In April 2023, the Chilean government announced its long-awaited National Lithium Strategy, with the aim of promoting the exploration, exploitation and beneficiation of this important mineral.
It is important to first understand how the current lithium regulatory regime in Chile is structured, before analyzing the newly-announced National Lithium Strategy.
Current lithium regulation in Chile
In Chile, the State has absolute, exclusive, inalienable and imprescriptible dominion over all mines located within the national territory. Therefore, for a private party to explore, exploit and benefit from a mine, it must obtain a title to do so, called a concession, which is obtained judicially.
Generally, a concession may be obtained for exploiting any type of mineral, except for some minerals that are exempted by law. Among the latter is lithium, which was concessionable until 1979, when it was reserved for the State because it was considered a material of nuclear interest. Lithium was thus excluded from the common regulation of concessionable minerals and, in order to explore for and develop lithium deposits, a series of special rules must be followed.
First, lithium can be mined under a concession obtained prior to 1979, according to the rules of the Mining Code of 1932, which considered lithium as a concessionable mineral. Currently, there are very few of this type of concession in Chile, being that the State is the primary owner, through Corporación de Fomento (CORFO).
CORFO owns almost all these type of concessions on the Salar de Atacama, the largest salt flat in Chile. It leases them to Sociedad Química y Minera de Chile S.A. (SQM) and Albemarle until 2030 and 2043, respectively, establishing certain production quotas and obliging these mining companies to pay very high leasing rents to the State (CORFO) that vary depending on the market price of lithium.
Through this system, in 2022 alone, Albemarle and SQM contributed more than US$5.5 billion to the Chilean Treasury, much more than the US$2.7 billion contributed by Codelco.
Chilean law has contemplated the following additional ways to explore for and develop lithium deposits:
1) Directly by the State;
2) By State-owned companies;
3) Through administrative concessions; or
4) Through Special Lithium Operating Contracts (CEOL).
So far, these avenues have been used very little, and the only mining companies that have exploited lithium in Chile (SQM and Albemarle) have done so under the system of pre-1979 concession leases.
National Lithium Strategy
In simple terms, the National Lithium Strategy involves a proposal to exploit lithium in Chile’s salt flats through public-private partnerships in which the State will participate through companies throughout the production cycle. This participation should be a majority if the salt flats have strategic value.
In addition, as part of this strategy, there is an intention to create the National Lithium Company which, if approved by Congress, should lead negotiations with private companies wishing to explore and exploit Chilean salt flats.
If the National Lithium Company is not created, the state-owned company Codelco will oversee negotiating with the private sector. Among these negotiations are those with SQM and Albemarle, regarding the Salar de Atacama, to guarantee the State’s majority participation in the next production cycle. Notwithstanding this, the Chilean government has committed to respect all contracts which are currently in force.
With respect to other salt flats, CEOLs will be granted to State companies, which will decide whether to partner with private companies to explore or exploit them. Likewise, in those salt flats that do not have “strategic value,” exploration CEOLs will be granted to private companies and, in case of positive results, the companies will have a preference to reach an agreement to exploit that opportunity.
The strategy has also proposed to create a Network of Protected Salt Flats and, in those salt flats where lithium is exploited, to ensure the use of low-impact technologies, such as direct extraction.
The implementation of most of the Chilean government’s proposal does not require legal reform, so it could be applied under the current regulations. The exception to this is the creation of the National Lithium Company, which must be approved in Congress and has many obstacles, as approval requires the support of four out of seven members of Congress in office, votes that the Chilean government does not currently have.
Doubts and discussions to come
Undoubtedly, the rationale behind the National Lithium Strategy is positive, with the aim of taking advantage of the current boom in lithium, hand-in-hand with the electromobility industry. In addition, it clears doubts about eventual regulatory changes that could have been proposed.
However, there are several questions and discussions that have arisen that require analysis. Over time, we will be able to determine whether the National Lithium Strategy will create more opportunities for promoting the exploration, exploitation and beneficiation of lithium.
Firstly, there have been questions regarding how negotiations will be conducted, first for Codelco and eventually for the National Lithium Company. In this respect, the negotiations with SQM and Albemarle will be very relevant, as they will set an important precedent for those who want to enter the Chilean lithium market, particularly regarding how the State’s majority position is agreed.
Secondly, it will be necessary to wait for the Chilean government to present the bill that proposes the creation of the National Lithium Company. This will clear several doubts about the attributions and objectives of this company, and will allow us to understand the role that the government would like the National Lithium Company to have. It should also be considered that the Chilean government does not have the parliamentary majority to approve this future bill so it could undergo several changes in its discussion and the bill could even be rejected, leaving the National Lithium Strategy without one of its main elements.
Thirdly, it will be necessary to determine which salt flats have “strategic value.” This will be essential, since the State must always have a majority participation in these.
Fourthly, the Chilean government must define the bidding conditions for private exploration CEOLs on salt flats that do not have strategic value. These bases will be key to determining whether investors enter the market.
Finally, it will be essential for the Chilean government to define the Network of Protected Salt Flats, where lithium cannot be explored or exploited.
Thus, even though the announcement of the National Lithium Strategy cleared up some doubts, there are many others that have also arisen. It will be essential to move forward and resolve them as soon as possible, to provide certainty and attract as many investors as possible.
If you have any questions about this topic, please reach out to José Ignacio Morán.