DIRECT AND INDIRECT MINING EXPROPRIATION IN THE CHILEAN LEGAL SYSTEM (ENGLISH AND SPANISH)

• Jurisdiction: Derecho Internacional

Mining and Oil and Gas Law, Development, and Investment - Book 1
(Apr 2007)
CHAPTER 5B
DIRECT AND INDIRECT MINING EXPROPRIATION IN THE CHILEAN LEGAL SYSTEM (ENGLISH AND SPANISH)
Juan Paolo Bambach
Attorney
Philippi, Yrarrazaval, Pulido & Brunner
Santiago, Chile

JUAN PAOLO BAMBACH

Juan Paulo Bambach S. was admitted to practice in 1988. Studies: University of Chile, Master of Laws at the University of Würzburg, 1993, Germany. Studies in Mining Law University of Atacama, 1997. Studies in Tax Law Universidad Católica, 2002.

Professor Mining Law Universidad de Los Andes. Lecturer at seminars in mining matters and author of various publications on this field. With Exxon Minerals and Cyprus Amax from 1988 to 1997. With Philippi, Yrarrazaval, Pulido & Brunner up from 1998 acting as legal counsel of Phelps Dodge, Aur Resources, Coeur d'Alene, Southern, Aconcagua Resources Limited, Arizona Star, BHP Billiton, Codelco Chile, Soquimich, DSM Minerals.

A. Introduction

Everybody is aware of the risks inherent to mining activities, such as randomization in exploration and prospecting; geographic and climatic difficulties; usually decreasing variations in ore grades; technological problems associated to recuperation; limited useful life of mine deposits; environmental challenges; and, especially, great fluctuations of mineral prices in international markets.

In spite of these risks, mining companies and financial institutions have been willing to risk capitals, resources and efforts to materialize the enormous investments required for developing a mining project, considering, however, other variables that go beyond the risks inherent to mining and that are essential when adopting investment decisions in mining. I refer to political and legal evaluations, especially as regards the degree of certainty and legal security offered by mining titles and the guarantees of stability, equality and non-discrimination in the free development of mining activities. The combined analysis of these two types of variables will permit not only to establish which the return on investment will be, but also to ensure that said payback can be really obtained.

However, after the investment has been materialized, there will always be a latent risk for the investor and which is difficult to foresee in the analysis mentioned above. This risk implies the possibility that a country, exercising its sovereign powers, carries out an expropriation or regulates mining activity in such a way that it will seriously affect the return on investment. This is why the basic concern of the mining investor and its finance experts in this respect, is to ensure an adequate compensation in case the aforementioned risks should arise.

There are more than enough reasons for said apprehensiveness, especially in countries such as ours where, from time to time, either encouraged by nationalist exhortations or due to budget tightness, the enticement to transfer to the state or nationalize the natural resources is a certain possibility.

To the traditional and most brutal formulas of direct expropriation that we have had the sad privilege of having witnessed not too long ago in our country, and recently in some of the countries of the region, more refined and sophisticated ways of dispossession have been added, which have been grouped by the doctrine under the term "indirect expropriation", and that are materialized as disproportionate taxes or the imposition of additional requirements and demands that sometimes make the development of the activity unfeasible. In fact, this form of indirect expropriation is characterized by State interference in economic activities performed by private parties, that

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does not affect the mining company per se, but its authority to the use, possession and/or disposal, which are limited, devaluated and finally deteriorated.

In the case of direct expropriation, there is consensus as regards the need of an appropriate, timely and sufficient compensation. Unfortunately, there is no such agreement with respect to indirect expropriation, in which the protection of the mining investor's property is subject to the free exercise of State sovereignty in regulatory matters, which implies that only under certain and specific circumstances, a state intervention will grant the right to just compensation.

The object of this presentation is precisely to analyze how our legal system shields the mining investor, both in the event of direct expropriation as well as in the more diffuse form of impact which is indirect expropriation, reviewing legal, contractual and jurisdictional protections and safeguards that are available for the mining investor to adequately protect his right and ensure a compensation in the event that his rights are affected.

