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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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More Than 50 Mining Companies To Negotiate Lithium Deals With Chile

  • The new public-private model of operations introduced by Chilean President Boric has attracted around 50 mining companies from over the world that are now looking to negotiate lithium deals.
  • Under Boric’s plan, the government will also negotiate with Albemarle and SQM for a larger stake in their current contracts.
  • Chile has also proposed to incentivize the exploration of other salt flats other than the Atacama so as to diversify the sources of lithium and expand production.

More than 50 companies from around the world are jostling to negotiate lithium deals under Chile’s new public-private model. Until now, U.S.-based Albemarle (NYSE:ALB) and Chile-based Sociedad Quimica y Minera de Chile (NYSE:SQM) have dominated the Atacama salt flat, which represents 30% of global lithium production. However, President Gabriel Boric’s new solution is a model that will see the state take a controlling stake in strategic and sensitive operations while private firms will retain control of non-strategic projects.

Under Boric’s plan, the government will also negotiate with ALB and SQM for a larger stake in their current contracts, with the negotiations to be overseen by the state-owned copper producer Codelco, a company tasked with creating a framework for establishing a new state-owned lithium company in the future. However, the president will need to seek the approval of the National Congress of Chile--where he lacks a majority--in the second half of the current year, meaning the plan is likely to undergo significant changes before approval. 

Boric has argued that the country’s lithium reserves represent “an opportunity for economic development that will likely not be repeated in the short term” and that, “This is the best chance we have at transitioning to a sustainable and developed economy. We can’t afford to waste it.” Boric’s left-leaning government is currently working on a bill that will establish the new national lithium company. However, getting the bill through Congress and implementing it could take a big chunk of Boric's four-year term, which runs through March 2026.

This is not looking too good for ALB and SQM. Currently, the two companies dominate the Atacama salt flat, which represents 30% of global lithium production, and nationalization of the companies would incentivize the renegotiation of those exploitation contracts. Although Boric has given his word that the current contracts would be respected, it’s far from clear how Chile plans to strike that balance between the conflicting interests. 

If approved, private entities in the lithium industry will be allowed to participate, but only as minority partners in joint ventures with the State. Codelco and its peer, Chilean State-owned mining company, Enami, would represent the State in future projects initially until the country creates a new, standalone lithium mining company. 

Related: Rig Count Decline Accelerates Amid Rising U.S. Crude Oil Production

Chile has also proposed to incentivize the exploration of other salt flats other than the Atacama so as to diversify the sources of lithium and expand production. The country plans to increase the number of private entities that produce lithium from the current number of two. Some 60 percent of the world’s lithium reserves are located in the so-called lithium triangle, a region that encompasses Chile, Argentina, and Bolivia. 

SQM is at the biggest risk here since its contract to extract lithium in Chile's Atacama salt flat expires in 2030, and the shares reflect this reality having crashed nearly 10% over the past four trading sessions. Under Chile's proposed policy, it has two choices to either allow the state take a majority stake with the understanding that it could keep operating longer or keep full control of its operation for the rest of the current contract and risk losing it when it ends. Albemarle is more inured, and has told investors that Boric’s plan has"no material impact" on its operations since its deal does not come due until 2043.

State Control

Lately, a wave of nationalization and protectionism has seized Latin America.

The decision by Mexican President Andres Manuel Lopez Obrador to roll back reforms aimed at opening Mexico's power and oil markets to outside competition has angered the U.S., Canada and Europe and triggered bipartisan calls for the U.S. to get tougher on its southern neighbor. In recent years, U.S. Big Oil companies, such as Chevron Corp. (NYSE:CVX) and Marathon Petroleum Corp. (NYSE:MPC), alongside a host of solar and wind energy companies, have struggled to obtain permits to operate in Mexico.

Since becoming Mexico’s president in 2018, Obrador has undertaken various radical reforms in the country’s energy and power sectors as he endeavors to achieve elusive energy independence. Two years ago, he announced a rather controversial plan to phase down oil imports, reversing a major reform plan enshrined in the constitution in 2013. 

As part of the plan, Mexico’s NOC Petroleos Mexicanos aka Pemex, was to cut crude oil exports from over a million barrels per day to just 435,000 barrels a day in 2023. The move is part of President Andrés Manuel López Obrador’s (AMLO’s) drive to lower imports of costly refined products, such as gasoline and diesel, and instead rely more on domestic production. “Practically 100% of Mexican crude will be refined in our country,” Pemex head Octavio Romero Oropeza said at the much-heralded opening of a new refinery in the southeastern state of Tabasco. 

But high oil prices and an uncertain economic outlook including high inflation might see those plans shelved by the Mexican government.

Like most oil companies, high oil and gas prices helped Pemex to post its first annual profit in a decade, prompting the president to declare that Pemex, “was in bankruptcy and it is now being reborn”. Although oil revenues are no longer as important to Mexico’s economy as they once were, economist Victor Gomez has told Efe it is “improbable the Mexican government can stop relying on the export of petroleum as a source of funds”. Gomez is a former Finance Secretariat official who now works in the private sector.

According to Gomez, the financial windfall from oil sales “is a positive note” for public accounts. However, much of the oil profits have gone to cover the nearly $21 billion in uncollected taxes after the Mexican government suspended retail fuel taxes. Last year, people living in the United States have been driving across the border into Mexico in search of lower gas prices.

But oil is just one of the energy commodities that Obrador has sought to secure. In another act of protectionism, he sought to reform the electricity sector such that it would guarantee state electricity group CFE 54% of the market. The proposal aimed to transform the regulatory landscape for the electricity sector, including canceling power generation permits and prioritizing CFE power over private renewables on the national grid. However, the bill was defeated in Mexico’s Congress.

Obrador is also pushing ahead with plans to nationalize the country’s lithium sector after nationalizing lithium deposits last April, saying “There will be a company to explore for it, extract it, commercialize it.” Back in February, he signed a decree handing over responsibility for lithium reserves to the energy ministry.

However, several experts have warned that the energy independence that Obrador dreams of might not be a very good idea. Indeed, a cross-section of analysts has pointed out that self-sufficiency would not be good for Mexico, and are even skeptical whether such a goal is economically viable. 

“The supposed benefit of self-sufficiency doesn’t exist. So ending all petroleum exports doesn’t look like a real possibility.” Gabriela Siller Pagaza, head of economic analysis at the financial firm Banco Base, has said. According to Siller, energy security, defined by the International Energy Agency as “the uninterrupted availability of energy sources at an affordable price,” is more important to Mexico than self-sufficiency. 

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Mexico’s economy is a fairly energy intensive one requiring large amounts of petroleum, liquids and natural gas. In turn, rising natural gas consumption has led to the need for more infrastructure, including new pipelines to import U.S. natural gas. 

However, Mexico is a classic example of a Jekyll and Hyde economy. On one hand, the country boasts a trillion-dollars in gross domestic product (GDP), making it one of the highest for a developing nation. However, the relatively big economy is overshadowed by the fact that ~44% of its population lives below the poverty line, with the country also having the third-highest degree of income inequality amongst the 39 member nations of the Organisation for Economic Co-operation and Development (OECD).

Meanwhile, the nation’s energy industry is riddled with rampant oil theft and a thriving black market.

Criminal syndicates associated with powerful drug trafficking cartels have frequently targeted Pemex’s pipelines to steal crude oil and derivative products. The problem has become so entrenched that by the time Obrador took office, the country was losing a whopping 80,000 barrels or more of petroleum and derivative products per day to oil thieves.

By Alex Kimani for Oilprice.com

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