manner
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of over 50 per cent. EPCM contractors were unable to meet the global demand, especially in terms of human capital and many workers from outside the industry where incorporated into the sector, which contributed to a significant deterioration in the quality of projects.
Then, the global market changed and demand for new projects slowed down dramatically. We have now returned to historical levels of supply and demand ca-pacity, but, importantly, the cost has not reverted to the same levels and it is very difficult to change the culture that was built over the boom period. From our perspective, we took the decision to move away from the EPCM contract model for new projects in around 2012. We also redefined our success criteria to stipulate that the first priority should be control of the budget and the quality of the project, not the schedule. Thus, we are now bringing the control of projects back in-house. However, due to the long absence of these capabilities within the company, as a result of third-party involvement, we currently must redevelop the capacity to be able to manage and really control a project ourselves. It is key to have strong internal capabilities, as it is one factor that allows for the nor-malisation of costs in a smaller timeframe. Furthermore, contract engineering services were not readily available during the boom because engineering companies were only interested in selling EPCM con-tracts. Now, the market is different and it is possible to contract engineering services for all the various phases of the project.
MS, Sierra Gorda SCM: During the optimisation and basic engineering studies for the expansion of Sierra Gorda, it was clear that engineering companies were not overloaded, but we still must be careful to avoid the risk of project overruns. Here, I think it is important to
make a distinction between ‘concrete’ engineering and ‘creative’ engineering. Currently, many companies sell you a lot of engineering hours that do not necessarily equate to value. Under the ‘fast track’ system, all aspects were pro-gressing in parallel and it was more difficult to control. However, project schedules are more relaxed now and purchasing engineering dollars is easy, but ‘creative’ en-gineering, as I mentioned, does not always mean good engineering. This must be taken into consideration.
DH, Antofagasta plc: Engineering contractors must also return to pre-copper price boom practices. There has been a slight tendency for contractors to pursue dis-putes or make claims related to changes in the scope of the work, rather than advancing the project. However, the mining companies must also take responsibility here. Under ‘fast track’ conditions, it was more difficult to anticipate and plan for every contingency; thus, there were more changes of scope that left us open to claims that result in delays and overspending. However, we can use this new environ-ment to engender a more disciplined approach, as we are taking greater control and we are able to develop a more detailed engineering plan before we tender the bid. Moreover, this could help miners to foster better relationships with contractors and projects will be much more successful, as a consequence.
MS, Sierra Gorda SCM: The original estimate for the Sierra Gorda mine was US$2.9 billion and the final cost reached US$4.16 billion. Thus, the budget was exceeded by almost a third. This was mainly due to the ‘fast track’ EPCM model, which essentially resulted in poor engineering from the outset and was compounded by the other difficulties that have already been men-tioned. Additionally, market conditions and reduced labour availability increased our expenditure. Clearly, we have reassessed this operational frame-work for the expansion project. As Phase II is basically a duplication of Phase I, it is relatively easy to imple-ment the project under an EPC lump-sum framework. Of course, it will depend on the contingency or premium required by the contractor, and a general improvement in our operational efficiency because late changes
It is key to have strong internalcapabilities, as it is one factor that allows for the normalisation of costs in a smaller timeframe
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always lead to colossal claims. However, we will clearly involve ourselves more closely in engineering, exercising tighter controls and greater discipline in the funding approval process from the very beginning.
FC, FCX: That is crucial, but another important con-sideration, in terms of early involvement, is the opera-tional workers and those who will maintain the plant. They must be consulted in early stages of the design and construction of the project because they have a clear and very practical idea of what is required. This enables a smooth start-up, decreases the likelihood of changes being imposed further down the line, and allows for the project to be ramped up more rapidly.
GN, BCG: Whether or not the EPCM model continues to be a viable option still depends on the type of project, the timing of the project and the availability of EPCM capabilities. However, I think the key takeaway from this is that mining companies should always retain the capacity to execute projects themselves with an owner’s team.
It is clear mining companies cannot always rely on the availability and quality of the EPCM model. Therefore, due to the sheer range of different processes and types of management required, keeping a minimum level of in-house competence is a key factor that will provide the flexibility to leverage a wider range of circum-stances in a beneficial manner.
IM, Ministry of Mining: Let’s continue by assessing the investment outlook. There are approximately 53 mining projects that are due to be completed in Chile within the next decade; however, the timeframes for a number of these projects have already been re-adjusted and will be delayed. Thus, the pertinent questions relate to
what the predominant reasons are for these delays and what can be done to facilitate projects?
DH, Antofagasta plc: Due to the reduction in commodity prices, companies must execute planned projects with reduced cash flow. Plainly, this means it is not possible to start new projects, and so the focus is on completing those already underway, which have continued, albeit with certain delays. The industry currently has more projects on its port-folio than it can afford to develop and must be selec-tive. If there are issues relating to permitting or any other uncertainties, companies will look at different markets with more favourable conditions. This is what has happened in Chile. In order to stimulate and secure inward investment, we must provide more clarity in the areas that have been discussed today. However, a phenomenon that has become more pronounced in recent years is that project location within Chile can increase or reduce project value. In terms of power availability, for instance, mining companies are bound to favour the north of the country because the power situation in the central zone is more problematic.
SB, Enel Green Power: I would add that, although there are some bottlenecks in the two interconnected elec-tricity grids, which create variations in cost in different parts of the country, I think that the situation will change in the coming years. This will, primarily, be due to the interconnection between Sistema Interconectado Central (SIC) and the Sistema Interconectado Norte Grande (SING). Additionally, new transmission lines currently under construction will be completed and al-leviate the bottlenecks. Thus, by 2020, I envision a sce-nario of homogenous energy prices throughout Chile. Furthermore, the interconnection will create an expanded market and increase demand, especially in the SING. Accordingly, large-scale energy consumers, like mining companies, may face greater competition for these resources from other areas, like distribution companies, for instance, particularly those mines that are physically located in the north of the country. This has a significant bearing on future investment because it will affect the power scenarios of new mines
If there are issues relating to permitting or any other uncertainties, companies will look at different markets with more favourable conditions
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that will begin operations after 2020. I think it under-lines the value of securing a contract that will ensure a stable energy price for the next 20 to 25 years, because the scenario will certainly change in Chile.
FC, FCX: I absolutely agree that in order to get projects moving, the climate of uncertainty must be rectified. If we take the tax reform as an example, although it was generally accepted that this area required some adjustment, the actual changes made have created a disadvantage for business. When multinational compa-nies have options elsewhere with more favourable, and importantly, more straightforward tax legislation, they will make their own calculations and choose to develop projects in other countries. The decision will be based on mathematics, rather than perception. Furthermore, regarding environmental issues, we are certainly missing the finality of the decision-making process that was present in the 1990s. Due to the com-plexity now involved in accomplishing community en-gagement, it is virtually impossible to assess risk. There is also a lack of available expertise and precedents in managing the engagement process and the ‘soft’ evalu-ation side. Clear guidance regarding the approach and an awareness of all possible outcomes is needed for success. The absence of this depth of understanding is costing the industry dearly.
IM, Ministry of Mining: Regarding the issues related to permitting, what is the ideal scenario in terms of the government’s role? What do you expect as companies?
DH, Antofagasta plc: As Francisco suggested, it comes back to uncertainty. The legislation is fairly new and there are loopholes that are open to exploitation. This leads to delays as a result of easily avoidable lawsuits. One example is in relation to the tailings dams. These dams are being shut down as a result of legal proceed-ings that claim they are constantly under construction and are, therefore, illegal. If there were a law or framework that defined the terms more clearly, these kinds of claims would be easy to settle. Furthermore, there are too many institutions and authorities with which companies must liaise to obtain permits and, moreover, the number of permits a project
must secure can be in excess of 200. The bureaucracy is stifling and it must be streamlined. We have even had to create a new permit management role within the project team to administer this process. Finally, a permit can be invalidated as a result of minor changes made during the construction of a project. This means the process must be started again from the beginning. It is an absurd system; this par-ticular aspect should be addressed immediately.
MA, Independent Advisor: One key loophole is that the Resolución de Calificación Ambiental (RCA), the overall environmental qualification permit, which is judged by a committee of government ministers, can be contested.
Even once all the permitting procedures for a project have been undertaken and the RCA has been approved, investors and companies do not have the guarantee that they will be able to initiate the project uninterrupted. Currently, RCA approval can be overridden, within a 30-day period subsequent to the granting of the permit, by a lawsuit that may delay the project significantly. Independent of the verdict, the law should be changed to ensure that all parties and stakeholders understand that RCA approval is final.
IM, Ministry of Mining: The application of ILO 169 is a very delicate and important issue. We are aware of the amount of work that is required in order to ensure the process is managed and implemented adequately. One possibility is to separate this consultation from the environmental evaluation system. However, perhaps this is not a definitive solution. What are your thoughts on this process?
Even once all the permitting procedures for a project have been undertaken and the RCA has been approved, investors and companies do not have the guarantee that they will be able to initiate the project uninterrupted
34 INTERNATIONAL INVESTOR
roundtable mining
FC, Barrick South America: It has been proposed that the consultation function could be transferred to the Ministry of Social Development or even to the new Ministry for Indigenous Peoples, and that the process would be undertaken prior to the environmental ap-proval. However, the latter could have a detrimental effect on approval timeframes. During the environ-mental approval process, projects are reviewed and generally undergo significant changes. Thus, it is likely that, once an approval has been granted for the environ-mental permit, companies would be forced to return to the beginning of the process and go through the consul-tation again because, indubitably, the parameters of the project will have changed.
SB, Enel Green Power: Even if the consultation needs to be reviewed at a later date, establishing a dialogue is vital. As I suggested at the beginning of the debate, contact with all community stakeholders is necessary at the earliest possible opportunity and must include all those affected. However, rather than hampering further permitting activity, early intervention could actually contribute to the subsequent consultation and environmental permitting stages. If certain problems are highlighted before the environmental permit is undertaken, it could reduce the time frame, for example. Furthermore, I see no reason why these processes cannot be conducted simultaneously. It is possible to start on the feasibility study and com-munity engagement process without having the detailed engineering in place, or the vast amounts of material re-quested by the Ministry of the Environment. This ensures that, at least in preliminary terms, all relevant stake-holders are involved and that there are no major issues.
Whatever the case, ensuring that timeframes are adequately defined is incredibly important. There must be limits. Removing the consultation process from the remit of the Ministry of the Environment seems like a step in the right direction, because they do not possess the specialist knowledge and skills that are required to undertake this process. However, more importantly, it is a non-environmental issue. Thus, it is not their responsi-bility and could create greater uncertainty.
MA, Independent Advisor: In the mining sector, pro-ducers generally conduct exploration simultaneously on several properties before initiating an engineering profile on the one with most potential. When the engi-neering profile has been completed, the company will have the necessary information relating to the chal-lenges and prospects in order to take a decision to move forward. Thus, only after this phase is complete is it pertinent to start involving the community, otherwise the company would have to engage every community at every potential site even before it had been chosen. This would waste time and add extra cost to the ap-proximately US$30 million that is required to get to this stage of development.
SB, Enel Green Power: We have a similar situation in the energy sector, related to geothermal energy. It is impossible to know the exact location until deep exploration is carried out, but this does not preclude engaging with the relevant communities at an early stage. Clearly, strategic decisions will need to be taken relating to site proximity, but in many cases it would not take significant resources to at least begin relation-ships and it may, to a certain degree, even inform a final decision on project location. In my view, this approach always creates an advantage.
IM, Ministry of Mining: It seems as though we have now covered the key areas of the agenda. I would like to thank you all for your time and your contributions to what has been an extremely enlightening discussion. I think it is very important that these kinds of debates take place on a regular basis to ensure that the mining industry in Chile continues on a balanced and strategic development path.
The application of ILO 169 is a very delicate and important issue. We are aware of the amount of work that is required in order to ensure the process is managed and implemented adequately
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CHILE 35
and the overall organisational improvements that have been implemented, are additional positive developments. We are enhancing our departments and di-visional equipment; reviewing the structure, processes, standards, capabilities and gover-nance of the Vice Presidency of Projects; and strengthening the integration of its operating divisions with customers, all with the aim of executing our investment plan.
What are you doing to minimise costs and increase productivity within a climate of declining copper prices?Unlike other companies, Codelco continues to push forward, and, in addition to realising our investment plan, we are focusing on both ensuring compliance with our production programmes and continuing to strengthen the containment measures and cost reductions. One example is the plan that we recently an-nounced as a response to the fall in copper prices, which posits a reduction in costs of US$1 billion by the end of 2015 and also aims to raise productivity. Under the framework of the Productivity and Costs Structural Project, we identified the implementation of lean management measures as a key lever in our increasing competitiveness. Other priorities
neLSOn pIzARRO cODeLcOexecutive president
INTERNATIONAL INVESTOR: Could you give an overview of Codelco’s investment programme? NELSON PIZARRO: This is the most ambitious investment programme we have ever conducted, with planned outlays for the period 2015-2019 expected to reach almost US$22.5 billion. Codelco’s future, and its ability to contribute to the Chilean State, depends on the programme’s timely implementation. That is to say, if the structural mining projects contained in the plan, which include Chuquicamata Underground, Andina Transfer, Andina Expansion, New Mine Level, Phase II RT Sulfide, and Rajo Inca are not executed in a timely manner, we will experience a significant reduction in production in the medium term, which in turn, would reduce the surplus available to the State. The projected investment in the latter set of projects alone exceeds US$10.3 billion for the period 2014–2018. The realisation of the company’s different structural projects will enable us, in the medium term, to increase production and consolidate our position as the leading copper producer in the industry. How will you meet the challenges of completing the programme, and what lies behind Codelco’s corporate restructuring? Along with the efficient management of our current operations, our priorities are to meet the goals we have set, as well as to execute the structural projects according to schedule and budget. We have a very solid mining base, with enough mineral resources for at least 70 years at current production levels. We also have a significant technical and technological ca-pacity; highly-skilled and experienced human resources; and an organisation dedicated to the management of structural projects, the Vice Presidency of Projects. The corporate governance advancements we have made,
are improving performance in the area of maintenance, and augmenting productivity when it comes to third-party services.
