Criticism mounts of Chile's lithium strategy and SQM-Codelco deal

Despite getting the green light from Chile's anti-trust authorities, the public-private partnership between state mining giant Codelco and SQM to produce lithium in the Atacama salt flat is facing mounting criticism. 

Detractors argue that the agreement is disadvantageous for the State and was not properly evaluated.

In the meantime, it was reported in recent days that Chinese firms BYD and Tsingshan have also abandoned plans to develop lithium-related projects in Chile – including battery and cathode production plants awarded by development agency Corfo, citing changes in the lithium market such as low prices, uncertainty, bureaucratic hurdles and delays in securing permits.

Even though the government has confirmed these reports, the Chinese embassy in Chile denied that the firms had withdrawn from the lithium projects, stating that they never expressed plans to exit and remain open to dialogue with authorities.  

One of the central criticisms of Chile's national lithium strategy is the apparent asymmetry in profit distribution between SQM and Codelco. Although Codelco will hold a 51% stake in the JV, it is expected to retain only 20% of the profits.

The JV, which will be formed by subsidiaries Minera Tarar and SQM Salar, will operate in two stages: from now until 2030 under SQM's management, and from 2031 to 2060 with Codelco taking the lead. A special commission from the lower house of congress is reviewing the clauses of the agreement. Its final report is expected on May 12.

Opposition has also come from the Colla Pai Ote indigenous community, which announced before the lower chamber of congress this week that it has filed a lawsuit seeking to annul the PPP deal for failing to comply with required consultations.

"Indigenous consultation was not carried out in accordance with articles 6 and 15 of [ILO] Convention 169, which states that any administrative measure that has a direct impact on the rights of indigenous peoples must be consulted," Ariel León, legal advisor for Colla Pai Ote, told BNamericas. Additional concerns are related to environmental protection, he said.

In parallel, Corfo is moving forward with a separate indigenous consultation process aimed at securing final approval to launch the JV in the second half of this year.

Approvals

At the end of April, competition authorities in Brazil, South Korea, Japan, Saudi Arabia and the European Union approved the deal. China remains the only one pending.

Chile's nuclear energy commission CCHEN also authorized SQM to produce an additional 300,000t of lithium carbonate equivalent (LCE) under its current contract with Corfo, valid through 2030. The authorization stipulates no additional brine extraction.

Risks

Geologists have raised concerns about the environmental and technical risks of this production increase, to be carried out through the Salar Futuro project, which is expected to average 280,000t/y of LCE.

At a recent seminar, members of the institute of mining engineers questioned whether existing lithium reserves can support this level of output and how much brine must be extracted to maintain production, as well as expressing concern over the lack of legal safeguards for mineral resources and reserves in Chile.

Calculations

Although Codelco will hold 50% plus one share of the JV with SQM, it will not receive an equivalent share of profits. According to lawyer Mauricio Daza, SQM has the right to extract up to 990,000t of LCE through 2030. Of that, 201,000t will go to Codelco, meaning SQM will retain 789,000t, or 80%.

Applying the same logic to the additional 300,000t authorized by CCHEN, Codelco would receive 68,000t (23%) while SQM would retain 232,000t (77%). Subtracting the 201,000t destined for Codelco, SQM would gain an additional 31,000t of lithium without any payment to the State, Daza said in televised comments.

From another perspective, if the 300,000t were evenly divided between the partners, SQM's share would be 150,000t, double what Rio Tinto obtained when it acquired Arcadium Lithium's assets.

While Rio Tinto paid US$6.7bn, SQM paid nothing. In the end, while SQM continues to contribute significantly to the State through taxes and lease payments, it will also retain a major share of revenues, Daza underscored.