Limited water sources in Chile could lead to higher costs of production

Chilean copper-mining companies likely will face significant environmental.....

Chilean copper-mining companies likely will face significant environmental, political and regulatory hurdles in securing future rights for water-intensive copper-processing operations. And that could boost future production costs and sale prices for the red metal from the world's largest copper-producing nation.“Copper production in Chile requires vast amounts of water, a commodity hard to come by in the mining-intensive Northern region, located in or bordering the Atacama Desert, one of the driest regions in the world,” writes Cesar Perez-Novoa at Calfin Capital, an affiliate of J.P. Morgan Securities in Santiago, Chile. “Water will be more expensive, significantly contributing to mining companies' surging production costs (along with energy), and also be harder to obtain.”Water supply is available through concession of water rights, water purchases from utilities firms domiciled in Chile or Bolivia, and surface/underground riverbeds; this supports current mining operations, but not future expansion. Today, little or no water rights are available, and farmers are pushing regulators to limit the granting of water sources to the mining industry.“Repercussions in ecosystems are also being monitored by environmental watchdogs, exerting further pressure,” says Perez-Novoa. “Risks are skewed to the upside, primarily because of the possibility of Bolivia limiting supply due to the dispute over the Silala basin (which is located in Bolivia but feeds Chilean mines).”There is a new law in Chile designed to de-concentrate holdings of water rights. Under the previous law, companies could accumulate water rights indiscriminately free of charge, without justifying the quantity claimed and without any obligation to use it, leading to concentration and speculation in holdings.In 2006, the new law lowered barriers to market entry and increased competition, allowing companies to have access to the resource. However, it establishes limits on water use that previously didn't exist, and companies will have to give technical justification for the amounts of water they use.So, water scarcity has led mining companies to launch exploration programs in the mining region, seeking to secure supply for future development. Some are implementing water management programs, ranging from design development to recovery of water from tailings dams, and some are looking to build desalinization plants. Perez-Novoa says buyers should assume the mining companies will incur higher costs—pressuring cathode prices upward—“until new technologies become economically viable.