INTELLIGENCE REPORT CHILE: US COPPER INVESTMENTS UNDER FIRE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP71T00730R000200040009-8
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 38
• Document Creation Date: November 9, 2016
• Document Release Date: September 17, 1998
• Sequence Number: 9
• Publication Date: July 14, 1969
• Content Type: IR

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AT?
DIRECTORATE OF
INTELLIGENCE
Intelligence Report
Chile: US Copper Investments Under Fire
14 July 1969
No. 1872/69
313
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WARNING
This doc:-ument. contains information affecting the n
defense of the United Statrs mg o Title
18 s o the US Code, as amended.
s transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
EXCLUDED FROM AUTOMATIC
DOWNGRADING AND
D Et; 1,.A N 5I F` I C A T f O N
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
14 July 1969
INTELLIGENCE REPORT
Chile: US Copper Investments Under Fire
Summary
Although the agreement between the Chilean Gov-
ernment and Anaconda providing for progressive na-
tionalization of the company's Chilean properties,
with compensation, may prevent an early crisis in-
volving the US Government, the future status of the
US copper investments remains clouded. President
Frei may be able during his remaining 16 months in
office to block the more drastic nationalization
measures favored by some Chilean congressmen. His
forthcoming negotiations with Kennecott and Cerro
(the other US copper companies in Chile) could fail,
however. The left could win the 1970 presidential
election and subsequently demand renegotiation of
the new copper agreements or institute immediate,
full nationalization. Even if the agreements sur-
vive, compensation payments may not be sustained
when--almost inevitably--Chile runs short of foreign
exchange.
During four decades preceding Frei's election
in 1964, Chile's intervention in and financial bene-
fits from the large US-owned copper mines (known as
the Gran Mineria) increased greatly. Under Frei's
"Chileanizataon program, the government obtained
partial ownership of some properties and the promise
of company investments sufficient to almost double
production and triple refining capacity. In exchange,
Note: This report was produced solely by CIA. It
was prepared by the Office of Current Intelligence
and the Office of Economic Research and coordinated
with the Office of Nationa-Z Estimates and the Clan-
destine Service.
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it guaranteed tax stability at improved rates for 20
years. Because of high world copper prices, both
Chile and the companies have had large revenues since
the final decrees were signed in early 1967. Moreover,
the expansion program has moved ahead rapidly. This
year, however, high company profits combined with
political factors to intensify the ever-present
pressures for nationalization.
Frei had proposed his "Chileanization" program
during the 1964 presidential campaign as an alterna-
tive to the Marxist candidate's nationalization scheme.
Kennecott and Anaconda, the two main producers, re-
acted differently to Frei's proposals because their
Chilean properties differed in importance to them.
Since 1938, Kennecott had invested relatively little
in its Ten:iente mine, which by the early 1960s ac-
counted for one third or less of the company's copper
output and roughly 10 percent of its net income.
Because Teniente's production had increased little
for years, Kennecott's tax rates remained very high,
averaging more than 80 percent between 1960 and 1966.
Kennecott therefore decided to sell 51 percent of
its stock to the Chilean Government at a reasonably
good price in exchange for substantially reduced tax
rates and a promise of tax stability. Moreover, it
was not required to put "new" money of its own into
Chile but merely to lend to the joint company the
government's payments for its equity.
Despite an increasingly difficult political
environment from the 1930s on, Anaconda continued
to invest in its two Chilean properties--the Chu-
quicamata mine, possibly the most valuable in the
world, and the Salvador mine. Their combined book
value of about $500 million in 1960 composed about
two thirds of the company's net fixed assets. More-
over, Anaconda's Chilean holdings accounted for
about 70 percent of its copper production and a
similar share of its profits. Because it feared
that loss of control over these properties would
put it in a bad business position in the United
States, Anaconda agreed to invest about $225 million
in its Chilean properties in exchange for only a
minor improvement in its tax rates and retention of
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full control in its existing operations. It also
agreed to sell to the Chilean Government for a nomi-
nal price a 25-percent interest in a new mine it is
developing.
