AV the Future of Mining in Chile WEB

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CSIRO FUTURESwww.csiro.au

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Mining in ChileThe Future of


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ii The Future of Mining in Chile

Cover image: CODELCOs Chuquicamata open pit copper mine near Calama, Chile

AUTHORSMeredith Simpson (CSIRO Futures)Enrique Aravena (CSIRO Chile)James Deverell (CSIRO Futures)

COPYRIGHT AND DISCLAIMER CSIRO. To the extent permitted by law, all rights are reserved and no part of this publication covered bycopyright may be reproduced or copied in any form or by any means except with the written permission of CSIRO.

ACKNOWLEDGEMENTSIn the course of developing this report, CSIRO engaged with and received valuable input from a number ofstakeholders. We are especially grateful for the time and input provided by the following stakeholders:

AngloAmerican Chile

Antofagasta Minerals

Antofagasta Regional Government

BHP Billiton Chile

CICITEM (El Centro de Investigacin Cientco Tecnolgico Para la Minera)

COCHILCO (Comisin Chilena del Cobre)

Consejo Minero

CORFO (Corporacin de Fomento de la Produccin de Chile)

Fundacin Chile

INAPI (Instituto Nacional de Propiedad Industrial)

Komatsu Chile

Ministerio de Economa, Fomento y Turismo de Chile

Ministerio de Energa de ChileMinisterio de Minera de Chile

SERNAGEOMIN (Servicio Nacional de Geologa y Minera)

Universidad Catlica del Norte

Universidad de Antofagasta

Universidad de Chile


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PrlogoEste trabajo es el fruto del esfuerzo conjunto entreel Centro de Excelencia en Minera y ProcesamientoMineral de CSIRO Chile y CSIROFutures , el brazo deanlisis estratgico prospectivo de CSIRO.

El Futuro de la Minera en Chile cumple con uno delas misiones declaradas por CSIRO Chile, la de entregaruna hoja de ruta estratgica para la industria minera,contribuyendo as a desarrollar una visin compartidadel futuro de la minera en Chile, facilitando la tomade decisiones por parte de los actores relevantes de laindustria, gobierno y la comunidad cientca.

Esta publicacin presenta una radiografa del estadoactual de la industria, con sus oportunidades y desafos,en el marco de las mega-tendencias globales que laafectarn durante los prximos aos, estableciendoas mismo las potenciales direcciones estratgicas que

el pas puede tomar. As, a travs de escenarios futurosbasados en evidencia concretos, tanto positivos comonegativos, se facilita un lenguaje comn para fomentarun dilogo constructivo nacional que busque avanzarhacia un ideal comn de productividad y prosperidad.

En consecuencia, el propsito de este estudio no esentregar recomendaciones estticas, sino que ms bienalimentar una conversacin provechosa sobre el caminohacia adelante.

Imaginarse el Chile del futuro sin la minera no esposible. Construir el futuro de la minera en Chile pasapor quienes hoy en da, en el presente, contribuyena que este sector produzca y se desarrolle. Por esoagradecemos de manera especial a aquellas personas einstituciones que apoyaron este proyecto con su valiosaopinin, informacin y experiencia, en particular a losparticipantes del seminario llevado a cabo en Santiago elda de junio en conjunto con la Sociedad de FomentoFabril, SOFOFA.

Dr Orlando Jimnez DIRECTOR EJECUTIVOCSIRO ChileSantiago, Chile

James Deverell DIRECTORCSIRO FUTURESSydney, Australia

JUNIO DEL

PrologueThis work is the result of a joint effort between theCSIRO Chile Centre for Excellence in Mining and MineralProcessing and CSIRO Futures, the strategic foresightingarm of CSIRO.

The Future of Mining in Chile fullls one of CSIROChiles declared missions, to deliver a strategic roadmapfor the mining industry, contributing to develop ashared vision of the future of mining in Chile, facilitatingdecision-making by stakeholders from industry,government and the research community.

This publication presents a snapshot of the current stateof the industry, its opportunities and challenges in thecontext of the global mega-trends that will affect itover the next years, as well as establishing potentialstrategic directions that the country can take. Thus,through concrete evidence-based future scenarios, both

positive and negative, it facilitates a common languageto promote a constructive national dialogue that seeksto advance towards a common ideal of productivity andprosperity.

Accordingly, the purpose of this study is not to deliverstatic recommendations, but rather to help create afruitful conversation about the way forward.

It is not possible to imagine the Chile of the futurewithout mining. Building the future of mining in Chileis the responsibility of those who today, in the present,contribute to the production and development of thissector. This is why we would like to especially thankthose people and institutions that supported thisproject through their valuable opinion, information andexpertise, particularly to the participants of the seminarheld in Santiago on June in conjunction with theSociedad de Fomento Fabril , SOFOFA.

Dr Orlando Jimnez DIRECTOR EJECUTIVOCSIRO ChileSantiago, Chile

James Deverell DIRECTORCSIRO FUTURESSydney, Australia

JUNE,


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vi The Future of Mining in Chile


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IntroductionChiles mining industry is at a crossroads. Mining hasled the country towards greater levels of wealth andprosperity and is a large part of the reason why Chileis well on its way to being considered as an advancedeconomy. Chile is, by far, the worlds dominant producerof copper ore but this position should not be taken forgranted. Rising costs, declining productivity and risingsocial and regulatory pressure in the areas of communityengagement and environmental sustainability arehampering the sectors protability and ability to remainglobally competitive.

The industry can choose to continue on its currentpath and address these challenges through short-termsolutions that provide incremental improvements.Alternatively, it can identify the opportunities for step-change innovation within the changing global landscapein order to forge a new upward trajectory for economicgrowth for both the industry and the nation.

In this way, mining has the potential to act as a platformfor change in Chile. Through advances in scienticresearch and development and technological innovationit can address the challenges that not only hinder theproductivity of the industry but of the country, suchas rising energy costs. It can drive the growth of anew mining services sector that helps to diversify theeconomy. It can take a leadership position on issues suchas environmental and social sustainability. Changes suchas these will be vital for ensuring that Chile remains akey player within the global mining value chain over thecoming decades.

However, this sort of progress will not be possiblewithout successful collaboration across industry,government and the research community. There is a needfor these different stakeholders to unite behind a sharedvision for the future of mining in Chile and work togetherto move towards this ideal.

This report aims to provide a starting point for thedevelopment of this shared vision. It can help to create acommon language across stakeholder groups as well asprovide a common understanding of where the miningindustry currently stands, the changing global landscapein which it operates, and the potential directions it couldtake. This is done through an assessment of the currentstate of the industry, an overview of the major globalmegatrends that will impact the industry over the nexttwenty years, and a forward- looking scenario analysis.It is not the intention of this report to provide concreterecommendations but rather to help create a national

conversation about the way forward.Mining has given a lot to Chile. A shared vision, anappetite for innovation and strong leadership will ensurethat mining continues to drive economic growth for thecountry well into the future.


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viii The Future of Mining in Chile

High-Level Approach Primary Componentsof the Report

. Key challenges and opportunities facing the Chileanmining industry A high-level overview of thecurrent state of the mining sector in Chile based onan analysis of the most pertinent challenges andopportunities facing the industry, within the globalmining context.

. Global megatrends shaping the future of miningaround the worldA foresight analysis of the megatrends that arelikely to impact the global mining industry over thenext years. This includes geopolitical, economic,environmental, social, and technological drivers andtheir potential implications for Chile.

. Conceptual scenarios for the future of mining in ChileAn analysis of ve conceptual future scenarios for

the Chilean mining sector and the broader Chileaneconomy. These scenarios look forward over a twentyyear time horizon and are focused on how industry,government, and researchers can work together tocreate desirable outcomes.

. Using scenarios for strategy development Ananalysis of the different actions that can be taken todrive towards positive scenarios and mitigate risksassociated with the negative scenario.


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Identifying the most signicant challenges andopportunities for Chiles mining industry

Mining in Chile:Current Perspective


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The Future of Mining in Chile

Key Challenges and OpportunitiesWhile there may not currently be a clear consensus onthe future direction Chiles mining industry should take,there is a widespread understanding of the currentchallenges, and resulting opportunities, facing theindustry.

The challenges and opportunities outlined herehighlight the key themes that emerged from extensiveconsultation across industry and government as well as areview of existing research.

