The nationalization of the large-scale copper mines in Chile: successful investment or financial failure?

Abstract

Between 1967 and 1971, the Chilean government nationalized its large-scale copper mining industry. While this process is widely considered successful given the demonstrated long-term state capacity to profitably operate the assets, the discussion on its net financial convenience has usually been disregarded. Aiming to improve the understanding of this case of resource nationalism, this paper follows two complementary approaches. First, we provide a systematic review of the historical background, development, and short-term impact of the Chilean nationalization, consolidating at the same time the available financial data on fiscal inflows and outflows as part of this process. Secondly, we perform an ex-post NPV assessment using a 10% discount rate over the annual cash flows that the government has perceived from the nationalized mining operations from 1967 to 2022 and compare it with a hypothetical counterfactual scenario in which these mines would have remained privately owned. This yields a higher NPV of the Nationalization compared to the counterfactual. Considering that discount rates above 11.1% or operational cost reductions by 4.5% indicate a net financial loss, the results suggest that, purely from a financial perspective, the nationalization process was marginally positive for the government. We expect that this analysis provides support for a thoughtful mineral policy that contributes to sustainable human and economic development in resource-rich countries.

Introduction

The way that mining can contribute to economic development in a country is a constant concern in academic research and public debate. In this regard, the expected role of the state in mineral resource management is key, particularly regarding the rules for mining activity and revenue sharing (Collier et al. 2010). The balance on how mineral rent is shared among public and private agents is fragile and could rapidly evolve into waves of Resource Nationalism (RN).

RN can be defined as the inclination of states to increase or try to increase control of economic activity in natural resource sectors (Ward 2009). The traditional view for RN comes from an opportunistic behavior from a host country where fixed resources are located and aims to attract foreign investment. After the investment is made, the country can try to capture quasi-rents, a behavior described by the classic obsolescing bargaining model (Vernon 1971). In this view, increasing RN appears as an additional political risk element that should be considered when making an investment decision and determining a country’s competitiveness in mining (Chermak 1992; Tilton 1992). Nevertheless, the traditional or rent-seeking view of RN gives less importance to other political and cultural processes that come with increasing state ownership in the mining sector. In this regard, RN has been historically associated with national security, strategic policies, criticality, and changes in regional and national ideologies (Heidrich 2016; Humphreys 2013; Jacobson et al. 1988; Katz-Lavigne 2017; Koch and Perreault 2018; Radetzki 1992). The broad scope of explanations for RN has led Bremmer and Johnston (2009) to classify events related to RN as revolutionary (a structural change in the means of production), economic (a drastic revision on how rents are shared), legacy (where resources are central to national identity), and soft (usually incremental revisions of tax policies).

In this context, nationalization, expropriation, or complete state ownership of natural resources are the most extreme cases of RN. The extreme case is well recognized in the mining industry, considering the close relationship between RN and price cycles (Bremmer and Johnston 2009; Humphreys 2010). Despite recurrent attempts for nationalistic policies in the mineral industry, there does not seem to be a consensual position on the net impact that those extreme events can have on countries implementing them. Click and Weiner (2010) highlight that nationalization processes in the oil industry increased country risk, leading to a decline in oil reserves value. In the mining sector, there is usually a distinction between successful and failed nationalization processes. For example, in copper, Chile is usually considered among the firsts, contrasting with processes that occurred in similar years in Peru, Zambia, and Zaire (now the DRC) (Ganbold and Ali 2017; Lagos 2017; Maxwell and Guj 2013).

The contrasting positions are recognized by Maxwell and Guj (2013) and are adapted in Fig. 1 (a) and (b). In chart (a), the optimistic view claims that after an initial loss in economic efficiency (due to political interventions in companies) the economic performance increases. It is argued that despite not reaching the same efficiency levels as a private company, public companies sustain greater social benefits (Radetzki 1985). Meanwhile, in chart (b), the pessimistic view shows that economic performance for state-owned companies cannot recover and constantly declines. In this sense, poor management, lack of investment, and misuse of rents can be claimed as a lost opportunity and a cause for the resource curse (Auty 1993). In support of this view is the evidence of increased civil conflict arising from natural resource endowment (Elbadawi and Soto 2015).

Fig. 1

Two views on the performance of state-owned mining companies after nationalization. The left side represents the optimistic view and the right side the pessimistic view. Source: adapted from Maxwell and Guj (2013)

In this paper, we provide a systematic revision of the evidence about the causes and impacts of the nationalization process in Chile, after more than 50 years of state ownership. As previously highlighted, the nationalization of mines cannot be studied as an isolated economic or political event; it requires knowledge of the historical context where it takes place and the economic and political consequences in short and longer terms.

Furthermore, a detailed assessment of the case is especially important in a context of revision of rents and the impact of policies on mineral development (Castillo 2021; Leiva 2020). As mentioned, the Chilean Nationalization process is usually regarded as successful. However, this assessment is typically based on the demonstrated state’s capacity to operate the assets profitably over an extended period, disregarding the discussion on its net financial convenience. Given the relatively long time elapsed since its occurrence, the present article consolidates available data to offer a financial assessment of its net impact on the government. To this end, we considered the effective performance of the nationalized mines and compared it to the expected performance of a privately owned company operating under the same conditions. This is to provide an approximated measure from the state’s point of view in terms of profits and tax payments, following the theoretical views illustrated in Fig. 1.

We find that the financial assessment is not as clearly positive as what would have been otherwise expected from a commonly considered success story of mining nationalization by the literature and mineral economists. Slight changes in the discount rate indicate a net loss compared to the counterfactual. It is worth mentioning that we do not monetize political and economic costs, national and international, that stirred from the expropriation of large-scale copper mines to other sectors in Chile. Neither do we quantify potential benefits from local linkages, nor the value created from higher social cohesion from the creation of a national symbol as the state-owned Codelco. Is it up to the reader to decide if those immeasurable effects can shift the balance of the financial assessment to one side or the other.

The structure of the paper is as follows. The “Historical background” and the “Nationalization process” sections provide a review of the historical and financial evidence on the cause and impacts of the nationalization process in Chile. The “Financial assessment” section presents the financial assessment of the nationalization, comparing its results with a theoretical counterfactual. Lastly, the “Conclusions” section summarizes the main conclusions of the historical review and the case study.

