Chile at a Critical Point | Diego Hernández Cabrera

Chile has often been praised as an example of how to use natural resources to foster economic growth. The industry is now at a crossroad - and Chilean society has made it clear that it expects to see more tangible benefits from it. Will it succeed?

Our guest today has had a remarkable trajectory at the top of Chile’s copper industry:  Diego Hernández Cabrera is former CEO of Codelco, BHP Chile and Antofagasta Minerals, and is currently President of the National Mining Society. 

Diego joins the Natural Resources Podcast to explore the past and future of Chile’s mining sector. 

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Transcript

Åsa Borssén:  
Aquí está recién nacida y ya cuenta mil senderos; Here she is, newly born and already with 1000 paths. This is how Nobel Laureate Gabriela Mistral described her homeland. How did this Chile become a mining success story? I’m Åsa Borssén and this is Highgrade.

Åsa Borssén: 
Chile has often been praised as an example of how to use natural resources to foster economic growth. So, what is the secret? Our guest today has had a remarkable trajectory at the top of Chile’s copper industry. Diego Hernández Cabrera is former CEO of Codelco, BHP Chile and Antofagasta Minerals, and is currently President of the National Mining Society. Diego is joining me today to explore the past and future of Chile’s mining sector. Diego, welcome to the Natural Resources Podcast.

Diego Hernández: 
Thank you, Åsa.

Åsa Borssén:
You have a long and distinguished career in mining. What have been the most notable changes in the industry since your early days?

Diego Hernández: 
Wow, many changes over all these years. The scale of the mining industry increased a lot. Same kind of equipment but bigger and bigger capacities. That's one big change. The other one is that usually mines are in remote places. We used to have two stakeholders only the company and the authority. Now we are in a world of multiple stakeholders. And we had to learn to live with that; much more integrated to the local economies than what we used to be.

Åsa Borssén: 
And let's then move on and look at Chile and the success story that that is. Starting in the 70s, Chile has gone through a process of mineral development that has seen the country become the top global copper producer. In your view, what has been the secret of that success?

Diego Hernández:
Well, in the 20th century, we had three mines and one project that were quite important, run by American companies. And these mines were nationalised in ‘71. And is when Codelco, the state company, was created and of course was in charge to run these four mines. After that, we didn't see too much foreign investment in Chile for a while. And then they created three tools that were quite important to build the new wave of mining companies in Chile that start really in ‘91 with the beginning of production of the Escondida mine. And these were: the mining code that granted the property of the mining rights; then a special law that allowed the state of Chile to have contracts, investment contracts with foreign investors that granted the tax invariability for a certain period, 12-14 years; and then also an effort to attract foreign investment from the Chilean government. These three elements were key to start a lot of investment. In ‘91 Chile was producing 1.6 million tonnes of copper per year - mainly Codelco - and in 2004, we reach 5.4 million tonnes of copper per year. That's really what allow us to grow.

Åsa Borssén:  
Some people argue that Chile's success can be traced back to the early days and the role of the public sector - you mentioned Codelco. However, it was the private involvement that followed that consolidated the country's position as a top mining destination with mines such as Escondida, El Teniente. So, what has been the role of the public and private sector in Chile’s success story?

Diego Hernández: 
You know, in Chile, we need to respect our history. In the 19th century, Chile had a lot of private mining investors, locals and foreigners. But early 20th century is when there was a technological breakthrough created in the states, in USA. That was the development of grinding and flotation, the flotation process that allowed to mine the porphyry copper that before that, they were not economic. They developed this this for mines in Chile, starting with El Teniente in 1910. And then Chuquicamata, and in the 30s El Salvador/Potrerillos and finally Andina, and as a result of that the local investors could not participate in that because they didn't have the capex, they didn't have the technology. The only expectation of the country vis-à-vis these enclaves were access and foreign currency. And that created a kind of belief that mining meant taxes. Then, in ‘71, the mines were nationalised. The same happened in other countries in DRC, in Congo, at the time in Zambia, and in Peru. And in Chile, they create Codelco and the state took over the company. And we were successful because we had the engineers at the time, that could take over that and it worked well. In the other countries, it didn't work as well. And then it was quite tough to attract again foreign investors. But the fact that we have a state company that today produce around 30% of Chilean copper, satisfy the idea of the people that believe that mining companies should be in hand of the state and at the same time the 70% that is produced by private companies, international and some local, satisfied the other side. I think that also these three segments - state investment, local private investment and foreign private investment - allowed us to capture a lot of synergies. Each side brought something to the party. Codelco had experienced workers. They contributed a lot on marketing of concentrates and copper cathodes; the foreign companies of course they brought technology, they brought know-how, they brought also some working practices like safety, they put a lot of money on exploration and found new ore bodies. And then Codelco took advantage of that also, the technology and the new ideas. And the local private investors, well they are present in the small mines that produce around 1% of the Chilean copper, the medium sized miners that produce around 4% and the balance 30% is Codelco and the balance is the big mining companies including a Chilean one that is Antofagasta PLC.