Each challenge and opportunity has implications acrossgeopolitical, economic, environmental, societal and/or technological dimensions. Some of them are uniqueto or driven by the mining industry while others haveimplications across other industries and the community.Innovation and commercialisation is different from theothers in that it is inherent in all of the other challenges

and opportunities that exist.These challenges and opportunities help to provide anunderstanding of the current position of Chiles miningindustry. Future strategies for the industry need toidentify ways to mitigate the risks associated with thechallenges and capitalise on the opportunities that exist.

Access to EnergyChile doesnt have any sizeable domestic petroleumsources; it has hydro-power and imports. Energy costsare also signicantly higher in Chile compared to othercopper mining countries.

Mining is the most energy-intensive industry inChile, responsible for over % of total electricityconsumption. Energy requirements for Chiles miningindustry are set to rise by % between and

.

Chiles energy costs are much higher than in othermining nations.

The mining industrys energy operating costs representup to % of total production costs, the highest levelregistered in Chile since .

Miners are beginning to realise they may need to investin building their own energy capacity, rather thanrelying on public infrastructure.

Chiles reliance on energy imports creates volatility inboth price and supply. Fossil fuels (oil, coal and naturalgas) account for % of the countrys total primaryenergy consumption and almost all of these fuels areimported.

There is signicant opportunity for growth inconventional hydropower in Chile but potential impactsof global warming , the lack of dams near mine sitesand community opposition inhibit growth in this area.

The government is committed to Non ConventionalRenewable Energy (NCRE) sources, introducing a lawspecifying that % of total production in new energycontracts must be provided by NCRE sources by .This goal was recently doubled to % by .

The government estimates that electricity generationfrom NCRE sources across Chile could increase from% of total capacity in to % of total capacity by

.

Access to WaterMost of Chiles copper mines are in the Atacamadesert - one of the driest places on earth and with highelevation. Water must be desalinated and pumped intothe mountains, a process that is both expensive andenergy-intensive.

Energy and Water

Human Capital

DecliningProduc vity

CommunityEngagement

EnvironmentalSustainability

EconomicDiversica on

Explora onand New Projects

Innovaon and Commercialisaon

T e c h n o l o g i c a l

S o c i e t a l

E n v i r o n m e n t a l

E c o n o m i c

G e o p o l i c a l

Industry Driven

Society Driven

12

8

4

02000 2002 2004 2006 2008 2010

Source: Cochilco, 2013

AustraliaCanadaChileChina

PeruUSAWorld

12.3

8.0

5.4

Energy costs are higher in Chilethan other mining na ons

c / k W H

1000

2000

3000

Mini-Hydraulic

0Wind Biomass Solar Geothermal

In process of qualifying

EQR approved, not yet built

Under construc on

In opera on

NCRE Projects Chile, 2011

M W


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The demand for water in Chiles mining industry isset to increase substantially, from Mm in to

Mm in .

Fierce competition for water use among the varioussectors of Chiles economy (e.g. mining vs. agriculture)has seen many mining companies invest in desalinationplants and is forcing the industry to consider theoptions of water purication and recycling, as well asthe use of saline water in its operations.

As a result of this increased commitment to waterefficiency, between and , on average,freshwater consumption in the concentration processfell from . m per tonne of material to . m/tonne.Consumption in hydro-metallurgical mineral processingfell from . m/tonne to . m/tonne over the sameperiod.

A number of companies, such as BHP Billiton, have

switched to desalination to avoid having to drain thewater table. Desalination plants and their associatedpipelines require signicant upfront capital investment.However, the main challenge is the ongoing energycosts associated with desalinating the water andpumping it from the coast to the mine sites. Usingdesalinated water in Chile costs, on average, threetimes more than using fresh water.

It can be argued that Chiles water troubles are, infact, caused by the energy challenges it faces. If newenergy sources are developed and energy costs decline,desalination will become a more cost-efficient option,

helping to solve the water challenges currently facingChiles mining industry.

Human CapitalChile faces a shortage of skilled labour, which is drivingup labour costs. Policies and investments in areas suchas education, training and immigration can be utilised toensure Chile has access to the labour and skills it needs.

Chile lacks an integrated, accredited system ofeducation stretching from primary school to PhD, inwhich credits are transferable at the appropriate levelsand consistent with international norms.

The inconsistency in quality across Chiles educationsystem has created an excess of professionals in areassuch as business management and accounting withinsufficient numbers of graduates in elds such asengineering and IT.

Mining is not a popular career choice for Chileanstudents because of distance to the job sites, thedifficulties of working in the mines, the sectorspoor image and discontinuous nancial support forstudents.

Chilean professionals working in the mining industrynow earn the highest salaries in Latin America and thesixth highest in the world.

Between and there will be a need for anadditional , workers, an increase of . % fromthe current workforce. The main gaps in human capitalare expected to be seen in the areas of maintenanceand xed plant and mobile equipment operators. Dueto a lack of programs that offer training in these areas,

mining companies and contractors must develop on-the-job training programs.

The government recognises the importance ofattracting talent from abroad in order to help growChiles economy, demonstrated by programs such asStart-Up Chile and a new immigration bill.

In , BHP Billiton and ten other mining companiescreated the Council on Mining Skills (CCM) to betteralign the needs of the industry with the programsbeing provided in Chiles educational institutions.

0

0.4

0.8

1.2

Concentra onProcess

Hydro-metallurgicalmineral processing

2000

2006

2012:350Mm 3

2020:500Mm 3

Demand for water in Chiles miningindustry is set to rise

Freshwater Consump on in Mining in Chile,2000 vs. 2006

Source: Villarino, 2012

Source: Cochilco, 2008

m / t o n n e

3


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Declining ProductivityAs costs continue to rise, one of the industrys biggestchallenges becomes one of productivity. This is an issuenot just for individual rms but one that threatens theglobal competitiveness of Chiles mining industry as awhole.

Declining ore grades mean that more ore must beprocessed to get the same quantity of metal. WhenEscondida began production in , average oregrades in Chile were . % copper. Estimates suggestthat ore grades have dropped to a level somewherebetween . % and % today, and are expected to fall toas low as . % copper by .

The need to dig deeper to access reserves is anotherfactor driving up extraction costs. For example,Codelco is investing US . billion in its El Teniente NewMine Level project to allow for extraction m below

the current operating level. Production costs have increased rapidly while growthin production volume struggles to keep up. Codelcosdirect cash costs increased by % between and

while production increased by %.

Productivity in copper mining in Chile dropped from apeak of tonnes of copper per worker in to tonnes of copper per worker in , a decline of %.

The issue of productivity is not unique to Chiles miningsector. Productivity levels for the nation (measuredas GDP per person employed) are the highest in Latin

America at US , in but remain well below theOECD average of US , for that year.

While Chiles mining sector faces a number of uniquecost challenges that need to be addressed to solve theissue of productivity, there are also factors that requiremore of a national approach, such as effectiveness ofthe education system and capacity for innovation.

Environmental SustainabilityMining companies in Chile must now meet localand international expectations in regards to theenvironmental impact of their operations.

Since the beginning of the s, environmentalawareness has had a signicant impact on policymaking activities in Chile.

The Environmental Framework Law was introduced in and the Environmental Impact Assessment System

began operating in .

In the government introduced signicant reforms,creating a Ministry of Environment, an environmentalassessment agency and a compliance agency theSuperintendencia del Medio Ambiente (SMA). In

the SMA imposed the maximum ne possibleon Barrick Gold ( billion pesos/US m), setting aprecedent for what the industry can expect in thefuture.

A new law introduced in obligates miningcompanies to reduce environmental and health hazardsrelating to the closure of mine sites.

Mining companies are increasing their commitment tosustainability in order to remain globally competitive.

All Codelco operations achieved ISO certicationby and a survey found that % of Codelcosclients considered this certication to be important.

A number of the biggest players in Chiles miningindustry have committed to implementing theSustainable Development Framework of theInternational Council on Mining and Metals.

The environmental challenges facing Chiles miningindustry are diverse and complex, spanning areas suchas water, emissions, biodiversity and waste disposal.Pressure from communities and regulatory bodies willcontinue to increase across all areas of environmentalsustainability.

The m ne imposed on BarrickGold in set a new record forenvironmental infringement in Chile

0

50

100

150

200

250

300

350

2007 2008 2009 2010 2011

Indexed Growth of Costs vs. Produc on for Codelco,2007-2011 (2007 = 100)

Direct Cash Cost (C1)

Produc on (volume)

Per Worker Produc vity in Copper Mining in Chile

42

89

106

146

99

0

25

50

75

100

125

150

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012 (e)

Tonnesof copper(perworker)

Source: Codelco, 2012

Note: 2012 represents esmated gures. Source: Hernndez, 2013


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Community EngagementMuch of the wealth from mining has been transferred toSantiago and Antofagasta. There is a large issue aroundensuring that the wealth accrued from the miningindustry transfers to the local communities most affectedby it. There is also a heightening need to engage thesecommunities to earn and maintain a social licence tooperate, in order to reduce risk.