Historical background

Following the development of large-scale copper mining, questions arose on how the government was to interact with the companies first from a fiscal perspective and then mainly through an investment promotion-based approach. This section describes these stages.

Initial development of large-scale copper mining

Following the 1891 Chilean Civil War, US investment enabled the materialization of Chile’s first large-scale copper mining projects: El Teniente in 1904, later acquired by Kennecott Corporation; and Chuquicamata in 1912, and Potrerillos in 1920, later acquired by Anaconda Copper Mining Company. As a result, Chilean copper output rose from 26 kt in 1900 to 321 kt by 1929, with two US companies, Anaconda and Kennecott, virtually controlling all production (Takeuchi et al. 1987).

In the first two decades, both companies were relatively isolated from the Chilean economy, with their main local linkage being the recruitment of domestic labor (Gedicks 1973). There was not a significant contribution to local value chains given that operational equipment and machinery were imported and both companies were vertically integrated with semi-finished copper manufacturers in the USA (Meller 2002; Moussa 1999). From a fiscal standpoint, the first General Income Tax was established in 1924, introducing a 5% tax on net profits arising from mining exploitation (Wagner 2005; Cuevas 2014). The next year, a 6% tax was set up on profit remittances (Sutulov 1975). However, the activity as a whole was not yet a matter of significant interest to the government (Correa 1976), allowing for what Mamalakis (1967) referred to as a “laissez-faire period.”

This perception began to change with the substitution of natural sodium nitrates for synthetic ones during World War I, which had been Chile’s main export since the 1880s. This brought about a persistent economic recession that was aggravated by the 1929–33 Great Depression (Lüders & Wagner 2003), making Chile the most heavily affected country in the world (World Bank 1980). Given that domestic production was tied to US consumption, Chilean copper sales dropped from $111 million in 1928 to $31 million in 1931 (Gedicks 1973). The end of the global crisis did not imply a strong sales recovery in part because the US Congress had approved tariffs on copper imports (Gedicks 1973; Pettengill 1935).

In light of the vulnerable macroeconomic conditions coupled with the painful lessons of the nitrate exports collapse, the government began to direct copper revenue to developmental purposes by establishing in 1939 an additional 15% tax on copper companies’ profits to finance Corfo, the newly created Economic Development Agency (World Bank 1980). During the 1940–1954 period, 25 new taxes and temporary excises that directly or indirectly affected the copper industry were imposed (Correa 1976). One particularly significant obligation was the “returned value,” which required Anaconda and Kennecott to purchase local currency needed to finance their operations at a fixed exchange rate. Thus, the more the local currency depreciated against the US dollar, the State was able to capture higher rents (Fortin 1979). According to Sutulov (1975), this norm along with the series of new taxes greatly discredited Chile to foreign investors as it manifested an unclear and inconsistent tax framework and legal instability.

This fiscal treatment was greatly fueled by the growing perception that Chile was not capturing enough rents from the copper industry (Moran 1974; Sutulov 1975). Distrust and animosity grew even more in 1941 when the US government, unilaterally, set the copper price at $0.12 per pound in circumstances where the free-market price was $0.37, which, according to Sutulov (1975), translated into $800 million in lost fiscal revenue. Subsequently, the US government’s imposition of a new price control mechanism upon its entry into the Korean War sparked a public outcry in Chile, highlighting the demand for greater autonomy over sales (Fortin 1979; Gedicks 1973).

Captive production and sales control

In view of the costly experience of the price controls, in 1951, Chile and the USA agreed to increase the price of Chilean copper by $0.03 per pound, that Chile would be entitled to sell up to 20% of its output in the open market excluding socialist countries and that the US companies were to increase production in exchange for modifications in the tax regime (Fortin 1979; Sutulov 1975).

However, within some political circles in Chile, the system controlled by two US companies was already seen as fundamentally detrimental to national development. The argument was that Chile was excluded from full participation in the upswings of the industrial cycle while bearing the major brunt of the downswings (Gedicks 1973) and, more significantly, that the country was in a situation of economic dependency on two foreign companies (Moran 1974).

As a response, in 1952 Chile decreed a state control on sales, a strategy under which the Central Bank proceeded to purchase copper from the companies, to sell it at the London Metal Exchange price (Bravo 1976; Fortin 1979). Thus, for the first time, Chile was freely trading all of its production (Gedicks 1973). This, however, posed a series of challenges. First, local authorities had scant information on market demand. Secondly, to avoid deepening the conflict with the USA, Chile refrained from selling to soviet bloc countries, which left the USA and Europe as the main possible buyers. However, these countries were already integrated, through formal and informal ties, with other producers (Gedicks 1973). This problem was only exacerbated by the US government actively dissuading several countries from buying Chilean copper (Fortin 1979).

All this occurred in a context in which Chile had been progressively increasing its mining tax burden on gross profits (defined as sales minus costs and depreciation) from less than 30% in 1940 to over 70% by 1954 (Wagner 2005). However, the absolute returns were being constrained by the virtual stagnation of output, leading to concerns that heavy taxation was, in effect, “killing the goose” (Sutulov 1975; Wagner 2005; World Bank 1980).

New deal for copper

In light of the failure of the sales state control, fiscal treatment was reoriented toward a more liberal approach aiming to encourage private investment. Accordingly, in 1955, the New Deal for Copper legislation was enacted, which essentially included the following: (i) a fixed 50% tax rate on profits with a variable rate of up to 25% depending on the output level, (ii) a redefinition of the returned value obligation at the current bank rate, (iii) accelerated depreciation and tax exemptions on imports of certain categories of equipment, and (iv) the creation of the Copper Department, dependent on the Central Bank, to oversee production and exports and to promote the use of domestic inputs (Fortin 1979; Sutulov 1975; World Bank 1980).

The corporate response was initially positive. Kennecott compromised investments for $200 million to increase their annual capacity at El Teniente from 165 to 255 kt, while Cerro Corporation announced a $75 million investment to start its Andina project with an annual production of 60 kt (World Bank 1976).

