By the end of this year, the world's largest copper deposit—Northern Chile's “Escondida Mine” –stands to make a $6 billion profit based on its first-semester earnings. Miners have gone on strike to demand that they receive a share in this bonanza. The demands of the miners represent a tiny portion of earnings compared to the profits reaped by the company.

At the heart of the issue is who should benefit from a natural resource that is being mined practically royalty-free. Under the current arrangement, Chileans gain nearly nothing from the boom in natural resource exploitation in their country. The situation reveals the need to consider nationalization, or at least the establishment of a realistic royalty fee.

The Escondida Mine, which is controlled by the Anglo-Australian mining group BHP Billiton, reported first-semester profits of over $2.9 billion dollars—a 211.5% increase over the same period last year. Projected over 12 months, profits could reach $6 billion, or 4.2% of Chile's total Gross Domestic Product (GDP). This semester's profits eclipsed those reported in 2005 ($937 million) for the same period, in part because of increased copper prices, but also because of significant increases in production. BHP Billiton was the second most profitable company in the nation that publicly report earnings, just behind the national copper company, Codelco. The Anglo-Australian company is required to report its earnings because it holds debt securities in the national financial market. Its first-semester sales, in real terms, jumped 157.8%. Three years of similar earnings from the Escondida Mine would exceed the amount paid in the largest mining transaction the world has ever seen—the acquisition by Swiss Xstrata of the high-profile Canadian consortium Falconbridge.

Codelco's profits go directly to the State, including resources earmarked by law to acquire weapons for the Armed Forces. Through these budget mechanisms, the revenue from the State-owned mining company directly translates into a high budget surplus.1 On the other hand, the profits from the Escondida Mine are taken abroad or spent financing new investments to increase future profits, taking advantage of the fact that the country charges practically no royalty fees for the extraction of a resource that belong to all Chileans. As such, average Chileans are excluded from the mining boom taking place within their own national territory.

The earnings attained by Chile's private mining industry, which exploits almost two thirds of the country's most valuable natural resource, will approach $10 billion this year. The South African company AngloAmerican earned $991 million in the first semester—a 139.5% increase. Its total income in the country reached $2.24 billion, double last year during the same period.

The first semester results from Escondida Mine were revealed under special circumstances—workers had just begun a strike. This fact puts the issue in a different light. The strike carried out by Escondida Mine's 2,052 workers has undeniable national and worldwide ramifications. International observers expressed concern that the labor conflict could have ramifications on international copper prices. Financial Times covered the story of the strike on the front page of its Internet edition immediately after it began.

As the largest copper deposit in the world, the question at the heart of the Escondida Mine strike is: who will benefit from the enormous revenues, and how much should the work force be compensated? The strike creates the possibility of staunching the flow of resources outside the country.

The President of Chile, Michelle Bachelet, declared the strike to be a matter of private-sector negotiations and in effect, that's exactly what it is—a negotiation between BHP Billiton, on the one hand, and the labor union on the other. But is the conflict really confined to the private sphere? Formally, it stopped being a purely private matter when the Department of Labor was contacted and Secretary Osvaldo Andrade stepped in to reestablish talks after BHP Billiton left the negotiating table. Nor was it purely private when Special Forces of Chilean policemen repressed some of the workers.

It is even less a strictly private matter if one considers the repercussions of the conflict and the multitude of negative effects the country suffers due to BHP Billiton's copper exploitation. Escondida Mine accounts for approximately 24% of Chile's copper production—more than 1.2 million tons a year—and in the year 2005 it made up 2.55% of the total GDP. For 2006, estimates of copper production at Escondida are on the order of 1.33 million tons. Its impact on Chile is not limited to these numbers, as the extraction of copper with almost no royalty charges directly affects fiscal accounts and the balance of payments.

Over the first semester, Escondida Mine had the highest return on assets in the country of large companies. Its ROA peaked at 126.84% and closed the first semester at 91.03%, indicating that investment costs are recovered over very short periods of time. Can the State remain indifferent in the face of such an obvious reality? Can this issue still be considered to be confined to the private sphere?

BHP Billiton is the largest mining group in the world in terms of market capitalization, followed by the South African company AngloAmerican (present in Chile in Collahuasi, the South Andes, Mantos Blancos, Mantos Verdes), Rio Tinto (the British consortium, which is a minority member of Escondida Mine), and the Swiss giant Xstrata, which in August acquired the Canadian company Falconbridge (one of the groups controlling Collahuasi, the smelter Altonorte, and the Lomas Bayas and El Morro deposits). Marketing of mining resources tends to take place abroad, and is yet another private matter that excludes the country of origin. The acquisition of Falconbridge constitutes history's largest mining transaction—surpassing 2001's merger between BHP and Billiton—at $17 million, just under three times the profits reported by Escondida Mine this year.

