January 30, 1995
Business

MINING THE MOTHER LODE:
Growing Canadian investment in Chile, especially in the mining sector, prompts a push to tighten political ties

BY WARREN CARAGATA

The Chilean altiplano is a harsh and strange land. At altitudes of more than 4,000 m, it is a place of thin air, fuming volcanoes and flightless, ostrich-like birds. Tucked along the Bolivian border nearly 2,000 km north of Santiago, it is a region little-known even by Chileans. But for two sister mining companies from Canada, the altiplano is anything but forbidding. For the geologists and mining executives of Vancouver-based Cominco Ltd. and Teck Corp., the painted canyons and volcanoes have marked a path to a rich copper deposit they call Quebrada Blanca--white canyon in Spanish. It is one of the highest mines in the world and it is just the latest addition to a growing string of major Canadian investments in Chile's booming mining industry.

In fact, it is the mining industry that has made Canada one of the largest foreign investors in Chile, with total planned investment of more than $5 billion. And it is the size of that growing grubstake, driven by giant ore deposits and low production costs, that will lead Prime Minister Jean Chretien to Santiago this week, in the first visit ever by a Canadian prime minister. ``These guys need backup,'' said Francisco Costabal, a native Chilean andvice-president of the Canadian-owned Cerro Colorado mine. ``There are too many Canadian dollars in Chile'' to be sustained without more formal political support. After stops in Trinidad, Uruguay and Argentina, Chretien will spend two days in Chile, where he will meet with President Eduardo Frei and discuss adding Chile to the current North American Free Trade Agreement, which includes Canada, the United States and Mexico. Chretien will complete his tour in Brazil and Costa Rica before returning to Ottawa. In total, officials expect the trade mission to generate about $500 million in contracts--including the construction of pipelines, thermal power stations and, of course, the development of even more mines.

But while Mexico may still be enduring market volatility and financial uncertainty related to its recent currency devaluation, few Canadian investors voice parallel concerns about closer commercial ties with Chile. ``The economic factors are different,'' says Marc Lortie, Canada's ambassador to Santiago, who points to Chile's falling inflation rate, strong economic growth and budget surplus. Above all, he says, Canadian investment in Chile is not speculative or temporary. ``It is a commitment in primary resources.''

For instance, along with its minority Chilean partners, Cominco and Teck--which owns 36 per cent of Cominco--have now invested more than $500 million in the Quebrada Blanca complex. To date, that has involved building their own road, power plant, and sewage and water facilities to get at the copper that they have been producing for export to markets in Europe and Asia. Almost next door to that site, Falconbridge Ltd. of Toronto owns a one-third interest in the Collahuasi project, which is emerging as one of the world's largest copper deposits. And about 100 km to the north, at the base of the Andes along the edge of the Atacama desert, Toronto's Rio Algom has sunk $390 million into the Cerro Colorado mine.

But while Chile is the world's largest producer of copper, that is not the only attraction for Canadian investors. To the south, near the coastal town of La Serena, lies the El Indio gold mine, one of the principal reasons for the fierce 1994 takeover battle--and hefty $2.3-billion price tag--for Lac Minerals Ltd. of Toronto. Lac owned El Indio, a large gold, silver and copper mine, and Barrick Gold Corp., also of Toronto, wanted those reserves to sustain its strong record of growth. North of La Serena, Placer Dome has a 50 per share of La Coipa, one of the world's largest silver mines.

The main reason why the Canadian mining industry has developed such a presence in a country at the opposite end of the world is not complex. Explains Jim Drake, the Vancouver native who directs the Quebrada Blanca mine: ``It's the quality of the ore body.'' And that quality is self-evident. Near the lunar landscape of the open-pit mine is the canyon, or quebrada, that gave the mine its name. Nature has stained the canyon walls in pastels, but one color stands out brilliantly--the blue-green of copper. Quebrada Blanca's reserves are 1.3 per cent pure copper, and Cerro Colorado's ore grade is 1.4 per cent pure copper. By comparison, B.C.'s Highland Valley Copper mine--50 per cent owned by Cominco--has an ore body of 0.4 per cent pure copper. ``At Cerro Colorado, we don't even count 0.4 per cent in our reserves,'' says Tom John, who evaluates new projects for Rio Algom.

