Santiago, 4 April 2011: Reuters

World top copper producer Chile wants to boost exploration at a time when rich deposits are increasingly hard to find in traditional mining districts, but faces an uphill battle that will take years to bear fruit. Chile wants junior mining companies to list on its local stock exchange and better access local capital markets, following in the steps of Canada and Peru. Last month, the government also launched a $90 million fund to promote mining exploration by small and mid-size companies.

Still, mining experts and some politicians say the government should do more to lure juniors, especially by freeing up land in the hands of big miners like state-owned Codelc, to boost exploration.

Mining Minister Laurence Golborne told Reuters the government plans more incentives for juniors like a review of the tax code, but acknowledged changing exploration concession rules may be a lost battle.

"Making changes in the concessions regime of Chile is not an easy thing to do," Golborne said. "You have to deal with historical rights that people have."

Chile has lost ground in the past three years as a destination for exploration money, according to a survey by Canada's Fraser Institute among 500 mining companies. "There has been a policy of exploring very little ... a policy of not taking risk," said Santiago Gonzalez, former mining minister from 2008 to 2010 in the previous government.

The country, which is home five of the world's 10 largest copper mines, needs to overcome major obstacles such as the lack of water in mining areas, poor access to updated geological information and concerns over its infrastructure in a quake-prone region, analysts said.

In the far north of Chile, where some of the world's biggest copper mines are located, water scarcity has forced some companies to pump seawater miles inland, greatly increasing operational costs.

Chile also has to compete for funds other attractive destinations like Zambia and Peru, where huge metal deposits and a friendly investor environment are attracting more mining companies.

Mining companies invested about half a billion dollars in exploration in Chile last year, only around 5 percent of the world's total. That is seen thin for a country with one-third of global copper reserves and lagging spending in the United States, Peru and Australia, according to data from Metals Economic Group.

A NEW OPPORTUNITY?

Precisely those reserves and a business-friendly reputation could help Chile increase exploration at a time when miners are racing to increase output as copper prices soar. Chile is still recognized as a safe place to invest, a plus at a time moment when governments worldwide are stepping up intervention in commodities markets.

But if Chile wants mining exploration to surge, it has to bet on junior mining companies, analysts said, just as Canada and Peru did years ago when they encouraged small metal producers to list on their stock exchanges and raise money in their capital markets, boosting exploration in recent years.

"It's the small junior mining companies who are literally on the ground seeking the next deposit," said London-based Charles Cooper, an analyst at Oriel Securities.

While junior mining companies performed 38 percent of global mining exploration, compared with 44 percent of major companies, in Chile, the picture is quite different: junior mining companies only performed 14 percent of mining exploration, while 74 percent was done by big companies.

Neighboring Peru, the world's third-largest copper producer, has received more exploration funds than Chile in the last decade, pushed up by tax breaks and better access to capital markets for juniors.

Canada doubled its exploration investment in 2002 and 2003, following a scheme of tax benefits for junior mining companies, and the same thing could happen in Chile, said Andres Mac-Lean, executive vice president of Chile's state-run copper think-tank Cochilco. But it could take years.

Spending exploration has inched up in the last three years and Peruvian conglomerate Brescia said earlier this year that it was considering moving into exploration in Chile, which is starting to show some signs of improvement. Big miners also have some prominent projects in the pipeline.

Antofagasta Minerals approved last year a $70 million investment for a pre-feasibility study in its Sierra Gorda district in northern Chile. Collahuasi, owned jointly by global miners Xstrata and Anglo American, plans to spend $470 million in a 10-year exploration plan.

"What the government is doing will help to create a pool of investors ... and link them with Chilean mining entrepreneurs," said Juan Carlos Guajardo, head of Santiago-based mining think- tank CESCO. "But it will take some time for these actions to mature and have a real, effective outcome."

High copper prices help Chile budget

World No.1 copper producer Chile expects prices for its top export to remain high thanks to strong Chinese demand, and they could help nudge a projected fiscal deficit for 2011 into a surplus, Finance Minister Felipe Larrain said.

Larrain told Reuters there has been a "structural change" in copper prices, putting them at much higher levels. "Of course you will have a cycle, but with a different average trend rate. So we have made this jump and I think it is extremely unlikely we will go back," he said in an interview ahead of the CESCO copper industry meeting in Chile.

"I don't think we'll go back to the old days of copper below $1.50 (per pound) ... That is gone. This is good for the country but the important thing is we have to manage those additional flows well so that we don't create perverse macroeconomic effects."

Larrain is worried additional inflows thanks to near-record copper prices could further raise consumer prices at a time when costly oil and food imports are stoking inflation expectations, forcing the central bank to hike interest rates.

Higher copper prices have boosted inflows of dollar revenues to Chile, helping lift its peso currency to near three-year highs and prompting the central bank to intervene in the foreign exchange market and the government to trim public spending. Still, high prices could help Chile achieve a budget surplus in 2011 after the government increased spending to battle the 2008 global financial crisis and later to pay for reconstruction from a massive earthquake in February 2010.

"We have a very low fiscal deficit, and depending on the copper price, we may have a surplus," Larrain said, adding the government would funnel copper revenues when possible to replenish a rainy-day sovereign wealth fund to cushion Chile from any future downturns, as it did during the global crisis.

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