In practice, however, effective investments during the 1955–1964 period reached $251.1 million (World Bank 1976), which was below expectations. Kennecott in particular did not execute investments in El Teniente. The only major investment was Anaconda’s project to replace Potrerillos with El Salvador. Consequently, as can be seen in Fig. 2, even though from 1956 to 1960 copper sales trended upwards, they were at a similar level to those seen during World War II.

Fig. 2

Annual copper sales in Chile, 1940–1964 period. Source: Own based on Novoa (1972)

To deepen the dissatisfaction, no significant investments were made in smelting and refining capacity, which was one of the most relevant expectations of the law. Thus, as it is shown in Fig. 3, refined copper produced in Chile dropped from 300 kt in 1950 (83% of total copper output) to 226 kt in 1960 (42%).

Fig. 3

Refined copper production in Chile, 1950–1964 period. Source: Own based on Cochilco (2020)

Given these results, it became increasingly clear that the companies were not responding to the New Deal legislation in the way it was anticipated. Subsequently, in 1960 the government raised the base tax rate to 60% with a variable tax rate of up to 26.25%. This increase heavily affected Kennecott, which had made no new investments since 1955 and whose production level in 1962 was only 10% above the base figure that had been set for tax purposes. As a result, the company ended up with an overall tax rate of 80% of its gross profits (Fortin 1979).

These tax hikes occurred in a social context that progressively turned to more radical positions against the private control of the companies. As a response, the corporations stated they would not compromise new investments in Chile unless they were guaranteed that the New Deal norms were to remain in place for the next 20 years (World Bank 1976).

Nationalization process

The Nationalization process can be divided into two stages: Chileanization and Nationalization by Agreement between 1967 and 1969, involving bilateral agreements between the government and the companies, and then, complete Nationalization in 1971 carried out unilaterally by the government.

Chileanization and Nationalization by Agreement (1967–1969)

Upon the presidential election of Eduardo Frei Montalva in 1964, a series of laws began to be passed which would be known as “Chileanization.” This policy relied on the premise that both public and foreign investment were needed for mining development. Thus, it outlined several key objectives to be reached by 1970: (i) creating joint ventures between the government and the US companies, (ii) doubling output to 1.2 Mt, (iii) refining all copper domestically, (iv) state control on copper sales, (v) openness to all markets, and (vi) guarantee not to raise taxes for the next 20 years (Fortin 1975; 1979; Sutulov 1975).

To represent the government in the joint ventures, in 1967, the Copper Department was transformed into the Copper Corporation, better known as Codelco. The same year, the Corporation purchased 51% of Kennecott’s El Teniente for $80 million to be paid in cash between 1967 and 1970 while loaning $92 million from Kennecott itself to contribute to the mine’s expansion. It also acquired 25% of Anaconda’s Exotica project with a starting capital of $15 million, and 30% of Cerro Corporation’s Rio Blanco project with a starting capital of $21 million (Fleming 1973; Fortin 1975; 1979; Gedicks 1973; Sutulov 1975). The agreements also included investment compromises and tax rearrangements on account of their individual pacts.¹

A second key stage of Frei’s program was the Nationalization by Agreement, involving the creation of joint ventures with Anaconda’s Chuquicamata and El Salvador, in which the Corporation acquired a 51% stake for $140.5 and $34.1 million in both operations respectively, paid in 24 six-monthly installments beginning June 1970 with an annual interest of 6%² (Fortin 1975; Sutulov 1975).

Table 1 summarizes the agreed purchases and investments as well as the effective materialization of the Chileanization and the Nationalization by Agreement policies.

Table 1 Participation of the Copper Corporation in the joint ventures

Based on the investment plan, Chile expected to raise its total copper output by 72% from 1965 until 1970. It also included a 182% raise in refining capacity and doubling blister copper output, which would translate into a nearly complete vertical integration of the copper industry (Sutulov 1975). However, due to design errors and delays, by the end of the 1960s, production was still relatively stagnant at 1964 levels while the increase in refining capacity had only reached about half what was initially expected (Sutulov 1975).

These results were seen in a context of growing copper demand which increased the price per pound from an average of $0.29 between 1961 and 1963 (base figure used for negotiations) to $0.66 in 1969. This translated into Anaconda and Kennecott raising their total profits from $35.4 million in 1961 to $179.8 million in 1969 (Fortin 1979). The fact that the companies were obtaining unprecedented profits with substantially lower tax burdens greatly undermined political support toward Frei’s copper reforms.

Nationalization (1971)

Even though Frei’s reforms had meant the entry of the Chilean State into the copper industry, they did not erode a growing resource-nationalist sentiment. On December 21, 1970, Salvador Allende’s administration submitted to Congress a Constitutional Amendment enabling nationalization, which was unanimously approved on July 11, 1971. Hence, Chile had “the absolute domain, exclusive, inalienable, and imprescriptible of all mines” bestowing the government the right to nationalize all natural resources and production inputs that were deemed to be of a preeminent economic or cultural importance (Ministry of Mining 1971).

Causes and motivations

The causes that led to the Nationalization were multiple and interrelated. They can be broadly grouped into five categories:

Mining enclave

Between 1950 and 1970, large-scale copper mining normally accounted for 6–9% of GDP, 55–65% of exports, and 30–50% of fiscal revenue (Meller 2002). Furthermore, the fact that these companies were vertically integrated with industries in their home countries meant that their investment decisions were not always made in the best national interest (Moran 1974). As a result, Meller (2002) stated that the mining enclave characteristic was a key element in the mining policy.

Achieving economic independence

In light of the importance of the copper sector, Moran (1974) asserted that Chile was in a situation of economic dependency given that no domestic decision about economic development, the balance of payments, aggregate employment, and social welfare programs could be made without a careful calculation of how the two US companies might exercise their discretionary power. Consequently, Allende’s coalition deemed that nationalizing the large-scale copper sector was a prerequisite not simply for greater government take but most crucially to achieve “economic independence” (Gedicks 1973; Sigmund 1974; Fortin 1979).