In mining regions, GDP per capita is % higher, theaverage salary is % higher, and productivity levelsare % higher compared to non-mining regions.Poverty levels are also % lower in mining regions.However, mining regions experience lower educationlevels and per-capita expenditure on health is %lower compared to non-mining regions. There is alsoan increased level of overcrowding in housing in theseregions and higher levels of drug use and imprisonment.

Mining companies are expected to contribute toregional development in areas of operation andmust work closely with local communities to createdevelopment plans for local services and infrastructure.

As part of its Buen Vecino (good neighbour) program,Codelco works with social organisations and publicand private institutions near its operations to improvequality of education, social integration and to supportculture and local development.

Miners are increasingly required to seek and maintain asocial licence to operate across all stages of a projects

life cycle. Failure to do so can result in large nes, thesuspension of existing operations, or the delay or evencancellation of planned operations.

In the Chilean Government ratied theInternational Labour Organisation Indigenous andTribal Peoples Convention No. that seeks to ensurethat indigenous and tribal people are consulted andparticipate in decision making concerning their rights.

Economic DiversicationCopper represents over half of Chiles exports and asignicant proportion of GDP. This lack of diversication

exposes the countrys economy to enormous risk butat the same time presents an opportunity to develop aservices/knowledge-based economy in support of theglobal mining industry.

In , mining accounted for % of exports (byvalue), up from . % in . It also accounted forone-third of foreign direct investment in Chile.

The Hirschman Herndahl index conrms the lackof diversication in Chiles export portfolio. Chilesindex in was . . Other OECD countries withstrong mining sectors have index values closer to zero,indicating more diversied export portfolios: Australia. , Canada, . and USA . .

Minings share of GDP grew from just % in to% of GDP in , although this declined slightly to% in .

Due to this lack of diversication, Chiles vulnerabilityto commodity price shocks has increased and is anongoing problem. Chiles GDP has been shown to riseand fall in line with copper prices. Alvaro Merino,Sonami research manager, told MINING.com that foreach cent (US ) copper prices fall, the Chilean economyloses million, and the treasury loses close to million.

The lack of diversication has also made Chile relianton Chinese economic growth as China accounts foraround one-quarter of Chiles total exports (mainlycopper).

At the same time, the countrys specialisation in thisarea presents an opportunity to develop a knowledge/services hub for mining. BHP Billiton, Codelco and the

Chilean government, are currently working to developmining sector suppliers through a mining clusterprogram.

40.5%

9.9%

49.6%

2003

Mining

Agriculture, hunting, forestry, shing

Industry

60.0%

6.2%

33.8%

2011

Value Share of Exports by Sector in Chile

Source: Korinek, 2013

Source: Based on data from Meller, 2013

How Chiles mining regions compareto other (non mining) regions

GDP per capita

Average salary

Produc vity

Poverty

Educa on levels

Health expenditure

Overcrowding

Drug use

Imprisonment


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Exploration and New ProjectsFalling ore grades mean that existing projects alonecannot sustain growth for Chiles mining industry.Exploration and the development of new resources willbe required to ensure Chiles copper output doesnt beginto decline in the coming years.

% of exploration expenditure in Chile is directedtowards expanding the resources at existing mines,rather than searching for new opportunities, a guremuch higher than the global average of %.

In most mining countries, junior explorers play animportant role in the discovery of new ore bodies.However, in junior explorers in Chile accounted foronly % of total exploration spending, considerablylower than the global average of %.

Gaining access to land for exploration can be difficult inChile. The current concession system allows companiesto hold land indenitely with no obligation to explorethe grounds and this can limit exploration efforts. Tencompanies currently hold exploration concessionscovering almost % of Chiles exploration grounds.

Accessing capital is another major challenge facing junior explorers in Chile and there is a heavy relianceon foreign investment. In an effort to support long-term growth through the discovery of new mineraldeposits, the government is working on a proposedsystem that would encourage mining companies to sellshares on the stock exchange to raise investment andwould offer incentives to investors, such as capital-gains tax breaks.

Innovation and CommercialisationAs Chile lacks a culture of innovation, an opportunityexists to maximise collaboration between researchgroups, universities and industry in a way that providessocial and economic benet for all Chileans.

Chiles R&D expenditure grew by % between and (from CLP billion to CLP billion).However, this expenditure represented just . % of

GDP in , compared to regional leaders Brazil ( . %of GDP) and Uruguay ( . % of GDP).

Most R&D is nanced by the Chilean government andcarried out in the universities with few connectionsto the business sector. Business sector R&D spending(BERD) accounts for about % of Gross Expenditureon R&D (GERD). This is much lower than the mostdeveloped countries where BERD typically representstwo-thirds to three-quarters of GERD.

The majority of Chilean rms innovation spending ( -%) is on importing machinery with little investment

in internal R&D.

More emphasis is given to basic research, ratherthan productive or commercial oriented research,demonstrated by the lack of pre-competitivecollaborative research in Chile. As a result, Chile isunderperforming in relation to technology transfer and

the efficiency of its R&D expenditures. Declaring the Year of Innovation is just one ofmany positive steps that the Chilean governmenthas taken to try and build a stronger, more efficientinnovation system.

Chile World Average

Junior explorersshare of exploraonspending

Propor on of explora onexpendituredirectedtowards exisngmines

39% 26%

39%21%

Explora on in Chile vs. the Rest of the World

Source: Preston, 2013

1.2% of GDP

0.9% of GDP

0.3% of GDP

Chiles R&D expenditure as a percentageof GDP is low compared to other

countries in La n America

Source: Euromonitor Interna onal, 2013


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Five megatrends that are shaping thefuture of mining around the world

Mining:A Global Perspective


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The Future of Mining in ChileThe Future of Mining in Chile

Global Megatrends Shaping the Future ofMiningA megatrend is dened as a substantial shift in social,economic, environmental, technological or geopoliticalconditions that may reshape the way an industryoperates in the long-run.

Megatrends are cross-sectoral and occur at theintersection of many trends. A trend is a signicantpattern of activity typically occurring within an industrysector, societal sector or within a localised geographicregion with implications for decision making. Comparedto trends, megatrends have a higher impact and developover a longer timeframe.

The key characteristics of a megatrend include:

There is evidence that it is already occurring;

It is relevant to decision makers;

It is signicant and has far-reaching implications for anorganisation/industry; and

It will continue play out over the future time frame(and possibly beyond) of the foresight study.

Importantly, megatrends are not mutually exclusive andthe trends that make up one megatrend can inuence orcontribute to another. Showing the megatrends in a Venndiagram of overlapping circles helps to illustrate thisinterrelation.

The ve megatrends outlined in this report represent themost signicant global shifts that will have an impacton the mining industry over the next years. Someelements will have greater relevance in the short term,while others will grow in signicance over time.

From the eastward shift in the centre of economicoutput to the new resource business models that couldbe created based on recycling materials, all of thesemegatrends have both supply-side and demand-sideimplications and present specic considerations forthe Chilean mining industry. As the mining industrycontinues to become more globally interconnected, anystrategy for the future needs to give due consideration tothe global context and how Chile can remain competitivein this changing environment.

The InnovationImperative

The AsianCentury

The Era of Accountability

The Rise of Recycling

The KnowledgeEconomy


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The Asian CenturyOver the next twenty years, Asia will become the mostimportant region for the worlds mining industry,exerting signicant inuence across both supply- anddemand-side dynamics. The staggering pace and scaleof growth in the region has sparked a demand for rawmaterials used in infrastructure development, as wellas in the production of consumer goods for the worldsfastest growing middle class. This demand for mineralsand metals will also see Asia become responsible for agrowing proportion of global mining investment. It iswidely predicted that the growth seen in the region willcontinue over the coming decades, albeit at a slightlyslower pace, leading the mining industry further intoThe Asian Century.

ASIA IS BECOMING THE WORLD S ECONOMICHOTSPOTThe global economys centre of gravity is on a cleartrajectory towards Asia. By , four of the worldsten largest economies will be in Asia (China, Japan, Indiaand Indonesia) and Asia will account for over half of theworlds economic output.

Alongside rapid growth in the region, Asia willcontinue to become more open to the rest of the world,negotiating trade agreements that will play a key role inshaping the future global economy.

