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Can Chile’s Gabriel Boric really nationalise the lithium sector?

The lithium mining sector was hit with some very bad news this week as Chile’s new president Gabriel Boric announced plans to bring local lithium miners under state control. Chile is planning to create a National Lithium Company to manage the country’s lithium resources. Chile’s Lithium Triangle is considered one of the richest sources of lithium globally, and the government is very aware of its strategic and financial importance.

Boric assumed office in Chile in March 2022, taking over from Sebastian Pinera. He beat right wing candidate Jose Antonio Kast in a second round run off on 19 December 2021, winning 55.8% of the vote. The youngest president in the history of the country, he was hand picked to run for office for Chile’s Broad Front in the wake of the turmoil around the creation of a new constitution for the country.

Resource nationalism is back in vogue in Latin America

Resource nationalism is now very much in vogue as governments sense the shift in emphasis globally away from fossil fuel production – still important – towards new sources of minerals and metals. We are seeing other countries like Indonesia bringing in export controls, and Mexico seems to have set the trend when it announced plans to nationalise its lithium industry last year.

It’s not a complete grab in Chile’s case, but its two primary lithium miners, SQM [NYSE:SQM] and Albemarle [NYSE:ALB], are now going to be expected to sit down at the table with the Boric government and renegotiate their concessions. It’s not over until the fat lady sings however: the plans still need to get through the country’s congress, and here Boric lacks a majority. Other elements of the government are known to be against the plan. Boric has already seen a landmark defeat on the country’s draft constitution and plunging approval ratings.

It casts something of a pall over the entire mining sector in Chile, with other mining companies now wondering whether similar plans lie in wait for copper, for example.

The Armchair Trader has met with several miners over the past week, none admittedly with direct exposure to Chile, but the consensus among veterans of the market is that this is going to spook investors. Capital will relocate to more market friendly jurisdictions wherever possible, as the risk component of Latin American mining ventures just went up a notch.

Mining industry insiders point to the example of Bolivia, which has potentially even larger lithium reserves than Chile, but which has already nationalised its own industry. This has led to a situation where miners and investors are happy to go elsewhere and the Bolivian lithium sector is now stagnant. It also plays into the hands of projects located in jurisdictions like the US, Canada and Australia.

Codelco gets nod to engage with lithium sector in Chile

Chile is going to use its state-owned copper behemoth Codelco to negotiate its participation with SQM and Albermarle. SQM itself used to be owned by the state, but was controversially privatised during the 1980s by the Pinochet military dictatorship.

Shares in SQM were down 29% over the last six months already. SQM shares were off by just under 2% over the five day trading picture on the back of a slight rally on Thursday. Albemarle stock was treading water Thursday, but it is still down over a third across six months. Shares have rallied slightly as value investors pick up some of the action in Albemarle.

Also on the table is the possibility of an OPEC-style lithium cartel, hatched between the left wing governments of Bolivia, Chile and Argentina.

From the perspective of investors, this has ramped up the risk profile of lithium miners explorers with any exposure or indeed concentration on lithium assets in countries where nationalisation is a likely option for governments.

Source: The Arm Chair Trader