Commodity: copper, lithium
Sentiment: long-term bullish for the commodities, bearish for Chilean copper and/or lithium companies
Chile will soon start drafting a new constitution. Yes, they will soon start drafting it. It’s not final yet, there is no real draft, so a lot can happen between now and the time the new constitution is drafted, and even more so before it is improved.
However, a political proposal, that could potentially result in mine nationalisation, was just passed on a 13-to-6 vote, and it’s not looking too good. It’s worth noting, though, that the proposal was only passed in the first degree, and it has to undergo a lot more voting before it becoming part of the final draft that is expected to end up in the referendum later this year. A lot can change between then, and it seems unlikely for the proposal to end up in the final draft as is. It will either have to be scrapped or heavily adjusted, experts said.
Chile is home to many copper and lithium projects, which are often open pit mines. The environmentalists, as confused as that bunch is, are already not happy about open-pit mines, but they’re now even less happy because those mines have to serve the Chilean population alone, in their eyes. Simply said, they’re just not happy with foreign companies making money off their lands. Sounds noble at first, but foreign investments have had a net positive effect on their economy in the last 30+ years since they got out of the dictatorship, so maybe I’m just missing the reasoning here.
I am not a political expert (nor and expert of any type), by any stretch of the imagination so I’m talking out of my back door here, but I would not expect this to fully end up in the new constitution. The Chilean economy is heavily dependent on open-pit mines and foreign investments. Disrupting those, would kill the economy and their currency because of the lack of demand for it, which comes from foreign investments.
The country would also have to repay those projects to the companies, which I don’t even think is possible, but even if it were, and even if they did do it, it would simply destroy the entire purpose of drafting a new constitution in the first place, the goal of which was to reduce inequality and stimulate prosperity by investing in the Chilean infrastructure and economy. Nationalising the mines would get Chile one step closer to a dictatorship, which is the opposite of what they wanted to achieve when they decided to start working on a new constitution.
There are so many questions and challenges around this, that it just seems (to my inexperienced eyes) that it isn’t really possible to go through with it. But then again, some people didn’t expect Venezuela to become a dictatorship either, yet here we are.
The fact that it even passed in the first degree, though, tells me that maybe there will be a push at least for some extra regulations or some sort of a tax increase. It’s kind of like that negotiating strategy where you start by asking three times as much money as what you would normally settle for, so that you can at least get double what you first thought you can get.
The Chilean peso isn’t doing all too good right now either, but a decision like that would destroy it even further, together with any hopes, dreams and plans for a better future of the Chilean people.
If this doesn’t go through then good for investors who bought cheap Chilean peso. If it does go through, then investors might want to pay attention to their Chilean holdings. Both ways, it’s worth paying attention to the situation, as their demands could eventually result in the “double”, even though they asked for the triple.