Since the signing of the copper agreements,
Chile's gains from the industry have been greater
than anticipated. The government had expected the
tax concessions to reduce its revenues from copper
for a few years, but unexpectedly high world prices
made production so profitable that tax receipts in-
creased in 1967. A further increase in 1968 was
secured through a forced loan from the copper com-
panies. The Gran Mineria investment program has
moved ahead qu ckkly. Despite a late start, as much
as $400 million--or nearly two thirds of the sched-
uled total--may have been invested by mid-1969.
These investments have about offset the increased
after-tax earnings of the copper companies, so that
there has been little net repatriation of funds.
.Higher prices and (to a far lesser extent) tax
concessions brought net company profits to record
levels averaging about $115 million in 1967-68, com-
pared with $93 million in 1966 and about $45 million
in 1964 and 1965. Although the government's share
of gross profits fell from an average of 68 percent
in 1960-66 to 63 percent in the first year under the
agreements, the share returned to 67 percent in 1968
because of the forced loan (which has been reimposed
in 1969). The proportion of total Gran Mineria
revenues spent in Chile for taxes, labor costs, and
domestic purchases of goods and services for operat-
ing purposes and for the investment program probably
is at an all-time high.
Despite rapid progress under the investment
program and high Chilean earnings, pressures for
nationalization--never far below the surface--were
strengthened. Several factors were responsible:
the government's perennial financial difficulties,
the results of the congressional elections last
March, maneuvering for advantage in the Presidential
election to be held in September 1970, and Peru's
expropriation of the IPC. Moreover, the large
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company profits resulting from high copper prices
were widely viewed in Chile as windfalls that were
not anticipated when the agreements were signed and
to which the government had a moral right. The na-
tionalization of US copper holdings thus had wide
popular appeal, and few politicians wanted to be
left behind in the race to achieve this end, what-
ever the cost.
Political pressures on the Frei government to
nationalize the copper companies (particularly Ana-
conda) became intense. Two bills calling for ex-
propriation were introduced in Congress, and a third
bill was drafted by elements of Frei's Christian
Democratic Party--all providing little or no compen-
sation. Consequently Frei sought a revision of the
earlier agreements with Anaconda, hoping to head
off radical Congressional moves without suffering
political losses.
During the negotiations with Anaconda, the
Chilean Government insisted on obtaining majority
control of the company's Chilean properties. In
the hope of retaining control, Anaconda offered a
new tax arrangement that would give Chile higher
revenues, under current conditions, than the gov-
ernment's tax proposal. On 26 June, President Frei
and Anaconda announced agreement along the following
lines:
-?-Chile :'gill acquire majority ownership (51
percent) of the Anacon(la, properties on 1 January
1970 and will begin buying the remaining equity no
later than 1981.
--Compensation for the 51-percent interest will
be based on the book value of the properties and
will be paid in bonds redeemable in dollars over 12
years with interest at six percent. A more flexible
formula will be used to compensate Anaconda for the
remaining 49 percent.
--Although Chile will have the controlling in-
terest in the two now companies that will take over
ownership of the )urines,s\naconc,.a will operate the
mines for at least three years under a service contract.
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--Anaconda's profits on its reduced equity will
be subject to higher, progressive tax rates whenever
copper prices exceed 40 cents a pound.
The agreement is unfavorable to Anaconda, in-
volving a decline of more than 60 percent in its
net profits from the Chuquicamata and Salvador mines
at 1968 prices and rates of production. The company
had little choice, however, because the most prob-
able alternative was immediate expropriation. Also,
the company had failed to put its coverage under
the US investment guaranty program. If the new in-
vestments increase the mines' production as expected,
and if the Chilean Government pays compensation as
scheduled, however, the company can still expect
substantial earnings and even larger repatriation of
funds--possibly on the order of $100 million annually
in the early 1970s if the price of copper were about
50 cents a pound. The agreement and the compensation
payments could fall victim to political or economic
developments, such as Congressional action for imme-
diate nationalization (unless successfully vetoed by
Frei), the coming to power of a leftist administra-
tion in late 1970, or one of Chile's endemic foreign
exchange crises. Even if the agreement is not
changed, it seems unlikely that Chile will allow
large-scale repatriation of funds over a long term.
