The London Metal Exchange's three-month copper contract recently hit an all-time high of $10,747 per tonne - industrial commodities have broadly rallied on the expectation that government investments in green energy schemes and infrastructure projects after the Covid-19 pandemic will boost future demand for the raw materials that underpin these initiatives.
But the bullish momentum in prices comes while any countries where the metals are mined are still struggling with the impact of the pandemic, are attempting to rebuild fragile economies and are re-negotiating the social pacts between the citizens and the politicians who represent them.
The disparity has forced a fundamental shift in recent weeks - while the share prices of many mining companies have soared, some of the countries in which they operate are now threatening to introduce a slew of progressive tax legislation.
In Peru and the Democratic Republic of the Congo (DRC), influential politicians are talking of raising taxes on mining companies; in Chile - the world's biggest producer of copper - a bill to increase royalties on miners is already making its way through parliament. And in Zambia, the government is in talks with miners about rebooting its tax regime on the sector.
“Governments that have had their finances battered by pandemic-related disruptions understandably want a greater slice of the pie,” Hugo Brennan, head of mining at risk intelligence firm Verisk Maplecroft, told Fastmarkets.
In turn, with top-grade mining deposits becoming scarcer, market watchers contend that rising costs make the chances of attracting the investment needed to bring the next generation of supply on-stream is increasingly remote.
“Taxing a little bit more is something that the mining industry can potentially support," Bank of America Merill Lynch head of metals research Michael Widmer told Fastmarkets. "But if you have punitive taxes I think it gets very, very hard and the taxes that are being discussed are punitive."
Chile, Peru, Zambia and the DRC produced a combined 10.14 million tonnes of copper in 2020 - representing 49% of global mined output. Chile, Peru and the DRC also account for 27% of the 15 million tonnes of copper mining projects due to come to market by 2030, Widmer estimates.
The moves could result in even higher prices for copper given a riskier environment for investment allocation, according to Steven Gill, managing partner at specialist private equity firm Pala Investments.
“By the very virtue of the dialogue that we all now have to have, they’ve become a more difficult jurisdictions. Chile and Peru have now put the investment community on notice of that,” he said.
The countries responsible for producing 45% of the world's annual mined copper are considering new royalties for mining companies.
Chile's royalty bill gains momentum
Over the past month, Chilean legislators unearthed a proposed law from 2018 that would change mining royalties to payments on sales rather than from taxes on operating profits, as is the case currently. This is taking place against a backdrop of a growing climate of social unrest and political tensions that started in 2019
The proposal, approved by the country's lower political house on May 6, introduced a variable royalty rate depending on copper prices in place of the fixed rate of 3% previously. The new rules stipulate that the 3% rate is applicable on sales at prices up to $2.00 per lb
If prices go above $2.00 per lb, every additional $0.50 per lb will incur a larger marginal tax up to an effective 32.3% at $5.00 per lb or above.
Most mining companies have a tax stability agreement with the government until 2023, meaning the new royalty scheme would not come into effect until 2024 if it is approved by the Senate. The royalties will be in addition to the standard corporation taxes paid by companies in Chile.
Sonami, the Chilean association of private mining companies, calculates that such rates will put about half of the country's copper mines and a quarter of production at risk
“The immediate effect would be to reduce investment in copper projects,” Sonami president Diego Hernández told Fastmarkets on May 5.
If the royalties come into play, Bank of America analysts calculate that copper projects would be generating returns on investment of up to 10%. Coming up against a 9% cost of capital, this slim rate of return would be unlikely to have an impact on current projects but would discourage new ones from coming on stream, the analysts said in a May 18 report.
"The Chilean industry is competitive but has been losing positions [in the global ranking] in recent years," Juan Carlos Guajardo, executive director at Chilean consultancy Plusmining, told Fastmarkets.
FMC, a union federation in Chile with members representing workers at mines such as Los Pelambres and Collahuasi, sees the new royalty as an “elegant” way to ensure private companies contribute more to the country,
in response to the social unrest that has been evident since October 2019.
“This is a matter that unites us [unions]. We will have to negotiate what actions could be taken if it isn't [approved in Senate],” FMC president Felipe Román Briones told Fastmarkets on May 19.
Aside from the immediate progress of the royalties bill, investors are taking their cues from a broad shift away from neoliberal politics that anchored business relationships in South America over the past decade and the potential policies that will arise from this change.
“If you pick apart some of the elements of how the process is going in Chile, there are some very clear guides,” Briones said. “There’s an underlying shift to the left - the direction of travel is clear.”
