Lithium: Chile moves to vote on 3% lithium royalty bill

In a move to help grow state revenues from mineral production, a bill proposing a 3% royalty on lithium production has been presented to Chile’s lower house. The bill proposes applying the 3% royalty to the nominal value of minerals extracted for production levels of 50ktpy LCE or greater. Proceeds from the royalty will be used exclusively to undertake development works in the communities where the respective deposits are located, aiming to help mitigate the environmental effects produced by mining activity.

In a recent release, SQM stated its intention to produce 70kt LCE in 2020 as part of a strategy to grow its presence in China, as well as building strategic inventory. Assuming an average selling price of US$7,500/t Li2CO3, the royalty payments would create a total of US$15.75M revenue for the Chilean state. In addition to the existing sliding scale royalty applied by CORFO, the new royalty from an operational perspective would increase SQM’s OPEX by US$225/t LCE.

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For now, the proposed 3% royalty would only impact the country’s top lithium producer SQM who is estimated to have produced around 55kt LCE in 2019 (adjusting for double counting). However, in the near-term, Albemarle is also expected to become subject to the proposed scheme, as it looks to expand production to meet expected future demand growth from lithium-ion batteries.

As highlighted above, it is clear that the 3% royalty would have a relatively marginal impact, firstly on state revenues and secondly to producers’ gross revenues, when considering the proposed scale threshold and preceding lithium prices. This compares to the existing CORFO “sliding scale” scheme which has a much greater impact on total costs at roughly five times the financial impact per tonne of lithium carbonate produced. The additional OPEX impact of the 3% royalty is considered marginal and, importantly, highlights how producers would be better off with a standalone 3% royalty rate in place of the CORFO sliding scale scheme.

If implemented, a clear unknown will be the government’s tendency to alter the threshold or royalty rate in future, thus rendering it an added operational risk. But what is certain is that lithium’s contribution to state revenue will be a fraction to that of copper, indicating the new royalty could be a long-term strategic move on the government’s behalf, banking on strong demand fundamentals of lithium and higher prices forecast over the coming decade.

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This article was written by Jake Fraser. Please get in touch below if you wish to discuss further:

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