Chile: Copper bottomed

Black flags hang from the doors of the one-storey red brick houses in Caimanes, a village that lies in the hills north of Santiago on the course of the Pupio stream. The banners are the most obvious sign of a bitter environmental protest against a nearby dam, which holds waste from a copper mine - one of Chile's largest - high up in the Andes.

Last November, a group of up to 150 villagers took matters in to their own hands and blocked access to the dam for 75 days, as the mine ground out copper - used in everything from smartphones to wiring on construction sites in China. The campaigners felt confident: the previous month Chile's Supreme Court had ruled that the London-listed mining company Antofagasta - majority owned by the Luksics, one of the country's richest families - should either demolish the dam or come up with a plan to allow water to flow into the town.

"We deserve respect, it should not just be the mining company doing what it wants," says Juan Olivares, vice president of the committee for the defence of Caimanes, as he plans the group's next move in the small green-painted room that serves as its headquarters. On the wall is a Google Map print of the dam, which he claims pollutes the village's water supply and poses an environmental threat in case of flooding or an earthquake.

"The mine has to give the water back to the community," he says.

The battle between the people of Caimanes and the owner of Los Pelambres mine, which produces more than 400,000 tonnes a year of copper, has become a symbol of social change in Chile.

The government of President Michelle Bachelet is committed to tackling inequality and as part of that is demanding higher standards from mine owners. But it is happening against a backdrop of slowing growth in China, the world's biggest copper market. Prices of the metal - which makes up 13 per cent of Chile's economic output - fell to their lowest levels in five years just as the protesters kept guard outside the town.

The shift in policy in Chile is being driven by a greater focus on the environment, in some cases, at the expense of economic growth. A new government environment agency was created in 2013 to investigate companies' adherence and later that year Canadian miner Barrick Gold Corp was fined $16m for violations at its Pascua-Lama gold and silver mine.

Falling prices

Chile produces about a third of the world's copper, with companies including BHP Billiton, Anglo American and Japan's Sumitomo Corp all operating there. But profits are under pressure as labour, power and water costs rise just as revenues dip. That, in turn, could threaten investment in new projects and Chile's position as the world's dominant producer.

"I think it's been a hard time for the business community to figure that out and understand the way you do business in Chile has changed," says Oscar Landerretche, an economist and chairman of the board of Codelco, the country's state-owned producer and the biggest copper miner in the world. "You have to create a new equilibrium and that takes some time.

"As with everything that dies . . . you go through denial, anger and at some point you accept it and move on and find a new boyfriend."

Dubbed "Chile's lifeblood" by the late socialist leader Salvador Allende, the country has some of the oldest copper mines in the world. Over the past decade young men have headed in droves to the Atacama Desert to work in the mines, sending copper across the Pacific to China - the most voracious consumer in the country's history since the UK's industrial revolution. In 2010, copper mining made up 20 per cent of the country's tax revenues.

As in other mining countries such as Australia, recruitment and wages boomed, as mining companies turned to third-party companies to bring in operating staff, employing some 1.1m people in 2013. Yet they have found that despite $40bn in investment since 2004 and the higher numbers of staff, productivity has actually declined. Total annual production of copper in Chile during China's best years of double-digit growth barely grew at all.

"The labour costs are going to go up in some fashion, all the laws and the [government's] approach does not help us," says one international mining executive. "The costs of Chile will go up. The government does not care. Chile accounts for 30 per cent of production of copper globally and they believe the world cannot do without it. If the costs go up they believe the price will go up as well and the margin will remain the same."

China was responsible for nearly all of the global growth in copper demand between 2005 and 2010. Since its peak in 2011, the global copper price has fallen 40 per cent.

The average investment of the 10 major mining companies in Chile was more than $8bn in 2012, but fell to $6bn in 2014. And as private mining companies reduce their investment in new projects, the burden is falling on Codelco to keep up Chile's share of the world market.

The company plans to invest more than $20bn over the next five years. But that is just to maintain its existing operations and production. Mr Landerretche brandishes a chart showing the extent of the problem Codelco faces. If it does nothing by 2023, its production will fall by half; by 2030 the company would cease to exist. "That's only 15 years away," he says.

As well as rising competition for water resources, which means investing in desalination and moving the water up to the mountains, the company's mines are ageing, requiring Codelco to dig ever deeper into the earth through thousands of miles of tunnels.

Boom and bust

Chile has experienced booms, busts and turns in policy in its past. In the 1880s a surge in European demand for nitrate to produce fertiliser led thousands to Chile's northern deserts, blasting the ground with dynamite to open up deposits. It was sent to Europe aboard the "nitrate clippers", beautiful masted ships that undertook the 14,000 mile trip around Cape Horn.

Before the first world war two-thirds of Chile's national income came from nitrate. But the discovery in 1909 by German chemist Fritz Haber of how to make nitrate from air sealed the market's fate. The clippers disappeared.

Many are now asking why the country did not learn that lesson and diversify its copper industry during the good times.

"In Chile, mining faces major challenges in the years to come," says Aurora Williams, Chile's mining minister. "We must be able to face it with conviction."

But it is facing an uphill struggle. In 1971, amid anger over the amount of money US companies Anaconda and Kennecott were making from the country's mines, the industry was nationalised. Wages were one-eighth of those in the US in the 1960s, while productivity was the same.

Now the situation is reversed: wages are higher than the US while productivity is lower, according to Diego Hernandez, Antofagasta's chief executive. In 2014, a digger driver in Chile earned about $69,000 a year, he says.

Despite the rising costs, the world's largest mining companies are likely to stay in Chile. Rio Tinto believes that while China is slowing demand for copper remains strong in other emerging economies, which should push the price back up by the end of the decade.

But it is difficult to predict when the market will witness that turning point. For now the copper price is reacting to the slowdown in China, which last year saw its economy grow at its lowest pace since 1990. As a consumer of more than 40 per cent of the world's copper, any further weakening in China's growth, without a revival in the rest of the world, could mean years before the price bounces back to previous levels.

"What could be argued is that during the boom the firms had the resources to solve some of these issues and maybe they didn't," says Mr Landerretche. "They were too busy taking advantage of the boom."

The Los Pelambres mine has sowed division. Residents say four or five families have benefited by setting up restaurants or hostels for the miners, but the village no longer makes money from agriculture.A sign written in paint at the entrance to the town proclaims: "In the not too distant future we will tell our children and grandchildren that there was once a town where there was a great bond between people."

In March, the mine's opponents won a second legal victory when a local court declared that Antofagasta's plan to address the Supreme Court's ruling was not sufficient and ordered the company to demolish part or all of the dam. Antofagasta says this demand is impractical and plans to appeal the local court's verdict.

Court battle

The company also says it built canals surrounding the tailings dam, allowing water to flow back to the stream; using acquirers, it has also provided the town with wells for drinking water.

"You cannot move it to another place, if you do you will be incurring a very high cost and at the same time reproducing the same problem," says Mr Hernandez. "And our tailings dam is built according to the world-class design from any point of view, environmental or safety."

Others in the mining industry argue that the local court's verdict shows its lack of knowledge about the technical side of mining.

The 10-year dispute in Caimanes serves as a warning, however. Mining companies say they have looked at what happened to learn how to pre-empt and avoid a similar outcome in their own projects.

"Chile has always been for mining, but now it has to represent the people," says Elif Karakartal, a film-maker living in the village who is documenting the dispute for the Danielle Mitterrand Foundation in France. "There will be change in Chile, people are more aware. It is not a poor country. Miners have to be responsible."

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