It is no secret that the roof of the Chilean Andes is made of copper. For years, mining heavyweights have been aggressively exploring “porphyry alley”, a 2,500-kilometre string of copper deposits stretching along the mountaintops of northern Chile. As a result, Chile contains the largest copper reserve in the world and by the end of the decade, copper production is expected to double to 4 million tonnes - almost half of total world production.
What is often overlooked amid the copper boom is the country’s growing contribution to gold production. By the end of the decade, Chile expects to join the ranks of the world’s top ten gold producers as several new projects bear fruit. According to projections of the Chilean Copper Commission, Cochilco, Chile will produce more than 69 tonnes of gold in 2000, a 32% increase over 1996 levels and a 79% gain over 1994 production. Although some of this new output will be a by-product of copper mining, most will stem from the discovery of major gold deposits over the past 20 years. Many of these discoveries are located along the El Indio belt, a 175 km X 10 km corridor of copper and gold rich rocks in central Chile.
Not since the 18th century has gold played such an important role in the South American country. Then, a near-bankrupt Spain introduced economic reforms to encourage mining and trade in its colonies. These measures coincided with the discovery of a number of gold deposits in northern Chile and, by the first decade of the 19th century, annual gold production reached an all-time high of about 3 tonnes. With help from Chile, Latin America became the world’s largest source of gold.
But a number of factors conspired to devastate the growing industry. First, the mines were disrupted by a series of wars associated with Chile’s independence in 1823. Later in the century, Chilean gold miners fled to take part in gold rushes in California, Canada and New Zealand. Meanwhile, the growing demand for metals to feed the industrial revolution and the coincident development of new technology to process copper ore encouraged copper production at the expense of gold. By 1880, gold production had dropped to less than half a ton per year.
Almost a century passed before gold reemerged as an important commodity in Chile. The precipitous rise in the gold price during the 1970’s, ending with a peak of US$800 per oz. in 1980, provided the motivation for exploration. But it was the discovery of the El Indio deposit high in the Chilean Andes that is responsible for Chile’s current envious position among world gold producers.
El Indio sparks gold fever in Chile
In the summer of 1967, a group of prospectors exploring a remote section of the Andes Mountains in central Chile stumbled across some high-grade copper ore. They worked what is now known as the El Indio deposit throughout the summer, transporting their copper bounty down the mountain by mule. But it wasn’t until 1973, when the gold price was climbing, that a similar group of ‘pirquineros’ (high-graders) mined the deposit for its gold content.
Recognizing that these small-scale mines may be part of a larger gold province, the state mining agency, ENAMI, began a series of surveys over the surrounding belt of rocks in 1974. The results of the agency’s work showed that the area had potential for epithermal precious-metal deposits, a common source of gold in British Columbia, the western U.S. and Indonesia. At the time, Chile’s gold production was a scanty 3- 4 tonnes per year.
Just as in the 18th century, changes to the mining code in 1974 acted as a catalyst for increased gold production. The new code encouraged foreign investment and prompted a small Canadian mining company called St. Joe Minerals to dispatch a geologist to Chile on a scouting mission. In La Serena, the coastal town closest to El Indio, the geologist heard about ENAMI’s work in the nearby mountains and paid a visit to the site. The samples he collected returned values of close to 100 grams gold per tonne (extremely high-grade) and within a year, St. Joe had taken an 80% interest in the property and had launched an ambitious exploration program.
Although the program was successful in outlining a respectable gold deposit, it was the discovery of a “bonanza” vein grading 3,543 grams per tonne in 1979 that launched El Indio into the big leagues. Mining began almost immediately and the first concentrates from a 1,250-tonne-per-day mill were shipped in late 1981. El Indio became the first modern-day mine in Chile to have gold as the major component of production. This year, the mine is expected to produce 140,000 oz. of gold and 35,000 tonnes of copper. The nearby Tambo mine, which came into production in April 1995, will add another 175,000 oz. gold to 1997 output.
Like other major discoveries around the world, the El Indio find sparked an explosive rush for gold in Chile, particularly within the late Cenozoic volcanic rocks of the high Cordillera. The proof that large, high-grade gold deposits could still be found in Chile, coupled with favourable investment conditions, attracted exploration and mining companies from around the world. The story of gold in Chile was just beginning to emerge.