As a state-owned company, what is your approach to human capital management? People management, leadership and labour relations are among our company’s top priori-ties. We aim to promote the creation of con-ditions that enable our specialised teams to reach their highest possible levels of produc-tivity, and moreover, we seek to remove all barriers that hinder the improvement of pro-cesses and obstruct operational excellence. In the workplace, our aim is to involve everyone who has something to say or something to contribute to our strategic plan.
This is especially true for employees of Codelco and their representatives, with whom we have an agreement in place based around a set of common goals. These goals aim to deepen the understanding of our employer-employee relationship and help the company meet increased productivity targets required for it to enjoy global competitiveness, while boosting the welfare of workers and the Chilean people.
How can a more adequate framework for the stakeholder and community engagement process be developed?The development of a transparent, par-ticipatory and effective relationship with our stakeholders, especially communities, is a central goal within our strategic focus on the sustainability of our operations and projects. Dialogue and participation with communi-ties have been particularly relevant in the development process of structural projects. For instance, I would mention our Calama PLUS initiative, which seeks to significantly improve the quality of urban space in the city and contribute to its socio-economic develop-ment. Another example is the indigenous con-sultation process that is taking place as part of the Phase II RT Sulfide Project, in which, for the first time, a division of Codelco is participating. In terms of public policy, we are improving mechanisms for the resolution of any conflicts that may arise with communities, in order to prevent these disagreements from escalating. Overall, we are generating a more structured institutional framework.
CAREER DEFINING MOMENTThe challenge represented by Codelco’s structural projects is a fitting culmination to my 50-year career in mining: the importance of Codelco to Chile’s development makes it worth the effort of managing such an extensive investment process.
LESSON IN BUSINESSConstant innovation of processes, namely the utilisation of technology, shields you from variables, and its importance cannot be underestimated: nor, in this changing world, can we ignore the need to develop virtuous, sustainable and inclusive mining, whose benefits can be enjoyed by all stakeholders.
Codelco’s structural projects will enable us to consolidate our position as the leading copper producer in the industry
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36 INTERNATIONAL INVESTOR
What effects have the economic climate had on the mining industry?The mining industry in Chile is very conserva-tive. We are intensive users of capital, which makes it more difficult to take risks and in-vestigate new technologies. Moreover, during periods like the previous super-cycle where prices are high and margins are big, it is more profitable to focus on increasing production in order to capture those margins rather than focusing on reducing cash costs. However, now we must address the latter. There are numerous ways to achieve this: by ensuring that plant usage is maximised or increasing automation across applicable op-erations, for example. In fact, automation is a particularly interesting way to improve pro-ductivity, and we have invested significantly in this area as a result. However, during the boom years, we were hesitant to implement the technology in order to avoid the risk of potential disruptions, so we continued to uti-lise operating crews. Now, with renewed focus on cost reduction, these kinds of decisions are more urgent: we must move forward with implementation. Additionally, despite the increasing educa-tional level of Chileans, especially in younger demographics, the industry has failed to take full advantage, under-employing this new generation of skilled individuals. Moreover, whereas previously salary levels and pro-ductivity levels in the mining industry were
DIegO heRnánDezAntOFAgAStA pLcChief Executive Officer
INTERNATIONAL INVESTOR: Could you tell us about Antofagasta’s activities and discuss the impacts of the changes in the economic environment?DIEGO HERNÁNDEZ: As China is the world’s biggest consumer of copper, a slowdown in its economy is clearly relevant to the mining industry in Chile and to the operations of Antofagasta plc. However, we believe the long-term trend for China will be towards further growth. Urbanisation of the population is not likely to cease: thus, raw materials will remain important to their market. Although copper demand has decreased, I do not envision the price collapsing. Moreover, we are generating good cash flow and main-taining a healthy operating margin, and if this is sustained, we can continue to invest and distribute dividends throughout the counter-cycle, as copper will remain an important commodity in the future. Accordingly, and given that mining proj-ects take a long time to materialise, present market disruptions have not led us to drasti-cally change our investment plans. In fact, we are focusing even more heavily on mining, as the recent sale of our water division demon-strates. Furthermore, in July 2015, we bought a 50 per cent stake in the Zaldívar copper mine in the Antofagasta Region, forming a partnership with Barrick Gold Corporation. This transaction has provided the opportunity to acquire an established operation with low production costs, generating strong cash flow. Additionally, we have recently completed the Antucoya project and aim to ramp up production in the second half of 2015. We are also working on Encuentro Oxides, a project to extend the life of the former El Tesoro plant in Centinela District, and are beginning the process of securing two environmental per-mits: one for an incremental expansion in Los Pelambres and the second for an additional concentrator in Centinela District, costing around US$1.2 and US$2.7 billion, respectively.
comparable with other countries in develop-ment, now we have a scenario in which sala-ries have increased to levels comparable with developed countries, but productivity has not, because we were not forced to make full use of these resources. The slowdown has provided us with the circumstances to revaluate and improve all our processes, maximising efficiency and productivity, and to take full advantage of our investments. The current climate will cer-tainly generate longer-term benefits for the industry, and the economy as a whole. Finally, the reduced demand has also had further positive outcomes for the sector. For example, when demand was high, we did not have enough qualified individuals, forcing us to recruit from outside the industry to fill the gap, which caused problems. Now, we have a better selection of people and companies, which gives us greater control over projects. What is more, we do not have to worry about fast tracking projects because the focus is on budget, not schedule. Clearly, as both these factors are related, our projects are less ex-pensive than they were at the peak.
What is the impact of the ongoing reforms programme initiated by the Government?Primarily, the labour reform does not ad-equately tackle all the issues that need to be addressed. It fails to address the labour issues relating to SMEs, but aims to increase the number of unionised workers in Chile. Also, the government wants to play a more significant role in arbitrating the relationship between trade unions and companies. Unfortunately, this does not necessarily lead to improved communication or better jobs for workers and could generate increased costs and more stoppages. In the case of mining, the industry is very unionised, reflected by current salary levels that have increased with demand. This shows that the unions have enough power to take advantage of the increases in demand for their services. Overall, I think the labour reform will make relations with trade unions less balanced and more complex. Moreover, similar criticisms can be made of the tax reform, which creates complex legislation subject to different interpreta-tions. Though the tax reform will have less of an impact on established players in the mining industry, it places a large burden on new com-panies and projects with high initial CAPEX. Essentially, the significant number of pro-posed and already-enacted reforms have cre-ated an atmosphere of uncertainty, which has a detrimental effect on the economic climate. While not altogether disastrous for the Chilean economy, these reforms create unnecessary complexities, making it more challenging to attract investment.
CAREER DEFINING MOMENTI have had a long career, but early on when I had only one year of experience, I started working in Brazil. I worked for a year in an engineering company, and then I received an offer to take charge of a medium-sized mine. I took on the challenge, and I think that was what really triggered it all.
LESSON IN BUSINESSI believe that you are always learning.
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nuclear energy as an option. It would require profound research and analysis, but it is clean energy that does not emit any greenhouse gases. Thus, considering that other energy resources are insufficient, we should seriously explore this option, reflecting upon the advan-tages and disadvantages with communities, and organising debates to discuss its validity.
What are the impacts of the labour and tax reforms enacted by the current administration on the mining sector?Over the past decade, the mining industry has been responsible for 21 per cent of Treasury contributions. The tax reform has generated uncertainty, which is not good for invest-ments, especially in mining, because mining investments are long term. The labour reform does not affect the industry as much, since the mining sector only directly employs around 3 per cent of the entire workforce in Chile. Importantly, mining companies provide wages that are above average and unionisation rates are high. However, what worries us is the lack of legis-lation regarding illegal work stoppages. When
ALBeRtO SALASSOnAMIpresident
INTERNATIONAL INVESTOR: How does SONAMI represent the interests of its members, and what are the organisation’s current priorities?ALBERTO SALAS: SONAMI was founded in 1883 and represents all private mining enterprises in the country: small-, medium- and large-scale companies that focus on metal mining and non-metal mining. While Codelco is not a member of SONAMI, they participate in our committees as a guest. As we believe that mining is Chile’s main driver towards growth, our committees and research department aim to promote the development of the mining industry and best practices contributing to sustainability. We have several committees, which inform the board of directors about the priorities of large-, medium-, and small-scale mining and define our challenges, and we represent all sectors vis-à-vis the government and Congress. The mining industry consumes around one-third of the country’s electricity, and an increasing energy demand is projected for the next 20 years. Therefore, we believe that it is necessary to boost competitiveness in this field, as Chile does not have large oil, gas or carbon reserves and mainly depends on sup-plies from abroad. Thus, it is important that the government explore and develop different kinds of energy sources, such as hydroelectric resources. Chile has very favourable climatic conditions to generate non-conventional renewable energies, and the mining industry is a strong advocate of their use. However, the supply from renewable energy sources is not sufficient to the industry’s needs: the solution to the issue, therefore, is to increase competitiveness, in order to lower the prices of energy generation and transmission, while discouraging the entry of large players and vertical integration. I believe the energy agenda launched by the government in 2014 is moving in the right direction. However, I would not exclude
miners block access to the mine, the owners of the mining companies stand alone as there is no legislation that defines the stoppage as unlawful.
How can regulatory policy be enhanced to benefit both the industry and country as a whole?Chile’s development and its aspirations to become a developed nation have caused regulations in different public institutions to advance rapidly. Each of these institutions analyse environmental permit applications, strictly adhering to guidelines. However, I believe it is necessary to strive for effective governance, understanding the importance of regulations, but also the investments at stake. For example, when a public official exceeds the full legal period to evaluate a certain permit application, he slows productivity, especially when other permits depend on the first permit. Institutions should focus on important issues, not the unnecessary details, and a public authority must be put into place to supervise the efficiency of the processes. To make this happen, the country needs solid institutions and adequately equipped public officials. In essence, regulatory bodies must be improved in accordance with the im-portant role mining plays in Chile’s economy.
Could you assess the development of the industry in terms of productivity?As the Chilean economy has grown very quickly, the mining industry has run out of skilled workforce, which is why SONAMI has put pri-ority on training people in the sector and the certification of competences. Another issue related to productivity is innovation. Besides increasing competitiveness, technological im-provements oblige a mining company to revise its mine plan, which, as a consequence, allows the company to obtain access to reserves that could not be exploited before. The productivity issue relates to many fields such as management, human resources, infrastructure and institutional frameworks. I believe in the importance of good working en-vironments, and therefore think that creating a more equal gender balance in the mining sector is essential. Women pay more attention to safety than men and decrease accident rates in an industry where safety is a top priority. Most of all, the mining sector needs sta-bility. Today’s employee works to contribute, as well as for money, and our responsibility is to provide opportunities and engage people. The industry can be proud of many things, but we have to work hard to bring to light what has not been visible for decades: that mining generates progress and development, and this can be done whilst respecting both the envi-ronment and local communities.
CAREER DEFINING MOMENTUpon ending my university career, I won a scholarship to travel to Europe, but instead I chose to start working. I rented a small mine and asked if I could get a loan to buy a compressor and drilling rigs in lieu of the scholarship, and started my own company. I am still very happy I took the decision to become an entrepreneur.
LESSON IN BUSINESSCommercialisation and management are key. A good sales agreement is more important than reducing production costs. Yet, at the end of the day, people make the difference: a good project with bad management will probably end badly, whereas a marginal project with good people will move forward and become successful.
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we have implemented three initiatives consis-tent with this approach, all of which imply a more active role by the government in relation to environmental issues. The first, a decontamination strategy that aims to mitigate the health implications of acute atmospheric pollution, requires the im-plementation of decontamination plans in 14 principal cities across the country. The second initiative focuses on the development of en-vironmental recovery plans in areas affected by pollution. The third and furthest-reaching initiative is the reform of the Environmental Impact Assessment System (SEIA), for which the president created a Presidential Advisory Commission with experts from various stake-holder groups.
How do you plan to foster a climate of stability to promote investment?We are acutely aware of the necessity of giving companies the certainty they need in order to be able to make long-term invest-ments. However, we are convinced that unless we solve pending environmental issues, com-
pABLO BADenIeRMInIStRy OF the enVIROnMent Minister of the environment
INTERNATIONAL INVESTOR: How does Chile’s new environmental policy mark a change from the previous approach?PABLO BADENIER: Over the past 20 years, Chile has made great strides in developing its environmental institutional system and policy. Undoubtedly, the two most significant milestones include the General Environmental Framework Law 19.300, enacted in 1994, which engendered the establishment of the environmental agency CONAMA; and the prom-ulgation of Law 20.417 in 2010, an act that created the Ministry of the Environment, the Environmental Assessment Service (SEA) and the Superintendency of the Environment (SMA). While these important reforms have set the stage for the implementation of a modern en-vironmental policy, in recent years there has been an increased demand for a policy with a stronger focus on how environmental issues impact vulnerable members of society. In par-ticular, socio-environmental issues related to the investment in and implementation of large mining and energy projects have generated a number of conflicts with local communities. In response to these issues, the government of President Bachelet is working to implement an environmental policy that ensures vulner-able communities do not bear the brunt of the costs of these massive investments. In fact, in order to guarantee that these projects are not just environmentally but also socially sustain-able, we believe it is important to establish a set of criteria that ensure ‘environmental equity’ or environmental justice. Therefore, we have adopted the concept of environmental equity as a guiding principle in the elaboration of our policies, which basically means that our ministry strives to implement policies that ensure local sustainable develop-ment. The Ministry of the Environment and several other ministries have established ini-tiatives in line with this idea, such as the elec-tricity tariff equity introduced by the Ministry of Energy. At the Ministry of the Environment,
panies will continue to have conflicts with local communities. Accordingly, we are com-mitted to designing a well-defined, legitimate environmental policy based on environmental equity, clear rules and standards to achieve a climate of certainty needed for long-term investment, in which the role of the State is to actively provide guidance and ensure a long-term policy, instead of setting impossible standards for the private sector. Importantly, we are not against the ap-plication of economic instruments in environ-mental policy, such as the implementation of environmental taxes, and we are proposing instruments like biodiversity offsets and pay-ment for ecosystem services in the Biodiversity and Protected Areas Bill. Additionally, we are working on Strategic Environmental Assessments as a way to examine the broader environmental implications of programmes and strategies, as well as to have a more terri-torial approach to policy, by further improving zoning processes, for example. Finally, it is important to emphasise that the government and this ministry view envi-ronmental protection as an important objec-tive, but not the only one, as we are also re-sponsible for promoting sustainable economic growth. For this reason, we are committed to developing the ‘Green Growth Strategy’, as well as the Programme on Sustainable Production and Consumption, two initiatives that seek to promote new ways of thinking about our economic growth model. As such, green growth makes sense for both the envi-ronment and the economy.
