INTERNATIONALIZATION OF MINING COMPANIES

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development and Investment
(Apr 2009)
CHAPTER 9A
INTERNATIONALIZATION OF MINING COMPANIES
Daniel Altikes
Corporate Counsel
Antofagasta Minerals S.A.
Santiago

Daniel Altikes Pinilla is a lawyer from the Universidad of Chile with a Masters in Natural Resources and Environmental Law from the University of Denver and a Graduate in Mining Law from the Atacama University, Chile. Prior to joining Antofagasta Minerals S.A. as Corporate Legal Counsel, Mr. Altikes worked for Minera Los Pelambres as In-House counsel and at the Chilean law firm Carey & Co. (1995-2003) in the fields of Mining, Water and Environmental Law as well as Corporate Law and Project Finance areas for mayor mining projects developed in Chile. In 2002, he joined the US-Colorado law firm Alfers & Carver LLP and in 2002-2003 joined the Canadian law firm McMillan Binch Mendelsohn to work in the Natural Resources and Securities area. Mr. Altikes is also a post-graduate professor of the joint program "Certification and Evaluation of Mineral Assets", held by the Catholic University of Valparaíso of Chile and Queen's University of Canada. He has also been invited to talk about Capital Markets and Mineral Industry at the Santiago Stock Exchange, Expomin-Chile and PDAC. Finally, Mr. Altikes was an active member of the "Task Force" that worked in structuring the legal framework to create the Competent Person concept as well as the Commission for the Certification of Mineral Resources and Reserves.

I. Introduction

Historically, the Latin American continent has played an important role in the internationalization process of many North American and European companies.¹ During the last 40 years, many other Asiatic companies, mostly from Japan, South Korea, and Malaysia, and more recently from China and India, have added to this internationalization process.

In fact, since the local markets became narrower and unable to contain the increasingly higher offer of goods manufactured by such economies, as well as the urgent need of guaranteeing raw materials for said economies, the countries and their industries have faced the necessity of looking for new markets beyond their own borders.

Many tools have been used to begin and strengthen the process of looking up other markets. However, now more than ever, the internationalization process is at the reach of the smaller economies and companies. Undoubtedly, the globalization process of the world economy and its principles has allowed an outstanding fluidity in terms of capitals and goods, as well as of information, thus allowing to open markets which had never been considered before.

In Latin America, Chile should be highlighted as an outstanding example of economic growth beyond its own borders. Companies related to the maritime and air transportation, manufacturing, retail, health, pension funds, banking, and natural resources, have crossed the border and started a process to open new markets.

However, being the internationalization understood as a process to look for markets beyond the own borders, it is an extremely complex process which should handle very different skills and capabilities. Clearly, good will and capital are not enough to go for new markets, having an adequate structure, a well prepared and motivated organization, and finally a well defined strategy, is required.

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Now, if we add the typical characteristics to the mining industry, such as the need of large capitals, the high geologic and metallurgical risk of the different types of ore bodies, the political risks of each country, the environmental issues, the local communities and the indigenous peoples, the decision of going for new opportunities beyond the own borders not only is a hard, but almost an impossible adventure to undertake.

II. Study Case: Antofagasta Minerals

The origins of Grupo Minero Antofagasta ("Antofagasta Group") date back to the beginning of the 80's, when Mr. Andrónico Luksic Abaroa² purchases the Michilla mine, a flotation and agitation leaching plant of 800 tpd, and a yearly output of 6,000 tons of copper, located at the Second Region, Chile, 105 kilometers to the north of the city of Antofagasta.

During those years, he also took control of the English company Antofagasta (Chile) and Bolivia Railway Company, listed at the London Stock Exchange,³ the same which was subsequently re-founded under the current name Antofagasta Plc.

Later, in 1985, he purchases Anaconda Chile, up to then a North American capital company, where Los Pelambres mine was one of its main assets. Los Pelambres started as a large scale mine only in 1996-1997 and previous association with two Japanese consortiums.