Domestic industrialization

Copper was seen as the “mainstay of the Chilean economy,” meaning that it was the cornerstone for an industrial value chain to be domestically created linking local suppliers and semi-finished copper manufacturers (Tomic 1986). This underscores Radetzki’s (2008) assessment that the strategic importance of the mining sector in countries with large mineral industries has usually been a significant motivation for public ownership due to the assured critical supplies into domestic manufacturing.

It is worth considering that copper integration as a basis for domestic industrialization was theoretically rooted in the Prebisch-Singer hypothesis (Prebisch 1962; Singer 1995), which stated that the price of commodities declines relative to the price of manufactured goods over the long-term, which causes the terms of trade of primary-product-based economies to deteriorate.

Bargaining power

The importance of the copper sector coupled with the growing hostility between the government and the copper companies prompted the development of key institutions, notably including the Copper Department in 1955 and the Institute of Geological Investigations in 1957, which gained technical, financial, and negotiating knowledge on the industry. As a result, the bargaining power progressively shifted from the mining companies to the government, enabling Chile to change its stance from being satisfied with a higher percentage of profits through taxes to demanding total ownership and control (Gedicks 1973; Moran 1974).

Unfulfilled expectations

The US government’s price controls during the 1940s and 1950s along with the companies’ perceived low levels of domestic investment fostered frustration and disappointment (Gedicks 1973; Sutulov 1975; Fortin 1979). Subsequently, when first the New Deal Legislation failed to effectively promote the expected investment levels, the political sectors’ demands for state control and ownership gained ground.

Compensations

The Constitutional Amendment entrusted the Comptroller General with determining an “adequate compensation.” To that end, the Comptroller was to discount from the 1970 book value of the companies the value of mining rights for the mineral deposits, assets in a defective condition, and corporate asset reappraisals after 1964. Lastly, discounts for “excessive profits” were also to be made, a deduction to be assessed directly by the President.

In order to set the criteria for excessive profits, a series of studies were carried out by different government agencies, primarily comparing the profitability of the copper companies in Chile vis-à-vis the rest of the world. As can be seen in Fig. 4, these were estimated to be significantly higher in Chile.

Fig. 4

Annual average profits as a percentage of their book value, 1955–1970 period. *Anaconda in Chile includes only Chuquicamata. Source: adapted from Fortin (1975)

Allende instructed that normal profits should not exceed 12% of the book value between 1955 and 1970 (Bonnefoy 2013; Fortin 1975; Sutulov 1975). Finally, all deductions considered, only Exotica and Andina were to receive compensation. Both had started their production in 1970 and did not have “excessive profits.” Table 2 summarizes the deductions and compensations to each company.

Table 2 Deductions and compensations for each company (US million dollars)

Throughout this process, the government continued paying its installments for the $92 million debt to Kennecott to finance El Teniente’s expansion, but it did not honor the promissory notes held by Anaconda for the 51% equity of Chuquicamata and El Salvador that fell due on 31 December 1971 (Fortin 1975). Even though the government recognized the obligation, it suspended payments on the basis that the Constitutional Amendment stipulated that compensation took the place of any previous obligations emanating from share purchases (Fortin 1979).

Finally, Andina’s value was estimated at $18.3 million, of which Cerro had a right to approximately $13 million. The government stated that it would pay its obligation in 29 biannual installments starting on December 31, 1973, with a 7% net annual interest.

Short-term consequences (1971–1974)

Following the Nationalization, there were several consequences of internal nature—such as labor productivity, resource management, and operational logistics—and also external, mainly including the response of the corporations and the US government.

Labor productivity loss

The loss in labor efficiency can be attributed to people with little to no experience and technical knowledge reaching managerial roles (Sutulov 1975) coupled with a lack of labor discipline after the replacement of the US companies’ system of rewards and sanctions for another based on workers’ participation and awareness (Fortin 1979). Labor strikes were rife. In Chuquicamata there were 39 strikes in 1971 and 46 in 1972 while El Teniente endured a two-month strike in 1973, drastically reducing expected output (Fortin 1979). These problems echoed Radetzki (1985; 2008), who noted extended and heavy setting-up costs following nationalizations.

Resource management

Novoa (1972) points out that following Frei’s copper reforms, companies began to extract as much copper as possible and as quickly as possible before total nationalization was to take place. To that end, they solely exploited high-grade ores, without caring to remove barren rock and residues. The World Bank (1976) reports that once nationalization became imminent, “the companies employed various short-cut techniques in an endeavor to produce as much as possible in the time remaining,” which dwindled capacity once they were finally nationalized.

Operational logistics

During the Nationalization legislative discussion, several plant maintenance and equipment repairs had been delayed. According to Fortín (1975), 95% of imported spare parts were from the USA, and many could not be obtained elsewhere. Given that the US trade networks had been severely severed, this became a problem for operational continuity.

Corporations

Both Kennecott and Anaconda stated that Chile had violated its agreements and international law. However, given that both companies faced different conditions³ and considering that nationalized assets represented different levels of importance,⁴ their responses diverged. On one hand, Kennecott tried to obtain writs of attachment on copper and the proceeds from its sale in Europe while warning buyers that they could seize up to 49% of the metal they purchased. On the other hand, Anaconda sought judicial recognition in the USA of the debt for the 51% stake. Under this strategy, they were able to seize equipment and production assets acquired by the Corporation in the USA (Fortin 1979). As a result of this and other policies, fiscal stability and credibility were heavily scrutinized leading to overall private investment dropping sharply in 1971 (Sigmund 1974).

US government

While the USA recognized that countries were entitled to expropriate or nationalize private property, it maintained that it was “lawful” only if it guaranteed just compensation. Such compensation had to be “prompt, adequate, and effective,” and it had to represent the market value of the assets, not its book value (Fleming 1973). Given that these requirements were not met, the US government responded by establishing what some referred to as an “invisible economic blockade” against Chile.⁵

As part of this strategy, in 1971 Eximbank classified Chile with its lowest credit category, a decision that, according to Farnsworth (1974), was significant since “Eximbank credit ratings have an enormous influence on other bankers.” Subsequently, the Inter-American Development Bank and World Bank loans virtually stopped, while USAID economic assistance to Chile dropped from $15 million in 1970 to zero during the entirety of Allende’s government (Bonnefoy 2013).