ECONOMIC DEVELOPMENT IN ASIA IS DRIVINGDEMAND FOR MINERALS AND METALSChina is already the worlds largest consumer of steel,

aluminium and copper, accounting for around %of global consumption for each of these metals. By

China will account for over % of global copperdemand. Indian demand for copper is forecast to grow at% per annum through .

This growth in demand is driven largely by rapidurbanisation in the region (particularly India and China)as each year around million people migrate from ruralareas to Asias cities. It is estimated that between and , developing Asia will require investments ofaround US trillion in national infrastructure capacityand US billion in regional infrastructure projects tosupport this rise in urbanisation.There is also growing demand for consumer productsmanufactured, in part, from minerals and metals, such ascomputers, mobile phones, jewellery and automobiles,driven by the rise of the worlds fastest growing middleclass.

ASIA S GROWING INFLUENCE ON SUPPLYChina is the worlds leading producer of black coal, ironore, gold, zinc, manganese, rock phosphate, rare earths,tungsten, and lead. Annual turnover in iron ore miningin China is expected to increase from US . billion

in to US . billion in while turnover innon-ferrous metal ore mining is predicted to grow fromUS . billion in to US . billion in .


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Production value in non-ferrous metal ore mining inIndonesia increased threefold between (US .billion) and (US . billion) and is expected toreach US . billion by . India has signicantmineral reserves as well, and has sought to remainprimarily self-sufficient in mineral production.

Asias role in production further downstream is alsogrowing in signicance. The turnover for Chineseproducers of basic precious and non-ferrous metals grewfrom US . billion in to US . billion in .Production is forecast to reach US . trillion by .China is also expected to continue to grow its output ofiron and steel from US . trillion in to just over UStrillion in . Asia has become the leading region forrened copper production and copper smelter output.

The growing demand for natural resources in China isalso driving investment in mining production in otheremerging economies, such as Africa, South America andcentral Asia. Chinese investment in Africas miningsector totalled US . billion in , a tenfold increasefrom the previous year.

THE PREDICTED SLOWDOWNEven though some are predicting a slowdown ineconomic growth in Asia, particularly in China, this willbe relative to the rapid pace of growth seen over the lasteight years. The ve year outlook by the InternationalMonetary Fund still has year-on-year economic growth at to percent for the developing Asia region comparedto economic growth in advanced economies of around

to percent.It is likely that as China develops it will follow the pathof most developed nations and transition to a moreservices-oriented economy. As a result, we may seethe importance of manufacturing decrease, reducingindustrial demand for raw materials in China. However,we are not likely to see this shift too dramatically overthe coming twenty years and any reduction in the sizeof manufacturing in China would likely lead to growth inthe manufacturing industry of another Asian nation, suchas India.

Asia will continue to be responsible for driving growth inend-user demand for metals and minerals as urbanisationin the region is set to climb at a rapid pace beyond and disposable incomes in the region will continue torise. Therefore, Asias dominance and inuence onmining, whether direct or indirect, is likely to be felt wellinto the twenty-rst century.


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CHILEAN PERSPECTIVE Demand from Asia will continue to drive demand forChiles minerals and metals.

China accounts for around one-quarter of Chilestotal exports, mainly copper. In , % of the

countrys copper exports were bound for Asia. Thisrepresents both enormous opportunity and risk forChiles economy.

China dominates global copper smelter productionand rened copper production, so is not only aprimary consumer of Chiles copper output but alsoa direct competitor in these activities.

Asian investment in mining, both in and outside ofAsia, also creates competition for Chiles miningindustry. At the same time, there is an opportunityto attract Chinese investment in the Chilean industry.

The Pacic Alliance will help to provide a gateway toAsian markets for Latin America. In addition, bothChile and Peru have signed free-trade-agreementswith China.

Peru and Brazil currently attract the bulk of Chinasmining investment in Latin America. Chineseinvestment prospects in Chile have suffered due toMinmetals failure to purchase a stake in the Gabymine. While an agreement had been reached in

, Codelco backed out of it due to political andsocial pressure. Chilean citizens (particularly workersfrom the mine) were concerned about the potential

effects of privatisation. If Chile wishes to benetfrom Chinese investment in its mining industry, astrategy needs to be developed for how to attractinvestment while appeasing the concerns of Chileancitizens.

The Innovation ImperativeA new wave of technology and innovation will berequired in the future, as the mining industry is forcedto nd ways to get more from less. Innovation hasalways been a key driver of the industrys success,improving efficiencies across exploration, extraction andprocessing. The importance of innovation will becomeparticularly prominent in the coming years as commodityprices come off their highs and the mining industry facesa new combination of challenges, the aggregate effectsof which threaten the future protability of the sector.Productivity improvements will not be gained throughtraditional approaches focused on moving more material,as mining doesnt just need better ways of doing things;it needs smarter ways of doing things. New innovationshave already begun to emerge and will continue to do soover the coming decades as mining companies look not just for incremental improvements on existing methods

but for entirely new ways of operating.THE CASE FOR IN NOVATIONThere is an abundance of evidence to support innovationas an important (often the most important) contributorto progress at a business, industry and national level.In particular, innovation can be linked to increasedproductivity levels.

Over the last fty years, the countries that have madea commitment to innovation have had much greatersuccess in making the transition from middle incometo advanced economies. One of the most important

factors required to achieve the sustained growth thatwill transition an economy out of middle income status isinvestment in human capital and innovation policies.

The World Bank writes that innovation has alwaysplayed a decisive role in the economic and socialdevelopment of countries: it is the main source ofeconomic growth, it helps improve productivity, it isthe foundation of competitiveness, and it improveswelfare.

MINING S INNOVATIVE PASTSince its early beginnings, the mining industry hascontinued to nd new, better ways of operating.Notable innovations have been seen across the entiremining value chain including geophysical explorationtechniques, cheaper and safer explosives, froth otation,ash smelting technology and SX-EW processing.

As production has moved fromcheap and easy to more difficult andexpensive, technological developmentis increasingly needed to solveeconomic and production problems,Giurco et al., .

We are starting to see a shift away from innovationfocused solely on nding ways to move more ore out


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of the ground and through the supply chain, as miningcompanies realise that this will not be enough to addressthe complex challenges they face.

INNOVATION HAS NE VER BEEN MORE IMPORTANTThe ten year period from to saw remarkablystrong growth in global minerals commodities marketsnot experienced for the previous half-century. As pricesrose, miners rushed to build new production capacity,investing heavily in capital. This has led to inefficienciesthat are now structurally ingrained into miningoperations and that hamper productivity.

Prots for the worlds forty largest mining companiesfell % in , while costs rose %, indicating anurgent need to address the productivity issues that havepreviously been overlooked.

The ten year period from to saw remarkablystrong growth in global minerals commodities markets

not experienced for the previous half-century. As pricesrose, miners rushed to build new production capacity,investing heavily in capital. This has led to inefficienciesthat are now structurally ingrained into miningoperations and that hamper productivity.

Prots for the worlds forty largest mining companiesfell % in , while costs rose %, indicating anurgent need to address the productivity issues that havepreviously been overlooked.

DRIVERS OF RISING COSTS AND DECLININGPRODUCTIVITY Declining ore grades In the mid- s copper gradeswere over % in Australia and around % in Canada.Australia, Canada and the USA currently have copperore grades of less than %. Global copper ore grades

are forecast to drop from . % in to just . % by.

Deeper deposits and complex ores Mining nowregularly reaches depths of over kilometre, with goldmines of the Witwatersrand eld in South Africa now atdepths of . kilometres. Furthermore, miners can nolonger rely on deposits with simple mineralogy and arebeing forced to deal with complex ores that are moredifficult to process.

Labour Mining must constantly compete for highlyskilled people with the necessary technical andmanagerial skills required to execute projects. Amongthe worlds top mining companies, reportedheadcounts grew by only % in while averageemployee costs increased by %. In Chile andAustralia, mining employees earn more than twice thenational average salary. The related issue of workersafety and increasing regulation in this area also bringswith it additional cost considerations.

Energy & Water Mining and minerals processingrequire signicant energy inputs. In Australia miningis the third most energy-intensive industry, behindtransport and manufacturing. South Africas


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mining industry uses % of all energy consumed inthe country and in Chile, over % of electricity isconsumed within the mining sector. Energy pricesare forecast to continue to rise over the next -years, making the development of alternative solutionsto fossil fuels increasingly urgent. The U.S. Energy

Information Administration predicts that between and the Brent crude oil spot price will increaseby %, the price of domestic coal will increase by %and natural gas prices will r ise by %.

