China's economic slowdown may hit Chile's mining sector

LIMA (Scrap Monster): Chile's mining sector may be hit by a slowdown in Chinese economic growth, dictated by the country's increasingly restrictive monetary policy which threatens to restrict demand for copper and other raw materials.

However, the mining industry is primed for substantial growth over the next few years and expects a substantial increase in silver, copper and especially gold output over the forecast period to 2015. Growth is likely to peak in 2012 and 2013 as several new expansion projects come to fruition. 

Copper sector to overcome short-term obstacles 
Copper remains the most important sub-sector within Chile's mining landscape, accounting for 42% of the country's total export revenues in 2009. Over the short term, we warn that Chile's copper production is likely to be restricted by falling grades at some of the largest mines, including Collahuasi and Escondida, leading us to revise our output forecast downwards in Q311. However, we expect a significant boost in output over the medium term as several expansion plans come online. 

The most recent data from Chile's National Statistics Institute (INE) indicate that the country's copper production fell by 6.6% y-o-y in February 2011, marking a 0.1% y-o-y decrease for the first two months of the year to 817kt. The decline in output in February was due to unscheduled maintenance at BHP Billiton's Cerro Colorado mine and falling grades at the joint venture between BHP and Rio Tinto at the Escondida mine. In addition, lower grades reduced production at the Collahuasi mine, a joint venture between Xstrata and Anglo American. 

The long-term prospects for copper production look positive, however, with several expansion projects expected to come online over the medium-term. The largest expansion project is at the Collahuasi mine, where output will increase from 535ktpa to over 1mtpa by 2014. Anglo American also plans to increase output by 50% to 300ktpa at its Los Broncos mine by 2012. Overall, we expect Chile's copper production to grow at annual average rate of 4.9% over the forecast period, reaching 6.87mnt in 2015, up from 5.42mnt in 2010. 

Regulatory Environment 
Chile has the rare combination of a very favourable business environment and substantial mineral reserves. The increased mining tax from 4-5% of operating profit to 4-9% has so far been met by little opposition from miners, either local or overseas.

In addition, Chile's reserves of copper and gold are likely to outweigh any concerns over tax rates. Overall, Chile will remain a highly attractive country for foreign investment as the centre-right government is eager to maintain foreign direct investment (FDI) flows into the country. That said, we expect Chile to tighten its safety laws after the collapsed mine at San Jose that highlighted the lack of regulation in the mining sector in the country. 

Key Players 
Chile's mining sector is dominated by the state-owned Codelco, as well as Xstrata, Anglo American and Antofagasta, which operate almost all the largest copper mines. The silver mining sector is expected to become more fragmented, with Genesis Minerals and Laguna Resources developing large deposits. Gold and copper production is likely to remain consolidated, with the largest companies continuing to dominate output and exploration.