Eximbank’s decision also led to challenges for international trade since at the time normal import–export operations were financed by credit, which meant that the importer needed not to pay for the goods upon ordering them but according to a pre-arranged schedule. In their absence, all transactions had to be paid off in cash, which was difficult if not impossible in most normal business operations (NACLA 1973).

While it is impossible to ascertain to what extent the Nationalization, in particular, led to these decisions as opposed to other government policies or the overall left-wing ideology of Allende’s administration in a Cold War context, the end result was that Chile was left without access to credit, rapidly decreasing international reserves and significant difficulties to honor its external debt, among other challenges. The ensuing economic crisis coupled with the growing social upheaval contributed to the coup on September 11, 1973 (Fortin 1979).

National identity

Considering that foreign ownership of natural resources is usually a key concern underlying nationalization aspirations, Pryke (2017) poses that resource nationalism is an important component of national identities while Castillo and Hancock (2022) argue that it continued to influence the national mood in the latter mining royalty debates in Chile. During the Nationalization discussions, Allende’s coalition appealed to nationalist sentiment to foster popular support, associating it with patriotism and full political sovereignty. This view was bolstered by Allende himself, referring to the day the amendment was passed as the “Day of National Dignity” while celebrating the event as “Chile’s second independence” (Gedicks 1973). Thereafter, political imagery rallied the people to collectively identify themselves with the nationalization process since copper was now collective wealth for all Chileans (Espinoza and de Aguilera 2020; Vergara-Leyton et al. 2014). Thus, it can be argued that Nationalization possibly contributed to national cohesion and identity.

Final compensation settlements

In 1974, the new authorities and the former company owners formally agreed on compensation settlements. The first of which was with Cerro, which at the time of the Nationalization had a 70% share in Andina. Then, a settlement was agreed with Anaconda for its 49% stake in Chuquicamata and El Salvador plus the remaining debt for the original 51% purchased during Frei’s administration. Later on, an agreement was signed with Kennecott for its 49% stake in El Teniente (Sutulov 1975). Finally, the government came to terms with OPIC⁶ for its 70% share in Exotica.

Table 3 details the paid sums and agreements by the account of Chileanization and Nationalization by Agreement between 1967 and 1969 (section A), the 1974 recognition of the remaining debt of the Chileanization and Nationalization by Agreement (B), the 1974 compensation settlements ensuing from the 1971 Nationalization (C), the 1974 recognition of unpaid remaining dividends (D), and lastly (E) exposes final compensation settlements by virtue of the previous sections (B, C, D). The intermediate columns illustrate the position of each company, while the last column shows to total amounts.

Table 3 Government payments under 1967–1969 Chileanization and Nationalization by Agreement, and final 1974 compensation settlements of the 1971 Nationalization (all figures in nominal US million dollars unless otherwise stated)

As can be noted in the final column of Table 3, the 1974 settlements meant that for 49% of El Teniente, Chuquicamata, and El Salvador, together with 70% of Andina, and 75% of Exotica, the government agreed to pay $142.9 million, whereas, during the 1967 Chileanization and the 1969 Nationalization by Agreement, it had agreed to pay $254.6 million to acquire its initial stake in these operations.

Financial assessment

In this section, we attempt to shed light on the following question: was the Nationalization of the large-scale copper mines a good financial investment for Chile?

For the abovementioned, we have calculated the discounted cash flow for the 1967–2022 period. The analysis was made from the Chilean State perspective, i.e., inflows and outflows of the Chilean Treasury. The methodology and results achieved are presented in the following subsections.

Methodology

The exercise consists of an ex-post net present value (NPV) assessment, by calculating the discounted cash flow (DCF) from the point of view of Chile (owner). For this purpose, we have considered two scenarios: first, the actual real process of Nationalization and the consequent creation and operation of Codelco; and second, a fictional counterfactual in which Codelco’s mines, both those acquired during the Nationalization process and the ones that started operating in later decades (Radomiro Tomic, Gabriela Mistral, and Ministro Hales) are owned and controlled by private companies.

For both scenarios, only direct cash flows were included, i.e., no indirect positive or negative effect on economic or social aspects took part in this exercise. The data for the construction of these scenarios was retrieved from Codelco’s annual reports and other sources mentioned in the “Nationalization process” section.⁷

The final result referred to as Resulting NPV in the following subsections, is computed as the difference between the NPV of the base case scenario and the NPV of the counterfactual.

The application of this methodology is based on common financial practices. DCF, despite its shortcomings, continues to be the preferred method to evaluate investment projects (Foo, Bloch, and Salim 2018; Rudenno 2012; Smith 2002; Topal 2008).

Scenarios

The assumptions and cash flows considered for each scenario are described below.

Base case scenario: state-owned Codelco

The base case scenario considers the inflows and outflows for the Chilean government as a result of the Nationalization process, including the Chileanization and the Nationalization by Agreement reforms of 1967–1969, as well as the Nationalization of 1971.

As inflows, all the contributions made by Codelco to the Chilean Treasury between 1967 and 2022 were considered, including the share of the profits derived from the Chileanization in 1967 and the Nationalization by Agreement in 1969. Fiscal revenue is specifically constituted by the Corporate Income Tax (CIT),⁸ Additional Tax for State-Owned Companies (ATSOC),⁹ Specific Tax on Mining Activity (STMA),¹⁰ payments required by the Copper Reserve Law,¹¹ and payments of dividends. Though differentiated in the aforementioned categories, in practice all profits before taxes obtained by Codelco are transferred to the Chilean Treasury.

Other indirect contributions from the company, such as employment, R&D advances, and production linkages, among others, were not part of the scope of the exercise presented in this article since they do not represent actual cash flows. Moreover, it is plausible to assume that these indirect effects would be similar in the counterfactual, i.e., they do not affect the result of the exercise.

Regarding the costs, two main outflows were considered. First, all payments from the government to the mining companies as part of the Chileanization and the Nationalization by Agreement (1967–1969), as well as the final compensation settlements agreed in 1974.¹² All these will be referred to as the Nationalization cost. Secondly, every capital contribution from the government to Codelco, as these represent a direct outflow from the National Treasury to the company. These also include the capital contributions made by the government agreed upon during the Chileanization and the Nationalization by Agreement for founding the expansion plans of the mines then involved.