How do you achieve a balance between meeting the requirements of industry players and other stakeholders?As a ministry, we are committed to devel-oping a policy that ensures social and envi-ronmental sustainability, and we believe it is in everybody’s interest to promote transpar-ency, clear rules and, above all, long-term goals and objectives. Notably, since environ-mental policy by its very nature has long-term implications, it should be viewed as a State rather than a temporal government policy. In this context, it is absolutely essential to involve all stakeholders, which is currently happening in the process of reforming the SEIA, in order to generate a long-term policy in which all actors are included. It may take a little longer, but in the long run, this process is essential to developing a legitimate reform proposal acceptable to all stakeholders. We are convinced that the proposals that emerge from the Presidential Advisory Commission will address many of the problems faced by local communities, ensure environ-mental sustainability and provide companies long-term certainty in their investments.
CAREER DEFINING MOMENTWorking as a regional director of the environmental agency CONAMA, I learned first-hand about the challenges and opportunities of the environmental institutional system. This framed my future career and reaffirmed my commitment to environmental sustainability as the essential element of a development policy and key determinant in the quality of life of citizens.
LESSON IN BUSINESSGreat environmental challenges require collective solutions and an ongoing dialogue between different stakeholders. Neither policy makers, politicians nor business leaders alone can deal with the issues that our generation faces today, and therefore, we must be able to construct a partnership for sustainability with all sectors of society.
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will continue its urbanisation, albeit with sustained and noticeable stuttering, and that copper will remain an in-demand commodity.
INVESTMENT IN EXPLORATION IN CHILE AND AROUND THE WORLDOne of the determining variables in the sustainable de-velopment of the mining sector is exploration spending. Following a period of growth that led to historic spending in 2012, the global exploration budget for non-ferrous metals fell by nearly a quarter for consecutive years in 2013 and 2014. The sharp decrease in exploration spending from US$14.426 billion in 2013 to US$10.739 billion in 2014 reflects the cyclical nature of exploratory investment, as well as the severe low price climate. Despite the significant overall decrease in explora-tion spending, the Americas have maintained a consid-erable stake in the copper mining industry, accounting for over half of the total exploration budget in 2014 (see fig. 1a). While Canada accounted for the largest percentage-share of spending, when examined on a country level, it is evident that Chile has maintained an important position, tying with Mexico as the fifth largest overall recipient of total global exploration spending (see fig. 1b). Though exploration spending in the country decreased by 22 per cent in 2014, it remained above the 26 per cent decrease in global terms. Chile’s exploration budget has risen consider-ably over the past 20 years and remains significantly above the levels of spending recorded in 1995, despite the reductions in 2013 and 2014, as outlined above.
GLOBAL CONTEXT Despite posting record highs as recently as 2011, falling copper prices have forced the global mining sector to contract, leaving many to wonder how long the present low price environment will last and whether or not the industry will rebound in the medium and long term. Although the downturn in Chinese demand and the low price climate have led to pessimistic forecasts for the industry, the present decline in copper is nothing new for the sector, which has expanded successfully despite pre-dictions of a sustained price drop in 2003, 2009 and 2011. For instance, in 2003, though the copper industry was actually approaching a cycle of growth, there were continued warnings of falls in prices. Again, following the 2008 Financial Crisis, prices dropped briefly, but contrary to expectations, they rebounded to reach unprecedented levels by mid-2009. They continued to rise until May 2011, during which time copper reached a record price of US$4.45 per pound. This time the downward trend, which began in 2011, has been less pronounced but significantly more sus-tained. Copper prices have now plunged to levels last seen in 2009, amid continued concern relating to China’s macroeconomic dynamism and the looming presence of an interest rate hike from the U.S. Federal Reserve. According to analysts, this downward trend is unlikely to be reversed by increased demand from China during 2016 and short-term predictions remain in the region of US$2 per pound. Thus, it is up to the supply side to cut costs. Although growth on the world stage is rela-tively uninspiring, it is generally accepted that China
A total of 42 copper and other major mineral mining projects are set for implementation in chile between 2015 and 2024.
Despite the present low price climate and slowed production, the red metal is expected to rebound in the long term, both in Chile and globally, due to its broad usage and direct link to economic development.
FOCus: gLOBAL cOppeR tRenDS
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40 INTERNATIONAL INVESTOR
Moreover, despite the fact that Chile’s share of global exploration spending was larger two decades ago, the country’s spending on exploration in real terms has substantially increased, along with the overall increases in total global exploration expenditure. However, in the context of uncertain market conditions, even though Chile’s share of global exploration investment rose to its highest level since 1995 in 2014, the country’s total exploration spending has reduced by almost half since posting a record high in 2012 (see fig. 2). CHINESE DEMANDChina presently accounts for nearly half of global copper consumption and, while the future annual growth rates of copper consumption and economic expansion will cer-tainly reduce in coming years, the country is predicted to maintain its position as the world’s foremost copper consumer until at least 2025. Undoubtedly, there has been a slowdown in Chinese economic growth, but it must again be emphasised that,
the country will continue its urbanisation. Furthermore, China will move from an investment- and export-based economy to a new growth model that is founded pri-marily on domestic consumption and service delivery. The model shift will give rise to demographic changes and gives credence to the prediction that China will remain the largest consumer of copper in the world for the foreseeable future. Several factors are expected to drive copper during this period: primarily, the expan-sion of China’s power grid, which will further enable increases in electrical appliance usage. China still lags significantly behind the average electricity consump-tion per person in developed countries, thus there is tremendous potential for development. Additionally, assuming the rate of motor vehicle use increases to levels closer to those found in the Japanese market, another outcome of urbanisation, China will require an average of 1.3 million tonnes of copper per year for the construction of vehicles for the domestic market until 2025.
2. GLOBAL MINING EXPLORATION SPENDING ON NON-FERROUS METALS VERSUS THE IMF’S PRICE INDEX FOR METALS
2005
Global spending on non-ferrous exploration Metals price index FMI
US$
in b
illio
ns
US¢
per
pou
nd
2006 2007 2008 2009 2010 2011 2012 20142013
Source: Cochilco, based on data from SNL Metals & Mining (2014) and IMF
0
5
10
15
20
25
0
50
100
150
200
250
1. PERCENTAGE DISTRIBUTION OF EXPLORATION SPENDING IN 2014 BETWEEN WORLD REGIONS AND COUNTRIES
* Includes Mexico **Includes Australia
Rest of the World 13%
Africa 16%
Pacific/SE Asia** 17%
Central and South America 27%
North America* 27%
Others 32.5%
Canada 13.9%Australia 11.7%
United States 7.1%
Mexico 6.6%
Chile 6.6%
China 5.5%
Peru 5.2%
Russia 5.2%
Brazil 2.9%
DR Congo 2.9%
a) World Regions b) Countries
Source: Cochilco, based on data from SNL Metals & Mining (2014)
Even if China were to receive 100 per cent of Chilean copper production in addition to its internal supply, a deficit would still exist between Chinese demand and supply
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mining focus
Already a global leader in smelting, China is also expected to increase its capacity in the sector in the coming years, which will drive additional demand. Furthermore, China will lead the development of a diverse range of sectors, such as the air conditioning industry, cellular phone manufacturing, and railway construction in a number of different countries: this will also boost consumption. China presently receives about 37 per cent of Chile’s copper exports. However, even if China were to receive 100 per cent of Chilean copper production in addition to its internal supply, a deficit would still exist between Chinese demand and supply (see fig. 3). Furthermore, the country is highly dependent on external copper, as it accounts for only 4 per cent of the world’s copper reserves and its spending on exploration is quite low compared to global totals. Consequently, in the long term, copper will maintain its importance as an in-de-mand commodity and, though it may fluctuate, Chinese demand will continue to drive the sector.
THE FUTUrE oF CHIlE’S CoPPEr SECTorWith expansive mineral reserves and a developed in-dustry, Chile remains a top destination for Chinese and other foreign investment in copper. The present mining investment situation in the country, significantly im-pacted by the prevailing global climate has also been affected by the challenges in Chile, such as availability of water and energy, community opposition and envi-ronmental regulations. However, this scenario should be seen as an opportunity for improvement and increased efficency, which are necessary for adapting to the new reality of global mining. According to revised estimates from the Chilean Copper Commission, Cochilco, a total of 42 copper and other mineral mining projects are set for implementa-tion between 2015 and 2024, totalling approximately US$77.29 billion in investment; a decrease from past estimates due to stage completion, project delays or cancellations. Of these, 30 initiatives with an expected investment of US$67.035 billion relate to copper. In response to falling copper prices, Codelco, the state-owned copper mining company, has stated that it would rather rein in costs than curb output and also reduced its original five-year US$25 billion investment plan by around US$4 billion in October 2015. Yet, other Chilean mines, including Collahuasi, the second largest in the country, have announced production cuts to pro-tect themselves against tumbling prices. Despite Chile’s efforts to stabilise the mining sector, a long-term rebound will depend on multiple factors, including the investment required to extend the lives of Codelco-owned mines, which account for about 11 per cent of global annual copper output. As the Chilean mining sector is using the present commodity price cli-mate as an opportunity to increase efficiency and cut costs, the country may emerge from the current situa-tion with a leaner, more effective production capacity.
➥ This feature was produced in conjunction with the Comisión Chilena
del Cobre (Cochilco).
3. CHILE'S ANNUAL EXPLORATION SPENDING VERSUS ITS GLOBAL PERCENTAGE SHARE
Source: Cochilco, based on data from SNL Metals & Mining (2014)
0
200
400
600
800
1,000
100
300
500
700
900
1,100
US$
in
million
s
1995 1996 1997 1998 1999 2000 20022001 2003 20052004 2006 20082007 2009 20112010 2012 20142013
Chile's Exploration Budget Share of global exploration budget
0
2
4
6
8
10
1
3
5
7
9
11
%
4. COPPER: PROJECTED CHINESE DEMAND AND SUPPLY VS. CHILEAN PRODUCTION (THOUSANDS OF TONNES)
Source: Cochilco
0
4,000
8,000
12,000
16,000
2,000
6,000
10,000
14,000
18,000
China demand China domestic supply
100 per cent Chilean production
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
interview mining
42 INTERNATIONAL INVESTOR
In terms of our in construction and devel-opment in Chile, we are building the Carrera Pinto solar photovoltaic power plant in the Atacama Region, with a total installed capacity of 97-megawatt, and Pampa Norte, a 79 mega-watts photovoltaic plant in the Antofagasta Region. Overall, the strength of our company globally and in Chile is the diversification of the portfolio in technologies and territories.
How do you see the development of non-conventional renewable energy (NCrE) in Chile?The discovery of this kind of technology is still relatively new in Chile. Between 2008 and 2012, only three or four wind farms were built; what I call the ‘wind 1.0 era’. In 2013, there was a renewed interest and companies started to invest again. This period is what I call the ‘2.0 era’, in wind at least. Interest in the tech-nology progressed into 2014, which we also started very strongly with photovoltaic plants. In Chile, as in many other countries, we are seeing an evolution in renewables. The dif-ferent technologies are becoming increasingly competitive and, as prices reduce and become more competitive, the market grows and com-panies start constructing plants.
SALVAtORe BeRnABeIeneL gReen pOWeRgeneral Manager, chile and Andean countries
INTErNATIoNAl INVESTor: How have you structured your operations in Chile and the region?SALVATORE BERNABEI: Enel Green Power is an Italian company established in 2008 and listed on the stock exchanges of Milan and Madrid. The company is owned by Enel Group and is devoted to the development, construc-tion, and operation of power plants from renewable sources of energy. We are one of the largest renewables players in the world. Since 2008, we have registered impressive growth, and we are currently growing at a pace of more than 1,000 megawatts per year. In fact, at the end of 2014, we had approxi-mately 9,600 megawatts installed worldwide. This corresponds to 737 power plants around the world in 15 different countries. We have plants operating in Europe, both American continents and we are also developing proj-ects in Africa and in the Middle East. With respect to Latin America, we are organised in three main hubs. The Central American hub is in Mexico, where we op-erate mini-hydro, wind and photovoltaic power plants, with a presence in Costa Rica, Guatemala and Panama. In South America, there are two hubs. One is Brazil and Uruguay, and the other, which I lead, is Chile and the Andean countries. Currently, we have offices in Chile, Peru, Colombia and Ecuador. At the moment, we are operating power plants in Chile and developing our pipeline in Peru, Colombia, and Ecuador. In Chile, we have 586 megawatts in operation in both main transmission systems: SIC and SING. In the SIC system, we operate two hydro plants in the south of Chile and three wind farms in the northern region near La Serena and Antofagasta, in addition to four photovoltaic plants. In the northern SING grid, we operate another wind farm near the city of Calama. We are growing very fast in Latin America, particularly in Chile, where we hired more than one person per week in 2014.