Peru's leading presidential candidate talks
In Peru, the world’s second-largest copper producer, all eyes are on the June 6 election between conservative Keiko Fujimori and leftist Pedro Castillo, a political newcomer who has taken a soaring lead in pre-election polls.
Castillo has recently proposed that his country introduce a royalty on mining sales and new income taxes, with a nod to the legislation making progress in southern neighbor Chile.
Peru has been a hotspot in recent years for clashes between mining companies and local communities over economic and social collaboration, with MMG's Las Bambas mine the epicenter of tensions - it was recently the subject of blockades that reduced output there.
“Copper is so critical to Peru in terms of a country that still faces challenges of poverty and so forth. So we just step back and watch the political [developments]," according to an earnings statement from Richard Adkerson, chairman of Freeport-McMoRan, which runs the Cerro Verde mine in Peru and the El Abra mine in Chile.
“We know we have to work with whatever government, wherever it is in the world, that a country selects. But we do have strong rights to do that,” he said.
In his latest manifesto, Castillo called for the creation of an assembly to rewrite Peru’s constitution, also following in Chile’s footsteps.
But to fulfill his campaign promises, the leftist candidate would need a majority in Congress - something market participants in Peru do not think he will get in the election - or to form a coalition with other parties, which is the likelier outcome.
“For all the talk about overturning the current constitution - for which he would also need the support of the army (which he does not currently have) - it's unlikely that Peru will turn into a Venezuela, for example,” an industry source in the country said.
If Fujimori, the daughter of imprisoned former Peruvian president Alberto Fujimori, wins on June 6, some changes are likely - but no one expects them to be as transformative as Castillo's propositions.
A Fujimori government “will have to assume relevant changes in mining policies, although I believe that these changes would revolve around aspects related to the use of mining regions, rather than what mining companies pay to the Peruvian state,” Guajardo said.
DRC could renegotiate mining contracts
The conversation around mining royalties is not unique to South America. In the DRC, high prices and a history of opaque deals for mining concessions havedrawn the ire of the country's president, Félix Tshisekedi.
The DRC already has a 2-3.5% royalty on non-ferrous metals and a 2.5-3.5% royalty for precious metals. These are in addition to a 30% corporation tax for mining companies and a super tax of 50% for those whose profits exceed 25% of what had been forecast in mine feasibility studies.
And in past week, Tshisekedi has signaled he could renegotiate mining licenses and contracts signed by his predecessor, Joseph Kabila, the latest example of a political break with the former president that started last December.
“It's not normal that those with whom the country has signed mining contracts get richer while our population remains poor,” Tshisekedi told a political rally in the mining town of Kolwezi on May 20, according to Agence France-Presse
As well as copper, the DRC is the world's leading producer of cobalt, a critical element in the current make-up of electric vehicle batteries.
The DRC has lost $1.95 billion so far from mining and oil deals that were organized from 2001 to 2019, civil society group Congo Is Not for Sale estimates. The country stands to lose a further $1.75 billion in future royalty payments if things stay as they are, the group said.
“It is time for the country to readjust its contracts with miners to seal win-win partnerships,” Tshisekedi said.
Zambia in talks with miners on tax regime change
To extract greater revenue from domestic copper production, the Zambian government is in talks with miners about simplifying the mining tax system, two sources with direct knowledge of the matter told Fastmarkets.
Africa's second-biggest copper-producing nation is home to First Quantum's Kansanshi, Vedanta's Konkola and China Nonferrous Metal Mining's (CNMC) Chambishi mines.
The nature of the tax reform is yet to be determined, with market participants suggesting potential of raising minerals royalties tax and cancellation of corporate tax, sources said.
Domestic producers are keen to cash in on rising copper prices. Zambia exported 228,000 tonnes of refined copper during the first quarter
of this year, up by 10.3% year on year, according to Zambian customs statistics in April. More than 80% of Zambia's export revenues are derived from copper sales.
Earnings from Zambia's copper exports for the first three months of the year were up by 30% from the first quarter in 2020, thanks to the sharp rise in the copper price.
Given a more challenging investment outlook, miners may need further assurances that prices will stay at current levels before deploying further capital.
Fastmarkets analysts forecast a base case cash copper price of $9,670 per tonne in the fourth quarter of 2022, with a high case of $12,000 per tonne and a low of $7,250 per tonne.
“Wherever you had an incentive price for new supply pegged, it will certainly move up, by virtue of the current debate because political risk was underestimated in analysts' incentive price calculations,” Pala's Gill said.