1. Why is it a crucial night? — Tonight the Constitutional Committee considers proposals for the nationalization of lithium mines
The Chilean Constituent Assembly is divided into seven committees, of which the nationalization bill is under the responsibility of the Environmental Protection Committee, and three core steps are required to nationalize lithium mines.
Step 1: Committees each give a "general vote" on the corresponding proposal and discuss the proposal rather than a substantive decision. (Main work in February). This was followed by a "special vote" in which all the chapters in the proposal were examined in detail and voted on in modification. (Main work in March))
Step 2: Submit the ECC proposal to the Chilean Constitutional Convention, and 103 of the 155 members pass it (2/3) before the proposal can be written into the new preparatory constitution. (Tonight)
Step 3: Complete the formulation of the new constitution by July 4, 222, and pass a referendum in Chile on September 4.
In other words, if tonight's nationalization bill is passed at the Constitutional Commission (the real battleground between the left and the right), then saving the future of Chile's lithium mines will only be the last step of referendum failure.
2. What is the market worried about?
We summarize the core concerns of overseas and domestic investors: can existing companies continue to operate? Can companies expand production in the future? And can China be laid out? The results of the nationalization of Chile are divided into three main assumptions:
1) Pessimistic assumption: Chile's existing lithium mining enterprises are fully nationalized, and SQM (Tianqi) + ALB has been hit hard.
2) Neutral assumption: Existing enterprises will not be nationalized, but there may be restrictions on later expansion.
3) Optimistic assumption: The operation of existing Chilean enterprises is not affected, but it is difficult for foreign enterprises to go to Chile.
3. What do we think?
3.1 Pessimistic Assumption: Full Nationalization? — We believe that the existing bill is difficult to pass.
1) There are actually 8 so-called nationalization proposals in total, compared with only 3 submitted to the Constitutional Commission, and the tone is greatly weakened. We observed that there are a total of 8 nationalization bills that have entered the general review process, and the more aggressive ones, such as the proposal to establish a national mining company, have been rejected, and there are currently three core articles submitted to the Constitutional Committee, and none of them mandate the nationalization of key metals such as copper and lithium:
Regulation 1: "The State and its companies may, on their own, mine substances such as lithium, non-metallic minerals, liquid, solid or gaseous hydrocarbons, as well as substances located in areas considered by the Constitution and the law to be of national interest." As well as other substances determined by law, administrative authorization is not granted. These substances will be used by state-owned enterprises.
Regulation 2: The State has absolute, exclusive, inalienable and inalienable control over all deposits of minerals, metals, non-metals, fossil substances and hydrocarbons.
Regulation 3: "When nationalization is involved, nationalization will include themselves, its rights holders, and all his assets." Mining exploration and exploitation concessions will cease immediately. The amount of compensation, depending on the circumstances, may be determined on the basis of the original cost of the asset, less depreciation, and the amount of compensation will be paid in cash for a period not exceeding 21 years, and the existing goods and materials will be immediately nationalized. ”
2) The Constituent Assembly needs 2/3 of the number of people to pass, but there are 72 rightists in it. The center-right in Chile's Constituent Assembly, which holds 72 of the 155 voting seats, has a difficult 2/3 majority in the proposal, and the passage of an extreme nationalization bill is unlikely.
3) The tone of the leftist government after coming to power was significantly softer. We observed that after the Chilean leftist government took office, the new secretary-general of the government was clearly soft on his speech on nationalization at the end of March, and in response to three questions from reporters, she said:
Q1: Should mining activities be nationalized at present?
A1: No, I think we have strategic resources and we are actively working with all parties to share resources.
Q2: Codelco (a state-owned copper company) has already played a role in the Chilean copper sector, what about lithium?
A1: Regarding lithium, we need to be involved, not hegemonic. Countries cannot ignore the problem of under-involvement in strategic resources, and we hope to make the transition to a newer, more sustainable approach.
Q3: When you say that the government is underserved, does that mean nationalizing or even terminating the mining concessions (SQM/ALB) that are now in private hands?
A3: No, no, no, we're not talking about this, it's not even in the [government] plan.
She concluded by adding: "We invite businessmen in the mining world, but it is not enough to invite businessmen, the state must be responsible for the ability to invest and produce in these territories."