To analyze the conflict, it is useful to compare the worker's list of demands, which obviously won't be accepted 100%, to Escondida Mine's revenues, as released in official records. BHP Billiton estimated that the demands represented increased labor costs of $220 million to $640 million over a two-year period. At $210 million a year, that constitutes around 3.5% of the estimated profits for 2006, including benefits, wages, contributions to pensions, vacations, education, and health, and taking into account both fixed and variable income. BHP Billiton's cost estimate of the demands is much larger than the labor union's, which would lead one to believe that the company's calculation of the impact on total profit has also been overestimated.

Escondida Mine's workers are paid less than Codelco's, which serves to increase profits. The company's capital gains have been enormous. “The employees that left Codelco,” declared president of the Confederation of Copper Workers, Raimundo Espinoza, “were our excavators and truck drivers. Now they are attempting to attain what we have here, and that's good” (August 13, 2006).

In a globalized world, salary comparisons should take place between companies in the same business, and pressure from workers with lower wages should tend to equalize things. Otherwise, transnational corporations maximize their profit in places where salaries are low and take huge profits out of the country. Consequently, low wages translate into benefits for other areas of the world. Wage comparisons shouldn't take place across different strata of workers, since other workers receive no benefit from low wages being paid to copper miners, especially if the profits remain in the hands of private consortiums.

“If salmon workers had the same negotiating power we did,” Raimundo Espinoza points out, “their profits would not be taken abroad, and the workers would not tolerate their current working conditions” (August 13, 2006).

Mining Boom and Worker Protests

Similar situations to Escondida Mine have arisen in other countries. High metal exchange rates have sparked demands from workers for the benefits to be distributed more evenly. At South Africa's biggest iron deposit, controlled by Kumpa Resources Ltd., workers managed to negotiate up to 9% wage increases for the lowest-paid employees, and 7.75% increases for more highly trained workers. “Higher prices for metal,” The Wall Street Journal summarized, “have triggered higher profits for mining companies. At the same time,” added the publication, “the scarcity of qualified workers in several mining countries makes breaking strikes difficult.” (August 16, 2006).

The relationship between profit and payroll at Escondida Mine is just another indication of the country's backward distribution of income, which, strictly speaking is the comparison between the earnings of the various productive factors. In this case, BHP Billiton's small percentage dedicated to both worker remuneration and royalty payments makes for huge overall profits.

In arguing against the strike, the director of Catholic University's Mining Department, Gustavo Lagos, points out that the paralysis in activity “is costing the country approximately $7 million a day in taxes, the equivalent of 750 basic homes, in addition to weakening the country's growth” (August 9, 2006). A number of equally superficial arguments can be made without addressing the core of the issue, namely, who benefits from the profits obtained at Escondida Mine. If the issue is about building more homes, the total company profits from Escondida Mine could fund far more houses than the money lost in the strike, and several Chacao bridges in addition. As for Lagos' growth argument, it may be valid in the short term, but it doesn't hold up when viewed over a longer time frame. Wage increases for workers would ultimately stay within the country, thus contributing to internal demand, instead of the current arrangement, where the high profits being registered by mining consortiums are taken abroad, except for investments made to increase future profits.

Gustavo Lagos also argues, defending the interests of BHP Billiton, “The only grounds for raising wages in the mining industry or any economic activity, is an increase in worker productivity.” However, when dealing with a transnational company that is allowed to exploit a country's resource virtually royalty free, shouldn't the level of production as well as the amount of revenue generated form the basis for worker remuneration? Meeting the demands of Escondida Mine's workers would only prevent intense exploitation of workers and increase the percentage of the wealth extraction that stays in the country.

The president of the National Mining Society (SONAMI, for its Spanish initials), Alfredo Ovalle, asserts that if other mining negotiations are “contaminated”, the conflict will affect Chile's competitiveness with other countries. In most cases, the reality is much different. The cost of labor in Chile's mining sector is lower than in many other countries, and mining groups are allowed to excavate practically without paying royalties, in contrast to the norm prevalent in other parts of the world.

The core of the debate leads us inextricably back to the question of who should be able to exploit Chile's huge copper deposits following the process of privatization that began after the 1973 coup and has continued throughout the administrations of the Concertación. “What is happening at Escondida Mine,” reflects the president of the United Center for Workers, Arturo Martinez “puts the issue of copper nationalization on the agenda. If all of the copper belonged to the State, the spike in copper prices would give us money to address all of our social problems. Instead, we are giving our copper away to foreign companies.”

So then,” he concludes, “the real question raised is who owns Chile's copper. The question,” Martinez insists, “is why is this mineral still in private hands after Chile's copper nationalization? Why are we just giving it away to foreign companies?” (August 18, 2006). If the strike at Escondida Mine contributes to this discussion, it will have an even greater and long-lasting impact on the country.

Endnotes

1. See "Economic Letter August 13, 2006".

Hugo Fazio is an economist, university professor, and director of the National Center for Alternative Development Studies (CENDA in Spanish) http://www.cep.cl/ in Santiago, Chile. He is a contributor to the IRC Americas Program www.ircamericas.org.

Sources

CENDA, Centro de Estudios Nacionales de Desarrollo Alternativo: www.cep.cl. Telephone: 6883760 - 6883761, Fax : 6883763, cenda@cep.cl, Vergara 578, Santiago Centro, Chile.

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