The government is committed to negotiate similar
agreements with Kennecott and Cerro. Kennecott's
profits would be cut by only about 30 percent, since
51 percent of the properties was sold to the govern-
ment in 1967. Its bargaining position is stronger
than Anaconda's because most of its assets are out-
side Chile and because it is covered under the US
investment guaranty program. Negotiations with Cerro
promise to be complicated because the Export-Import
Bank and Japanese interests also are involved in the
financing of its new mine.
Under the new agreement with Anaconda, Chile
will not only receive larger earning from copper but
can also probably count on completion of the current
copper investment program. Moreover, Chile has gained
time to prepare for eventual operation of the mines
itself, although even a sudden expropriation need
not create severe economic difficulties.
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The Setting
1. In recent months the Frei administration has pressed
for fundamental changes in its two-year-old agreements with
the US copper companies that might enable it to sidestep the
prompt, outright expropriation that probably is favored by
most Chileans and a majority in the Congress. Agreement on
the long-term nationalization of Anaconda's two established
mines was announced on 26 June, and basic changes are likely
in the status of the other two US copper companies in Chile.
Although a new era clearly has arrived for the US copper in-
vestments, which are the mainstay of the economy and one of
the largest US investments in Latin America, many problems
remain to be resolved.
2. The copper industry accounts for about three fourths
of Chile's export: earnings, one sixth of the government's rev-
enues, nine percent of gross domestic product, and five per-
cent of the industrial labor force. More than 80 percent of
copper production comes from the following three large mines,
known as the Gran Mineria:
--the Chuquicamata mine, wholly owned by the Anaconda
Company through its subsidiary, the Chile Exploration
Company
--the Salvador mine,
wholly owned by Anaconda
through another subsidiary,
the Andes Copper Mining
Company
--the Teniente mine,
which until 1967 was
wholly owned by the Ken-
necott Copper Corporation
through its subsidiary,
the Braden Copper Com-
pany, but is now a joint
venture with the Chilean
Government under the name
El Teniente Mining Com-
pany.
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3. Chile's annual copper output of 660,000
metric tons constitutes 12 percent of world pro-
duction and makes Chile the world's third largest
producer. About 60 percent of Chile's copper is
refined domestically. The Gran Mineria complex
has all of Chile's refining capacity except for two
government-owned smelters and an electrolytic re-
finery completed by the government with West German
assistance in 1966. Under the current expansion
program, which involves investment of $620 million
by the Gran Mineria and $130 million by small- and
medium-s zed mi-'nes, the Chilean Government hopes to
raise output to 1.2 million metric tons annually and
almost to triple refining capacity by 1972. Comple-
tion of the program would make Chile the largest
copper exporting nation in the world by the early
1970s, even though other major exporters also are
expanding operations.
4. Chile gets a large cut of the Gran Mineria's
profits and benefits in other important ways. The
government's share of the profits has ranged from 63
to 74 percent in recent years. In addition, the Gran
Mineria at present spends some $200 million annually-
fordomestic goods and services required in operations.
Moreover, more than half of the materials and equip-
ment and most of the construction and technical ser-
vices required for the investment program are to be
bought in Chile. By the end of 1968, these purchases
already had reached $150 million and were providing
a badly needed impetus to some other industries.
5. Both Chile and the copper companies have
benefited greatly from rising copper prices in re-
cent years. Until 1966 the average price Chile re-
ceived for its copper moved in line with US prices,
ranging from 29 to 32 cents per pound during 1959-
64 and then rising to 35 cents in 1965. Because
of booming demand, world copper prices rose sharply
in 1966 and have since remained high. US prices,
however, were controlled, and rose only slowly.
Consequently, Chile began to sell its copper on the
basis of prices on the free London Metal Exchange,
and the f.o.b. export prices of the Gran Mineria
rose from about 35 cents in January 1966 to 59 cents
in April and 67 cents in May.