St. Joe Minerals, the owners of El Indio, were major players in this rush. They quickly assembled an extensive land package along the El Indio belt in the late seventies, including the Nevada property about 50 kilometres north of the new mine. At an elevation of 4,800-5,000 metres above sea level, Nevada was to become one of the most important gold deposits within the belt. But lack of interest from majors with deep pockets stalled exploration for years and almost killed the project entirely. First, South African powerhouse Anglo American Corp., St. Joe’s first partner, pulled out of the project. Subsequent attempts to attract new joint venture partners failed. In the meantime, St. Joe went through a series of ownership changes and was finally swallowed by Lac Minerals. Lac decided to proceed alone at Nevada, and drilled over 70,000 metres between 1992-95.
Meanwhile, the movers and shakers at Toronto’s Barrick Gold (then American Barrick) were beginning to rethink their conservative strategy of restricting operations to North America. With foreign investment rules loosening in geologically attractive countries throughout the developing world, Barrick began to see the logic of establishing off shore operations and started to shop around for acquisitions.
Barrick’s new strategy led them into a bidding war with Royal Oak Mines for control of Lac Minerals. In September 1994, Barrick captured Lac and its important land position around El Indio for $2.3 million, or $15.60 per share. In retrospect, the selling price looks cheap – since Barrick took control, reserves at the Nevada prospect (now called Pascua) have skyrocketed from 1.8 million oz. to 10 million oz. while resources stand at 6.7 million oz., a huge deposit by any (post Bre-X) standards. Largely as a result of exploration at Pascua and the Pierina property in Peru, Barrick’s reserve base jumped 40% to 51 million oz. last year.
And the potential to expand the Pascua deposit is “too tempting to be true”, says Alan Hill, Barrick’s executive vice-president of development. “This is going to be a very big deposit”, he says. The company is currently pumping $11 million into Pascua to expand reserves, including driving a tunnel through the lower portion of the deposit to investigate the potential at depth. Based on current reserves, Pascua is expected to produce an average of 400,000 oz. gold per year for 20 years at a cash cost of US$220 per oz.
There have been challenges. Pascua sits at an altitude of 5,000 metres, about 1,000 metres higher than the El Indio mine. It takes at least a day for workers coming in from the coastal town of La Serena to adjust to the thin air at this elevation. Barrick must also budget about 10-15% downtime to account for the viscous storms that lash these mountaintop locales. And not only is Pascua one of the highest exploration properties in Chile, it also straddles the border with Argentina. Although the two countries are working on a protocol to deal with cross-border exploration and development, Barrick has not yet been allowed to drill on the Argentinean side of the property. Hill expects the protocol to be signed by the end of the year.
The original El Indio mine that sparked Chile’s latest gold rush is now a mature mine with 17 years of operation behind it. But its discovery in the late 1970’s led to the exploration and redevelopment of several other major gold deposits including Choquelimpie, La Coipa, El Hueso, Tambo, Marte, San Cristobal and El Guanaco. More recently, Bema Gold opened the Refugio gold mine and, in partnership with Arizona Star Resource, is drilling off Cerro Casale, a major deposit in northern Chile. As a result of these and other projects, Chile’s gold production is expected to skyrocket, overtaking current production from the world’s ninth and tenth top producers – Peru (65 tonnes) and Brazil (64 tonnes).
Foreign investment in Chile’s Mining Industry
Although Chile’s mining potential has always attracted investment from outside the country, the past decade has been exceptional in this regard. More than 80% of the total foreign investment in Chile’s mining industry - $9.5 billion at last count - has materialized since 1988.
The catalysts for this investment boom were political and economic reforms introduced during the 1970’s and 1980’s coupled with rising prices for Chile’s two main commodities, copper and gold. In particular, new foreign exchange rules provided the legal framework that guaranteed the rights of foreign investors by establishing maximum tax rates and a minimum period before profits could be repatriated. The government’s current mining policy strives to promote private investment and increase productivity while protecting the environment through new regulation and investment in clean technologies.
This new policy has established Chile as a market economy and set a precedent for mining laws in other emerging nations. Indeed, the current trend towards globalization of the mining industry can be traced back to initial investments in Chile during the 1980’s. Favourable experiences there gave foreign companies more confidence in investing in other developing nations, including those in Southeast Asia and Africa.
But Chile cannot afford rest on its laurels. Competition among emerging nations for first-world mining capital is fierce and in many a miner’s eye, Chile is beginning to look ‘picked over’ and expensive. In 1996, foreign investment in the country’s mining industry plummeted to $886 million from $1.7 billion the year before as most of the copper megaprojects reached final development. Although this figure is expected to climb again with investments in the Collahuasi, Lomas Bayas and Yolanda projects, Chile’s ability to attract the biggest piece of the foreign investment pie may be on the wane.