We do not include costs previously mentioned in the “Short-term consequences (1971–1974)” section related to a drop in labor efficiency, resource management, and operational logistics, or costs associated with the judiciary response of the companies abroad coupled with the loss of international credit access and foreign investment credibility following the 1971 Nationalization. While it is difficult to determine how much the Nationalization itself contributed to these adversities, besides the fact that the elicited costs are difficult to quantify, it should be considered nevertheless that their impact significantly diminished following the 1973 coup, and especially after the 1974 final compensation settlements. Likewise, we are also not including the possible effects of delayed private mining investment associated with the nationalization process as the deferred investment cannot be separated from other significant political issues at the time.

It must be mentioned that regardless of the capital contributions made by the government, an important funding mechanism employed by Codelco has been debt, especially during the last decade.¹³ Though a high level of fiscal debt could indeed have an impact on the credit interest rates to which the country and its public companies can have access (Castañeda, Caro, and Contreras 2017; Wagner, Jara, and Musacchio 2018), Codelco’s debt has not been considered in this exercise because it does not directly affect the Chilean Treasury, i.e., it does not represent an actual outflow. Nevertheless, if the mentioned effect were to be considered, it would have had a negative impact on the result of the base case scenario.

The cash flows just described are summarized in Table 4.

Table 4 Summary of cash flows considered in the base case scenario

The net annual cash flow was calculated as follows:

$$\mathrm{Net}\;{\mathrm{income}}_t={\mathrm{Income}}_t-\mathrm{Nationalization}\;{\mathrm{cost}}_t-\mathrm{Capital}\;{\mathrm{contribution}}_t$$

Annual net income was then deflated by the Producer Price Index for All Commodities (PPIACO),¹⁴ to obtain their value in 2022 US dollars:

$${\mathrm{Net}\;\mathrm{income}\;(\mathrm{base}=2022)}_t={\mathrm{Net}\;\mathrm{income}}_t\bullet\frac{{PPIACO}_{2022}}{{PPIACO}_t}$$

Counterfactual scenario: mines of Codelco run by private companies

Under this scenario, Codelco would have never been created, and therefore, the only fiscal involvement over the hypothetical private mining operations would have been through tax collection. Consequently, only inflows representing the different tax payments that, theoretically, would have taken place were included. Specifically, the taxes considered were CIT, STMA, and Withholding Tax (WHT).

The calculation of the total tax payment was based on the following assumptions:

Same behavior

It was assumed that these mines would have had the same overall behavior and performance in this scenario, i.e., identical annual production, operating costs, and consequently, the same operating margins. Also, the same investments to sustain their production levels. It is plausible, however, to presume differences in productivity and efficiency between Codelco and other large-scale private mining companies operating in Chile, as conceptualized by Maxwell and Guj (2013). For this reason, a sensitivity analysis regarding the operating costs of the counterfactual scenario has been included (see the “Operating costs” section).

Tax burden status quo until 1973

One of the consequences of the Chileanization reforms, which began to be discussed in 1964, was the rearrangement of the tax regimes from which the large-scale copper mining companies benefited before the full Nationalization took place. Therefore, in the counterfactual scenario, since neither of these occurred, we assume that the overall large-scale copper tax burden of 73% in force in 1964 (Wagner 2005) would have remained unaffected until 1973 when the change of regime came into place after the coup.

Avoidance of double taxation

Chile has signed agreements to avoid double taxation with a series of countries over the years. All the large-scale copper mining companies operating in Chile have their headquarters in such countries. It is plausible then to assume that, in this counterfactual scenario, the private companies would have benefitted from these agreements, specifically by discounting 100% of their CIT payment from the WHT.

Companies’ efforts to minimize taxes

Even though it is well known that multinational corporations behave strategically to minimize their tax burden (Schmidt 1995; Jensen 2013; Altshuler and Grubert 2001), we assume that the theoretical companies in this scenario do not make such efforts. More specifically, a 100% yearly withdrawal of profits is assumed. This premise simplifies the calculations and general suppositions over the behavior of the companies. Nevertheless, a sensitivity analysis regarding the portion of profits withdrawn, and its periodicity, is also presented in the “Profit withdrawal policy” section (Table 5).

Table 5 Summary of cash flows considered in the counterfactual scenario

Thus, the annual tax payment was calculated as described below¹⁵:

$${\mathrm{Tax}\;\mathrm{revenue}}_t=\left(\mathrm{Profit}\;\mathrm{before}\;{\mathrm{taxes}}_t-{STMA}_t\right)\bullet\max\;\left({CIT\;\mathrm{rate}}_t,{WHT\;\mathrm{rate}}_t\bullet{\mathrm{profits}\;\mathrm{withdrawn}\lbrack\%\rbrack}_t\right)+{STMA}_t$$

Likewise, the annual tax payments in the counterfactual scenario were deflated by the PPIACO to obtain their value in 2022 US dollars:

$${\mathrm{Tax}\;\mathrm{revenue}\;(\mathrm{base}=2022)}_t={\mathrm{Tax}\;\mathrm{revenue}}_t\bullet\frac{{PPIACO}_{2022}}{{PPIACO}_t}$$

Discount rate

The discount rate is a critical parameter in DCF. The results obtained can be highly sensitive to this variable, and yet there is no universal rule for its definition (Komzolov et al. 2021; Taheri et al. 2010; Rudenno 2012; Topal 2008). Due to the nature of the ex-post NPV assessment presented in this article, determining the discount rate can be especially complex.

On one side, it can be argued that since the exercise is made from the perspective of the government, the applicable discount rate should be the one that the government uses for the evaluation of its social projects, currently at 6% (MDSF 2023) though it has been higher in the past, particularly in the early years after the Nationalization took place.¹⁶ However, comparing social investment projects such as hospitals, schools, or road infrastructure, with the nationalization of the large-scale copper mining industry does not seem appropriate. It is admissible to assume that the profitability expected by the government when nationalizing mining companies would be fairly above the one expected from social projects.

