By now, the Pascua Lama mine — located on the border between Chile and Argentina — could be generating 5,000 jobs, with both countries profiting from their alliance to explore for gold, silver and copper. The project would be the envy of neighboring countries, including Peru, Brazil and Bolivia, widely recognized for their mining traditions.
All of that could be a reality now, if not for economic and tax disputes between the governments of Chile and Argentina, which have postponed the mine’s development. The first bi-national mining project in the region, Pascua Lama is better known as “the mine of Latin America.”
Situated some 4,000 meters above sea level in the Andes mountain range, smack on the border between Chile and Argentina, Pascua Lama contains deposits of several metals, including proven reserves of 18 million ounces of gold; 731 million ounces of silver; and 662 million pounds of copper. With a useful life of 23 years, the project is run by Barrick Gold, a Canadian mining firm that will invest $2.5 billion in its construction and operations, thanks to its winning bid for the contract.
Although the initiative dates back to 1997, it took years before the project passed the scrutiny of environmental impact studies and both governments were convinced of the respective economic benefits of the mine. Finally, at the beginning of 2008, authorities in Chile and Argentina announced with great fanfare the start of the mine’s construction. But they had failed to agree on a taxation system to apply to the exploitation of the minerals, so the project was delayed once more, further testing the patience of Barrick.
The Chilean government argues that most of the taxes from the mine’s output should be paid to Chile, since 90% of the metallic wealth of Pascua Lama is concentrated on the Chilean side of the mountain range. However, Argentine authorities propose a 50-50 split, citing the fact that most of the construction work must be done on the Argentine side of the mountains.
According to John Tilton, a professor in the mining department of Pontifical Catholic University of Chile, “When investment projects involve two or more countries, it creates enormous additional risks and difficulties for the foreign company, since the host governments represent sovereign states that can differ in strategic goals and unilaterally change the accords that were reached between themselves and with the multinational.”
Is it more advisable, then, to focus an investment in a single country? And, what variables could determine the success of future cross-border mining initiatives?
The Complexities of Bi-national Investment
Gustavo Lagos, a professor in the Pontifical Catholic University of Chile’s mining department, notes that foreign companies must consider several key factors before embarking on investments that involve two or three countries. “The first thing is to guarantee that the project is profitable over the long run. That means making a conservative economic evaluation and, especially, studying the political risk in both countries, guaranteeing that the rules of the game surrounding the initiative are not going to be fundamentally modified.”
Tadeus Golosinski, another professor in the Pontifical Catholic University of Chile’s mining department, adds that you must also evaluate each country’s labor and environmental laws; the economic development level of each country; the degree of governmental intervention in each country’s economic activity; and the tax regulations that characterize each country.,
If a multinational were to analyze the titanium market and then decided to give the green light for investing in it, it must then prepare for the most critical part of the process, warns Jorge Yáñez, professor of economics at the University of Chile. “Before doing anything, [the company] needs to clarify the property rights that each country has over the resource that is going to be exploited. This means that they need to sign an economic agreement between both countries, and with the foreign company in charge of the project,” says Yáñez. This process is very complex because “it means determining how much wealth corresponds by law to each country.”
Next, notes Yáñez, you have to harmonize the tax regimes of each nation, which may have significant differences from each other. “This is a tremendous complication for a multinational, which needs to have just one, clear set of rules. Once again, this subject must be resolved through an agreement between the countries and the foreign enterprise.”
Golosinski argues emphatically in favor of creating an agreement about business taxation, something that depends essentially on the attitudes of the countries involved. “If you have a win-win philosophy, there are ways to overcome a lack of an agreement, but if the ruling premise is that one party wants to win without consideration for the other, it is impossible for the project to prosper and have a happy end.”
The problem with this kind of project, says Lagos, is that once a foreign investment is confirmed, “Latin American governments tend to behave like masters and lords, as if they are savoring a victory.”
Yáñez agrees, concluding that a business-tax negotiation “depends on the will of the parties, which means incurring costs for achieving monetary benefits.”