Mining accounts for just under % of global industrywater consumption and many of the worlds minesare located in arid and semi-arid regions wheregaining access to water for use in mining is an ongoingchallenge. Existing solutions to this problem bring withthem a range of other challenges e.g. desalination ishighly energy intensive.

Looking forward, it is expected that both energy andwater costs will increase as companies move to moreremote regions in search of higher-grade deposits.There will also be costs associated with environmentalcompliance as governments introduce more regulation inthis area aimed at the mining industry.

A TECHNOLOGY DRIVEN FUTUREThere are a number of areas where innovation isbeginning to play a role in helping to solve miningsproductivity challenges:

Innovations relating to automation can help toaddress labour costs in mining from lower levelautomation where technology simply plays an assistiverole, through to full automation allowing for remoteoperation.

Data modelling/predictive analytics is the use ofhistorical data to model possible outcomes in futuresituations and has the potential to drive muchgreater efficiencies across mining operations. Forexample, the Common Mine Model (CMM) developedby CSIRO is a D data model of a deposit that integratesthe ow of data over the mine site and mining processto provide feedback on the face or operations.

Geologically intelligent processing involves anautonomous mining system capable of mining oreselected for grade and with an ability to sort ore as it ismined. Intelligent processing has the potential to speedup assessment of the viability of new ore deposits,select the most effective crushing and grindingtechnologies to enhance the processing performanceof an ore, keep people isolated from hazardousactivities, as well as reduce environmental impactthrough keyhole mining techniques.

Some mining companies have made signicantinvestments in renewable energy technologies. For

example, in , Barrick Gold opened its US millionPunta Colorada Wind Farm in northern Chile. Withrising energy prices and increased environmentalregulation, non-conventional renewable sources ofenergy will begin to make greater economic sense.

CHILEAN PERSPECTIVE The recent growth of Chiles mining industry hasbeen driven by a rise in pr ices, not output. Labourcosts in Chile have risen and are now on par withlabour costs in the USA and Canada, however outputhasnt grown in line with this increase. Issues such asdeclining ore grades and access to energy and waterare also of particular signicance to the Chileanmining industry.

There have been some signicant developmentsin Chile in the area of automation. For example,Codelco has been a pioneer in the area of remoteoperations. However, there is still progress to bemade in regards to the efficient use of technology inthis area.

While progress is being made through governmentinitiatives, Chile still lacks a culture of innovation

and underperforms in technology transfer andcommercialisation. Boosting productivity requires ashift in culture to get people to operate in new ways.

Changes to the R&D tax credit (Law . )introduced in have had a signicant impact. Inthe ten months since the new law was implemented, R&D projects with a cumulative value of around

US . million were certied, compared to a totalof just US . million of certied R&D projects overthe four year period prior to the new law.

A number of challenges exist regarding therelationship between academia and industry thatwill need to be overcome if the level of innovation isto improve.

Chile is one of the most economically andtechnologically developed countries in its region.Innovation will be one of the key factors responsiblefor helping with the completion of the countrystransition from middle income to high incomestatus.


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The Knowledge EconomyAs emerging economies rise as the mining powerhousesof the future, a lack of human capital and skills in theseregions will open up opportunities for developedcountries with more advanced mining skills to exporttheir knowledge. At the same time, the miningindustries of developed countries are facing majorproductivity challenges that will only be addressedthrough new expertise and innovation. The solutionsfor the future will be less about mining machinery andequipment and more about mining services and know-how. Regions with a history of success in extractiveindustries and a desire to invest in building expertisewill be best placed to capitalise on this opportunity foreconomic growth in the knowledge economy.

KNOWLEDGE AS THE KEY TO SUCCESSThe developed world is in the process of shifting to a new

economic model, in which knowledge will be the mostimportant currency. The knowledge economy is denedas production and services based on knowledge-intensive activities that contribute to an accelerated paceof technological and scienti c advance as well as equallyrapid obsolescence.

The global output of knowledge- and technology-intensive industries accounted for around % ofglobal GDP in , with knowledge-intensive servicesaccounting for the greatest share at %, and high-technology manufacturing industries accounting for %.

A companys health used to be judged based on itstangible assets (e.g. factories and equipment) but manyrms are now realising that success in a knowledgeeconomy is best derived through intellectual capabilities,rather than physical inputs. The productivity challengesfacing mining are seeing the focus of mining companiesshift away from machinery and equipment towardsgreater know-how.

Three decades ago advancedindustrial economies were dominatedby sectors that invested largeamounts in plant and machinery.

By contrast, the rapidly growing sectors of recent decades such aselectronics, pharmaceuticals andtelecommunications invest mainlyin R&D, software and informationtechnology, advertising and training,OECD, .

KNOWLEDGE SUPPLY DEMAND IN MIN INGThe centre of gravity for mining has shifted dramaticallyover the last two centuries, from developed todeveloping countries. The former mining powerhousesof USA and Europe (excluding Russia) that accountedfor over half of total metal mining value in the mid thcentury, now account for less than percent of worldmining.

Emerging economies such as Latin America, Africa andAsia have attracted signicant mining investment as theyare often associated with lower production costs. Moredeveloped regions therefore need to nd new ways tocompete.

Emerging economies, however, often lack the skills,technology and expertise (i.e. knowledge) requiredfor efficient exploitation of mineral reserves. They caneither invest in developing local capabilities, which maytake decades, or they can import the required skills andexpertise, usually from more developed regions withlong-standing extractive industries.

% o

f w o r l

d m i n i n g

0

10

20

30

40

50

60

706 resource rich developing countries (Chile, Brazil, Peru, South Africa, Zambia, DR Congo)

Europe

1850 1870 1890 1910 1930 1950 1970 1990 2009

USA China USSR/CIS Australia and Canada

Loca on of World Mining by Region, 1850 to Present

Note: World mining is measured as the total value at the mine stage of all metals produced in all countriesSource: ICMM, 2012 cing Raw Materials Group


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This dynamic is a key driver for the growing global METS(mining equipment, technology and services) sector. Anumber of regions around the world have developedas clusters of expertise in this eld, originally to servelocal markets. However, the knowledge-demand gapthat is being created as mining investments are directed

towards emerging economies provides a broader exportopportunity for suppliers in the METS sector.

FROM ORE TO MORENorth Ontario, Canada is an example of a region thatis home to a number of world-class METS suppliers. Adownsizing of the regions mining industry in the sled to the release of skilled labour and management,resulting in the formation of a number of small rmsand the development of a mining supply and servicescluster. The METS sector in Ontario now includesaround rms and organisations, and employsapproximately , people. Sales in totalled C .billion, of which around % came from the internationalmarket. While the Ontario region is still responsiblefor % of all Canadian nonfuel mineral production , itis leveraging latent expertise to move beyond primaryproduction and identify global industry needs that can beaddressed by its local suppliers.

More recently, Australias resources boom has seen thecountrys METS sector grow from sales of A . billionin - to sales of A . billion in - , with exportsales representing % of this total. While Australiasmining industry Gross Value Added grew by a compoundannual growth rate (CAGR) of around % between - and - , Australias METS sector global sales

grew by a CAGR of over % during the same period.

A number of countries/regions with strong miningindustries are in a position to leverage and build on theknowledge and skills they have to develop a thrivingMETS sector that can supply both the local industry andoverseas markets.

GLOBAL REACH, LOCAL BENEFITSA thriving METS sector means that local issues can beaddressed through local innovation, without the need toimport a knowledge base from overseas. This can provide

aggregate economic benets for a country as it seesgrowth not only in its traditional extractive industries(through innovation) but also in the newly created METSindustry.

In fact, innovation that occurs in the development ofmining-related equipment, technology and servicescan often also be applied to other industries, such asmanufacturing or agriculture, extending the sectorseconomic benets even further. Moving beyondproduction into knowledge-based activities can thereforeincrease economic diversication, helping to stave off thedreaded resources curse.

Successful mining clusters around the world (e.g.Sweden, Finland, Canada, and Australia) have shownthat there are a number of factors that play a rolein developing a prosperous, new, knowledge-based

industry. These include trade openness, a strongnational innovation system and a solid talent base. Oneof the most important factors, however, is the role ofinstitutions that facilitate cooperation and collaborationbetween industry, government, education and researchorganisations. There needs to be a commitment fromboth the public and private sectors to the development ofknowledge and skills if there is going to be an economy-wide transition into more knowledge-based activities.

