Dictionary Thesaurus Word Dynamo Quotes Reference Translator Spanish

Chilean nationalization of copper

The nationalization of the Chilean copper industry commonly described as the Chilenización del cobre or Chileanisation of copper, was the progressive process by which the Chilean government acquired control of the major foreign owned section of the Chilean copper mining industry. It involved the three huge mines known as 'La Gran Mineria' and three smaller operations. The Chilean owned smaller copper mines were not affected. The process started under the government of President Carlos Ibáñez del Campo, and culminated during the government of President Salvador Allende, who completed the nationalization. This "act of sovereignty" was the espoused basis for a later international economic boycott, which further isolated Chile from the world economy, worsening the state of political polarization that led to the Chilean coup of 1973.

Background

Copper mining has long been the mainstay of Chilean exports and at present it still accounts for almost a third of all foreign trade, down from a peak of almost 75%. Copper has been mined since pre-colonial times in the area between central Chile and southern Peru. Between the 1850s and 1880's Chile became the largest copper producer and exporter in the world but production more than halved by the end of the century as the nitrate industry boomed. This was due to several factors including the depletion of the higher grade veins, competition with the nitrate producers for both shipping space and coal supplies and the generally antiquated methods used by the copper industry. This changed at the beginning of the 20th Century with the entrance of mainly American capital and the development of methods to treat the massive low grade porphyry copper deposits that have become the mainstay of the industry. Due to the introduction of artificial nitrates following World War I, the world market for saltpeter, then Chile’s main export, collapsed. Copper then became Chile's principal export and it was during that period that copper became known as “Chile’s salary”.

The first substantial foreign-owned copper mine was El Teniente, which was bought by the Braden Copper Company but soon taken over by Guggenheim interests because of Braden's lack of capital. The first really big copper mine started with the purchase of a large section of the old Chuquicamata copper mines in 1912 by the Guggenheims which became the Chile Exploration Company. Construction started in 1913 and the first copper was produced in March 1915.

Production was about 19,000 tonnes in 1810, the year the country became independent and climbed to 51,803 tonnes in 1869 whilst it was the world's largest producer then fell away to only 20,253 tonnes in 1892. Therefter there was a gradual improvement to 51,000 tons in 1918, 100,000 in 1923, and 200,000 by 1937. Today, Chuquicamata is the mine that has produced the largest amount of copper in the world (approximately 29 million tonnes), and one of the largest man-made holes in the planet. In 1923, Guggenheim Bros. sold a majority interest in the property to the Anaconda Copper Mining Company, who bought the bulk of the remainder in 1929.

The mines involved in the nationalisation

By the late 1950s, the three principal copper mines in Chile were: Chuquicamata, El Salvador, and El Teniente. Chuquicamata and El Salvador were owned by the Anaconda Copper Company and El Teniente was owned by the Kennecott Copper Corporation. The La Exotica mine, an adjunct of Chuquicamata, was added to these big mines in 1966.These large mines were mainly self-contained and self-sustaining settlements with their own cities to house their workers, their own water and electrical plants, their own schools, stores, railways, and even in certain cases their own police forces.

Three other mines were eventually nationalised, Cerro de Pasco's Andina operation, which went to Codelco, and the two mines, Los Bronces and El Soldado, owned by Peñarroya's Disputada de las Condes, which were bought by ENAMI. Evidently these mines did not fit in with ENAMI's plans and Disputada de las Condes was subsequently sold (at a substantial profit) to Exxon Minerals.

First stage of nationalization

The first indication of the growing frustration over the copper revenues was indicated by the enactment of law 11.828 on May 5, 1955 (also known as the law for a new deal), under President Carlos Ibáñez del Campo. That law created the Copper Office (Departamento del Cobre), which had the primary objective of dealing with these multinational corporations that were fast becoming states-within-the-state.

During the administration of President Eduardo Frei Montalva, Congress sanctioned law 16.425 on January 25, 1966 and transformed the Copper Office into the Copper Corporation of Chile (Codelco). The principal objective was to increase state control over the copper industry. It also authorized the government to participate directly and invest in new and existing operations.

Based on this law, the government invested in the newly discovered La Exotica mine on February 10, 1967. The La Exotica mine was jointly owned and developed by the Anaconda Copper Company (75%) and the Chilean government (25%). More importantly, in that same year, the Chilean government acquired the majority of shares (51%) of the El Teniente mine, with the remaining 49% left in the hands of the Kennecott Copper Corporation.

Second stage of nationalization

On June 26, 1969, President Eduardo Frei Montalva signed an agreement with the Anaconda Copper Company (which was afterwards ratified by Congress). In this agreement, the government acquired the 51% of the remaining two major mines (Chuquicamata and El Salvador) and also the right for Codelco to consolidate the international sales of Chilean copper.

This process was known as negotiated nationalization, and was designed to avoid a conflict with international investors (and ultimately with the United States), and to allow for the acquisition of the technical, financial and marketing knowledge of the multinationals. A similar process was used to acquire a dominant ownership over the rest of the copper industry.

