Chile is forecast to increase its output by 3.7% in 2021 to 4,397kt and by 6.6% in 2022 to 4,686kt. The two largest new capacity contributions in Chile in 2021 and 2022 will be BHP’s 200ktpa Spence Growth Project and Teck’s 275ktpa Quebrada Blanca Phase 2 (QB2) project. Over the medium term (2021-2025), Chile's copper in concentrate output is forecast to grow at a CAGR of 3.2% to 4,968kt, while over the long term (2026-2040), production from Chile is expected to grow at a slower CAGR of 1.3%, reaching 6,043kt in 2040.

Copper is an integral part of Chile's economy, but many of the country’s mines are ageing, with declining grades of ore and high operating costs as producers burrow deeper into the earth. Over the last 15 years, grades have declined from around 1% copper to around 0.6-0.7%. Escondida’s grades, for example, have decreased by 35.7% during the past ten years from, 1.29% in 2010 to 0.83% in 2020. Declining ore grades result in higher unit costs of production as more material is mined and processed to produce the same amount of payable metal. Capital costs also increase as long-life operations make capital investments to increase throughput and sustain copper production as mined ore grade declines.

Chile’s state-owned Codelco, the world’s largest copper producer, has launched a 10-year, US$40bn initiative to refurbish and upgrade its enormous but ageing suite of mines. The company kicked off commercial production from its phase one expansion project at its El Teniente mine in January 2020. This was the first of a four-phase project expected to add 50 years of operational life to El Teniente. Once the full expansion is completed in 2023, the El Teniente mine’s production is expected to reach 500ktpa of copper, positioning it among the world’s five largest copper operations. In August 2021, Codelco initiated construction work on Rajo Inca, a US$1.38bn expansion project at its Salvador mine, which will extend the mine’s lifespan by 47 years to 2070 and increase copper capacity by 50% to 90ktpa. The Rajo Inca project will convert Salvador, in operation since 1959, from an underground mine to an open pit mine, with copper grades 40% higher than the current ones. The expanded mine is expected to start operations in 2022.

Chile produces over one-third of the world’s SX/EW copper; but its refined copper production share faces a notable downside risk as the country’s mines exhaust reserves suitable for leaching and SX/EW processing. Chile’s refined production share is expected to decrease from 8.8% in 2021 to 7.4% in 2025 and further to 5.9% in 2040. Cathode production is expected to have ceased by 2040 at Codelco’s 220ktpa Radomiro Tomic, 160ktpa Chuquicamata and 130ktpa Gaby sites, BHP’s 130ktpa Spence and 100ktpa Cerro Colorado sites, Mitsubishi and Mantos Copper’s 60ktpa Mantoverde mine, and Glencore’s 75ktpa Lomas Bayas mines.

Peru

As the world’s second-largest producer of copper concentrate, Peru produces approximately 13% of global supply. The country is forecast to increase its output by 6.4% in 2021 to 2,207kt and by 10.4% in 2022 to 2,437kt as it recovers from Covid-19-related lows and new projects come online. Over the medium term (2021-2025), Peru's copper in concentrate output is forecast to grow at a CAGR of 6.0% to 2,777kt. Over the long term (2026-2040), copper in concentrate production from Peru is expected to grow at a slower CAGR of 1.3%, reaching 3,347kt in 2040.

The two largest new capacity contributions in Peru in 2021 and 2022 will be Minsur’s 60%-owned 93ktpa Mina Justa and Anglo American’s 60%-owned 300tktpa Quellaveco. Mina Justa shipped the first batch of copper concentrate in July 2021. At full capacity, Minsur aims to produce 51ktpa of copper in concentrate from a 6Mtpa concentrator and 42ktpa of copper cathode from a 12Mtpa oxide SX/EW plant. The Quellaveco copper project in southern Peru includes the construction of an open pit mine and 47Mtpa concentrating operation producing 300ktpa of copper equivalent in the first ten years of its life. Despite a Covid-19-related slowdown in 2020, the project is tracking against its original schedule, with first production still expected in 2022.