GAINING COMPETITIVE ADVANTAGEProduction in emerging economies will continue to growas resources sector infrastructure is developed to accessabundant mineral and energy resources. This creates asignicant opportunity for more experienced regions tostep up and ll the gap in human capital and technology.As more suppliers enter the market, however, there willbe increased pressure on them to establish a competitiveadvantage. This will require ongoing investment ininnovation and R&D.

We are already seeing this in Australia where businessexpenditure on research and development in miningrepresented just . % of gross value added in - ,while in the countrys METS sector, R&D expendituretotalled over % of sales. The global mining industry is facing a number ofsignicant challenges relating to both inputs (e.g. energy,water, labour) and outputs (e.g. declining ore grades)that will require innovative approaches (not just newmachines) if they are ever to be solved. As a result, therms that get ahead in the knowledge economy and theglobal METS sector will be those that develop, throughinnovation, complete or integrated mining solutions,rather than just parts and equipment.

A NEW IP LANDSCAPE

Managing the ownership of knowledge is an increasinglycomplex issue in a world where knowledge is bothcreated (through cross-country collaboration) and tradedacross global markets. Intellectual property rights,

Indexed Growth of AustraliasMETS Sector vs. Australias Mining Industry

(1995-96 = 100)

Source: ABS, 2013; Tedesco and Haselne, 2010

0

100

200

300

400

500

600

700

800

1995 -96 2003 -04 2008 -0 9

%

Australian METSSector Global Sales

Australian Mining IndustryGross Value Added

(excluding explora on andsupport services)


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member performance against commitments relating tosustainable development.

FROM GUIDELINES TO MANDATESBeyond sustainability reporting, there are a numberof other global sustainability initiatives applicable tomining including the International Finance CorporationPerformance Standards, the UNs Guiding Principleson Business and Human Rights, OECD Guidelines forMultinational Enterprises, the Framework for ResponsibleMining and the Natural Resource Charter.

While many of the guidelines and initiatives relating toenvironmental and social sustainability have been partlyor wholly voluntary until now, this is likely to change inthe coming years. Increased awareness of the benets ofsustainable practices (and the damage that can be causedin the absence of such practices) has led to greatersocietal pressure and, as a result, an increase in theamount of regulation in this area.

Several countries have already adopted laws andregulations that mandate sustainability reportingincluding Australia, France, Italy, Malaysia, theNetherlands, and Sweden. The Minerals Council ofAustralia believes that the minerals resources sector isnow the most heavily regulated industry in the countryclaiming that mining approvals in the country can takeve to seven years to complete.

Putting a price on carbon, through emissions tradingschemes or other similar mechanisms, is another way ofindirectly regulating the environmental impacts of themining industry. More than national and sub-national jurisdictions have either implemented or are inthe process of considering carbon pricing mechanisms.

GLOBAL FRAMEWORKSMany of the worlds biggest mining companies nowboast an international footprint and are therefore subjectto international scrutiny. While there are a number of

disjointed sustainability initiatives, there is no primaryglobal standard-setter for the industry. In the future wemay see the development of a global regulator of mining,similar to the Basel Committee on Banking Supervisionin the banking sector, to allow for the creation of globalstandards for a global mining industry.

The World Economic Forums Mining and MetalsScenarios to report discusses a potential futurein which the world is divided and countries are denedeconomically by whether or not they belong to a GreenTrade Alliance. In this new world a metric has beencreated called GDP+ which incorporates environmental,sustainability and social indicators. While it is yet to bedetermined whether such a future will pan out, it doesappear that regulation concerning environmental andsocial sustainability will continue to rise at both a localand global level.

SOCIAL LICENCE TO OPERATEEnvironmentally and socially responsible practices areneeded to earn more than just a tick of approval fromthe regulators. Such practices are also required toearn and maintain community support and approval,often referred to as social licence to operate. Thebenets from a mine site are expected to ow downto all community stakeholders through improvedinfrastructure, employment and training opportunitiesand access to better services, such as healthcare. At thesame time, mining companies are expected to minimisethe detrimental effects (often environmental) of theiroperations.

While the budgets for mining projects continue totighten, community expectations are constantlyexpanding. As a result, mining companies will have tond smarter ways to ensure that nearby communitiesare affected in a positive way by the presence of theirmining operations. For example, when developing a newmine site, mining companies could consider how their


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infrastructure needs (roads, housing etc.) align with theinfrastructure needs of the surrounding communities, inorder to establish development plans that are mutuallybenecial without adding signicantly to project costs.

Where regulations fail to meet community standards,local residents will often take matters into their ownhands, as was seen when citizens in Chile becameconcerned about the Pascua-Lama gold mine and theeffect it was having on the water supply and glaciers.

ECONOMIC DEVELOPMENT LEAD S TO GREATERLEVELS OF CONCERNStudies have shown that environmental concern canbe linked to a countrys wealth. Mining is alreadyunder signicant pressure to improve in the areas ofenvironmental and social sustainability and this pressurewill continue to grow as a number of mining operationsexist in highly populated developing nations across Asia,South America and Africa. In fact, the ban on open pitmining enforced in the South Cotabato province in thePhilippines in indicates the level of environmentaland social concern that already exists in many developingnations.

MINING NEEDS TO LIFT ITS GAMEIn terms of sustainability reporting mining is currentlyleading the way, with % of the industry reporting oncorporate responsibility initiatives. However, in regardsto taking action other indicators suggest that the industrystill has a long way to go. For example, in the CorporateResponsibility Magazines Best Corporate Citizens

of , only one mining company Freeport-McMoranCopper and Gold Inc. features in the list. By comparison,a number of oil and gas companies can be found in thetop list, including Chevron, ConocoPhillips and ExxonMobil.

Public opinion of the sector as a whole is poor and manyNGOs, such as Oxfam and Friends of the Earth, havecampaigns specically targeted at the mining industry.Mining has a signicant reputational issue that willrequire effort above and beyond minimum/mandatoryrequirements if it is to foster more widespreadcommunity support.

Just as mining companies around the world have madeworker safety a top priority over the last twenty years,they must now apply that same sense of commitment andquantitative targets beyond employee wellbeing to thewellbeing of the environment and the communities inwhich they operate.

THE BOTTOM LINECorporate responsibility doesnt just have to be aboutappeasing the regulators and the environmentally andsocially minded; it has also been shown to contribute toa rms nancial performance. A Harvard Business Schoolstudy found a clear link between environmental andsocial sustainability and economic performance over an year period. In addition, a recent study shows that

one in every eight individual investors is willing to forgonancial returns to achieve ethical principles.

A growing demand for sustainably sourced materialswill also see investment ow to companies with a trackrecord in sustainability. Certication programs acrossindustries such as construction and jewellery are leadingto greater concern for how minerals and metals havebeen sourced. For example, in order to achieve a green

building credit under BREEAM (an assessment methodfor rating the sustainability of buildings), the HandballArena for the London Olympic Games used coppersourced from the Minera Escondida mine in Chile, due tothe mines ISO certication and the existence of acorporate responsibility policy.

This megatrend also brings about new opportunities forcompanies in areas such as carbon sequestration, cleancoal technology, renewable energy, water-efficiencytechnology and desalination. In the Era of Accountabilitymany companies will just be looking for ways to surviveand carry on with business as usual. However, the

companies that embrace the trend towards sustainabilityand adapt to capitalise on the opportunities it presentswill experience the greatest success.

CHILEAN PERSPECTIVE Chile faces a number of environmental challenges,particularly in relation to access to water and tailingsdisposal.

As Chile transitions to a developed economy it islikely that its citizens will continue to demand morefrom the companies operating in their backyard.

In the absence of strong regulations in this area,mining companies will have to self regulate in orderto avoid potential negative consequences, as seenwith case of Pascua-Lama.

Chile has voluntary reporting standards but nomandatory standards for reporting sustainability.However, the majority of major mining companiesoperating in Chile, including Anglo American,Barrick, BHP Billiton, XStrata and Codelco, aremembers of the International Council of Mining andMetals which was founded to improve sustainabledevelopment performance in the mining industry.

As members of the ICMM these companies have acommitment to conduct sustainability reportingaccording to the Global Reporting Initiativeguidelines.

In the Chilean Government ratied theInternational Labour Organisation Indigenous andTribal Peoples Convention No. a legally bindinginstrument that seeks to ensure that indigenousand tribal people are consulted and participatein decision making concerning their rights. Thisessentially makes earning a social licence to operatean almost mandatory part of the approval process

for any mining project.


