Chile: Analysis Of The New National Lithium Strategy: Nationalization Or An Opportunity For Private Companies?

Just a couple of days ago the Government of Chile released the National Lithium Strategy ("NLE"), perhaps the most important announcement regarding lithium that has been made in the last 40 years, and there are already several national and international media outlets that are talking about a "nationalization" of lithium companies. However, the NLE does not imply the nationalization of these companies, nor does it imply making changes that do not have legal support or that are not the result of an agreement with the companies involved.

What is the National Lithium Strategy?

The NLE is a strategy, not a policy and much less a new institutionality that regulates lithium. It is a set of general and high-level principles and ideas, which aim to promote the development of the lithium industry, based on public-private collaboration. Notwithstanding the fact that several of these principles are ideas associated with the leftist coalition that currently governs Chile, the State and its companies will require agreements and approvals from different actors, including lithium producing companies and Congress, where the government does not have the necessary majority to push through certain reforms that would be necessary to implement the NLE.

It should be noted that so far very few details have been disclosed regarding the NLE, which is of a general nature. From its mere reading there is little information that can be drawn; therefore, giving an informed opinion requires familiarity with the current lithium regulation -which has not been amended-, international treaties, and the political situation of Chile.

Objectives of the National Lithium Strategy.

The NLE seeks to promote the exploration and exploitation of lithium in salt flats, through a public-private collaboration. Likewise, the creation of technical and academic capacities is sought through a Lithium Research Institute.

The state aims to have a preponderant role throughout the production cycle. For this, the current administration proposes the creation of a National Lithium Company, owned by the State, who establishment would require the passing of a law with the approval of a majority of Congress, which currently the government does not have. Until the aforementioned company is created, ENAMI and CODELCO (both existing state-owned companies engaged in mining activities) will be the representatives of the state.

Majority control of the State.

The most controversial point of the NLE is the declaration that the state will have a majority stake in the public-private lithium projects, without specifying how it will achieve it and what exactly it means. At first glance, it would seem that the statement is especially aimed at the two companies currently exploiting lithium in Chile, both in the Atacama Salt Flat: SQM and Albemarle. However, the same NLE makes it clear that it will respect the contracts in force with the companies (which end in 2030 and 2043 respectively) and any amendment to the contracts will be made in agreement with the aforementioned companies.

Situation of private companies that intend to explore lithium.

The NLE's announcement is ambiguous and vague in this regard. On the one hand, it says that special lithium exploration contracts ("CEOL") will be tendered, aimed at private companies, and that, if the results are encouraging, the private company will have the right to subscribe a CEOL with the state, in which the latter will have a majority stake.

Since the expropriation of private projects is not part of the NLE (and those projects constitute private property that is also protected by national laws and international treaties), the terms laid out in the previous paragraph should only apply to areas that are controlled by state enterprises, in which they invite private companies to explore and then operate, but with the state retaining a majority shareholding.

However, the NLE then indicates that, only if the project has strategic value for the state, it is obliged to have a majority stake, opening the door to cases in which the majority shareholder would be the private company (at least in salt flats other than the Salt Flat of Atacama).

Situation of private companies exploring lithium.

Nothing is said in the NLE regarding the companies that are currently exploring lithium. Since they cannot be forced to share their property with the state, the question remains as to whether they could still apply for a CEOL. At the moment, the answer is yes, but it is uncertain whether the state will grant one, and if so, under which conditions. In any case, this is no different from what happens today, since only one CEOL has been granted, and to a state-owned company (CODELCO). If we assume that the government would not grant a CEOL to a private company that is currently exploring lithium, unless the regulation changes (which requires a congressional majority that the government lacks), the aforementioned private company could request it again once the remaining period of the current administration -3 years- has ended, because the NLE, by itself, is not binding on future governments.

Similarly, the companies that decide to enter the country by associating with or buying projects that are owned by private companies will be in the same situation.

Finally, an unregulated situation is one in which the current holder of mining concessions where lithium exists seeks, on his own initiative, to partner with the state. Would the state have to compensate the concession holder? Could the holder offer the state a minority stake, especially if the project is deemed strategic (since it has already been mentioned that in non-strategic projects there is no obligation for the state to have a majority)? These and other questions will have to be clarified in the future.

Notwithstanding the paragraph above, most likely, the NLE will have to recognize that there are projects already in exploration. An elegant solution in most cases could be to offer a CEOL in which the state becomes a minority partner. It is unlikely that the government will just "ignore" these projects already in exploration, as they will be the quickest way to get results and profits (i.e. a "quick win").

Situation of companies providing technologies that minimize the environmental impact of the recovery of lithium.

Perhaps the biggest beneficiaries of the NLE will be these types of companies, such as those that offer direct extraction with brine reinjection. Indeed, it is stated that, as part of future environmental regulation, the use of environmentally-friendly technologies for the extraction of lithium will be required.

Next steps.

The NLE contains a set of general and high-level ideas, which will require for their implementation agreements and approvals from different actors, including Congress, where the government will have to negotiate with the opposition to pass laws as important as the creation of the National Lithium Company and a new institutionality (eg environmental), without which the NLE could very well be forgotten when the current government finishes its mandate.

This is just the beginning, and there are still several open topics. It is to be hoped that dialogue between the different players will prevail and that ideology will be left aside, in order to attract more private investment and generate greater value for Chile.