3.2 Neutral hypothesis: do you not allow companies to expand production? — SQM's ambition of 270,000 tonnes has not been thwarted
According to the SQM Quarterly Report, the board of directors resolved to expand the total production capacity of SQM lithium carbonate to 210,000 tons of LCE, and the capacity of lithium hydroxide to 40,000 tons, and it is expected to complete the capacity expansion in 2023. SQM currently has a production capacity of 120,000 tons of lithium carbonate, and the overall shipment of 101,000 tons in 21 years is expected, of which it is expected to complete the expansion of 180,000 tons of production capacity in 2022. According to the SQM annual report call guidelines, it is expected that the sales volume of lithium carbonate in 22 years will be 140,000 tons. Looking ahead to 2023, SQM production capacity is expected to increase to 210,000 tons, with sales guided by 190,000-200,000 tons of LCE.
SQM actually has greater ambitions, and plans to expand production to 270,000 tons of LCE in the long run. In addition to the data disclosed by the board of directors, we found that SQM actually has stronger expansion guidelines. In the data submitted to the Chilean Environmental Protection Agency, SQM applied for a mining license totaling 270,000 tons, of which the expansion project will be divided into two phases: 1) New expansion phase I: 30,000 tons of lithium carbonate, old process, old plant, completed in 2023, a total Capex 250 million US dollars. 2) New expansion phase II: 60,000 tons of lithium carbonate, new process, new plant, can switch between lithium hydroxide and lithium carbonate production, with a total Capex of $737 million.
The nationalization of SQM has had no impact and the EIA process has been highly followed since 23 April. Chile's EIA review has been suspended and resumed on 23 April. The deadline for this EIA assessment is June 3, and it is expected that in the next three months, we can see whether SQM can achieve expansion.
3.3 Optimistic Hypothesis: Is the Layout of Chinese-Funded Enterprises Difficult? — The suspension of BYD's Chilean bid has another reason
On October 13, the Chilean Ministry of Mines launched a global public tender for exploration/production licensing experience contracts for the Chilean region for the next 29 years, totaling 400,000 tons of lithium metal (2,129,200 tons of lithium carbonate). It includes five exploration rights of 80,000 tonnes of lithium metal (425,800 tonnes of lithium carbonate) each. The 400,000 tons of lithium metal will be divided into 5 separate quotas, each accounting for 80,000 tons. The successful bidder will have a 7+2 year exploration + development license, and the production period after the completion of the development will be 20 years, which translates to the successful bidding enterprise will be allowed to produce 21,000 tons of lithium carbonate per year for 20 consecutive years.
A total of 5 companies participated in the final bidding, and BYD finally won the exploration + mining rights of 80,000 tons of lithium metal (425,800 tons of lithium carbonate) in Chile for the highest price of 61 million US dollars.
On January 14, a Chilean court received an appeal of protection and announced the suspension of lithium tenders. The Court of Copiapo in northern Chile received an appeal of protection from the Governor of the State of Copiapo and the indigenous community of atacama Salt Lake and ordered the immediate suspension of the selection process and award of the national and international public tendering process for the exploration and exploitation of lithium mines. It should be noted, however, that this appeal does not imply that the tender is not innovated, but only that the consideration is suspended.
The key person to appeal was the governor of Atacama, Correa (the salt lakes in Chile are all located in Atacama, and the above-mentioned Cupiapo is the capital of Atacama State). Correa, who served as mayor of Atagama for a second term of 14-17 years in Bachelet(left) and governor of Atacama state since July 14 last year, appealed that the auction violated the violation of constitutional guarantees and did not specify which legal provision was violated, but we guessed that it was most likely related to environmental protection and local investment permits.
The left is not opposed to the BYD acquisition process, but is nothing more than a discussion of three major issues
Before the Ministry of Mines announced the success of BYD's tender (Jan. 13), there were discussions between the left and the right governments. According to the latest statement of the Chilean Ministry of Mines on January 14, as early as January 5, the Chilean left and right had communicated about the auction of lithium mining rights, and most of the views on the operating contract were accepted at the meeting. Compared with the market's past concerns about the left to come to power and cancel byBYD's lithium mining contract, we find that the leftist government is not opposed to this tender, which is nothing more than a requirement to add three supplementary regulations to the auction contract:
1) Add specific mechanisms for compensation to local communities. (Community welfare activities + environmental protection subsidies)
2) Set up post-investment output value standards and incorporate them into the bidding process. (Required to assess the total investment amount and the local new output value after the completion of the investment)
3) New national lithium industry R & D investment. (We infer that the rate is probably to pay R&D funds to the Chilean government)
This is significantly different from what the market expects.
In summary, we find that the Chilean left did not substantially block the expansion of enterprises or foreign investment bidding after coming to power, and the nationalization speech of the left in the early stage was more to win the support of voters (nationalization speech after the first round of defeat) rather than the actual will. Compared with the establishment of a national mining company or nationalized private mining enterprises, the current Chilean ruling party is more inclined to win-win cooperation with foreign capital, and tomorrow morning will be clear.
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