Currently, there are more than 2,000 megawatts of renewable projects under con-struction in Chile, and I am convinced that this growth will continue. However, as I un-derstand it, the problem in Chile is this surge seems to be unexpected. The country was not able to foresee this huge development. Thus, the real constraint is the capacity to integrate renewables into the existing electrical infra-structure due to the lack of important invest-ment in transmission undertaken in time. This will be a bottleneck for some years. Despite this, we estimate that by 2018 the situation will be stabilised. Moreover, a new electric power transmission bill that we expect to be approved in 2015 will allow sus-tainable growth of the system and facilitate the integration of new plants to the grid.
How can transmission difficulties for renewable projects be overcome?Regarding local lines, this is a bigger problem for mini-hydro rather than wind or photovol-taic plants, especially in the south of Chile, where some projects become economically inconvenient because it is necessary to build a new transversal line. As of yet, there has been no central coordination that allows market actors to join forces in order to build the lines and share the cost. We think the new bill could help to solve this problem. Clearly, private developers could act to-gether and decide to build a line, but once again, in terms of the planning model oper-ating for the trunk and transversal transmis-sion systems, this concept was not completely taken into consideration. Essentially, this issue highlights the need to develop corridors for electrical lines, or in other words, the need for an integrated ap-proach to the development of trunk and trans-versal transmission lines, so that optimisation synergies can be achieved by coordination among different operators.
How will the interconnection between different power grids impact the development of NCrE?Regarding the transmission bottleneck I men-tioned, my hope is that it would be solved by 2018, assuming that the SIC-SING interconnec-tion will be in operation. Generally speaking, it will certainly have a positive impact; the system will be larger, thus, there will be the capacity to install a greater amount of renew-ables. There is lot of potential in the SING in the north of Chile, and, as a result of the in-terconnection, all this capacity could be easily exported to the southern regions. Likewise, depending on the development of hydropower, we could also have energy flowing from south to north. Furthermore, the recently mate-rialised interconnection between the SING
CAREER DEFINING MOMENTI left Italy for Spain and worked there for six years before moving to Chile. When you work in different countries, you gain different experiences which shape you as a professional and a human being, and provide you with a holistic view, which empowers your judgement and prepares you for future challenges.
LESSON IN BUSINESSOne may be tempted to apply the best practices learned elsewhere in a new business culture. However, if you do not understand the local context it is very hard to replicate these best practices. Each country is different and sometimes it is in the details where you can lose the business.
mining interview
CHILE 43
grid and Argentina’s national grid will provide more stability to the system.
Does renewable energy have the potential to solve energy issues in the mining sector?It is just a matter of time before renewables become more widely used in this industry. Mining companies have already started looking at renewable energy and are trying to under-stand the processes and infrastructure needed to receive energy from renewable plants. In fact, some mines have already signed power purchase agreements with photovol-taic or wind developers, so there are already mines on board with this kind of technology in Chile. Other mining companies are still scep-tical, but in my opinion, once they see that the technology works and is competitive, they will be very interested in renewables. There are some myths in Chile and other Latin American countries about renewables and, to some extent, this hinders growth. However, if the sector succeeds in showing the mining industry that renewables really work, there will be a snowball effect in terms of investment in this area. It is important to understand that, in many other countries, this problem does not exist because people and industries are already familiar with renewables. In Chile, we have just started the 2.0 era and we need some time for the idea to seed. In 2014, we had about 750 megawatts of additional capacity in renewables, which represented a growth rate of 75 per cent compared to 2013. In order to inspire invest-ment, we need to have wind farms, solar pho-tovoltaic plants and geothermal plants all in operation, so that the mining companies can see the technology working.
What needs to happen in order to develop and foster a competitive geothermal industry in Chile?Geothermal is a very capital-intensive tech-nology, especially in the initial stages of project development. Furthermore, drilling entails the greatest investment risks, since in this phase the operator can incur the highest costs without the certainty that sufficient resources, in terms of quantity and quality, will be found in order to make the project economically viable. Accordingly, projects are developed by a step-by-step drilling programme in order to gain a better understanding of the chemistry and physical issues in the area. At the outset, one or two slim holes are drilled to detect the presence of supposed thermal anomaly, followed by two to four commercial wells and the first assessment of the resource. This process could last several years and each well costs millions of dollars.
Currently, the technology to do this kind of work is not available in Chile, and there-fore, foreign companies must be contracted to undertake these projects, which means that the costs are far greater than if a local company carried out the work. This is true for the drilling company or other companies providing the drilling services. In terms of energy technology, in the ma-jority of cases, development has taken place as a result of government support. If a tech-nology is new, the costs are high and there are no services, it is necessary to foster develop-ment through the public sector. Thus, as is the case in all other countries in the world where geothermal is already developed, in order to assure growth in Chile, the government and industry must work together to support the industry and allow it to develop. This support could be expressed in dif-ferent ways: insurance could be made avail-able for the drilling phases in order to help share risk, there could be some fiscal facilities in order to have an accelerated appreciation, the technology could be exempt from VAT, or a government grant could be established where the government directly assumes the risk. There are different instruments that could be utilised, but a decision must be taken regarding which instrument to use in Chile in order to launch geothermal. Regarding Enel Green Power in Latin America, Chile is the country in which we have our most advanced development. We started investing in geothermal seven years ago, and have a project called Cerro Pabellón, which is a very, very advanced project. We think conditions to start the construction could be achieved, although we have benefited from neither incentives nor support. The crucial point is: if you want to foster the development of geothermal in Chile, potential investors need government support and partnerships among private companies, otherwise our plant would remain the only one in Chile, and the potential this country has will not be fulfilled. It is in the interest of all stakeholders to facili-tate the development of this technology. We are supporting any initiative that aims to foster the development of this sector in Chile. Enel Green Power owns around 9 per cent, approximately 770 megawatts, of the total production of geothermal energy in the world and is currently operating geothermal plants in Italy and the U.S. Geothermal tech-nology was discovered and developed in Italy one hundred years ago, and it is the country where the first geothermal plant was built. As an Italian energy company, we have a lot of expertise and experience dealing with this technology. As a result, we believe that we have a competitive advantage over any other developer in the market.
interview mining
44 INTERNATIONAL INVESTOR
How has the current macroeconomic climate influenced your strategy in Chile?Our company operates on the premise that there will always be demand for copper, as it is an essential material to so many industries. While we carefully track commodity prices, we remain aware that the mining business follows a continuous cycle of ups and downs. Consequently, we have had to make some adjustments to our strategy, which is still developing. For example, as a result of cost overruns in the Sierra Gorda project, we have developed a value-creation plan to allow us to reduce operating costs. Currently, we are still working to specify our short- and long-term business plan propo-sition; nonetheless, the state of the macro-economic climate is relevant to the formula-tion of our strategy, and as such, we keep a close watch on global conditions. However, we have always considered Sierra Gorda as a long-term investment, so current macroeconomic conditions may affect some of our plans, but they do not change our positive view towards this project. Additionally, we have several other opportunities to extend mine life, which will increase shareholder value.
How have you overcome challenges related to labour here?The Sierra Gorda mine is one of the largest and most expeditiously developed endeavours
MACIEJ ŚCIĄŻKO SIeRRA gORDA ScMgeneral Manager
INTERNATIONAL INVESTOR: Could you tell us about Sierra Gorda SCM and the decision to enter the Chilean market?MACIEJ ŚCIĄŻKo: Sierra Gorda SCM, a joint venture between KGHM and Japan’s Sumitomo Metal Mining and Sumitomo Corporation located in Chile’s Antofagasta Region, is among the world’s largest copper projects. Construction of the concentrator plant was completed in July 2014, and, after meeting the criteria that a plant must operate for at least 60 days at 65 per cent of its designed capacity and that a molybdenum plant has produced concentrate with at least 40 per cent molybdenum content, we officially began commercial production at the end of June 2015. Though, as a result of some technical issues, it took us a bit longer than expected to ramp up output, we expect to meet our goals. During the first five years, once at full pro-duction, the mine is slated to process 110,000 tonnes of ore daily, providing approximately 120,000 tonnes of copper, up to 50 million pounds of molybdenum and 60,000 ounces of gold per year. Should we choose to execute Phase II, which will likely entail the construc-tion of a second plant, we will nearly double output capacity to 220,000 tonnes of copper, additionally producing up to 25 million pounds of molybdenum and 64,000 ounces of gold an-nually for the next 20 years. In terms of the decision to begin opera-tions in Chile, the motivation was twofold: improving cost effectiveness and increasing the company’s global stake in the industry. In Poland, conditions require our mines to be underground, meaning the cost of the pro-duction process is almost double what it is in Chile. Furthermore, it is because the country is one of the most important copper produc-tion bases, and to be truly global, you must have a presence here. For these reasons, it made sense to establish Sierra Gorda, our flagship project, in Chile.
of its kind. We faced a significant budget overrun, which was due primarily to increases in Chilean labour costs, as well as the swift nature of the project’s production. In terms of logistics, our main challenges were meeting the project’s time constraints and ensuring everything was properly en-gineered, from procurement to execution. Construction involved over 53,000 people, 18.5 million working hours and over 600 contractors. The manpower and its proper al-location were critical to getting the project executed in this short amount of time. While labour issues here in Chile have been problematic, as they are, in part, the reason for our cost overruns, we must work within the conditions of the market. We believe it is essential to build good relations inside Sierra Gorda itself and with the surrounding communities of Antofagasta. In fact, we are working with local companies to help with long-term business development plans, ac-tively supporting local businesses, and spon-soring events and schools. Engaging the local communities is something that we have been doing since the beginning, and we believe it is crucial to company and project success.
How have you implemented efficiency and innovation throughout your Chilean operations? We are currently exploring several projects to reduce costs, increase productivity and optimise processes. For instance, we recently set up a project to look at renewable energy sources in the Atacama Desert, which would allow us to secure additional energy for ac-tivities in our growth strategies. Additionally, we have contracted 251 megawatts to meet our mine’s energy needs with AES Gener’s Cochrane thermal plant for a 21-year period, for which construction will conclude in 2016. Another interesting initiative we have re-lates to our company’s water consumption. Given that the Atacama Desert is one of the driest places in the world, we are very con-scious of our water usage in the region. As a result, we have developed an innovative and technically ambitious environmental protec-tion solution in which we run our plant using seawater that would have otherwise been discharged back into the ocean. We have developed a 142.6-kilometre pipeline to transport saltwater from the cooling systems at a thermal electricity-generating plant in Mejillones to the Sierra Gorda mine. Moreover, we have several other pro-ductivity initiatives, including an oxide ore heap leaching study, a pit slope optimisation project, and two reverse osmosis plants. All of these efforts illustrate our company’s commit-ment to finding innovative solutions to situa-tions related to energy and efficiency.
CAREER DEFINING MOMENTPrior to joining KGHM, I had worked in many countries and had a truly global experience, but I would say that joining this company was genuinely my career-defining moment as it gave me the opportunity to work on a project of such great scale and scope.
LESSON IN BUSINESSIt is simple. If you are patient and work hard, business will be better.
focus mining
46 INTERNATIONAL INVESTOR
still faces falling metal export revenue, the nation ap-pears to be slowly moving toward recovery with gains in mining production in the second quarter of 2015, rises in infrastructure spending, and expected increases in GDP as compared to 2014. In an effort to stimulate the economy and combat slowing growth, the current Peruvian administration, led by Ollanta Humala, has put forth the country’s largest stimulus package in 15 years, which aims to boost public works spending and reduce bureaucratic obstacles in order to simplify and expedite mining and infrastructure projects. Moreover, President Humala has been granted special economic powers in order to boost the mining industry and the wider Peruvian economy before his term ends in 2016. These measures will be enacted in addition to personal and corporate tax cuts and the easing of environmental restrictions in 2014. Despite its great potential, if Peru hopes to become a mining powerhouse, it will have to address challenges including labour shortages, a lack of sufficient infra-structure and community engagement issues, the latter being a significant problem that has caused several project delays. While general labour in Peru is abundant, the growing deficit of trained Peruvian workers is compounded by the fact that the country’s law stipulates that no more than 20 per cent of a workforce can be non-Peruvian. Eva Arias de Sologuren, an experienced and respected industry participant, who serves as president of the Inter American Society of Mining, president of the board of Poderosa Mining Company and a former president of
MINING IN LATIN AMERICAOver the past decade, mining investment in Latin America has grown exponentially, and although the region covers only one-sixth of the earth’s land surface, its rich territory produces a significant amount of min-erals and metals, accounting for 45 per cent of global copper, 50 per cent of silver, 26 per cent of molybdenum, 21 per cent of zinc and 20 per cent of gold in 2013. Beginning in the early 2000s, gains from the com-modity boom, second only to those seen in the oil-exporting Middle East, boosted the region’s economy as Latin America developed its mining sector. While Brazil’s large-scale iron-ore mines and Chile’s copper sector may be most widely recognised globally, challengers in-cluding Peru, Mexico and Colombia now boast expanding industries, substantially increasing their positions during this period and still offer tremendous opportunity for investment and further development.
COUNTRY OUTLOOK: PERUPeru, one of Latin America’s largest recipients of foreign investment in mining, has made a name for itself as a producer of precious and industrial metals, holding 13 per cent of the world’s copper reserves, 4 per cent of gold, 22 percent of silver, 7.6 per cent of zinc and 6 per cent of tin reserves. In fact, the mining sector has in-creased its share of GDP significantly from levels seen in the early 2000s, and investment in mining has increased more than eightfold since 2005 (see fig. 1). Although the country’s mining sector has been im-pacted by the present commodity price climate and
Peru, Colombia and Mexico are focusing on efficiency and lowering costs in order to attract outside investment.
FOCus: RegIOnAL MInIng OppORtUnItIeS Despite the difficult climate, Latin America will continue to be a primary destination for investment. Peru, Colombia and Mexico offer vast territories rich in minerals, established mining industries, and interesting investment opportunities.