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CHILE: Trends in Copper Output
Thousand
Metric Tons
1901
-10
Chile's Percentage Share of World Output
400
1901-10 1911-20 1921-30 1931-40 1941-50 1951-60 1961-65 1966 1961 1968
-ANNUAL AVERAGE.
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Chilean Returns From the Gran Mineria Before Frei's
Election
6. During the four decades preceding Frei's
election in 1.964, the returned value* to Chile from
the copper companies' operations increased enormously
as a result of growing.taxation, foreign exchange
controls, and marketing regulations, as well as social
legislation that boosted labor costs throughout in-
dustry. At the beginning of this period copper ex-
ports amounted to some $45 million, but the returned
value for Chile was relatively small. Taxes were
low, employment was limited by the capital-intensive
nature of the industry, and it was economically ad-
vantageous for the copper companies to import most
of their needed materials and equipment. Returned
value rose from 38 percent of the value of production
in 1925 to 45 percent in 1931, suffered a setback during
the world depression, and then soared from 36 percent
in 1938 to 94 percent in 1953**. Chile's copper pro-
duction continued to climb during the period up through
World War II, and its share in total world copper out-
put rose from 14 percent in the 1920s to a peak of
21 percent in 1948. High taxes and production costs
and excessive government intervention in the industry
made it increasingly difficult to compete in the world
market, however, and during the Korean War boom Chile's
share of world production declined sharply. By 1953,
Chilean copper made up only 13 percent of world output,
a share that haa in general merely been maintained
during the past 15 years (see the chart, "Trends in
Copper Output").
't Returned value is a concept employed by the
Chilean authorities to measure the economy's benefits
from the Gran Mineria. It consists of direct taxes,
other taxes and duties, and the companies' purchases
of domestic goods and services on current account.
Gross returned value also includes purchases of domestic
goods and services for investment purposes. Value
not returned to Chile consists of net company profits,
capital depreciation (that is, repatriated investment),
and imports of goods and services.
;t'FFor further details on this period, see the
Appendix.
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7. By the early 1950s, it was apparent that
the copper industry was almost bankrupt. The "New
Deal" copper law of May 1955 replaced the cumbersome
and counterproductive array of taxes, surtaxes, and
extraordinary taxes with a unified system that re-
stored production incentives. The law provided for
a basic tax of 50 percent on profits and...a surtax
that would start at 25 percent and decline progres-
sively as the company increased production above the
1949-53 level. Moreover, special deductions were
permitted for new investments in electrolytic re-
fineries and other preferred projects, and profits
from new mines producing over 25,000 tons annually
were exempt from the surtax. Anaconda.-responded by
investing about $110 million in the new Salvador mine
and $50 million in expansion of the Chuquicamata mine
during 1956-60. Kennecott's investment expenditures
at Teniente continued to be small, however, totaling
about $15 million for the five-year period.
8. The favorable atmosphere evaporated in the
early 1960s as political attacks on the companies
resumed. In late 1961, as a means of financing
government wage increases, Congress imposed two sur-
taxes, totaling 13 percent, on profits. Thereafter,
Congressmen introduced various bills detrimental to
the copper companies which, although not passed, shook'
investor confidence. The companies made it clear
that their proposed $325-million expansion program
was contingent on a government guarantee of no further
increases in taxes or controls. As political ten-
sions rose, it became apparent that major new legis-
lation and investment decisions would have to await
the outcome of the 1964 election.
Frei's Program of "Chileanization" and Investment
Expansion
9. Frei proposed his "Chileanization" program
during the 1964 presidential campaign as an alterna-
tive to the :Marxist candidate's nationalization scheme.
Shortly after assuming office in November 1964, Frei
announced that the appropriate agreements had been
signed with Kennecott, Anaconda, and Cerro. The
agreements called for large new company investments
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Million
US Dollars
1000
900
CHILE: Trends in Copper Exports
*~, = ~ =to
500
Value of Total Exports
Thousand
Metric Tons
-1000
Value of Copper Exports
400
Volume of Copper E ports
-600
- 500
- 400
CONFIDENTIAL
95458 7-69 CIA
0
1960 1961 1962 1963 1964 1965 1966 1967 1968
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in copper production and refining, government acqui-
sition of a controlling interest and greater policy
influence in Kennecott's Teniente property, and gov-
ernment ownership of 25 percent of two new mines to
be opened by Anaconda and Cerro. In return the com-
panies were to benefit from reduced and nondiscrimina-
tory tax rates that would be maintained for 20 years.