At the beginning of the decade, and after its association with Australian capitals, El Tesoro mine, located at Sierra Gorda sector, Second Region of Chile, begins its operations.

Currently, along with its Japanese partner, Antofagasta Group is building the Esperanza mining project, also located at Sierra Gorda sector, Second Region of Chile. Said project currently involves an investment of nearly MUS$2,2.

III. Internal Consolidation

The two key pillars for the successful growth of Antofagasta Group are firstly composed of a process to assure and strength the base business, followed by an organized and sustainable growth of its assets.

This assurance and strengthening process necessarily involves assuring the current operations of the Antofagasta Group, and the development of its Esperanza mining project, all of which represent the core from which the platform to a sustained and secure growth is built.

On the other hand, the organized and sustainable growth of the business is necessarily based on projecting the current mid term and long term operations,

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permanently and continuously optimizing its processes and incorporating sustainable development principles and social responsibility.⁴

Securely projecting the mining business beyond the own borders, and allowing an international strategic expansion plan is only feasible from such principles.

IV. Internalization Process

a) Expanding the Copper Base

The process of orienting Antofagasta towards the internationalization and seek for new opportunities necessarily responded to a strategic analysis, which involved an internal re-structuring process of its organization, and the definition of the core business areas to be developed.

In fact, the exploitation of copper at the Los Pelambres mine sector and at the Sierra Gorda sector, Second Region of Chile, was established as the base business of Antofagasta Group. From that point, the geographical diversity in copper was determined as the primary common means area, through the search for other high potential mining districts already established at world level, to then continue searching for other not developed districts, in other parts of the world.

The strategy mainly consists on not spreading to metals other than copper such as Lead, Zinc, Nickel, Molybdenum and others.⁵ Likewise, not starting an integration process to other more advances phases of the business such as smelting plants, refining plants, and/or the manufacturing of other products from copper was determined. Some integration to strategic products and/or supplies such as water,⁶ energy,⁷ acid, tires, etc., was determined, only if their development involves strengthening the core business.

b) Internationalization Strategy

The internationalization process as defined by Antofagasta comprises 3 sequential phases:

First Phase

• Starting the capture of a high potential mining base at an early stage, worldwide.

• Gaining international experience in projects undertaken with partners.

• Preparing and training the organization

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• Developing the internal capabilities

Second Phase

• Making it feasible projects in low risk countries, with mining districts already established.

• Establishing pilot operations in countries having an admissible risk to Antofagasta.

• Expanding the organization abroad.

• Implementing standards, processes, systems and structures for a global company.

Third Phase

• Making it feasible, realizing, and operating projects worldwide.

• Developing strategies in other countries' districts.

• Generating economic, environmental, and social value.

• Transferring the best practices worldwide.

c) Copper beyond frontiers: Pakistan

The acquisition of the mining project called Reko Diq, located in the Province of Baluchistan, Pakistán, was the first international experience of Antofagasta Group.⁸ In fact, in 2005, Antofagasta decided to undertake the project to enlarge its mining base, which at the time and currently is considered as a high mining potential.

Immediately after the acquisition, and given the multiple -- metal ore field,⁹ a Canadian mining company was incorporated as a partner, thus establishing a new company named Tethian Copper Corporation, to gain new international experience with new partners.

Clearly, this has not been the best way of starting an internationalization process, but it has been a great experience for Antofagasta, since it has allowed us to know the weaknesses and strengths of our organization, and learning significant lessons which have allowed to better design our current strategy to face the incoming internationalization process.

d) Developing capabilities to make it Feasible, Realize, and Operate projects worldwide.

The strategy for a successful internationalization involves working on 3 simultaneous areas:

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i) Internal development of people, systems, processes, and experiences: First of all, we should refer to the preparation of the members of the organization to face the new challenges via ongoing training in languages, knowledge, and culture corresponding to those places where we intend carrying out our activities. Probably, this is the most important element of the

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