From a private perspective, the most widely used discount rate is based on their corporate cost of capital, calculated as the Weighted Average Cost of Capital (WACC) (Ryan and Ryan 2002; Rudenno 2012; Smith 2002; Taheri et al. 2010). In the mining industry, commonly accepted rates can vary between 8 and 12% (Rudenno 2012; Smith 2002; Topal 2008), though higher rates can also be found. Rudenno (2012), for example, highlights 15% as the management’s preferred discount rate. This value, 15%, is also used by Auger & Guzmán (2010) in their ex-post NPV assessment to evaluate the rationality of investments made by mining companies in the 1957–1999 period.

In the specific case of Codelco, the discount rate applied by the Chilean Copper Commission (Cochilco)¹⁷ for the evaluation of the company’s investment projects, based on its estimation of Codelco’s WACC, has been 10% for almost two decades.¹⁸

In consideration of the above, we have chosen a discount rate of 10%, in line with the trends and practices of the industry, and the historical Chilean Government estimation for the WACC of Codelco. Regardless, we have also included a sensitivity analysis covering discount rates in the range of 6–15%.

Results

The “Annual cash flows” section presents the annual cash flow considered in the analysis, not discounted, and expressed in 2022 US dollars (unless otherwise stated). Next, the “DCF and NPV assessment” section shows the DCF results. The sensitivity analysis regarding the discount rate, operating costs, and profit withdrawal can be found in the “Sensitivity analysis” section. Finally, the “Residual value” section presents alternative results when considering residual values for each scenario.

Annual cash flows

Figure 5 shows the annual inflows and outflows described in Table 4. The payments corresponding to the Nationalization cost were made between 1967 and 1991. In total, approximately $3,204 million was paid to the previous owners of the expropriated mining operations.

Fig. 5

Annual cash flow in the base case scenario (2022 US dollars). Source: Own

Conversely, the capital contributions from the government have been concentrated in recent decades. However, a large capital contribution of $1,342 million (nominal) was made in 1976, equivalent to approximately $5,889 million in 2022 US dollars. In sum, the government has made capital contributions to Codelco for $14,696 million.

The income perceived by the Chilean Treasury from its state-owned mining company has been especially significant during the 2004–2014 period as a result of the last copper price super-cycle. Total income from 1967 to 2022 reaches $147.8 billion.

Finally, the cumulative net income in the base case scenario, i.e., the net contribution of Codelco to Chile, discounting the Nationalization cost and capital contributions, is approximately $129.9 billion.

The annual cash flow of the counterfactual is presented in Fig. 6. Since the involvement of the government under this scheme relies exclusively on tax revenue, only non-negative flows can be perceived.

Fig. 6

Annual cash flow in the counterfactual scenario (2022 US dollars). Source: Own

Similarly to the base case scenario, higher tax revenue can be observed in the years during the last copper price super-cycle. Likewise, lower tax payments take place in years with low copper prices, e.g., right after the super-cycle in 2015 and 2016.

In the counterfactual scenario, the government would have collected a total of $63.5 billion.

DCF and NPV assessment

As previously mentioned, a 10% rate was used to discount the annual cash flow of each scenario. The cumulative DCF over the 1967–2022 period is presented in Fig. 7. It can be observed that, for most of the analyzed period, the cumulative DCF of the base case scenario is lower than the counterfactual’s, evidencing the impact of the Nationalization process’ elicited debts and early capital contributions. Only by 2006, during the copper price super-cycle, the cumulative DCF of the base case scenario surpasses the counterfactual’s, i.e., the cumulative DCF difference becomes positive, meaning a discounted payback of roughly 40 years.

Fig. 7

Results of the NPV assessment (2022 US dollars). Source: Own

For the complete 1967–2022 time period, the Resulting NPV, i.e., the NPV of the Nationalization process under the assumptions described in this article, is $116.4 billion.

Sensitivity analysis

In this section, a sensitivity analysis is presented, considering three key parameters: discount rate, operating costs in the counterfactual scenario, and profit withdrawal policy also in the counterfactual scenario. The effect of each assumption is evaluated separately as follows.

Discount rate

The NPV of each scenario was calculated using flat discount rates varying between 6 and 15%. The results are shown in Fig. 8.

Fig. 8

Discount rate sensitivity analysis for the NPV assessment (2022 US dollars). Source: Own

As expected, higher discount rates impact negatively the Resulting NPV, as a consequence of the greater influence of the early outflows in the base case scenario, i.e., the Nationalization cost and early capital contributions. Moreover, at an 11.09% discount rate, the Resulting NPV is zero, indicating the tightness of the positive financial results obtained in this exercise. It can also be observed that lower discount rates do not greatly affect the net present value, but a higher cost of capital can rapidly turn into a financial loss.

Operating costs

Authors often present varying perspectives when discussing the efficiency of private and state-owned companies. Theoretical arguments suggest that private companies are generally more efficient due to their profit-driven nature (Arocena and Oliveros 2012). An exemption comes from seaports and airports where ownership does not necessarily result in a significant increase in efficiency (Gong et al. 2012). In the case of railways, there is evidence of a 5–10% increase in efficiency (Estache et al. 2002), while manufacturing efficiency improvements are around 13% (Chirwa 2001). High-income countries have experienced approximately 4–8% profitability gains through privatization (D’Souza et al. 2005). In the mining sector, the efficiency gains of private firms compared to state-owned companies in the coal industry in India have been estimated to range between 2 and 6% (Parida and Madheswaran 2021). Considering these findings, we present a sensitivity analysis that explores the potential effect of efficiency gains from privatization on the government take.

Specifically, the cashflow for the 1971–2022 period in the counterfactual scenario was re-calculated introducing a reduction between 0 and 10% in the annual average operational cost¹⁹ of the hypothetical privately run mines. The cashflow in the 1967–1970 period remained unchanged as only in 1971 the Chilean government achieved full control of the operations. The results are presented in Fig. 9.

Fig. 9

Operating costs sensitivity analysis for the NPV assessment (2022 US dollars)

The analysis exhibits that an average operating cost reduction greater than 4.48% would translate into a negative Resulting NPV, i.e., making the counterfactual more convenient over the base case scenario.