CHILE 47
mining focus
become a formidable competitor for its neighbour Chile, as the country can now boast the greatest amount of global investment in terms of copper mining projects set to materialise in 2015, and falls only slightly short of Chile in productive contribution from these projects.
COUNTRY OUTLOOK: COLOMBIAColombia is one of the world’s top ten coal producers and has the potential to double its output. Since the early 2000s, the country has taken several critical steps to improve its economic performance and enhance se-curity, as its growing market becomes an increasingly attractive destination for foreign investment. Colombia has generally been able to maintain posi-tive levels of GDP growth, above Latin American and global averages, and weathered the 2008 Financial Crisis reasonably well, unlike many other countries (see fig. 2). Under the leadership of re-elected President Juan Manuel Santos, in a climate of greater political stability and continuing peace talks, the country anticipates a growth in coal and other mineral exports, which include nickel and gold. Similarly to other countries in the region, Colombia’s economic growth slowed in the last quarter of 2014 and the first quarter of 2015; however, there were certainly positive signs in the second quarter of 2015 as construc-tion output rose 8.7 percent from the previous year, and the mining and agriculture sectors both expanded by 4.2 and 2.5 per cent respectively. To combat a cooling economy, the Colombian Government announced a stimulus plan entitled the Plan to Boost Productivity and Employment (PIPE) 2.0 in May 2015, which shares the same objectives as the successful series of measures enacted in 2013. The plan aims to facilitate the construction of critical infrastruc-ture and to create two million new jobs by 2018. In terms of the mining industry, PIPE 2.0 will provide seed capital for innovation and invest in upgrades to primary and secondary roads, which require significant improvement and will be vital if Colombia hopes to reduce produc-tion costs for its minerals and metals. Eduardo Chaparro Ávila, the executive director of Cámara Asominero at the National Business Association of Colombia (ANDI) points out that, “the metallurgical coal in Colombia is ideal for steel production; however, due to the lack of infrastructure, transporting coal from the interior of the country to the coast is extremely costly, which affects its profitability as an investment”. Thus, the plans to elevate infrastructure could greatly improve Colombia’s competitiveness in this sector. The Santos Administration has also undertaken addi-tional measures to create a climate conducive to foreign and domestic investment. For example, the Colombian Government issued a decree that simplifies the permit-ting process, reduces permit waiting times and provides clarity to mining authorities and agencies. Additionally, in a further effort to facilitate the permitting and regu-latory process, the government has created a special designation for mining projects of ‘national interest’, applicable to those that meet certain criteria. Moreover, although Colombia has no formal mining code, the nation addresses the interests of the sector through its National Development Plan, published every four years.
the National Society of Mining, Petroleum and Energy (SNMPE) commented that in order, “to meet the needs of the mining industry, it will be necessary to expand the number of training programmes available, as well as ensuring that the sector’s communication with the academic world improves significantly”. With regard to infrastructure development, an issue the government intends to address through increased spending and construction in the aforementioned mea-sures, she suggested that the, “road towards competi-tiveness requires greater investment in increasing Peru’s connectivity. This will include building better highways and expanding telecommunications availability”. On the topic of community issues, Arias highlights the, “necessity for the mining industry to cultivate a stronger relationship with local communities” in Peru, as certain groups of stakeholders have strongly voiced their concerns relating to water availability and increases in pollution. With 175 ongoing social conflicts as of May 2015, smoothing relations between local populations and companies must be approached in a sensible and inclu-sive manner. This will require the involvement of all par-ties, including both mining companies and the Peruvian Government, in order to ensure uninterrupted project progression up to completion and smooth production. Despite the need for Peru to confront these ob-stacles, the mining sector remains a key driver for the nation’s economy. Accordingly, Arias highlights that, “there is still a lot of potential for mineral exploration in the country, as mineral reserves are considerable and the competitive prices of Peru’s growing energy sector only increase the attractive prospects for mining de-velopment in the future”. According to estimates from the Ministry of Energy and Mines (MEM), Peru expects approximately US$64 billion to flow into the country in the form of mining investment by 2020. Moreover, it has
Eva Arias de Sologuren, President of the InterAmerican Society of Mining, President of the Board of Poderosa Mining Company and former President of National Society of Mining, Petroleum and Energy (SNMPE)
1. INVESTMENT IN MINING IN PERU (US$ IN BILLIONS), 2005-2014
2005 2010 2009 2008 2007 2006 2014 2013 2012 2011
Source: Ministerio de Energía y Minas, Peru
0
2
4
6
8
10
1
3
5
7
9
focus mining
48 INTERNATIONAL INVESTOR
The most recent plan seeks to weed out illegal mining operations in the country by following Peru’s example, and formalising small, artisanal miners. Despite the Colombian Government’s recent efforts, illegal mining remains one of the key challenges and accounts for approximately 80 per cent of the mines in the country, according to official data from authorities. Illegal mining operations, many of which are controlled by criminal gangs or armed groups, include mines that do not pay taxes, provide insurance to workers or obey environmental laws. Beyond illegal mining, the country is working to address major security issues that have hindered the sector and other business operations for decades. However, regarding the conflict, the Colombian Government and the Revolutionary Armed Forces of Colombia (FARC) have made considerable progress and are set a to sign a peace deal in March 2016, which will bring into effect the various aspects of the peace process and end the hostilities. If this deal materialises in the expected manner, it will provide a safer, more stable climate for doing business, as well as opening up parts of the country for exploration that were previ-ously inaccessible. Another challenge that requires significant attention is safety. Colombia is seeking to improve the less than op-timum safety situation in the sector and is attempting to tackle accident statistics, particularly in the small-scale and artisanal mines. Finally, the effective corporate tax rate in Colombia, comparatively high relative to other countries, is pro-hibitive to smaller projects as it imposes high costs on marginal investments. While Colombia has several issues to address in order to reach its full economic potential, the nation has made substantial progress in this respect. Due to signifi-cant advancements in the oil and gas sector, which have allowed the nation to reach 95 per cent energy self-sufficiency, the mining sector is less vulnerable to price fluctuations than its competitors. In fact, Chaparro remarks, “After the U.S. and Canada, Colombia has one of the most developed and regulated energy sectors in the Americas”. Moreover, although the country has struggled with competitiveness, a factor exacerbated by infrastructure gaps, it is gradually resolving these
issues and strengthening its business climate. According to the World Economic Forum’s Global Competitiveness Report, Colombia has made great strides in developing both its infrastructure and level of technological adap-tation, ranking eighth in Latin America on the index. Chaparro links the issue of economic potential to mining, emphasising that once certain barriers have been resolved, Colombia, “has unexplored metallo-genic potential as well as valuable experts including engineers, economists, lawyers and professionals with extensive experience in mining activities that can help push the nation forward as it seeks to increase its posi-tion in the global mining industry”.
COUNTRY OUTLOOK: MEXICO Mexico is the world’s largest producer of silver, ac-counting for approximately one fifth of global produc-tion, and among the top ten producers of gold, copper, lead and zinc. The country is now considered one of the top destinations for mine prospecting. Furthermore, it has shown a significant ability to attract foreign direct investment in the mining sector, ranking only behind Peru and Chile in Latin America in 2014 and ranking 18th out of the 122 global mining jurisdictions, according the Canadian think tank, the Fraser Institute. The country is considered an especially attractive investment destination, both because of its proximity to the U.S., the country’s primary partner in trading and investment, and its significant potential produc-tion capacity. Furthermore, due to the devaluation of the Mexican peso, production costs in the country have further declined, increasing the nation’s competitive position. Additionally, technological developments have opened the market to greater private investment, and mining companies have access to a relatively inexpen-sive workforce, with the industry employing approxi-mately two million people in 2013. Sergio Almazán Esqueda, the general director of Camimex, a Mexican trade organisation that represents the interests of the local mining industry, points out that the industry is, “operational in 28 out of 32 Mexican states and has an important impact on communities, allocating MXN1.087 billion to community development and MXN1.171 to environmental conservation”.
Eduardo Chaparro Ávila, Executive Director, National Business Association of Colombia (ANDI)
2. ANNUAL GROWTH IN GDP, 2005-2014
2005 2010 2009 2008 2007 2006 2014 2013 2012 2011
Source: World Bank national accounts data and OECD National Accounts data files
-2
0
2
4
6
8
Colombia Latin America & Caribbean World
Gro
wth
Per
cent
age
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mining focus
Despite the commodity price environment, figures from Mexico’s Secretariat of Economy suggest total investment in the mining sector is expected to grow to US$5.46 billion in 2015, exceeding the US$4.95 billion taken in 2014. Almazán strongly emphasises, “the need for public policies that enhance mining activities and boost invest-ment, as the sector has an important impact on the country’s socioeconomic development and contributes to improving the quality of life of millions of Mexican families” and the government has shown a willingness to implement policy in this vein. In order to improve the regulatory environment and increase investment in mining, the government has developed a number of programmes, enacted a series of reforms and is considering additional changes in policy. In May 2014, the Secretariat of Economy released the Mining Development Program 2013-2018, which is aligned with National Development Plan 2013-2018, and aims to promote greater investment; increase financing in the mining sector and its value chain; promote the small, medium and social mining; and overhaul the institutional regulation to improve internal processes related to mining concessions, especially relating to inquiries from private parties. Importantly, the programme specifically addresses Mexico’s potential to increase the exploration and ex-ploitation of minerals that are used in high-technology manufacturing such as titanium, cobalt, antimony, as well as rare earths, an important emerging market. Furthermore, to strengthen the effectiveness of regulations and provide the kind of stable environ-ment investors require, President Enrique Peña Nieto is exploring the possibility of further reforms that will strengthen the legal certainty relating to land tenancy. In effect, the proposed reforms would provide the State with more power to act in favour of private investors when arbitrating land-use disagreements. The idea is to provide certainty to rural landowners, while at the same time facilitating new jobs and investment in these areas. If passed, the reform would be the most dramatic overhaul of land laws since the 1992 reform enacted by President Carlos Salinas. The Mexican Government has also undertaken re-forms in other areas, including those related to energy and fiscal policy; however, some of these changes have caused concern within the mining industry. For example, although the energy reform has opened up the oil, gas and petrochemical sector and could lower energy costs for the mining industry in the future, it also gave priority to hydrocarbons in terms of land use, which has the potential to affect decisions on foreign investment in mining. Furthermore, the 2014 tax reform included an increase in royalties on earnings before interest, taxes, depreciation and amortisation, as well as an additional charge on sales of gold, silver and platinum. Many market players questioned the logic of these reforms, but the government has been resolute, indicating that the revenue will be put into the Sustainable Regional Development Fund. Almazán suggests that, “other changes to Mexico’s policies are necessary to stimulate the industry, such as further reforms to the fiscal policy that allow mining
companies in Mexico to deduct 100 per cent of the costs incurred in the preoperational stage from taxes”. Another barrier for industry development is security, which still remains a primary concern and some areas, particularly Guerrero state, have seen an upsurge in violence affecting mining operations in 2015. Although the majority of mines have progressed without incident, companies have found it necessary to improve security measures, which clearly comes with a cost. Despite the challenges related to weak metal prices, increased taxes and heightened security issues, the out-look for Mexico’s mining industry is generally positive. While spending over the short term will be subdued, in-vestment is continuing and as many of the reforms, which will have a positive effect on the industry, come into play, the industry can focus on efficiency and reducing costs. Thus, when commodity prices recover, the industry will be in a position to engender sustainable growth. Furthermore, as mineral extraction becomes more problematic, the country is looking to leverage off technology to optimise production. Mexico has unques-tionable potential for future mining investment, with mineral reserves covering 70 per cent of the territory, of which only 27 per cent have been explored.
FUTURE CHALLENGESGlobally speaking, the mining industry has seen growth falter, not least because of a decrease in Chinese demand. Latin America has not been immune to these market dynamics, yet still remains a formidable force in terms of attracting mining investment. In the context of low commodity prices, mining companies in Peru, Colombia and Mexico are cutting costs and looking in-wardly at processes in order to find a way through these circumstances. The governments of these three nations are also playing their part and have already passed, or are considering, legislation that aims to stimulate in-dustry and economic growth. The impact of limited infrastructure is certainly a concern faced by all three countries, as it is across the region as a whole. This issue is expected to improve as the countries invest in expanding housing, transportation and road systems in the coming years. Yet, according to Willis, a leading global risk advisory organisation, Latin America will need to invest about 9 per cent of its GDP in infrastructure on an annual basis from now until 2020, in order to catch up with Southeast Asia, which will take a concerted effort by the region’s governments and industries. Nevertheless, being careful not to disregard the previously outlined difficulties, mining in the region is expected to remain profitable. Analysts point to lower production costs in the region resulting from factors such as transport costs, as well as the impact of the strengthening U.S. dollar to support this prediction. Moreover, the membership of Colombia, Peru and Mexico in the Pacific Alliance economic bloc, along with Chile, and soon-to-be-member Costa Rica, could have a signifi-cant impact on trade and value chain optimisation. Undoubtedly, the region has considerable production potential and untapped resource-rich territory, with Peru, Colombia and Mexico offering significant opportu-nities for investment in mining now and in the future.
Sergio Almazán Esqueda, General Director, Mexican Chamber of Mining (Camimex)
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50 INTERNATIONAL INVESTOR
To avoid any sort of delays, at Kinross Chile we work hand-in-hand with local communities to build lasting relationships. For this reason, the company has created a department dedi-cated to government and community rela-tions. We have good relationships with the Colla communities, which are close to the mining operations of Maricunga and La Coipa, enjoying regular, open dialogue, as in the case of the permitting process for our Lobo-Marte project in the Atacama Region. The socio-environmental agreements we committed ourselves to have been signed and executed, and we were rated by the Mining Council as best in class in Chile for our work with communities, who we involve in every decision that is made in regard to both of our mine sites.