Åsa Borssén: 
And alongside 50 years of geological success, Chile has outperformed its peers in economic growth. The country is often praised as a good example of how to use natural resources to underpin development. How did such a renowned institutional governance materialise?

Diego Hernández:  
I think that the basis is what I mentioned: a good mining code, non-discrimination between foreign investment state investment and local investment. Chile is a small country. For us it has been very important to be more global, and globalisation helped us to develop the country. In the last 10 years, mining counts for around 14% of GDP in average. But if you consider the money that is recirculated in the country in salaries and services and others, probably we can conclude that mining count for around 20% of GDP. Then the country should have been much different without mining. But still, it's difficult for people to understand. And now we are going through a difficult period that eventually could put in jeopardy all that we have built.

Åsa Borssén: 
And we will come back to, but it is an interesting question what the perception of the industry is. It's so important to the economy, but is it a liked industry?

Diego Hernández:  
I think that we, what we say, perhaps to justify ourselves is that we are not good communicators. In our business, we produce commodities, then we don't need to do to have to do a lot of things to convince our clients. You produce, and automatically, you can sell it. The other point is that, of course, in the past, mining had a lot of environmental liabilities. All these investments done in Chile since the late 80s, until now, has been done according to the best environmental practice worldwide at the time, then now we are in a much better shape. But still we carry the kind of stigma that we destroy nature and so on.

Åsa Borssén:  
And Chile has also achieved relatively high levels of economic diversification. Was this policy induced, or did it just happen?

Diego Hernández: 
The policy, in very general terms, has been that we should develop the economy in sectors where we have competitive advantages. And of course, mining is one, forestry, wines, fruit. And that's something that that has worked quite well, some people don't like that, because we, they say, depend too much on exports. But certainly to build a big industrial park here, like car manufacturers, or any anything like that, it doesn't make sense, because we have a very small local market.

Åsa Borssén:  
How does mining interact with the rest of the economy? Or in other words, has mining been a catalyst of non-mining development?

Diego Hernández: 
Certainly, because that's one of the difficult things to explain. Because if we go back to last century, when we had these four copper mines, they were enclaves and not very related to local economy. For obvious reasons, because at the time, the country didn't have too many things to offer to those mines in terms of technology, service companies, and so on and so forth. And now, it's completely different. The mining industry in Chile is totally integrated to local economy. For instance, we can produce our own engineers that are world class, they could work in any other country in similar positions, we have a lot of service companies to the mining industry. And what is very important is that because the mining industry is so big in the country, and is world class, we bring technology to the country, that then can be used in other industries, others than mining. Like automation, remote control, and all of that. And you disseminate that to other industries. Then certainly we have been a vehicle to improve and to bring technology to the country.

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Åsa Borssén: 
If you're just tuning in, we're talking with industry nestor Diego Hernández Cabrera. For 50 years mining has been at the centre of the Chilean economy. How did Chile become the world's top copper producer? Well, Diego has singled out three developments that paved the path to industry success. A mining code granting property rights to private investors; a foundational law securing fiscal stability; and, more generally, an active effort to attract foreign investment.

Looking forward, will Chile retain its status as a top mining investment destination?

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Åsa Borssén: 
Let's move on then. And look at the current challenges. Mining is a cyclical industry and for some time now, the national industry has been facing structural challenges and risks, including underinvestment declining productivity, rising labour cost, high energy costs and increasingly water stress. How does the industry resolve this conundrum?

Diego Hernández: 
Well in our case many of these mines started to produce in the 90s and then 2000s, just to put dates, from ‘91 When we produce it 1.6 million tonnes of copper to 2004 with a lot of investment, we increase production to 5.4 million tonnes per year. And from 2005, until now, with more investment in nominal terms than we invested on the first period, we increase production only from 5.4 to 5.8 million tonnes of copper per year. And the reason is that in porphyry coppers you have the best grades on the top of their bodies, then when you mine you go from secondary sulphides to primary sulphides and so on, and the grade decreases. In 2008, 2009, the average grade was 1%. Today's 0.67% on average. Then, for us is very important to improve our productivity, to have our industry still competitive worldwide. And the only way to do that is incorporating innovation and technology, automation and many other things. In Chile, in the big mines, local miners, the operators, they have similar salaries than what you can find in the States, Australia or Canada in similar positions. But our productivity is close to half of the productivity in those three other countries. Then we have a problem there that we need to solve. And the pandemia forced us to adopt more innovation. For instance, many mines used to have automatic control in their plants. And with the pandemia we were forced to do it, then it has been quite important this pandemia. And the authorities also were much open to allow that, for instance, in terms of working schedules, the rosters and so on, in a way that we could organise us and the mining industry in Chile was successful in keeping production at the same pace, irrespective of the pandemia.