Profit withdrawal policy

Different profit withdrawal strategies were evaluated focusing on two parameters: the annual extracted portion of the profits and the frequency with which the company would have drawn all the retained surplus. Scenarios with a yearly payout in the range of 50–100% were considered, and a frequency from 2 to 10 years. The range between 50 and 100% comes from different analyses focusing on the Chilean mining sector (Castillo and Valverde 2021; Jorratt 2021; Ministry of Finance 2022). The effect of these different behaviors was measured on the Resulting NPV and the internal return rate (IRR), as presented in Figs. 10 and 11, respectively.

Fig. 10

Profit withdrawal policy sensitivity analysis on the NPV assessment (2022 US dollars)

Fig. 11

Profit withdrawal policy sensitivity analysis on the IRR

As expected, this sensitivity analysis exhibits a significant increase in the Resulting NPV for strategies that tend to retain larger parts of the profits over longer periods. Regardless, the results prove robust when considering the moderate effect of these variations on the IRR, which reaches a maximum value of 15.71% in the most extreme scenario evaluated, i.e., an increase of only 4.62% (Fig. 11).

Residual value

Common methods to estimate the value of a mining company include DCF, market comparisons, and market multiples (Rudenno 2012). However, since Codelco is not publicly listed, determining its value requires a thorough analysis, which is out of the scope of this study.

Regardless, rough estimations can be made to assess the variation of the Resulting NPV when residual values (RVs) for both scenarios are taken into account. To this end, we employed a DCF approach. Out of simplicity, we have considered the average annual net income for the base case scenario and the average annual tax revenue for the counterfactual scenario, over the last 5, 10, 15, and 20 years. In each case, the average annual figures were projected over a 30-year period²⁰ and discounted at a 10% rate to obtain its NPV. The estimated values are presented in Table 6.

Table 6 Estimated residual values in each scenario ($ billion)

As can be seen, the estimated residual values vary significantly depending on the period used to calculate the average annual net income and tax revenue in each scenario. In the base case scenario, they range from $20.1 to $43.4 billion, while in the counterfactual they vary from $12.6 to $19.9 billion.

Though relying on averages to estimate residual values is an oversimplification, our objective is not to offer a meticulous assessment of this variable but simply to establish a straightforward method to compare them.²¹

Finally, the Resulting NPV for each combination was calculated as follows:

$$\mathrm{Resulting }NPV \left(\mathrm{with }RV\right)=\mathrm{Resulting }NPV \left(\mathrm{without }RV\right)+{BRV}_{i}-{CRV}_{j}$$

It can be observed from the results, presented in Fig. 12, that the Resulting NPV fluctuates between − 2% and + 29%, depending on which period is chosen for the estimation of the residual values in each scenario. Likewise, it is important to highlight that the spread on the variation of the Resulting NPV is considerably lower (+6% to +20%) when using the same period to estimate both averages. Particularly, considering a 20-year span, the Resulting NPV reaches $139.8 billion.

Fig. 12

Resulting NPV for different considerations (2022 US dollars). Source: Own

Conclusions

The Nationalization of the large-scale copper mines in Chile illustrates how these policies usually respond to complex historical and political processes. At the same time, it also serves as an example of the variety of means through which the nationalization itself can be implemented, and their implications.

The Chilean case was an extended process whose main milestones took place between 1967 and 1971, though the social and political factors that facilitated it were rooted years before. It was initially carried out via joint ventures, having the government purchasing a share of the mining assets during 1967–1969, and later through the unilateral decision of the government to fully nationalize the industry in 1971.

Though full-scale Nationalization was legally implemented, backed with consensual parliamentary approval, it meant significant financial and geopolitical costs for the country. Finally, compensation settlements had to be agreed upon with both the affected companies and the US government in 1974, creating financial obligations to be paid overtime.

To evaluate the financial convenience of the Nationalization process, we performed an ex-post NPV assessment over the annual cash flow that the government has perceived from the nationalized mining operations, i.e., Codelco, from 1967 to 2022. We compared this with a hypothetical counterfactual scenario in which these mines would have remained privately owned. The construction of the latter scenario is particularly complex as it involves simplifying assumptions over a 56-year period.

Despite the challenges, our estimates indicate that, purely from a financial perspective, the Nationalization was at best marginally positive for the country. Discount rates above 11.09% indicate a net loss for Chile. For comparison, the S&P 500 annualized average nominal return with dividend reinvestment in the last 50 years has been in the range of 10.5–11%. Likewise, moderate cost efficiencies from privatization in the counterfactual scenario would revert the obtained results, though this could be balanced with alternative profit withdrawal strategies. Our analysis is also robust to different residual values for each scenario. In the preferred approach, our estimation for the Resulting NPV varies in the range of + 6% to + 20%. These results are considerably influenced by the high copper prices observed in 2021, in part as a consequence of the extraordinary COVID-19 context. However, the financial performance of Codelco has already started to narrow and is expected to continue on the same path in the upcoming years, due to its large investment plan strained by delays and cost overruns in the development of its structural projects (Cesco 2023). All of these, if considered, would have affected negatively the corresponding residual values.

It is worth mentioning that we do not monetize geopolitical and private investment-related costs, national or international, that arose from the Nationalization process. The analysis also does not include the benefits derived from potentially reaching the stated goal of “economic independence” for Chile, nor the eventual value created from higher social cohesion (as a national pride symbol) because of the existence of a state-owned Codelco, among other possible gains and losses.

Finally, in a context of political uncertainty and increasing questioning of the social contribution of the mining sector, it is important to consider that nationalizations are usually endeavors with a high risk associated that carry legal complexities, onerous financial obligations, and political costs. Once implemented, the government must then face significant operational challenges on the domestic front, coupled with foreign investment and geopolitical ramifications internationally.

We expect that the financial analysis of the most well-known case of a “successful” nationalization in the mining industry provides support for a more thoughtful mineral policy, where countries manage their resources beyond the seeking of mineral rents. We remain optimistic that both state-owned and private companies can reach a balance that supports sustainable human and economic development in resource-rich countries.