How important is responsible mining to Kinross in general, and, in particular, in South America?Responsible mining is central to Kinross’ op-erations worldwide. We maintain the same values and outlook in our relationships with our internal and external stakeholders at all of our sites, no matter where we are around the world. One of the company’s goals is to be a global leader in creating value through re-sponsible mining, which means that not only
BOB MUSgROVe KInROSS gOLD cORpORAtIOn Vice president of Operations, South America
INTErNATIoNAl INVESTor: Can you give us an assessment of the climate in the Chilean mining industry?BOB MUSGROVE: The present environment is challenging because of rising costs. The growing expense of electric power is among the main factors that have placed Chile at a disadvantage, put into perspective by the fact that it represents about 20 per cent of our operating costs. As a result, we have de-veloped energy conservation projects at our mine sites, employing engineers to report on our monthly consumption in order to identify solutions to curtail it. I am encouraged that the new administra-tion is bringing energy to the fore, pushing to address the shortage issue: however, we foresee that the high cost of energy will con-tinue for at least three to five years before we see any relief. I think the energy issue is an infrastructural problem, primarily due to the fact that the majority is amassed from offshore energy sources, such as coal and oil. What is more, we are overly dependent on outside factors, for example, heavy rainfall, which increases hydropower capacity. The final issue in the Chilean mining in-dustry is the tax reform. The mechanism implemented to give guarantees to foreign investors, generates some uncertainties re-garding the development of strategic business plans, making it more complex for us to look to the future.
What is Kinross doing to avoid the operational setbacks that community issues can present? There is a regulatory and institutional frame-work being developed in regard to indigenous communities, which, again, creates uncer-tainty for the future. This is particularly the case when we are trying to permit new mining projects, or bring existing projects up to a larger scale of operation.
are we able to remain profitable no matter where we operate in the world, but that we do this hand-in-hand with the communities that we work with. Kinross has done an excel-lent job in this respect. We are also very proud to be included in the Dow Jones Sustainability Index and the Jantzi Social Index, as well as of being a member of the United Nations Global Compact and Extractive Industries Transparency Initiative. Moreover, we are a signatory of the International Cyanide Code, which is a voluntary international com-mitment that regulates the transportation and use of cyanide in gold operations.
How do you adapt the ‘quality over quantity’ approach to a climate of rising costs?The quality over quantity principle, producing fewer ounces while making the same amount of money, really came into effect when Paul Rollinson took over as CEO in August 2012, ini-tiating a programme called the ‘Kinross Way Forward’. The idea was to take a hard look at how we could survive in a lower commodity price environment, which saw gold drop from US$2,000 to US$1,300 an ounce.
Our mind-set during the high gold price en-vironment was ‘growth at all costs’, as, at the time, we sought to transform the company from the 2.6 million ounce producer we are today into a 5 million ounce producer. Instead, we are now focused on maintaining sustainable margins at our existing opera-tions, to ensure that we have enough money to invest in the future; this has forced us to be conservative in our price estimates when calculating our mineral resource and reserves, therefore lowering our gold cut-off grades. Though this may shrink the lives of our mines, it ensures that we are able to remain profit-able in a rock-bottom gold price environment. All of our South American mine sites have shrunk: production was suspended at La Coipa in October 2013, although we are assessing the viability of restarting operations via a pre-feasibility study, on track to be completed by 2016. And while the mine that we have left in Chile, Maricunga, has decreased overall pro-duction, it has been able to maintain its net asset value by lowering operating costs. Additionally, we have two projects: Lobo-Marte, which is currently suspended as we need a higher gold price to bring it into production; and Coipa Phase 7, a project to extend the mine life of La Coipa.
CAREER DEFINING MOMENTMy career defining moment came when I was asked to come to work in South America. I was able to collaborate with multi-cultural teams in the successful pursuit of a common goal.
LESSON IN BUSINESSDo not expend energy on worrying about the things that do not matter, because it will keep you from focusing on the bigger picture, which is your people. What is important is to make sure that my people have what they need to be successful, then we as a company will follow suit.
We were rated by the Mining Council as best in class in Chile for our work with communities
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How are you mitigating the effects of the slowdown in the mining industry?The mining industry in Chile is one of the main pillars of the economy and plays an im-portant role in GDP growth. A few years ago, it was predicted that mining investments for the next ten years would reach US$100 bil-lion. However, they have slowed down more than expected due to various reasons such as permit restrictions, macroeconomic condi-tions and political issues. Nonetheless, Chile remains the principal copper exporter in the world, and therefore, there are still plenty of opportunities in the mining industry. In order to keep growing, SalfaCorp is also working on brownfield projects, which focus on opera-tional improvements of existing constructions. The principal challenge in Chile is to keep improving. The country has a serious energy shortage, and it is one of the countries with the highest energy prices in the world, whilst between 15 and 20 per cent of the operating expenses of a mining company relate to energy costs. The current average price per node stands at around US$150 per megawatt compared to US$80 in the U.S. and US$70 in
gAStón RUBIOSALFAcORpgeneral Manager & Vice president
INTERNATIONAL INVESTOR: Could you tell us about SalfaCorp’s projects related to mining?GASTÓN RUBIO: As a leading company in the engineering and construction industry, with an impressive project portfolio, as well as an active international expansion plan, SalfaCorp currently has around 33,000 employees across different projects in the industrial and retail sector. Covering a wide range of sectors such as energy, mining and infrastructure, we have the capacity to deal with projects in an inte-grated way. SalfaCorp was involved in the construction of the Sierra Gorda copper mining project, which required a total investment of around US$4 billion, employing 7,000 people at the peak of the construction phase. Similarly, we took part in the Caserones mining project, which required around nine million man-hours, employing 5,000 people. Due to our sales levels and track record of more than 85 years in the market, we have built and maintained long-lasting relationships with our employees and customers, prioritising safety and providing client support in all stages of our projects, including the feasibility stage. Salfacorp makes a difference when it comes to managing large projects, as not many compa-nies in Chile have the capacity and manage-ment to handle projects with construction costs between US$300 and US$400 million. With annual sales of US$2.2 billion in en-gineering and construction, we have the ca-pacity to support our clients during the entire construction process, from estimating capital expenditures and dealing effectively with com-munity and labour relations to providing inno-vative construction methods and maintaining the highest safety standards. Thus, we know how to manage the challenges in the industry. Besides industrial projects, we have also been involved in the construction of emblematic projects in Chile, such as the National Stadium and the Costanera Center mall.
Peru. We have to look for creative solutions and develop hydroelectric projects to gen-erate energy at a lower price.
How do you maintain a safe working environment and encourage employee development?Twenty years ago, SalfaCorp implemented a new security policy in compliance with inter-national standards, as we started working with international companies such as BHP Billiton and Minera Escondida, who brought a safety culture they had applied previously in coun-tries such as the U.S. and Australia. We appropriated that culture and devel-oped our own safety standards, which must be adhered to at all times. Before they start working, new employees receive security training. This policy has become part of our corporate culture; it is in the DNA of our em-ployees, supervisors and senior management. In terms of development, we organise reg-ular on-site training programmes, allowing em-ployees to grow within their areas of expertise and within the organisation. In all of our proj-ects, we try to incorporate the local workforce as much as we can. Our experts provide classes to local engineers, teaching specialised skills, such as welding. After one year of training, someone can double their salary as a profes-sional welder; a significant improvement.
How have you managed to adapt and prosper in other markets in Latin America?Principally, we were able to adapt in countries such as Peru, Colombia, Panama and Uruguay because our expansion abroad went hand in hand with the growth of our clients, like BHP Billiton, Bechtel, Fluor and Xstrata, among others in the industrial sector, and Cencosud and Falabella in the retail segment. As they developed their businesses in other countries in South America, they brought us along because they were familiar with our policies and modus operandi. Additionally, our high quality and safety standards have served as an example in other countries. Therefore it has been easy for us to enter new markets, especially because we associated ourselves with local companies in order to adapt to their culture. At the end of the day, Chile is an important market, but it is relatively small, so it is important to grow in other regions. Notably, prior to expanding internation-ally, we adopted a policy which entailed hiring people from the countries in which we planned to expand and offering them jobs at SalfaCorp in Chile, so they would get used to the company’s policies and the corporate culture. Subsequently, we associated with a local company in the other country and sent the people we trained in Chile back to start working at the newly acquired companies.
CAREER DEFINING MOMENTDuring an internship, I worked at the construction of a plant in the Chuquicamata mine, and I became fascinated by the mining industry. Mining is a challenging sector, as weather conditions are extreme and the desert is an inhospitable and isolated place to work. Nonetheless, I have never regretted the decision.
LESSON IN BUSINESSA deal is only closed when you have signed the contract, not before. In the Chilean mining industry, there are many foreign actors, and every country has different negotiation habits. Therefore, it is very important to understand the culture of the person you are negotiating with, in order to successfully nurture a business deal to its close.
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perspective mining
By 2035, it is expected that Chilewill be home to 250 world-class suppliers that will export approximatelyUS$10 billion in technology-related and knowledge-intensive services
PERsPECTIVE: InnOVAtIng the InDUStRy
Creating conditions for attracting greater investment and strengthening public confidence in mining activities in Chile are two areas that must be prioritised. Progress in environmental sustainability must also be secured to achieve harmonious relations with local communities.
A LONG-TERM VISION FOR THE MINING INDUSTRYIn 2014, a report entitled Mining: A Platform for Chile’s Future was produced by a highly influential group of stakeholders linked to the mining industry, brought together by the National Innovation Council for Competitiveness (CNID). The report, delivered to President Michelle Bachelet in December of the same year, is a joint effort between the public and private sector to promote the future development of mining ac-tivity in the country. An important part of the measures put forward in the document deal with a concern that not only affects the mining industry, but also the country as a whole: the need for a shared long-term vision. Broadly, the document contained a vision for the industry, an agenda of strategic priorities, and an insti-tutional framework that would allow the components of the vision to be fostered. The vision itself assumes that the mining industry should be structured according to certain attributes. First, it must be ‘virtuous’ in the sense that, at the same time as strengthening its competitiveness and produc-tivity, the industry must create the necessary conditions for the emergence of an ecosystem of innovation that will contribute to the establishment of a knowledge economy. Moreover, it must be an inclusive industry, encouraging participation from the local communities and sharing the benefits it generates. Finally, it must be sustainable and include all the critical variables in its operational design in order to prevent, avoid, miti-gate and compensate for the environmental, social and cultural impacts generated throughout the lifecycle of a project. This will clear the way for a rationalisation of the processes relating to environmental requirements and permits, as well as facilitating adequate monitoring by the State.
SOCIAL, ECONOMIC AND ENVIRONMENTAL CHALLENGES To move in this direction will require substantial changes to the way in which the mining industry develops going forward. Most transformation processes are triggered by critical situations, and this particular instance is no exception. Thus, the aforementioned agenda must be understood as an aspiration resulting from a set of challenges that, if not resolved, could affect the com-petitiveness of a critical national industry. Chile is globally recognised for its mining industry and is the world’s largest copper producer, contributing
approximately 32 per cent to global production, as well as being the third largest producer of molybdenum. Since 2005, the industry has contributed 14 per cent to the national gross domestic product, accounting for 56 per cent of total exports and 19 per cent of total tax revenues. On average, around 11 per cent of the coun-try’s total workforce is directly or indirectly involved with the mining industry. In fact, it is often referred to as ‘the backbone of the economy’ and viewed as ‘Chile’s salary’. Despite its importance, mining has been unhelpfully and wrongly labelled as a cash cow with the sole pur-pose of bolstering state coffers year-on-year. As a con-sequence of this supposition, progress towards a more sustainable mining industry is severely hindered, as is the industry’s ability to create local production chains that drive the country’s development. Moreover, questions surrounding the future of mining in Chile have become more relevant as the challenges faced by the industry become increasingly urgent. Ore grades are decreasing and extraction now takes place at greater depths, while costs related to energy and water have increased significantly and are considerably higher than other mining countries with which Chile must compete. Importantly, factors that are increasingly influenced by public opinion, such as social and environmental requirements, are complex and have become consider-ably more demanding as time has passed. Thus, it is important that the agenda of strategic priorities, set out in the report, is analysed to discern whether the stated goals are achievable and if they can firmly locate mining at the centre of sustainable development. The majority of the proposed measures seem to be more than adequate in terms of focus and approach. The purpose of the agenda is twofold. First, it aims to consolidate the leadership of Chile’s mining industry at the global level, allowing the country to fully capitalise on the continued and significant demand for copper projected for the coming decades. Notably, the export target outlined in the report’s vision has been set at 130 and 150 million tonnes of copper and other min-erals between 2015 and 2035. The second purpose proposed in the report is to take maximum advantage of the opportunities provided by mining to improve the diversification of the country’s productive and export industries. By 2035, it is expected that Chile will be home to 250 world-class suppliers that will export ap-
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mining perspective
proximately US$10 billion in technology-related and knowledge-intensive services.
STRENGTHENING THE INSTITUTIONAL FRAMEWORKIn order to achieve this, the report calls for a strength-ening of the institutional framework to ensure better coordination between the private sector and the government through the creation of a public-private council, which would strategically guide long-term decisions concerning the mining industry to allow plan-ning to extend beyond the particular government of the day. Additionally, the authors advocate better financing for research, development and innovation projects un-dertaken by suppliers, mining companies and research centres, as well as improving the regulatory framework that relates to consultation processes with indigenous people. It was also suggested that greater availability of geological information and improved access to mining property would stimulate investment. Specifically, the authors suggest the creation of a database for mineral exploration and geological resources, following the standards of the most developed mining economies. Furthermore, the report advocates strengthening the powers of environmental institutions, which would include the development of environmental norms, regulations and recommendations for the industry based on best practices. Currently, a major issue facing mining projects is finding a supplier within Chile to whom the task of dealing with particular project chal-lenges can be allocated. The industry would, therefore, benefit from a more flexible model that allows for the allocation of a supplier and a research centre to work in conjunction on resolving particular challenges and problems. This could consist of a network of on-demand research centres, which specialise in mining issues, col-laborating with mining suppliers’ research and develop-ment departments. Although this agenda is relatively new, some pro-grammes that facilitate a move in the aforementioned direction are already being implemented. For example, the National Mining Programme, driven by the Chilean Economic Development Agency, the Ministry of Mining and the Ministry of Economy. The initiative, which will be implemented by Fundación Chile, aims to strengthen the ecosystem of innovation, research and develop-ment of the mining industry. Clearly, the results of these measures can only be assessed over the long term. Although the vast majority
of the actions proposed accurately reflect the needs of the sector, success will depend on the willingness and ability of the different stakeholders to discuss and sup-port this effort in the long run. The magnitude of to-day’s challenges requires the joint effort of all players linked to the industry. Otherwise, the possibility of maximising mining as a tool for Chilean development will be increasingly difficult.