Åsa Borssén: 
Talk to me about water. This is another big challenge for the industry. How do you mine successfully with mounting water stress?

Diego Hernández:  
Chile will be and is being affected a lot by climate change. Then we have problems now of water. We have gone through a long period of draught and as a result of that, we have had a lot of pressure in the past to reduce our water consumption. In total in Chile, mining industry today we consume less than 4%, probably around 3.2% of the water that is consumed in the country. What we have done is in areas in northern Chile, where it is desert, we were forced to start desalinating water from the sea and found that to some of the companies because there is no more underground water available. I would say that in general the mining industry in Chile has invested a lot in that and is less or less dependent of continental water - for an additional cost and an additional investment. But that's the solution that we have chosen. And I will say that that is the trend for the future.

Åsa Borssén: 
The widespread social unrest of 2019 has left a deep mark in the Chilean society. How do you read these events? What is it fundamentally about?

Diego Hernández: 
It's very unexpected. There is a lot of reasons for that. Probably some social inequality. We built an emerging middle class, when you are there, you have more expectations. And these expectations, probably the country didn't manage that the way we should have managed and, and it creates some unsatisfaction. And that was part of the of the unrest. Many other reasons, one, for instance, is that the number of people going to university grew a lot, then you create a lot of expectation, because of course, education is entirely is considered as the main tool for social mobility. And after all that effort, you have a graduate in your family for the first time. And finally, he cannot find a better job than then than his parents. Finally, politicians decide to have a new constitution.

Åsa Borssén: 
And will the constitutional changes impact the mining industry do you think?

Diego Hernández:  
Could be but I hope not. And it's very difficult to say, look, in mining don't change anything, because people want to change everything. And it’s very difficult to defend the status quo. But I would say that it's very important the mining code, and some characteristics of the mining codes, that should be kept in a way that a long-term investor like you have in mining. On the other hand, I think that one of the main very important things post-pandemia, hopefully starting next year is the economic recovery of the country like many other countries. And of course, we need investment for that. And mining investment could be really very important in that economic recovery.

Åsa Borssén:  
Speaking of change, Chile has long been praised for the stability of its investment terms, which has made it a most desirable investment destination, as we've talked about. But today the country is flirting with changes to its mineral tax structure. Why is that?

Diego Hernández:
Well, that is explained in the 20th century, the only expectation that people had, and politicians had, vis-à-vis mining foreign investments was taxes. And they don't see that today the mining industry is so integrated to the local economy, that even if you have a mining company that is not paying little taxes, because they are not doing well, because for instance, is a mature mine, they are the end of the life of the mine and grades are low and so on. If you put an ad valorem royalty, you will take them out of business. For a lot of people, it's very difficult to understand all these conditions. And some politicians believe that because in Chile, we have a royalty, but it's a royalty on the operating margin is not a royalty on ad valorem. Then some people because of dogma they believe that it should be ad valorem. We are going through that discussion. And it's difficult to predict what will happen with this new royalty.

Åsa Borssén: 
Final question, are you fundamentally optimistic or pessimistic about the future of Chile's mining industry?

Diego Hernández: 
Well, when you work in mining and I've worked in mining all my life, you have a bias you need to be optimistic.

Åsa Borssén: 
Yeah. Diego, thank you so much. It's been a pleasure.

Diego Hernández:  
Thank you, Åsa. for the opportunity.

Åsa Borssén:  
And thank you for joining Highgrade and these natural resources podcasts. 

It's been a pleasure to talk with Diego to explore the fortunes and misfortunes of Chile’s mighty mining sector. A key takeaway from me: past success has not been down to the state or to the private sector, but rather to the active synergies between them. The industry is now at a crossroad, and that Chilean society has made it clear that it expects to see more tangible benefits from it. Will it succeed? I would expect so, but only time will tell. 

As always thank you to our sponsors the German Federal Ministry for Economic Cooperation and Development through BGR. Make sure to subscribe to our channel on whichever every podcast platform you're using. Until next time, so long!