The Rio Blanco Copper and Molybdenum Mine in Peru is among the 10 largest undeveloped copper mines in the world. The deposit has estimated resources containing 7.41Mt of copper and 280kt of molybdenum. The operator, Zijin Mining, holds a 51% stake in the mine. It is planning on constructing an open-pit mine and concentrator facility, which will produce 200ktpa of copper and 3ktpa of molybdenum in concentrate. Zijin is currently undertaking a definitive feasibility study which was initially expected to be completed in the September quarter of 2018. Construction of the mine was initially expected to be completed in 2021 at a capital cost of US$2.5bn. AME notes that Zijin is also considering construction of a copper smelter and refinery facility to process the concentrate from the mine locally.

Southern Copper has indicated it will be investing US$8bn in its projects across Peru, including the controversial Tia Maria copper project. Tia Maria is an oxide SX/EW project located in southern Peru. The project is expected to produce 120ktpa of copper cathode for 20 years. Tia Maria is estimated to contain Reserves of 2.6Mt of contained copper. With an estimated initial capital expenditure of US$1.4bn, the project’s capital intensity of US$5.29/lb ranks at around the industry average. Southern Copper has experienced several setbacks since it first announced its intention to develop Tia Maria in 2010. Construction plans have been halted and readjusted twice, in 2011 and 2015, due to fierce and at times deadly opposition by locals, who worry about Tia Maria’s impacts on nearby crops and water supplies. The construction permit was approved in late 2019. However, the new President, Pedro Castillo, denounced the Tia Maria project in 2021. Southern Copper plans to start production from Tia Maria in 2024, but protests and violence over the project have led to doubts as to when the project development will be completed.

Beyond the Tia Maria project, in Peru, Southern Copper is progressing the US$2.5bn Michiquillay and US$2.6bn Los Chancas projects as well as a smelter expansion at Ilo. Southern Copper acquired Michiquillay in 2018, and the company has indicated it plans to start production in 2025 and produce 225ktpa of copper for at least 25 years. Los Chancas’ deposit is estimated to contain more than 3Mt of copper in resources. Southern Copper is considering the development of an open-pit mine, concentrator and SX/EW plant to produce 130ktpa of copper and 7.5ktpa of molybdenum from 2027. The main issue with the project has been the lack of infrastructure and complicated topography. Los Chancas is not included in AME's base case supply forecast.

Political Uncertainties

Copper prices have soared this year as the global economy rebounds post-pandemic on the back of the global vaccine rollout, which has prompted an easing of restrictions and higher economic activity. Copper-producing countries in South America, led by Chile and Peru, seek to increase mining royalties and taxes, looking to reap the benefits of the surging copper prices to help them to pay for post-pandemic recovery programmes. In Chile, a bill to increase the mining tax to as much as 75% on copper sales when the price is above US$4/lb was approved by the lower chamber of congress in May. The proposal was passed by a Chilean senate mining committee in late August and has now gone to the senate floor for debate. Likewise, in neighbouring Peru, the country’s new left-wing president, Pedro Castillo, has proposed a similar measure to increase tax on copper sales to as much as 75%. The new government in October asked congress for authorisation to overhaul the country’s tax code, with a focus on raising taxes on the mining sector. The Brazilian lower house also approved a personal and corporate income tax reform bill in early September which included a 1.5% increase in mining royalties to 5.5%.

Higher taxes and royalties could cause currently operating mines to become economically unviable and make the construction of new mines uneconomic. The move could drive away investment in new projects or in the expansion of existing mines to meet growing demand for copper. Some mining companies operating in Chile, including BHP, Anglo American and Lundin Mining, have lobbied against the measures. Several major miners have said that they are holding off on investments in Chile until there is greater regulatory clarity. Freeport-McMoran plans to wait and see how the country’s fiscal regime will change before making commitment to any expansion at its 51%-owned El Abra mine. Lundin Mining has paused new investments in Chile amid uncertainty over the country’s regulations and the proposed tax hikes.

Nevertheless, South32 has agreed to buy a 45% stake in the Sierra Gorda mine in Chile from Sumitomo for US$1.55bn. The seller has agreed to provide South32 with a tax indemnity in relation to potential changes in the Chilean tax regime up to an agreed cap that was not disclosed. South32’s acquisition in Sierra Gorda can be seen as a gamble on royalties being mitigated to keep the county competitive.

Higher taxes and royalties are likely to be in Chile’s future, but the bill already passed by the country’s lower house is unlikely to be finalised in its original version. Modifications with more moderate voices have been discussed during recent senate debates. Finding win-win scenarios that encourage investment while still adequately filling state coffers is the challenge for governments.