CONCLUSIONThe development of a long-term vision for the mining industry in Chile is pivotal to the nation’s trajectory, given the importance of this sector to the national economy. Accordingly, securing its future is a task which needs to be confronted in the present. The challenge of innovating the industry was taken up by a group of experts in 2014, in collaboration with the CNID, from which participants produced a roadmap for change. This document sets out a strategy which proposes ways in which collaborative efforts in areas such as social innovation, institutional development, and scientific and technological advancement can help secure the innovation required. Signatories to the report, who come from across the sector and beyond, argue that a more virtuous, sustain-able and inclusive mining industry will lay the founda-tions for a number of improvements. These include a better-respected, more productive and competitive sector, and one that is able to contribute directly to the wellbeing of people throughout the country. Timing is the key, and taking advantage of the historic moment in which Chile finds itself, in terms of the increasing demand for minerals from emerging Asian markets, is a central reason why the industry must accept the chal-lenge and begin innovating as soon as possible.
➥ This feature was produced in conjunction with Innovum Fundación
Chile.
The development of a long-term vision for the mining industry in Chile is pivotal to the nation’s trajectory
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Mining as well as the mining and energy com-mittees and other related associations. APRIMIN promotes positive mining guide-lines and is very active in organising activities that focus on increasing the attractiveness, sustainability and competitiveness of the mining industry. We provide opportunities to suppliers that can add value to their services and products through innovation and tech-nology propositions. We also play a major role in defining a framework of requirements in education, skillsets and work experience for technical positions in the mining sector. This is done by evaluating industry demands for educational programmes in coordination with the Chilean Ministry of Education, the Mining Council and the mining association SONAMI. Additionally, we endorse specific labour and tax regulations that concern the mining industry, and we have developed standardised health and safety criteria around obtaining access to mining sites, which the Sernageomin, the National Geology and Mining Service, is now formally enforcing.
How do your associates benefit from the agreement with the Chilean Mining Council?The agreement aims to align the training that
AnDRéS AgUIRReApRIMInpresident
INTERNATIONAL INVESTOR: What are APrIMIN’s background, goals and mandate as a trade organisation? ANDRÉS AGUIRRE: APRIMIN, the Mining Suppliers Association in Chile, was created by a group of major mining suppliers in 2003. Currently, we have over 100 associates, in-cluding multinational companies, such as the engineering group Sandvik, the energy firm Petrobras and construction machine manufac-turer Liebherr; as well as Chilean companies which include the explosives firm Enaex, construction firm SalfaMontajes and insur-ance company Mutual de Seguridad. More than 130,000 people are employed directly and 40,000 indirectly through APRIMIN’s as-sociates, selling around US$11 billion to the mining industry on a yearly basis. APRIMIN is managed by directive board and an executive committee that represent suppliers such as heavy equipment company Komatsu, engineering group Weir Minerals, technical repair company Maestranza Diesel, process instrumentation company Endress+Hauser, and the construction holding Arrigoni. It has seven active committees working on standardisation, innovation, productivity, labour relations, cor-porate social responsibility (CSR), ethical issues and mining fairs. We aim to boost the development of companies that service the mining sector by addressing issues that affect the industry, as well as providing information related to regu-lation, science and legal matters. Striving for standardisation among the requirements of different mining companies, APRIMIN encour-ages strict compliance with regulations in the supplier industry, as well as ethical guidelines. Improving and standardising policies is key, because we want Chile to become a country with significant levels of exports in mining sup-plies and services, following successful exam-ples in other mining countries such as Australia, Canada, Sweden and Finland. To achieve this, APRIMIN works closely with the Ministry of
is on offer with the human capital require-ments in the industry. The current market is not providing enough technicians and pro-fessionals to meet the needs of the mining industry. Many suppliers spend valuable time and resources in developing their own training centres. The agreement encourages both mining and supplying companies to provide in-formation about their human capital demand in the medium and long term. With this information, training centres, technical schools and universities will be able to update the curriculum for programmes re-lated to extraction, process management and maintenance in mining operations. They can also contribute to the establishment of quality standards for the certification of labour com-petences in order to better prepare students according to the needs of the mining compa-nies and the suppliers of the mining industry.
How does APRIMIN contribute to the sector in terms of innovation?Promoting innovation in the Chilean mining industry is hugely important, especially in an increasingly competitive global economy. As suppliers of the industry, we understand that our role is to add value through innovation and technology. We are currently working on a programme to train contract managers for both suppliers and mining companies. Our aim is to emphasise the added value of services, rather than focusing only on organisational and transactional issues, which has been the norm so far. Clearly, it is very important to identify and mitigate the risks related to innovation in a way that works for both the suppliers and the mining companies. APRIMIN is also participating in forums organised by universities, governmental au-thorities and mining companies to promote innovative projects, and the creation of new world-class suppliers, in order to stimulate the development of the country as an ex-porter of goods and services related to the mining industry.
What role does APRIMIN play in encouraging environmental sustainability in mining?One of APRIMIN’s four foundational pillars is to strive for a sustainable mining industry. Since our associates operate in different in-dustries across the country, not only mining, we are committed to exceeding the environ-mental standards set by Chilean regulators and our customers. To this end, we have created APRIMIN’s CSR Committee, which aims to share best practices and improve corporate social responsibility in our industry. We also established a code of conduct, sin-gling out concrete measures to take care of the environment, in order to make the mining industry as sustainable as possible.
CAREER DEFINING MOMENTWhen I graduated from university in 1982 as a civil mechanical engineer, the level of unemployment in Chile was high, and I accepted a job below my expectations in a remote mining site as maintenance supervisor. The position turned out to be a great opportunity to learn and grow in the mining industry, in which I have worked for more than 30 years now.
LESSON IN BUSINESSEmpowering people and helping them to develop their potential is very important. Technology and products can be acquired, but passionate people, leadership and sharing a common vision are assets that make the difference in the long term.
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the highest payload to vehicle weight ratio in their class, which means reduced operating cycle times, allowing our customers to meet production targets with fewer trucks in less time. Furthermore, the lighter gross vehicle weight minimises fuel consumption, meaning lower cost. Additionally, Liebherr’s custom drive system improves efficiency and further reduces fuel consumption, and our front wheel design also considerably improves tire life. We sell equipment, but as per our core values, we supply products and services that create genuine added value and user benefit. Our policy is to be satisfied with our work only when the customer is satisfied. This has led to steady growth since 1949, when the first Liebherr company was established. We strive for close cooperation with our customers and business associates, based on loyalty, fair play and commitment to long-term relationships. As we speak, Liebherr is influencing the Chilean mining industry’s perception of our company by consistently achieving the de-fined contractual availability on all our sites. Resultantly, the market in Chile will recog-nise our ability to maintain and support our equipment. This has been possible due to the improvements that we addressed over the last years before the current market downturn. First, we concentrated on improving and adapting our MARC contract management to
DALe cLAytOnLIeBheRR chILe S.p.A. Managing Director, Mining
INTERNATIONAL INVESTOR: What is the importance of the Chilean market to liebherr’s overall mining business? DALE CLAYTON: The size of the mining in-dustry and its ability to support our key busi-ness area here, the ultra-class truck market, made the Chilean market especially attractive for Liebherr. We have sold 68 units of our T282 range, 20 excavators, and we are expanding our operations to allow us to compete in the ultra-class excavator market. Once there is one excavator operating, the quality will speak for itself and we will expand that part of our business. As per our growth format, we established a factory branch in 1999 to develop a business pipeline and started Liebherr Chile in 2005. We have a presence in Santiago, Antofagasta and Calama and site offices at mines which use Liebherr machinery. In 2014, Liebherr Chile undertook a huge logistical effort to showcase the T264 truck at the biannual event EXPOMIN, highlighting our commitment to Latin America, and especially to Chile, and its importance to our business as we build our brand in the region. Our objective, therefore, was to demon-strate what we represent in terms of size and ability. Achieving a group turnover of €8.8 billion in 2014, we are the world leader in lifting technology; and our mobile, tower and maritime crane divisions are very successful and well-represented in Chile. Despite chal-lenges, we are continuing to grow our opera-tions in the country, exemplified by our three year Labour Plus Parts (LPP) contract with Codelco for the Chuquicamata mine that is expected to increase company profits by 15 per cent.
How does Liebherr differentiate itself from the competition?In terms of our machines, our ultra-class trucks stand out because of the payload and fuel economy. For example, our trucks offer
ensure planning, thus, enhancing our ability to provide significantly greater truck availability. This was achieved through strategic and struc-tural changes. In terms of organisational structure, we divided our operations into smaller, more de-fined areas, so our various site managers are able to better focus on what really matters i.e., safety and availability, which equates to more production and reduced costs for cus-tomers. Consequently, some functions from the individual contracts were instead oper-ated centrally. This is an ongoing process and has worked really well. As a result of these changes, we deemed an increase of our Antofagasta facility necessary to ensure we could support projects and meet the growing demand for our products. The fa-cility has a warehouse and workshop meaning that, other than electric motors, we can un-dertake all the component repairs in Chile, strengthening our vertical integration capacity and allowing us to reduce the cost to our cus-tomers and minimise unscheduled downtime.
Could you explain the importance of innovation to liebherr?As a group, Liebherr makes significant invest-ments in innovation and development in all product groups, mining being no exception. We have brought much of our component design in-house, facilitating dialogue and un-derstanding within the company and ensuring our parts are highly functional and effec-tive. In fact, our vertical integration efforts add to the company’s efficiency, as when Liebherr develops a component it is designed to suit the requirements of that specific piece of equipment. Moreover, we have introduced a tablet-based electronic trouble-shooting guide for our technicians. This will further improve ef-ficiency because the training and experience necessary to become an expert diagnostic technician is vast. Now, this guide will provide information that previously had to be gained through experience.
Could you tell us about liebherr’s plans for regional expansion and growth?Obviously, Chile is our main market, but we also have companies in Argentina and Colombia. Furthermore, in 2014 we employed a sales manager for the Peruvian Market and opened an office in Lima. There are a large amount of mining projects in the pipeline in Peru, and the country does not have the energy and water constraints at present that the Chilean mining industry is experiencing. Though Peru and its mining sector must con-tend with a number of pressing social issues, our investment in the country represents an exciting prospect with good growth potential.
CAREER DEFINING MOMENTWithout a doubt, working for Liebherr in Ghana. I was in Africa for nine years and I think the time I spent there and the diversity of cultures and operational challenges made me a much better manager and person. In a global company, the ability to understand different cultures and expectations is crucial.
LESSON IN BUSINESSMake sure you have good people around you and do not micromanage. You cannot do everything by yourself.
focus mining
56 INTERNATIONAL INVESTOR
which presently stands at around 18 per cent, continues to grow. In general, the participation of women in the Chilean labour market stands at 45 per cent. Despite this overall decline, 18,000 people entered the Chilean mining sector in 2014, of which 10,000 were employed for the first time and 8,000 were transferred from other economic sectors. This development poses major challenges in terms of training and adaptation to the demands of the industry.
EDUCATION SUPPLY VS. INDUSTRY DEMANDIn the field of education, the number of students en-rolled in programmes related to mining has grown ex-ponentially since 2010. However, better coordination between higher education institutions and the industry is necessary, as the current situation could lead to an oversupply of new graduates entering the market. For this reason, the mining industry has identified ensuring quality education as a priority over training large quanti-ties of graduates. Furthermore, as there is still a lack of clear strategy with respect to training in the field, an ongoing and adequately executed policy regarding the supply of tradesmen is required to secure the labour supply for the future and to determine which areas will require the most personnel in the medium and long term.
HUMAN CAPITAL CHALLENGESThe manner in which Chile’s mining sector approaches the challenges related to human capital development has changed considerably in recent years. Previously,
A CHANGING WORKFORCEAn estimated 27,000 new workers will be needed to join the mining workforce between 2014 and 2023, 60 per cent of whom will be replacing current employees reaching the age of retirement. In fact, by 2023 around 9 per cent of the staff currently working in mining and contractor companies will be eligible for retirement or will have retired. This gap in human capital will be mainly concentrated in the fields of fixed plant and mobile equipment operations, as well as in maintenance (see fig. 1). A study by the The Chilean Mining Skills Council (CCM), entitled Chilean Large-scale Mining Workforce 2014-2023, indicates that the estimated demand of the sector’s workforce contracted by approximately 6,000 people in 2014 due to the deferral of investment proj-ects and greater cost control, as well as restrictions in project cost estimates and the implementation of proj-ects. The figures suggest that this trend will continue for a further period. Data collected from various companies in the sector shows that in 2014, the large-scale Chilean mining industry employed 178,000 people, of whom 26.9 per cent were mining company employees and 73.1 per cent were contractor company employees. This is a decrease of 1.5 per cent compared to 2013 (see fig. 2). Likewise, the rate of women employed in the mining industry has stagnated at 7.3 per cent in 2014 after nearly a decade of growth. This falls well short of the numbers in countries such as Australia and Canada, where female participation in the mining workforce,
Long term predictions suggest a shortage of equipment operators and maintenance professionals.
