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Chile’s move to control lithium risks scaring off investors

Chile has moved to take state control of key lithium projects in an attempt to develop its vast resources of the key electric car battery metal after decades of two industry leaders dominating production.

But mining executives and analysts believe the strategy unveiled last month will have the opposite effect, further eroding the attractiveness of the world’s second-largest lithium producer as an investment destination, to the benefit of Australia, Argentina and several African countries.

The move brings Chile somewhat closer to fellow Latin American countries Bolivia and Mexico in deterring commercial investors by imposing greater state control, though Chinese groups may still be keen to fill the gap, one executive said.

Even the two existing lithium groups in Chile — US-based Albemarle and Chile’s SQM, the world’s two biggest producers — look set to face a radically different investment landscape in the country with the largest lithium reserves globally.

Maximo Pacheco, chair of Codelco, the national copper company tasked with negotiating a stake for the state in the two companies’ operations, told the Financial Times it was “serious” about its mandate to take state control, which he indicated meant securing 51 per cent stakes in consortiums with the existing producers.

“Because of the sense of urgency we all have given the prices and demand for lithium in the world, I believe it’s something we should solve during this year,” he said.

The plan for fresh state involvement announced last month by leftwing president Gabriel Boric stops short of nationalisation, instead proposing private-public partnerships to develop resources owned by Santiago. His government said the duration of existing contracts would be respected.

But the prospect has spooked investors: the value of the country’s two lithium incumbents has slumped by a collective $8.5bn since the announcement.

Daniel Jiménez, who spent 28 years at SQM, said: “If it was my money, I would go and explore Argentina, Brazil and Africa. You’ll get ripped off in Chile.” Jiménez is now a consultant and independent director for Galan Lithium, an Argentine project.

Reg Spencer, analyst at Canaccord Genuity, said: “The Chileans have shot themselves in the foot. While the policy opens up opportunities for more development, it’s going to have the opposite effect because of the uncertainty.”

At the centre of the strategy is the jewel in Chile’s lithium crown, the Salar de Atacama salt flats in the north, where the battery material is extracted from brine through evaporation ponds.

But the groups operating there have already begun looking further afield. Albemarle, which has been muted on Atacama expansion for two years, in March made a $3.7bn bid to acquire Liontown Resources, an Australian hard-rock lithium producer. “I don’t think it’s a coincidence,” said Spencer. Albemarle also operates in the US, Australia and China.

SQM, in which China’s Tianqi Lithium holds a 22.16 per cent stake, is developing the $1.4bn Mt Holland hard-rock project in Australia with local conglomerate Wesfarmers.

Industry insiders expect more diversification. Jose Hofer, a former SQM employee, said: “It won’t take long until SQM announces something outside of Chile and Australia. I believe SQM will go for Africa, the same as many Chinese companies have.”

The strategic challenge from greater state involvement is most acute for SQM, a controversial company whose contract expires in 2030. Its largest shareholder is Julio Ponce, former son-in-law of Chilean dictator Augusto Pinochet. SQM agreed a $30mn settlement in 2017 with US authorities for anti-bribery violations.

But SQM, which paid more than $5bn to Chile’s coffers last year, would be desperate to retain the brines, and Santiago needed its technical expertise, said Hofer. Even in the worst-case scenario, its infrastructure could process brine from any successor and from Argentina into lithium chemicals. SQM declined to comment.

The salt flats were “the lowest cost asset globally. I don’t believe any company would like to leave the salar,” said Hofer, who now works for European lithium refiner Livista Energy.

Codelco’s Pacheco said “a big number of companies” were interested in Chile’s lithium, but the uncertainty had left other significant producers of the silvery-white metal such as Livent, Pilbara Minerals and Rio Tinto cautious about building their growth plans around Chile.

The government’s plans still lack detail, and formal proposals will need to pass through congress. Boric lacks a majority there, making it likely that the lithium package will undergo changes.

Any expansion of Atacama extraction would face environmental pushback. And the sector already faced uncertainty after Boric’s government raised hurdles for project approvals and promoted the idea of rewriting Chile’s constitution, a tortuous process still under way.

Beyond Salar de Atacama, there are pockets of optimism. Junior lithium miners see opportunities to take stakes in nine salars held by Chilean state entities.

Yet efforts to introduce fresh competition have faltered. One potential new deal fell apart last year when an appeals court suspended a contract auction following objections from the local governor, after awarding quotas for about 80,000 tonnes of lithium to the world’s largest electric vehicle manufacturer, China’s BYD, and a local company.

Chile’s move comes as governments from Jakarta to Kinshasa demand more in return for their resources. Not all onlookers view this as a barrier to production. Thea Riofrancos, associate professor of political science at Providence College, said: “To varying degrees multinational firms have entered into joint ventures for oil and copper, yet there’s this automatic fear-mongering.”

Still, failing to capitalise on the boom means Chile is set to fall from the world’s second-largest lithium producer last year to fourth in 2030 after China, Australia and Argentina, with its share poised to shrink from almost a third to 12 per cent, said Fastmarkets.

Argentina’s devolved model, under which project approval lies with mining-friendly provincial governments, has garnered investment, while speedy issuing of permits in Africa has caught the eye of Chinese investors.

The threat of rising competition will be felt more acutely after lithium prices crashed from $80,000 to below $30,000 a tonne this year after weak Chinese demand for electric vehicles met growing raw material supply.

Some argue Chile’s latest move opens the door to Chinese groups. Jimenez said that “the only ones who cannot get ripped off are state-owned Chinese companies” because they were primarily seeking resources, with profit a secondary concern.

Days after the plans were announced, Chile said China’s BYD planned to build a $290mn battery materials plant in the north.

With alternative supply set to flourish in Australia, Canada, the US and Argentina, and uncertainty over the longevity of lithium’s boom as work proceeds on alternatives like sodium-ion batteries, the west’s need for Chile’s supplies is not assured. But the metal is expected to be scarce for at least a decade because of the speed of the electric car transition — and the west is playing catch-up.

“In the near future, the west doesn’t have much of a choice,” said Patricia Vasquez, a lithium specialist at the Wilson Center, a think-tank. “Latin America produces the only lithium that has been refined already outside of China. That’s a big advantage today.”

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