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Energy Shortage Challenges Chile's Copper Outlook

By Shihoko Goto — Exclusive to Copper Investing News

Energy Shortage Challenges Chile's Copper Outlook

When it comes to the global copper market, two truths remain constant. First, Chile is the world's largest producer of the red metal, and second, China is the world's largest consumer of copper. However, continuing to produce copper at the rate it has until now is proving challenging for Chile due to growing worries about energy supply in addition to concerns about global copper prices and market demand.

The South American nation produces about one-third of the world's copper supply and holds 28 percent of total global reserves. As a result, the copper industry accounted for about 15 percent of Chile's GDP, and state-owned Codelco remains the world's largest copper producer.

Still, the country faces considerable challenges in reaching its goal of producing over seven million tonnes by 2020, such as securing a steady energy supply. At the annual meeting hosted by Chile's Center for Copper and Mining Studies ( CESCO) last month, Codelco CEO Diego Hernandez stated that ensuring a steady supply of energy is the single biggest challenge facing Chile's mining industry. Of course, infrastructure development has always been a major issue for miners, not just in Chile but in locations worldwide, from Mongolia to Arizona. In Chile, though, analysts estimate that the government will need to increase energy supply by nearly 50 percent over the next eight years in order to keep up with demand from domestic producers as well as international mining giants like  BHP Billiton (ASX: BHP) and Rio Tinto (LSE: RIO).

“Chile will have to shelve many of the country's mining investments due to the high cost and scarcity of electricity,” warned Chile's Mining Council president, Joaquin Villarino. Indeed, blackouts are not uncommon, and many expect them to become more frequent as energy demand from mining giants increases. The problem is that public opposition to building new power plants is becoming an increasingly large obstacle for lawmakers to overcome.

Instead of waiting for the government to step up investments in infrastructure, some private companies are looking to take matters into their own hands. BHP Billiton, for instance, is considering building a power station in Northern Chile. As for Vancouver-based Teck Resources (NYSE: TCK, TSX:TCK.B), it is looking into possible locations and providers for a power station in the Atacama Desert that would supply its $5.6 billion Quebrada Blanca mine. The site is slated to more than double Teck's copper production and increase the mine's life by about 30 years.

Private companies securing energy supplies by building their own power plants or partnering directly with energy providers will nonetheless simply be a temporary solution to the more fundamental problem of whether Chile is willing and able to invest in its energy needs for longer-term growth. According to the National Energy Commission, Chile will need to add about 8,000 megawatts to its 17,000 megawatt power system by 2020; the mining industry accounts for about 20 percent of the nation's total energy needs. Some analysts believe lack of competition is a key factor in Chile's energy deficiencies, and have called for greater market competition, especially for renewable energy projects, to be promoted nationwide.

Environmental considerations also at play

Moving forward, environmental considerations will certainly be a major concern for mining groups operating in Chile. Goldcorp (NYSE: GG) found that out the hard way this week when the Supreme Court rejected the construction of its El Morro mine by revoking its environmental permit. The mine is 70 percent held by Goldcorp, while the remaining 30 percent is held by New Gold (AMEX: NGD).

Meanwhile, ownership of the El Morro mine is in disputeBarrick Gold (NYSE: ABX) has claimed that it had a deal in 2009 to acquire a majority stake in the property from Xstrata (LSE: XTA), but New Gold claimed the right of first refusal as Xstrata's minority partner. New Gold sold its holding to Goldcorp, but held onto its original 30 percent stake while receiving $50 million in cash from Goldcorp for facilitating the transaction.

There are other challenges to operating in Chile, including adverse weather and labor disputes. The Collahuasi site, which is the world's third-largest copper mine and is jointly owned by Anglo American (LSE: AAL) and Xstrata, saw output drop ten percent in 2011 as a result of heavy rains and labor disputes. Yet the two companies continue to hash out an expansion plan that may bolster output to over one million tons.

Clearly, Chile is rich in copper, and as David Baril, Teck's Vice President for copper in Chile, said, “if you want to hunt elephants, you have to go to elephant country." That indisputable fact should keep copper miners both large and small continuing their operations in the country.


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