Chile Wants Higher Taxes For Copper Miners

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New tax reforms in Chile have the potential to weigh upon earnings for some ASX-listed copper miners.

-Higher proposed taxes for copper miners in Chile
-Goldman Sachs sees largest impact for BHP Group
-Scenario analysis for three ASX-listed miners
-Impact on new investment decisions

By Mark Woodruff

A tax reform package proposed by Chile’s Finance Minister on July 1 includes higher taxes for copper producers, to be implemented at the beginning of 2024.

While the newly proposed system remains subject to changes, Goldman Sachs believes the likelihood of a royalty replacing the current mining profits tax is high. The broker doesn’t currently incorporate these changes into forecasts, though runs a scenario analysis for major Australian miners operating in Chile.

The largest potential negative impact relates to BHP Group ((BHP)), the analysis suggests. The Big Australian has exposure via the Spence copper project and its 57.5% interest in the Escondida copper mine. Rio Tinto ((RIO)) also owns 30% of Escondida, while South32 ((S32)) has a 45% interest in the Sierra Gorda copper mine in Chile.

The existing mining profit tax results in an overall effective tax rate of 5%-14%, in addition to the corporate tax rate of 27%. Also, several tax stability agreements were signed between mining companies and the Chilean state, dating back over a decade in some cases. These include an exemption from new taxes and royalties, though Goldman Sachs notes around 50% of these agreements with foreign companies expire in 2023.

Given these stability agreements, even if the bill were to be approved in its current form, the broker doesn’t expect any material negative EPS impact for Australia miners until 2024.

Under the new proposals, companies producing between 50-200ktpa of copper will pay a royalty/tax of 1%-2%. A rate of 1%-4% will apply to those companies producing above 200ktpa, with an additional tiered royalty rate of 2%-32% on profits when copper prices are in the range of US$2-5/lb. 

Highlighting the moveable-feast nature of the tax reform package, Morgan Stanley points to changes since July 1 to the Royalty bill by Chile’s Senate. It’s thought these latest changes will only come as an incremental negative surprise for Chilean-exposed equities.

Scenario analysis by company

For BHP Group, Goldman Sachs estimates a possible negative EPS impact of around -10% from FY25, as the Escondida stability agreement expires at the end of 2023. An around -10% decline in net asset value (NAV) is expected, based on the broker’s long run copper price forecast of US$4.1/lb.

A -5% EPS decline is expected for Rio Tinto from FY24 and a NAV impact of around -4% from a reduction in longer-dated cash flows from Escondida.

Taking into account the most recent Royalty bill changes in the Chilean senate, Morgan Stanley estimates an around -1% erosion to attributable net present value, based on a long-term copper price scenario of US$3.50/lb. Assuming a more bullish US$4.5/lb scenario, the impact would rise to circa -2%.

Goldman Sachs sees a minor EPS impact until FY29 for South32, as the Sierra Gorda tax stability agreement expires at the end of 2028. It’s believed any significant NAV impact is mitigated by an agreement with Sumitomo for a tax indemnity in relation to potential changes in the Chilean tax regime that is enacted prior to 31 December 2025, up to an agreed cap.

South32 negotiated the purchase of its interest in Sierra Gorda with Sumitomo last year for a price tag of $2.05bn.

Impact of new proposals on investment decisions

At best, Macquarie believes the new proposal will cause delays to project approvals. At the very worst it would stop investments from going ahead, unless a tax stability agreement is already in place.

As the global project pipeline is heavily weighted towards Chile, the broker estimates a halt in investment would result in the removal of such material tonnage as to require a higher long-term incentive price to motivate projects.

Goldman Sachs also sees possible delays in project approvals until well into 2023. This especially applies to BHP Group, with possible development timeline risks to the company's around US$20bn copper pipeline, more than half of which relates to Chile.

The proposed mining royalty could also impact future investments at Escondida, explain the analysts, impacting upon both BHP Group and Rio Tinto.

As South32’s Sierra Gorda project has a tax stability agreement to the end of 2028, Goldman Sachs believes the company could likely push ahead with the fourth milling line, for which a feasibility study is due in mid-2022.

Conclusion

While Morgan Stanley expects the market to react negatively toward global copper miners that have a substantial Chile footprint, more confirmation is awaited on exact fiscal terms.

There is also potential for further modifications as the Royalty bill returns to Chile’s Lower House and then to the President.

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