Chile’s National Lithium Strategy

Following great expectation, on April 20 the Chilean Government presented its “National Lithium Strategy”, a public policy providing new rules for Chile’s next generation of Lithium exploitation.

The announcement was made recently, and a lively debate is taking place regarding the tangible effects that the new policy will have. To better understand what this new policy implies and how the industry will move forward consequently, it is important, first, to have a contextual understanding of Lithium’s current exploitation in Chile.

Context/History

Chile accounts for approximately 40% of the world’s Lithium reserves, mainly located in the “Salar de Atacama” salt flat. However, Lithium exploitation in Chile is rare if compared to metallic substances’ mining (mainly copper).

As opposed to copper and other conventional substances, that are exploited by virtue of mining titles granted by courts (“concessions”), in 1979 Lithium was declared a strategic substance that is not subject to concessions. From there on, its exploitation is reserved to the state, directly or through public-private partnerships.

Therefore, Lithium’s current exploitation in Chile is carried on with a relevant involvement by the State, so the portrayal by the press of a “nationalization” of Lithium due to the Government’s new announcement is not accurate. In fact, two companies from the private sector, SQM (Chile) and Albemarle (US), account for approximately 36% of the world’s Lithium production, and they operate by leasing Lithium concessions in Salar de Atacama (grandfathered from the previous concessions’ regime) to a government’s agency.

In the context of a global hunt for Lithium, a new policy on exploitation is crucial to provide certainty (for better or worse) on what the landscape will be for future investments. This is especially relevant for SQM and Albermarle’s operations in Salar de Atacama because their leasing agreements expire in 2030 and 2043, respectively.

National Lithium Strategy 

As announced by the President on live television, the foundations of the National Lithium Strategy are the following:   

1. The State’s participation in the whole Lithium production cycle, with the creation of a National Lithium Company (“NLC”). This state-owned company must be created by law, and the bill will be submitted to Congress in the second semester of 2023 after discussions with communities and other key stakeholders.
2. The exploration, exploitation and value-addition efforts will be based on public-private partnerships.
3. The fostering of new technologies’ applications for Lithium extraction, such as direct extraction with re-injection of brines in salt flats, as opposed to the prevailing, and less environmentally friendly, method of water evaporation.
4. The development of Lithium initiatives will consider participation and involvement of communities around the salt flats.
5. The promotion of generation of value-added Lithium products in Chile. 
6. The creation of a “Public Technological Research Institute of Lithium and Salt Flats”, as a contribution to the development of sustainable extraction techniques and a better understanding of the salt flats and their communities, through research in ecology, geology, and social sciences.

The announcement also focused, separately, on the Salar de Atacama and on the other salt flats.

Salar de Atacama:  

1. All contracts in force will be respected (ie, SQM leasing until 2030, and Albemarle leasing until 2043).
2. State-owned copper company CODELCO will be appointed to begin negotiations with SQM and Albemarle to assess the potential early participation of the State in these companies’ operations (ie, before the leases expiration dates). Nevertheless, it was emphasized that any early public-private partnership in this sense will necessarily be the result of an agreement with the current titleholders of the projects.
3. If a public-private company is created to exploit Lithium in Salar de Atacama, it will be controlled by the State through CODELCO.

Other Salt Flats:

1. CODELCO and mining state-owned company ENAMI will get exploration/exploitation agreements for current projects in different development stages (ie, CODELCO’s exploration-stage project in the “Salar de Maricunga” salt flat), and these companies can choose if they enter into a joint venture with private-sector companies or not
2. For salt flats with exploitation feasibility, a public tender process will be launched to grant exploitation agreements, in addition to prospections made directly by the State. In case prospections are positive, the awarded private party will have a preferential right to request an exploitation agreement in association with a state-owned company (such as the NLC). Regarding “strategic value” projects for the country, all public-private partnerships will be controlled by the State. 
3. For the harvesting of Lithium in these salt flats it will be mandatory to use technologies that minimize environmental impact, such as direct extraction. 

What to Expect?

The National Lithium Strategy comes to break stagnation in regulation for the Lithium industry in Chile, which is positive in terms of certainty, but it is still soon to tell whether the new policy will create more opportunities than constraints for investors. 

However, it is worth noting that some key companies have shown interest and optimism in the new layout for investment. Even SQM and Albemarle have revealed a positive approach to negotiations with the State, presumably to secure continuation of their leading Lithium ventures in Chile.

In our view, the following are the main key topics to focus on closely as they develop:

1. How negotiations with SQM and Albemarle will evolve regarding the State’s early participation in the ongoing operations in Salar de Atacama. An important bargaining tool for these companies is the possibility of an extension of their agreements beyond the expiration of their leases, in exchange of allowing the State to have a stake in the operations’ vehicles.
2. In ventures where the State will have control, it is yet to be seen what this control will really mean (financing contributions, governance, preferential rights, etc.). In this line, Government officials have asserted that “they cannot do it alone”, and they need private-sector investment and know how. The key will be to create a balance between expected yield on investment for private parties and securing a significant say for the State in the projects.
3. Regarding “strategic value” projects for ventures in other salt flats (not in Salar de Atacama), it is crucial to understand the contours of the policy so that there is certainty in what is a project with “strategic value” or not. 
4. How will CODELCO and ENAMI respond to the possibility of joining efforts with private-sector companies to develop early-stage projects in other salt flats.It is likely that this will create opportunities for non-incumbents, since CODELCO and ENAMI could face capital constraints for developing these projects and lack of know-how.
5. Timing for anticipated public tenders for exploration in other salt flats, where private-sector companies will play a leading role.
6. What measures will the State take to make Chile a feasible location for the generation of value-added Lithium products.Given the long distance that separates Chile from the countries that concentrate the demand for Lithium, a significant effort is needed to make Chile a credible and competitive option to generate such type of products. So, if the State is willing to make things happen in this sense it should be by creating friendly conditions for investors, probably through tax breaks or other kinds of aid.

It is just the beginning of a much-expected change in the Lithium industry in Chile that provides certainty, at least, on what direction the Country will take regarding this critical mineral. This, combined with an increased need for the State to finance social reforms, reveals that the new policy for Lithium should create more opportunities than constraints if things are made right. 

Briefly, investors, prospectors, geologists, environmental and technology consultants, could benefit from opportunities to be created with this renewed layout of the industry.

Our firm is constantly monitoring the market and views from different stakeholders to generate expert insights on the subject, so we are always at forefront of the debate and available to discuss key opportunities with our clients. 

For more information, please contact us and we will be glad to assist you.