Chile is recognized all over the world as a mining country. Mining has played a crucial role in the country’s economic development and has always been its main productive activity.
Huge ore deposits, along with current levels of exploitation, have allowed Chile to achieve world leadership in the production of copper, silver, gold and other minerals.
Chile is the world’s largest copper producer, and is planning a US$50 billion investment in the mining industry by 2017, with US$35 billion to be invested by the private sector and US$15 billion by the public sector.
China is the world’s biggest copper consumer and the principal buyer of Chilean copper, which is used in hundreds of Chinese industries. Copper sales are among the factors that make China Chile’s main trading partner.
In spite of this, China currently has little investment in Chile.
Winds of change?
Partner
Urrutia & Cia
In the past 10 years, more than 3,000 foreign enterprises from over 60 countries have invested close to US$64.8 billion under Chile’s Foreign Investment Statute (Law Decree No. 600). Chinese enterprises have contributed only US$85 million of the total.
Chinese direct investment in the Chilean mining sector has been correspondingly low.
There are many explanations for this lack of investment. One of the main causes is the labour market’s inflexibility. Chinese companies like to bring their own workers to their facilities. Under Chilean law, if an employer employs more than 25 workers, at least 85% of them must be Chilean citizens.
Another reason for China’s low level of investment in Chile is the huge amount of paperwork that is required to start a business in Chile. Also, previous Chilean governments have focused their attention on closer countries, such as the US, Canada and Spain.
However we believe that a lack of knowledge about the Chilean legal and economic system is the main cause of this limited investment.
Fortunately, this situation may be changing. The current Chilean government is keen to attract Chinese investment in mining activities.
Both Chilean government and private entities have organized seminars and visits to China in order to generate awareness of the investment opportunities in Chile’s mining industry and its many attractions for Chinese investors.
These visits seem to have achieved positive results. For example, in a meeting on 4 July with Chile’s former minister of economy, Juan Andrés Fontaine, China’s main sovereign wealth fund, the China Investment Corporation (CIC), confirmed its interest in investing in four sectors of the Chilean economy: mining, ports, infrastructure and energy. The latter three sectors are directly related to the mining industry.
Associate
Urrutia & Cia
The CIC – which manages capital in excess of US$300 billion, or 1.5 times Chile’s GDP – generally makes direct investments, usually participating as a partner in companies that attract its interest.
Joint business ventures would be a good way to bring Chinese enterprises to Chile. Such ventures would smooth China’s entry into an unknown market, and at the same time would give Chilean companies access to more advanced technologies.
Chinese companies could provide capital, equipment and technology to explore new ore deposits in Chile and could join with Chilean mining property owners that lack sufficient capital to exploit their concessions.
China has the liquidity and cash flows necessary to invest in projects that are considered strategic for maintaining the country’s growth. Both the government and enterprises are searching for ways to secure their supply of copper. A greater stake in the Chilean mining industry could help achieve this target.
Advantages clear
Chile offers investors the advantages of a stable economy and clear regulatory framework.
Chile’s economy is the most highly regarded in Latin America and one of the most highly regarded among emerging economies worldwide. Thanks to Chile’s social progress, political stability, macroeconomic responsibility and fiscal austerity, it has consolidated its standing as an attractive destination for foreign investment.
As proof of this, many of the world’s largest mining companies, such as Río Tinto, Vale, Freeport, Barrick Gold, Xstrata Copper, BHP Billiton and Kinross, have already successfully settled in Chile.
Another major advantage is Chile’s clear and stable legal framework for foreign investment, characterized by transparent and non-discriminatory rules and, as well as non-discretionary procedures and decision making.
To invest in Chile, offshore investors have two legal vehicles for transferring capital: Chapter XIV of the Foreign Exchange Regulations of the Central Bank of Chile; and the Foreign Investment Statute. However, since 1974, most foreign investors have chosen to use the Foreign Investment Statute. By 2009, US$74.9 billion of foreign investment had entered through the statute, representing 67.3% of the foreign capital that entered Chile during that period.
The statute guarantees investors: non-alteration of an investment agreement as contained in a legally binding contract with the state of Chile; capital remittance after one year from the date the investment was performed; remittance of revenues at any time; free access to all productive sectors; free access to the official foreign exchange market; and a choice between Chile’s common tax regime and the special tax regime (usually entailing non-variable rates).
Both the government and Chilean companies are open to investments from China and are prepared and willing to provide investors with any economic and legal guarantees that may be necessary for using Chile as an economic platform in Latin America.
The Chilean Andes Mountains still have numerous copper mines left to explore, prospect and exploit. The most highly regarded economy in Latin America and the quintessential mining country is waiting for Chinese investors to participate in such ventures. Now is the time for China to rely on the solidity of Chilean economy and legal system and on its long and ongoing mining experience.
Enrique Benitez Urrutia is a partner and José Ignacio Morán is an associate at Urrutia & Cia, a full-service law firm based in Santiago, Chile. The firm’s clients include major mining companies. Mr Benitez Urrutia may be contacted on +56 2 4995900 or by email at ebenitez@urrutia.cl