The Cost of Siding
In the case of Pascua Lama, Lagos argues, “The governments of Chile and Argentina have a completely different focus for doing business. That means it is extremely hard for them to reach points of agreement. In fact, when it comes to energy, the experience of the gas pipelines between the two countries has been a very negative one.”
In that respect, Barrick should be evaluating the possibility of carrying out its Chilean initiative on its own, according to the media in that country. Last September, Santiago González, Chile’s mining minister, told the local newspaper La Nación, “If Barrick Gold decides to alter its plans for the project, we are entirely prepared to work with them. But they would have to undertake a new environmental impact study in order to approve moving the [construction] equipment from Argentine territory into Chile.”
According to Juan Carlos Guajardo, director of CESCO, the copper and mining research center in Chile, “Since a large part of Pascua Lama is located in Chilean territory, it would theoretically be possible for the exploitation to be done only in Chile. Nevertheless, from the geological point of view, this is a single deposit that should be simultaneously operated in both Chile and Argentina in order to maximize output and take full economic advantage.”
Professor Juan Ignacio Guzmán, a professor in the Pontifical Catholic University of Chile’s mining department, adds, “On the Chilean side, there is no way to construct a processing plant for the minerals at a reasonable cost. That’s because there are lots of steep slopes and the region is very mountainous. Meanwhile, on the Argentine side, the topography is much friendlier, which makes it easier to build the project there.”
Guzmán notes that concentrating the investment in just one country could be a temporary solution for Barrick. “But over the long term, once the open-cut [mining] process has begun, the multinational could find out that there is greater mineral wealth in Argentine territory than they initially thought, which would mean the company loses a big opportunity.”
Past Border Mining Projects
Nevertheless, history offers case studies of border mining projects that have been carried out successfully, according to Golosinski. “For example, several years ago, a project was developed for exploiting high-quality lignite coal along the border between West Germany and East Germany. The remarkable thing about this initiative is that it took place during the Cold War, when both countries were political enemies. They reached an agreement to jointly develop the mineral, and reaped the benefits thanks to the fact that they were guided by the ‘win-win’ principle.”
Another remarkable case, Golosinski adds, involves the Flin Flon mine (copper, gold and zinc), located along the border between the Canadian provinces of Manitoba and Saskatchewan. “In that country, minerals are the property of the provinces, not the federal government. Each province has its own legal regulations and different tax laws. Despite that, the provinces established an alliance to exploit that deposit.”
Guzmán argues that the Flin Flon case does not fall under the same category as Pascua Lama. “That initiative materialized within the borders of the same country, and while it is clear that Canadian provinces have distinct tax regulations, their political interests are the same. In contrast, the Pascua Lama project is [unique], because it involves two countries that have a completely different focus when it comes to taxation, economic development, and politics.”
Guzmán argues that conditions are currently not right for Pascua Lama to materialize. “However, there is no way that [the project] will be scrapped by the multinational, since it is an initiative that has great economic potential. Without doubt, what Barrick has gained by dodging obstacles for all these years, has been greater experience in the market.”
Future Bi-national Projects
In the future, mining projects across the borders of two or more countries are going to occupy a position of critical importance in the industrial world, warns Guzmán. “Both at the North Pole and the South Pole, there are enormous deposits of minerals [and] deposits of fuels and non-fuels in regions that belong to several nations.”
Guzmán adds, “Chile and Argentina even share jurisdictions in Antarctica, but there is currently no way they can discuss their economic rights over those territories because of a global regulation that establishes that no country can engage in mining or petroleum exploration in Antarctica until 2048.”
However, once countries are freed from that decree, warns Guzmán, there will surely be new conflicts between authorities in Argentina and Chile. “There are also many projects that, at a theoretical level, involve exploitation of minerals in underwater soils. People believe that the mining of the future will go there. Most likely, the development of these initiatives will involve the maritime limits of more than two countries, and the final results of Pascua Lama will provide a case study in that regard,” he says.