B. Direct Mining Expropriation

In a concessionary system as ours, there is no doubt that it is in the establishment of direct expropriation where the patrimonial content of mining concession is really relevant and evident. Beyond the theoretical discussion generated in our country with respect to State ownership of mines, what is really relevant is to fully establish the right of the affected party to compensation in the event of expropriation.

And this is the great achievement and merit of our current mining legislation, which has resulted in legal acknowledgment and thus the transfer of important investment flows as regards mining. By strengthening the patrimonial nature of the concessionaire's rights to the mining concession and establishing concrete formulas to calculate compensations, the traumatic experiences which mining investors had to face on the occasion of the nationalization of large copper mining in the seventies, have not been repeated.

Below we will try to answer some questions such as: What is expropriated? Who expropriates? Which is the purpose of the expropriation? and How is the damage caused compensated?

1. Historical record of Direct Mining Expropriation in Chile

Three stages may be clearly defined in this respect:

a) The first stage is prior to the constitutional reform of 1971, in which acknowledgment of the miner is strongly marked by its nature of owner of the deposit and not of holder of a mere right. As such, inviolability of said property was constitutionally established.¹ On the other hand, regulations on expropriation set forth that this could be performed by legal judgment or by reason of public interest qualified by law, and after paying the compensation set out in the corresponding trial. It is worth mentioning two legal initiatives that made easier the path towards nationalization

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of large copper mining, directly affecting the concept of "compensation".² The first law authorized to take material possession of rural property expropriated, abandoned and underexploited, by paying only 10% of the indemnification. The second law authorized the State to reserve for itself the exclusive ownership of the national community, setting forth that the expropriation could be materialized through payment of an indemnification calculated on the basis of the tax assessment of the property expropriated.

b) A second stage in this historical record -undoubtedly the most important due to its impact and significance in mining activities- started with the so-called "Copper Chileanization" and then the "nationalization agreed". Both processes were a precursor to the constitutional reform introduced by Law No. 17.450 of 1971 and which would culminate in the nationalization of large copper mining. It should be noted that said processes were initiated with greater interference and control of the State in the activities of large copper mining companies, through the creation of the "Copper Office", today Codelco", as a reaction to the significant profits obtained from the copper industry and the generalized perception that those companies operated at the margin of the legal system. Soon, and through the mixed companies law in large copper mining, the State made a full-fledged entry into the property of mining companies by acquiring 51% of the mining companies controlled by North American multinational companies, and ensuring a purchase option for the remaining 49%.³

Next, and by virtue of the constitutional amendment provided for in Law No. 17.450 of 1971, the absolute, exclusive, inalienable and imprescriptible ownership by the State was established on all of the mines, and the new regime of mining concessions to private parties was created. During this period, the United Nations, through Resolution No 1803, proclaimed the recovery of basic wealth by the countries, declaring the inalienable right of any State to freely make use of their natural wealth and resources, in the interest of their national development and based upon respect for the economic independence of the States.⁴

It was repeated at the time, not unreasonably, that mining investors had gone to sleep as owners of their mine and had woken up as concessionaires thereof, alluding the régime in place before the reform, in which they were ensured full ownership of the mines, compared to the weak concessional ownership that the 1971 constitutional amendment was launching.

As regards this presentation, the most interesting aspect to analyze in this stage is the fact that the aforementioned constitutional reform implied the approval by both of the chambers of the National Congress, of the expropriation or "nationalization" of large copper mining, most of whose large deposits were owned by United States companies (The Anaconda Company and Kennecott Copper Corporation). Said reform also fixed the book value of the companies' investments as a criterion for indemnity, approved deducting those values from the profits that were considered excessive in the period between May 5, 1955 and December 31, 1970, and established a 30-year term for paying the indemnity. It also set forth that the amount of...