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The Rise of RecyclingWith declining ore grades and rising mining productioncosts, the mine of the future may be increasinglyconcerned with materials that lie above, rather thanbelow, the earths surface. We can expect to see a riseof recycling as many recyclable materials contain richand accessible mineral content. For example an open pitmine will yield between and grams of gold for everyone tonne of ore body extracted. This compares to grams of gold yielded by one tonne of discarded mobilephones and grams of gold yielded by one tonne ofcomputer c ircuit boards. While pr imary productionis still strongly favoured today, mineral scarcity and arange of other factors indicate that recycling is goingto play an increasingly signicant role in internationalcommodity markets and global supply chains in thefuture.

MINERAL SCARCIT Y POINTS TO SECONDARYMATERIALSRecycling rates are still fairly low due to the relativelylow efficiencies in the collection and processing ofdiscarded metal-bearing products, limitations ofrecycling processes, and the relative abundance andlow-cost of primary materials. For example, copper is

% recyclable without loss of performance and %of all copper mined over the last , years is stillin use somewhere today. Yet less than one-fth ofglobal rened copper production comes from secondarysources.

The ratio of secondary to primary production is likely toincrease as a recent study nds that mineral scarcity is abigger issue than energy scarcity. Total non-renewableenergy resources (that can power recycling plants) areexpected to last the world another years while totalmineral resources will last years.

When the demand for certain minerals exceedsproduction levels, recycling could be one way to ll thegap. For example, copper reserves are expected to meetglobal demand until around , after which there

will need to be a reduction in copper consumption or anincrease in secondary copper production.

SUBSTITUTES V S. SECONDARY MATERIALSA noteworthy trend running concurrently to the Rise ofRecycling megatrend is the rise of substitute materials.Nickel pig iron was developed in China as a cheaperalternative to pure nickel for use in the production ofstainless steel. Nickel pig iron usage accounted for %of Chinese stainless steelmaking raw materials in , upfrom % in . Graphene (a single-atom thick sheetof hexagonally-arranged carbon atoms) is being toutedas having the potential to act as a substitute for silicon,steel and even copper due to its exibility, strength andthermal conductivity. And with a density similar tothat of gold, tungsten is being used as a substitute forgold in jewellery.

While there is no doubt that the expected future mineralsupply decit will create a need for alternatives tomined ore, the true potential of a number of identiedsubstitutes (e.g. graphene) is yet to be determined andthere will often be limitations to their applications orother issues that reduce their favourability. For example,nickel pig iron has been labelled dirty nickel due tothe poor environmental outcomes of the productionprocess.

Due to the widespread understanding of the basicenvironmental benets of recycling as well as thegrowing strength of a number of other drivers, it is likelythat secondary materials will be responsible for lling a

signicant proportion of the supply decit created in aworld with increasing mineral scarcity.

THE KEY DRIVERS OF RECYCLING Abundance of some energy resources The worldhas an abundance of certain energy sources includinguranium, coal and natural gas that can supply theenergy needed to convert anthropocentric wastestreams into useful materials.

Rising energy costs and a demand for more sustainablemining practices While there is an abundance of

Global Demand

Global Producon

P r o d u c o n v s

. D e m a n

d ( M t C u

/ Y e a r )

0

9

18

27

36

45

2010 2020 2030 2040 2050 2060 2070 2080 2090

Projected Global Copper Demand and Mine Produc on to 2090

Source: Mudd et al., 2012


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Manufacturers will be held more responsible for therecovery of their products (either through incentives toact or punishment for non-compliance);

Collection systems will improve to involve less effort onthe part of the consumer; and

Public awareness will increase around the benets ofrecycling a broader range of products (beyond currentcommon recyclables such as aluminium cans, plasticbottles and newspapers).

RECYCLING AS A GLOBAL MARKETRecent decades have seen the emergence of the recyclingindustry as a global business with international marketsand extensive supply and transportation networks. Theworld market for post-consumer scrap metal is estimatedat million tonnes per year while paper and cardboardis around million tonnes annually, representing aglobal value of at least US billion per year. World

trade in copper and copper alloy scrap has increased bymore than percent over the last two decades.

China has recognised the value of secondary sources,creating a tax regime that facilitates access to morerecycled copper at lower prices. Chinas Ministry ofFinance allows duty-free treatment of copper scrapimported into China, while imposing heavy taxes onexports of copper scrap from China. This has seen thecost of copper scrap and prices for downstream productsincrease for producers in the US and Europe, anddecrease for producers in China.

As recycling grows, we may see an entirely new industrymodel emerge in which materials are controlled centrallyand are then loaned, rather than bought, by individualcompanies. Rather than purchasing materials such ascopper and aluminium, these materials could be loanedfor a lower cost with the promise that they would bereturned at the end of the loan period. While this is onlyspeculative and it will likely take more than years forthis aspect of the Rise of Recycling megatrend to come tofruition, it does demonstrate the potential for recyclingto completely reshape global commodity markets.

CHILEAN PERSPECTIVE Recycling and other substitutes for copper ore havethe potential to create new/increased competitionfor Chiles mining industry.

Chile has signicant expertise in regards to copper,one of the most recyclable materials in existence,but has little expertise in copper recycling. There isa potential opportunity to apply Chiles extensiveknowledge relating to smelting and rening copperore to the secondary copper production supplychain. While there may not be the economies ofscale required to make copper recycling a newindustry in Chile, knowledge could be developed inthis area and then exported to other regions, such asAsia, as part of a growing mining services sector.


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Scenario AnalysisScenarios are evidence-based narratives of the world ata future point in time. They help decision makers thinkabout futures to guide strategic directions and to betterunderstand trade-offs between possible decisions.

Scenarios also provide a means for clearlycommunicating a wide range of possible outcomes andthe consequences of each. This can be used to buildconsensus across a diverse set of stakeholders by puttingthese outcomes in the appropriate context for individualstakeholders.

This report includes ve scenarios for the Future ofMining in Chile: a baseline, three positive scenarios, andone negative scenario. These scenarios were craftedfrom an understanding of the current state in Chile andpossible ways that the global mining megatrends couldimpact Chile in the future.

In general, scenarios are more useful for broadeningthinking than giving a strong prediction of what willhappen in the future. The scenarios presented in thisreport are conceptual; no conclusive evidence exists thatone scenario is more likely than another.

Scenarios provide a framework for thinking aboutallocation of scarce resources (labour, capital,government expenditure, etc.) across a range of possiblefutures. By identifying common features across scenarios,a long-term strategy can be formulated that optimisesresource allocation under the widest range of scenarios.

Scenario planning is useful not only to understandpossible futures and react to them, but also to guideproactive actions that will inuence ideal outcomes. Eachof the positive scenarios includes a set of high-level keyactions to drive the associated outcomes.

Scenarios can be used to identify major risks associatedwith negative futures. The negative scenario in thisreport looks at the current weaknesses and indicatorsthat must be addressed to avoid the consequences ofthese scenarios.

Scenario CharacteristicsSTART WITH A BASELINE

The Uncertain Future scenario is a baseline thatdescribes a likely set of future conditions if no signicantactions are taken to inuence outcomes. This baselineprovides a point of comparison for the other scenarios.The timeframe for the outcomes described in all of thescenarios is roughly the next years.

EXTREMES

The ve identied scenarios for the future of miningin Chile represent a diverse set of possible outcomes.While it is unlikely that any of these scenarios will playout exactly as stated, by looking at extreme cases we canmore clearly illustrate the trade offs between differentscenarios.

OVERLAPPING

The scenarios presented in this report are not meant tobe strictly mutually exclusive, and contain some overlap.For instance, the outcomes in the Mining Powerhousescenarios would not preclude the outcomes described inStrong Services and in fact, the two scenarios could beconsidered complementary.

IDEAL MAY BE A COMBINATION

This report contains three predominately positivescenarios, each with different characteristics thatwould be benecial to Chile in the long run (Mining

Powerhouse, Strong Services and SustainabilityLeader). An ideal future could include some aspects ofall of the positive scenarios.

A B

C D

AB C

D

A B


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Scenarios for the Future of Mining in Chile

Scenarios Economic Drivers and Output

Mining Powerhouse

Collapse of Copper

Demand for copper remains strong and Chilean miners usetechnology and innovation to increase productivity, reducecosts, and remain globally competitive. Mining prots continueto drive growth in the Chilean economy and foreign investmentfuels a new wave of mineral exploration.

Chile diversies its economy through the development of astrong knowledge and services economy built on innovation.Mining services (METS) pave the way for ICT and other serviceindustries. This creates export opportunities and bolsters Chilesregional and global trade.

A national approach is taken to developing Chiles reputation asa world leader in sustainable mining practices. A commitmentto green technology and innovation sees Chile become a majorexporter of technology and services relating to sustainability.