In the agreement, it was established that the Chilean government could buy within the next 13 years (counting from 1970) the remaining 49% of the foreign ownership from the multinational corporations, but only after having paid at least 60% of the current debt due from the purchase of the original 51%. It also fixed a clear formula for the valuation of the assets to be bought, for the liquidation of profits, for the increase of direct investment in new works, and related issues.

Third stage of nationalization

The process of "negotiated nationalization" met with vociferous critics from the leftist political parties, and from a section of the President’s own Christian Democratic Party. The idea was accused of bowing to American Imperialism, being too slow and too expensive.

In the 1970 presidential election, the outright nationalization without compensation (known as the Chilenization of copper) became one of the basic campaign issues. Two out of the three presidential candidates incorporated the idea into their political platforms, while the third opted for a faster version of the "negotiated nationalization".

After socialist candidate Salvador Allende won the election, he promised to deal with the issue head-on. In fact, at the beginning of 1971, he sent Congress a project for a constitutional amendment that would allow him to nationalize outright all mines, and to transfer all present and future copper fields to the state. Congress passed this amendment on July 11, 1971, by a unanimous vote, and based on it, on July 16, 1971 law 17.450 was promulgated, and became effective immediately. The event was celebrated as the Day of National Dignity (Día de la Dignidad Nacional).

In principle, there was complete agreement about the process of nationalization of the mines among all political parties represented in the Chilean Congress, as indicated by the unanimous vote that approved law 17.450. When it came down to the particulars, however, there was much concern about the political use that the Allende administration would make of it. Even so, the bigger concern was for the expected reaction of the US Government.

Compensation

Originally, the expropriation was based on the book value of the properties. Nevertheless, the Allende administration introduced the idea of "excessive profits" into the calculation of indemnization for the mines. This idea was based on the concept that the multinational corporations had reaped profits far in excess of what was considered "normal business practice". The way this was done was by comparing copper profits in Chile with the companies' profits elsewhere in the world. It was calculated that twelve percent was the world-wide profit rate for these companies, and that they had made $774 million above this in Chile from 1955 to 1970: "This deduction exceeded the book value of the companies' properties".

In October 1971, the General Controller's office handed down the calculations of the indemnizations due, in line with the parameters established by the Constitutional Amendment. According to this document, the American companies were not to receive any compensation for the Chuquicamata, El Salvador and El Teniente mines, and only a very small one for the rest of their properties. The US government reaction was immediate. The US Department of State declared: "This serious infraction to international practice can cause damage not only to Chile, but to all other developing countries".

Aftermath

The nationalised Chilean mines were kept under state control after the Pinochet's coup in 1973, despite the junta's pro-U.S. leanings and this is still the case, largely because of public sentiment and because Codelco is a major contributor to the Chilean Exchequer. Codelco pays income tax, all dividends go to the government and it also pays a 10% tax on the export value of copper products and associated byproducts according to Law 13,136.

Article 1 of the Chilean Mining Code states that "The State has absolute, exclusive, inalienable and imprescriptible ownership of all mines" but goes on to say that anyone may prospect for and establish concessions or mining rights for the search or mining of substances. It appears that anyone may apply, including boys down to the age of 15 and girls down to the age of 13. As well as the Mining Code, foreign investors have to observe Decree Law No. 600 which deals with foreign investment and investment contracts. This allows tax invaribility for 10 years from start of production, access to the foreign exchange market and the right to return capital actually brought into the country without being taxed. The tax invariability can be extended to 20 years for companies bringing in US$50 million or more. In return for these concessions foreign investors have to pay a combined tax rate of 42% compared with the current 35%. They may change, but once only, to the current mining tax regime but most have opted for the higher tax rate because gives more certainty to financial planning.

On June 16, 2005, Law 20.026 was published in Chile's Official Gazette ("Diario Oficial"). The Law establishes a specific tax on mining activities, which will come in force on January 1, 2006 consisting of a sliding scale according to copper production from nothing below 12,000 tonnes p.a. to 5% above 50,000 tonnes p.a. on production in excess of 12,000 tonnes p.a. Foreign companies that signed a DL 600 contract before Dec 1 2004 and are still liable to 42% tax are not affected by this. Companies bringing in US$50 million or more now can be granted invariability of mining taxation but must pay normal income tax. They must also submit their annual financial statements to external audit and to the Securities and Insurance Supervisor as well as their quarterly statements and an annual report on the property.

A fact not widely appreciated is that mining companies are generally granted generous concessions to allow them to recoup their initial capital expenditures because of the very risky nature of mining. This gives rise to a long initial tax free period and the suspicion that they are avoiding tax. The most important of these in Chilean law are organisation and startup expenses,interest expense,technical assistance,tax losses and asset depreciation, which may be accelerated. This explains why it was some years before Escondida started to pay tax.