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Politics poses the latest threat to the country’s copper industry
More education. More equality. Those are nice things for Michelle Bachelet, hoping to return as Chilean president after December’s run-off vote, to be promising. But here is another challenge for her if she wins. Chile, the world’s top copper producer, will struggle to stay economical as a place for red-metal miners to invest in new capacity.
Another Bachelet promise – to raise the corporation tax – may not help here. A planned increase in the rate from 20 per cent to 25 per cent would lop 5 cents off earnings per share next year of Antofagasta, a London-listed Chilean miner, reckon Investec. The remaining 61 cents would already price in higher payments by miners to smelters next year. There is more to smelt: mined supply is rising as a previous wave of industry investment in capacity comes online.
One question for Antofagasta’s high multiple then (it trades at 16 times forward earnings) is where it can still find low-cost production growth. Two new projects in Chile would need future copper prices above $7,000/t and ambitious annual production levels to make them worth building, Goldman Sachs estimates. Antofagasta’s Antucoya mine, set to start operating in 2015, is already the industry’s most capital-intensive.
Chile’s older mines are humming along in the short term. In the last quarter production leapt a third at Escondida, the ageing warhorse of the Atacama Desert, and the world’s largest copper mine. But further ahead, Escondida is running dry – of water. BHP Billiton, the majority owner, is paying $2bn toward a desalination plant. This will not come online until 2017. Ms Bachelet might be around to cut the ribbon. But water scarcity overall (will miners or parched voters get first dibs?) will define her challenge.