This scenario is based on Chiles current trajectory. In thisscenario Chiles economic growth levels off as demand forcopper stabilises and costs continue to rise. Chiles miningservices industry grows slowly and mining companies continueto import labour, technology and services. Efforts to develop athriving national innovation system are hampered.

Chiles copper industry fails to remain globally competitive asdomestic labour and energy costs rise. Lower cost competitionemerges in developing countries and the rise of recycling andpotential substitutes squeezes out demand for raw copper.

?

Strong Services

Sustainability Leader

Uncertain Future?

EconomicGrowth

EconomicDecline

Knowledge / ServicesDriven Economy

Resources / LabourDriven Economy


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Mining Powerhouse

Demand for copper remains strong and Chilean minersuse technology and innovation to increase productivity,reduce costs, and remain globally competitive. Miningprots continue to drive growth in the Chilean economyand foreign investment fuels a new wave of mineralexploration.

KEY CHARACTERISTICS Mining remains a major industry in Chile, continuing todrive both GDP growth and exports.

Strong global economic growth continues to fueldemand for copper and copper prices remain level orslowly increase. Decreases in Chinese growth rates areoffset by rapid growth in India and other developingcountries.

Multi-factor productivity (MFP) in Chiles miningsector rises and becomes comparable to MFP in otherdeveloped mining countries such as the United Statesand Australia. This is driven by research, innovation,and use of advanced technologies in automation,remote operations, advanced processing, and smartinformation platforms.

Increased production of unconventional oil and gasresources drive down global energy prices, reducing oneof the key input costs for the Chilean mining industry.

A new wave of mineral exploration is driven by thedevelopment of a national pre-competitive geosciencesdatabase and the reformation of exploration rights.

Research in deep exploration technologies and in-situmining allows deeper and more difficult resources tobe mined protably.

Mining companies partner with government anduniversities to make large investments in human capitaldevelopment.

Copper remains competitive against potentialsubstitute materials.

OPPORTUNITIES AND CHALLENGES

KEY SUPPORTING MEGATRENDS The Asian Century

Innovation Imperative

Exploration

HumanCapital

EconomicDiversification

Access toEnergy and Water

Productivity

Benefit forCommunities



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Mining Powerhouse

Key Actions to Drive OutcomesPRODUCTIVITY GAINS THROUGH TECHNOLOGYINNOVATION Chilean miners continue to drive productivitythrough the use of automation and successfully applyautomated solutions as they convert from open-pit tounderground mines to pursue deeper resources.

Mining in the cloud becomes a reality as Chileanminers develop remote operations centres in majormetropolitan areas to take advantage of networkeffects and a skilled labour force. These centres arecapable of controlling mine sites and operations

nationwide. Mining companies develop common mine models thatallow a single integrated mine model to be used todrive operations across the value chain.

Mining companies develop and deploy control systemsthat integrate seamlessly with the mine model fornear real-time optimisation of both excavation andprocessing at an increasingly granular level.

Intelligent processing plants can analyse ore content inreal time and feed ore grade data into the mine model.Processing can also be optimised based on external

conditions such as commodity spot prices and currenttransportation costs.

SOLVE THE ENERGY AND WATER CHALLENGE Research in dry processing techniques, seawaterprocessing, water reuse, and water conservationmethods reduces water feedstock requirements,driving down energy requirements and costs.

The central electrical grid (SIC) and northern electricalgrid (SING) are integrated, allowing northern miningoperations to use the souths hydropower during wetyears.

Research into desalinisation efficiency drives downwater costs by reducing energy requirements fornorthern desalinisation plants.

Chile reconsiders its policy on energy regulation andbecomes a leader in market-driven energy solutionsthat also account for the natural monopoly/oligopoly inenergy generation.

NEW EXPLORATION / INVESTMENT Chilean miners collaborate with SERNAGEOMIN todevelop a national pre-competitive geo-scienticdatabase similar to Geosciences Australia that

integrates a wide range of geosciences data and makesit available online.

Chile supplements foreign direct investment withdomestic investment through the development of a

resources bourse, perhaps in conjunction with otherPacic Alliance members.

Hyperspectral core analysis (using tools such as CSIROsHylogger) gives insights into the characteristics ofgeological and mineral systems and the potential tomore rapidly develop new resources.

Research in deep-drilling technology, advanced drillsensors, large-scale geophysical analysis (e.g., ASTERmapping), and D resource modelling allows deeperand more difficult resources to be protably mined.

ENVIRONMENTAL SUSTAINABILITY AND SOCIALBENEFIT

Development of in-situ mines brings Chile closer to theconcept of the invisible mine and allows access todeeper resources without the environmental damageassociated with open cut mines.

Chile develops a national vocational training programto developed human capital in mining-related skilledlabour.

Current strengths to capitalise on andindicators that support this scenario

Longstanding expertise in mining, especially copper.

Signicant mining investment expected between nowand approx. US billion.

R&D expenditure has increased over the last years.

Demonstrated ability to use desalination as a means toaccess water.

Demonstrated ability to incorporate remote operationinto mine site operations.

Risks and challenges associated with thisscenario

Exposure to global copper demand and prices a largedecline in either would have a signicant impact on theChilean economy.

Lack of economic diversication and a two-speedeconomy a highly successful resource-dependentexport economy will likely face rising input prices anda strong currency which will make it difficult for otherindustries to complete globally.

Opportunity cost capital invested in mining activitieswill be at the expense of other opportunities such asnovel innovations and new markets.


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OPPORTUNITIES AND CHALLENGES

KEY SUPPORTING MEGATRENDS Innovation Imperative

Knowledge Economy

The Rise of Recycling

Strong Services

Chile diversies its economy through the developmentof a strong knowledge and services economy built oninnovation. Mining services (METS) pave the way forICT and other service industries. This creates exportopportunities and bolsters Chiles regional and globaltrade.

KEY CHARACTERISTICS Chile builds a more diversied economy through thedevelopment of a thriving and globally competitivemining equipment, services, and technology (METS)sector based on strong research and innovation. Thisaccelerates economic growth and reduces dependenceon imported mining services.

Capitalising on successes in mining services, Chileseconomy ourishes which encourages stronginnovation and investment in additional serviceindustries in areas such as ICT, agriculture, aquaculture,forestry, and energy.

Chile exports services, specialised skills, and innovativetechnologies throughout Latin American and todeveloping mining countries around the world,strengthening its exports and terms of trade.

Santiago and Antofagasta develop into globalinnovation hubs with world-class research universities,strong entrepreneurial cultures, access to globalventure capital, and the creative classes. Santiagocentres around ICT and high-technology servicesand Antofagasta around mining and energy-relatedinnovation and services.

The Pacic Alliance strengthens and increases tradebetween Latin America and Asia. This gives Chile thescale necessary for advantageous terms of trade.

Chile fosters cultural change towards innovation andrisk-taking through the development of government,industry, and university programs to encourageentrepreneurship and investment.

Exploration

HumanCapital

EconomicDiversification

Access toEnergy and Water

Productivity

Benefit forCommunities



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Strong Services

Key Actions to Drive OutcomesMINING SERVICES Development of Antofagasta as a world-leading miningresearch, education, and innovation precinct, includingboth a strong university applied research program andvocational/technical training programs. Partnershipwith major mining companies to create a living mineresearch centre. Industry, SMEs and researchers areall co-located here and collaborate on fundamentaland mission-directed research, through a strongpartnership model, similar to Australias CRC program.

Expansion of BHP Billiton/Codelcos Proveedores deClase Mundial program into more innovative andtechnology-oriented services.

INNOVATION AND BROADER SERVICE S SECTOR Develop a series of industry precincts or collaborativeresearch centres that act as innovation hubs and bringtogether industry, university researchers, government,and SMEs in core Chilean industries: agriculture,forestry, aquaculture, winemaking.

Create an ICT services incubator (using the Techstars/Y-Combinator model) in Santiago that provides commonfacilities, support, funding and mentorship for

entrepreneurs. Universities bolster their technology transfer officesand build programs that provide incentives to staff andstudents to commercialise research.

EDUCATION AND HUMAN CAPITAL Invest in the development of multiple world-class (top

) science and research universities.

Foster a cultural shift that encourages more PhDsto move into industry and facilitates a strongerrelationship between the university researchcommunity and industry research groups

Creation of a regional vocational program, modelledon Australias TAFE system jointly funded bygovernment and industry that prepares workers forthe transition from resources to service-related jobs.

Create a researcher and skilled labour exchangeprogram with other countries with common industriesand challenges, such as

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