FOCus: IMpROVIng LABOUR SKILLSBy 2023, approximately 27,000 additional skilled workers will be needed in the Chilean mining industry. However, in an effort to improve labour productivity rates, the demand for quality has prevailed over concerns about quantity.
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mining focus
current situation while incorporating certain local ideas and site-specific elements. As a result, there have been profound improvements in training and an increased em-phasis on vocational education in the country. In 2013, the organisation received the Avonni National Innovation Award in recognition of the importance of its work and its pioneering nature, making it a model for several other productive sectors in Chile.
➥ This feature was produced in conjunction with Innovum Fundación
Chile.
the sector’s approach could be characterised as a col-lection of disparate efforts by individual companies and educational institutions, which were usually both inef-ficient and insufficient in overcoming the gaps in human capital within the industry. However, over the last four years, there has been a paradigm shift towards a sector-based, collaborative system that, as a result of numerous studies and the de-velopment of educational tools, can now provide voca-tional institutions with guidance in order to strengthen and improve their curricula. The result of this change in modus operandi has been the proliferation of training programmes tailored to produce specific worker profiles that are critically needed by the industry in order to expand and increase productivity. Importantly, this work model does not just benefit the mining sector. It also helps educational and training institutions to improve the quality of their targeted pro-grammes, thus optimising investments in education and training made by individuals, companies, and govern-ment, which, in turn, provides graduates with greater employability. Moreover, through specifically focused State and private company scholarships, students from lower socio-economic segments of the population are able to take full advantage of the work opportunities created by the development of the mining industry: a perfect example of shared value creation. The CCM is at the heart of this transformation. It is the first ‘skills council’ in Chile and was created in 2012 under the wing of the Consejo Minero, an association that unites national and foreign producers of copper, gold, molybdenum and silver in Chile from both the public and private sector. The project was undertaken with assistance and close collaboration provided by Innovum Fundación Chile. In essence, its aim is to pro-mote more effective coordination between the industry, universities and training institutions, as well as to en-courage the use of technical and educational standards, in order to prepare the mining sector for challenges in the years to come. The CCM takes advantage of the broad experience that skills councils from Australia and New Zealand have to offer, adapting best international practices to Chile’s
The mining industry has identified ensuring quality education as a priority over training large quantities of graduates
2. CHILEAN MINING WORKFORCE
Source: Consejo de Competencias Mineras
178,000Total workforce
2014
Contractor companies 73.1%
Female participation in mining
7.3%
From other industries
27,000 Additional jobs
2023
Mining companies 26.9%
45%
55%
18,000 new employees
First-time employees
1. ACCUMULATED HUMAN CAPITAL GAP IN THE MINING INDUSTRY BY 2023 (THOUSANDS)
Source: Consejo de Competencias Mineras
-7.7
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58 INTERNATIONAL INVESTOR
business intelligence mining
HIDROMAULEHidromaule, a pioneering company, is dedi-cated to leading the non-conventional re-newable energy generation industry in Chile. Since its beginnings in 2005, the founder company, Italy-based Sorgent.e, has pro-moted sustainability as a fundamental prin-ciple in generating electrical energy. According to this vision, Hidromaule saw the potential of using irrigation channels to provide the water for producing energy, particularly in Chile’s Maule Region. The company’s plans were realised as the result of a strategic agreement with Asociación de Canalistas del Maule (ACM), an association of about 2,200 irrigators from the area. The agreement allows the use of the ir-rigation waters to generate electrical energy using the natural course of the irrigation channels and natural height differences in the terrain. This particular generation method minimises negative impacts on the environment and, due to the fact that after the electricity has been generated the water used is returned to the same irrigation system, the final destination of the water remains unchanged. Currently, Hidromaule has developed three run-of-river projects: Lircay, Mariposas and Providencia, totalling 41 megawatts of installed capacity. In order to operate the scheme fairly and sustainably, Hidromaule and ACM signed a long-term water use agreement that estab-lished annual payments from Hidromaule to ACM, thus allowing the association to cover a relevant part of its operational and mainte-nance costs along its irrigation system. To this end, Hidromaule Group operations contribute to sustainable development, by making a direct and positive impact on local stakeholders in the area. Moreover, they have a positive environmental impact with the production of clean and renewable energy for the national grid, as the energy produced is recognised as non-conventional renew-able energy generation according to Chilean law. The operations also qualified under the
emissions reduction and project develop-ment schemes of the Clean Development Mechanism and the Verified Carbon Standard.
PROjECTSLIRCAY RUN-OF-RIVER PROjECTThe Lircay Run-of-River Power Plant, the first of the projects developed by Hidromaule, began its commercial operation in October 2008 and is located in San Clemente com-mune, in the Maule Region. Specifically lo-cated in the first section of the Norte Bajo Canal, it is from this canal that the power plant captures the water it needs in order to produce electrical energy. Lircay has an installed capacity of 20 megawatts and generates an average of 130 gigawatt hours per year, which is supplied to the Sistema Interconectado Central (SIC). Its design, which incorporates well-proven and reliable technologies from the electrical market, consists of a water intake; a three-kilometre-long open channel with a capacity of 25 cubic metres per second; a pressure penstock; a power house with two horizontal axis Francis turbines of 9.7 megawatts each; and a 6.6/66 kilovolt substation. Moreover, it has a 27-kilometre-long trans-mission line in order to supply the electrical energy generated to the SIC grid through the existing Maule substation. Lircay is registered under the Clean Development Mechanism, in accordance with the United Nations Framework Convention on Climate Change (UNFCCC), and contributes to environmental sustainability with an emission reduction of 53,000 tonnes of CO2 per year.
MARIPOSAS RUN-OF-RIVER PROjECTThe Mariposas Run-of-River Power Plant started its commercial operations in March 2011 and is located about ten kilometres south of the Lircay Run-of-River Power Plant in the San Clemente commune, in the Maule Region. Mariposas has an installed capacity of 6.3 megawatts and generates an average of 40 gigawatt hours per year, which is supplied to the SIC grid.
Hidromaule operations contribute to sustainable development, making a direct and positive impact on local stakeholders in the area
LeADIng the WAy In MInI hyDROHidromaule has established a number of run-of-river power plants that provide clean, stable, safe and sustainable energy to the national grid.
providencia plant
CHILE 59
mining business intelligence
Its design consists of a water intake with a capacity of 20 cubic metres per second; a pressure penstock; a power house with a ver-tical Compact axial Turbine; a 6.3 megawatt Alconza synchronous generator; and a 6.6/66 kilovolt substation. It has a seven-kilometre-long transmission line, which connects Mariposas to the SIC grid through the existing Lircay substation. Mariposas is registered under the Verified Carbon Standard, which allows the gen-eration of environmental emission reduction certificates. The project provides important environmental benefits, such as annual CO2 reductions of about 21,000 tonnes.
PROVIDENCIA RUN-OF-RIVER PROjECTThe Providencia Run-of-River Power Plant, the company’s third run-of-river project, began its commercial operations on 28 March 2013. This project is located about 10 kilometres north of the Lircay Run-of-River Power Plant in the San Clemente commune, in the Maule Region. The project has an installed capacity of 14.2 megawatts and generates an average of 60 gigawatt hours per year, which is supplied to the SIC grid. The design of Providencia considers a water intake with a capacity of 28 cubic metres per second; a pressure penstock; a
power house with two Andritz/Vatech hori-zontal axis Francis turbines; two Indar gen-erators of 7.1 megawatts each; and a 6.6/66 kilovolt substation with a nine kilometre long transmission line, which connects the Providencia plant to the SIC grid through the existing Lircay substation. The Providencia plant is registered under the Clean Development Mechanism scheme, in accordance with the UNFCCC. The project contributes to emission reductions of 37,000 tonnes of CO2 per year. SUSTAINABLE ENERGY CONTRIBUTION Hidromaule Group provides the SIC with a stable, safe and sustainable source of non-conventional renewable energy, producing an average of 230 gigawatt hours per year. All the energy created by the run-of-river power plants is currently sold to the spot market, but it could be suited to any direct industrial client in the system. Without a doubt, Hidromaule projects deliver a new standard of development and growth for the future of Chile. Besides the contribution of clean and efficient energy to the grid, the innovative agreement between Hidromaule and the ACM offers significant benefits to agriculture in the area, providing additional income to the association and
optimising the management and efficiency of the irrigation channels in the area. In ad-dition, Hidromaule projects contribute to emission reductions of almost 111 tonnes of CO2 equivalent every year.
Mariposas plant
HIdROMauLE s.a.Av. presidente Kennedy 5757, Of. 802,torre Oriente, Las condes, Santiago de chile
+56 2 2963 5200www.hidromaule.cl
CaRL wEBERChief Executive Officer
Lircay plant
interview mining
60 INTERNATIONAL INVESTOR
sales agent for Concha y Toro wines for over 30 years. We have also supplied Chile with a series of thermal power and other industrial plants under an engineering, procurement and construction scheme through which we have been able to share our experience in integra-tion services. With MC’s total investments amounting to over US$6 billion, Chile is our second largest investment destination globally.
As an investor in and operator of power projects, what are your views on the energy situation?There is great potential in Chile for developing renewable resources, which have advanced to a high technological level, including hydro-electric, solar, geothermal and wind sources. Although investments in the renewable energy sector will continue to grow, the need for a stable supply of fossil fuels that can be pro-cured globally, such as liquefied natural gas and coal, will also remain. Chile also enjoys a very positive reputation among foreign investors as a destination that provides economic, social and regulatory sta-bility. Accordingly, as it lacks a large number
tOShIhIRO ShIMAzAKI MItSUBIShI chILe LtDA.president
INTERNATIONAL INVESTOR: Could you outline the business interests of Mitsubishi in Chile?TOSHIHIRO SHIMAZAKI: Mitsubishi began commercial activities in Chile in 1920, ex-porting nitrate to Japan. In 1960, Mitsubishi Chile Ltda. was incorporated and, since then, we have developed in many industrial areas through our different business segments. In 2014, we commemorated the 60th anniversary of the historic re-merger that gave birth to today’s Mitsubishi Corporation (MC), following the dissolution of original company, Mitsubishi Shoji Kaisha, in 1947. In most areas, MC has a presence in the whole of or, at least, a significant part of the value chain. MC’s Metals Group currently in-vests in the iron ore and steel industry through CAP S.A. and Cia. Minera del Pacífico, while our Living Essentials Group invests in aqua-culture through Southern Cross Seafood and Salmones Humboldt; forestry through Forestal Tierra Chilena and Astillas Exportaciones Ltda.; and agriculture through Agrícola Ovalle Alto Ltda. In addition, our Machinery Group distributes Mitsubishi elevators through Heavenward Ascensores S.A. and Mitsubishi vehicles through MMC Chile S.A., together with local partners. MC’s Global Environmental and Infrastruc-ture Business Group is also heavily involved in sectors critical to Chile’s economic growth. For instance, with our local partner, CAP S.A., we finished the construction of a desalination plant in northern Chile in late 2014, which is expected to have a long-lasting impact on helping to address water demand issues facing the mining industry in the Atacama Region. With regard to electricity generation, we have a 40 per cent stake in the Cochrane Project in association with AES Gener. MC is also active in the trading business in Chile, importing and exporting commodities, equipment, industrial plants, and other goods. For example, Mitsubishi has been the Japanese
of generation projects, the country is taking steps to avoid a major energy crisis, which could hinder continued growth in mining and other sectors. The government is there-fore working to tackle this situation through the implementation of an energy agenda, launched in 2014. The energy agenda aims to reduce elec-tricity costs and increase the contribution of renewable sources. It also seeks to address difficulties related to obtaining permits for power generation projects. It is always a chal-lenge to strike the perfect balance between environmental concerns and the need to ensure sustained economic growth, while at the same prioritising decision-making through democratic means. Consequently, we are developing and intro-ducing technologies that will simultaneously contribute to achieving both goals of environ-mental sustainability and economic growth. Currently, MC is able to offer clean coal tech-nologies by applying efficient emission abate-ment systems to conventional coal-fired plants or coal gasification plants to burn synthetic gas in gas-steam combined cycle plants. Needless to say, growth in Chile is inex-tricably linked to the development of its in-dustries, particularly mining. One of the key factors in enabling mining development is the provision of a stable and affordable supply of energy. In this regard, Chile’s energy sector therefore has much room for growth.
How does your company’s value system contribute to Chile’s business community?The growth and development of MC has always been based on the values of the old Mitsubishi organisation, encapsulated in three corporate principles: ‘Shoki Hoko’, corporate responsi-bility to society; ‘Shoji Komei’, integrity and fairness; and ‘Ritsugyo Boeki’, global under-standing through business. It is through these principles that we have developed our activities in Chile. Our com-mitment to this country is not only through business. We also recognise our duty to con-tribute socially, including the value of educa-tion, which we support through the provision of scholarships to university students, among other CSR activities. On the business side, we are also looking at ways to help respond to infrastructure needs in Chile and neighbouring countries. Thus, we have studied, along with local and regional partners, the feasibility of the Aconcagua Bioceanic Corridor project, which seeks to provide a safe and efficient cargo transporta-tion solution that links the Pacific and Atlantic countries in Mercosur. Though challenging, the project will have incredible benefits not for only Southern Cone countries, but also for their global trade partners, including Japan.
CAREER DEFINING MOMENTJoining Mitsubishi was a long-term career decision. The essence of MC’s business revolved around the company’s trading functions. As a result, I learned that establishing long-standing positive relationships is the real foundation of any good business.
LESSON IN BUSINESSIn order to do business you need a philosophy. Accordingly, you must act with sincerity, seek to establish mutual trust and consider the benefits of your initiatives for your counterpart. At Mitsubishi Corporation, we place great store in making a sustainable contribution to society and, consequently, we consider both business and societal factors with the same level of importance.
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