Chile's allure is not limited to geology. Since the end of the military dictatorship of Augusto Pinochet in 1990, the country has developed a stable, multiparty political culture with what observers say is general consensus among the major power blocs about economic policy. ``Everybody is in agreement,'' says Costabal. ``Nobody wants to change the system.'' For one thing, under the current regime, the Chilean economy has grown steadily. Unemployment is now about five per cent and the government is predicting an inflation rate this year of 8.3 per cent.

Not surprisingly, foreign business executives have few gripes about such a pro-business environment. ``It's a pretty good place to do business,'' Drake told Maclean's last week. Furthermore, what investors say they especially prize about doing business in Chile is the ability to get quick decisions by government officials. ``People don't throw a lot of roadblocks in our way,'' Drake notes. David McMurdo, the company's operations manager, relates a story about a recent problem on a Friday with customs officials. A Quebrada official called the national director of the customs service in Santiago, who then ordered the local office to stay open all weekend to address the problem. At Cerro Colorado, it took only two years from decision to production to build a mine that employs 264 people and produces 44,000 ton of cathode copper a year. ``If this mine had been located in Canada, in terms of the environment, it would have taken a lot longer,'' says John. ``But it would have been built the same way.''

Still, some Canadian critics claim that the domestic mining industry is guilty of environmental dumping and that it is rushing to less stringent countries like Chile to escape tough pollution controls at home. For his part, Bob White, president of the Canadian Labour Congress, insists that any trade deal with Chile must include environmental and social safeguards. ``Trade can't just deal with property rights and the trading rights of multinational corporations,'' he insists. But Quebrada Blanca and Cerro Colorado, their owners maintain, were both built to North American environmental standards. That was less an ethical decision than a business one, according to Drake. He anticipates that environmental regulations in Chile will get tougher and that it makes more sense to build to a higher standard initially, rather than make expensive modifications down the road. Both mines use an efficient process of leaching and solvent extraction, which does not work with the type of copper ore found in Canada, that eliminates the need for costly--and polluting--smelter works. ``Most of the operations are in barren land'' with virtually no population centres nearby, says Ricardo Cortes, the publisher of Mineria Chilena, an independent trade magazine located in Santiago. ``Nobody's screaming at their front door.'' Both he and Anatol von Hahn, a vice-president of the Chilean/Canadian Chamber of Commerce, say Canada is becoming a difficult place for mining companies to do business. ``There are many more interests to satisfy,'' says von Hahn, who is also vice-president for Chile at the Bank of Nova Scotia.

Certainly, there is no arguing about the isolation of Quebrada Blanca. The nearby town of Ujina has a police post, a temperamental llama named Tatiana, and Emilio Bueno, an Aymara Indian who shuttles back and forth from Bolivia with souvenirs he sells to the miners. To gain access to the area, Cominco and Teck had to spend millions of dollars to construct 138 km of road, a 30-km water pipeline, and one of only three tertiary sewage treatment plants in Chile. The companies also built temporary housing at the site and permanent housing, offered to employees at subsidized rates, 240 km away at Iquique on the Pacific coast. But the most challenging complication is the high altitude. The local landing strip is 2.7 km long, but it can only handle light planes. In such thin air, engines do not run as well, which means the $70 million power plant has 10 turbines instead of the standard six. Even steam does not work the way it usually does, because it is not as hot. Neither do people run as well as they do closer to sea level. Because of distance and the need for gradual acclimatization, the mine uses a shift rotation that has the miners at the site for only seven days at a time. And while the food is good, there is no wine to finish off a meal because the effects of alcohol are magnified by altitude. ``At any remote site, there's always a question whether it should be dry,'' says Drake. ``At 4,400 m, it ceases to be a question.''

While the mining companies plot their next developments in Chile, B.C. Mines Minister Anne Edwards says that she is not worried that Canadian mining projects will suffer from the competition. ``The large Canadian investments in Chile reflect the overall stature of the Canadian mining industry,'' she said. And the companies say they have no choice but to go to where the ore is deposited. Says Drake: ``People buying a car may care where the car came from, but nobody cares where the copper in the car comes from.'' Nobody, perhaps, except Drake and the growing number of Canadians whose lives are tied to it.