The impact of Royalty Scheme on Mining Investors in Chile

  • In the new royalty scheme, two proposals have been floated. The first one proposes a 3% royalty on net sales, while the second one has set a 5% royalty on mining margin, equivalent to 2.7% royalty on net sales.
  • Overall project economics is unaffected, as the project is largely immune to royalty rate. Advancing royalty from 1.20% to 3.0% of sales diminishes the project’s net present value (NPV; currently 8%) by 2.9ppt and the IRR (Internal Rate of Return) by less than 0.5ppt.
  • Additional royalty can downsize production or force a number of mines in Chile to fold operations.
  • Chile will likely become less competitive than countries such as Australia, Peru, Canada and Mexico. For example, the average tax for mining companies is c.44% of net sales in Australia, c.41% of net sales in Mexico, c.40% of net sales in Peru and c.40% of net sales in British Columbia, while the new tax in Chile envisages a royalty of 75–80% of net sales.
  • Fiscal stability agreements. They are likely to be critical to investors. These deals are invoked through local tribunals or international arbitration and lend an edge in negotiations with fiscal authorities. Projects that benefit from stability agreements are more attractive in non-uniform tax scenarios.
  • Project ownership structure. Investors should evaluate project holdings to guarantee most suitable investment treaty coverage for their foreign assets.



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Acuity Knowledge Partners

Acuity Knowledge Partners

We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points.