10. Legislation to implement the agreements
was not completed until April 1966, after a long
and tortuous journey through Congress, where it was
attacked by the left, received lukewarm support from
the right, and created splits within Frei's Christian
Democratic Party. The government's Copper Corporation
then began negotiating the details of five separate,
complicated agreements. The first investment decree
(the legal document culminating the negotiations) was
signed on 9 December 1966 with the Campania Minera
Andina, a firm jointly owned by Cerro Corporation and
EE-3-Chilean Government. Decrees authorizing expansion
of Anaconda's existing operations and its joint venture
with the government in developing a new mine--Exotica--
were signed on 23 December 1966 and 10 February 1967,
respectively. Signature of the decree concerning the
Teniente joint venture was delayed until 13 April 1967,
reportedly because of disagreements concerning Braden's
management contract.
11. The agreements with Anaconda and Kennecott
differ widely, although the Chilean Government had
made essentially the same offer to both. Kennecott's
agreement seemed to be the most generous and concilia-
tory, giving the government a controlling interest in
the Teniente mine for $83 million. -Actually, this
concession was not particularly burdensome for Kennecott,
because Teniente accounted for only one third or less
of the company's copper output and little more than
10 percent of its net income. The book value of the
Teniente operation in early 1967, when the government
acquired its interest, was only $102 million.
12. At the same time, Kennecott won a sharp
tax cut on the Teniente operation. Because produc-
tion had increased little after the 1955 "New Deal,"
taxes had remained very heavy--amounting to 82 percent
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of gross profits during 1964-66. Under the 1967
agreement, the effective tax rate on the company's
share of the profits dropped to 44 percent, and the
government began to receive 72.5 percent of Teniente's
total profits in taxes and dividends.
13. Although $234 million is to be spent to
expand Tenie:nte's production capacity from 180,000
to 280,000 metric tons annually, Kennecott is in-
vesting no "'new" money of its own in the venture.
It is merely obligated to lend to the joint company
the payments that Chile is making for its equity over
a four-year period. The funds are to be repaid to
Kennecott at. 5.75-percent interest between 1972 and
1986. In addition, the Export-Import Bank has loaned
$110 million to the operation, and Chile's Copper Cor-
poration is to provide $40 million from government
copper dividends.
14. Anaconda's response to Frei's proposals,
which differed sharply from Kennecott's, was con-
ditioned by the fact that its Chilean holdings ac-
count for about 70 percent of its copper production
and a similar share of its profits. Despite the
increasingly difficult political environment from
the 1930s on, Anaconda
had continued to invest
in its Chilean holdings.
The combined book value
of Chile Exploration and
Andes Mining reached al-
most $500 million in 1960,
at which time it amounted
to about two thirds of
Anaconda's net fixed as-
sets. Although Anaconda
has been expanding output
in the US and elsewhere
and had been diversifying
into Other products, it
feared that loss of con-
trol over its Chilean
properties would place
it in a poor business
position.
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15. Under the decision finally reached in 1966,
Anaconda retained full control Of its Chuquicamata
and Salvador operations but agreed to invest $126
million to expand their annual capacity from 350,000
to about 515,000 metric tons. Anaconda also agreed
to invest $60 million in housing for miners at Chu-
quicamata and at a new mine to be developed jointly
with the government., It sold a 25-percent interest
in the new Exotica property for the nominal price
of about $4 million and agreed to invest $43.7 million
in it to develop an annual production capacity of
110,000 metric tons. The government also obtained
a 49-percent equity in a joint company formed to seek
and evaluate new ore bodies. Either Anaconda or the
Chilean Government would have a two-thirds equity in
any new development, depending upon whether the ore
was located on Anaconda or state property.
16. Tax arrangements for Anaconda were changed
in only two important respects: the government re-
moved the surtaxes passed in 1961 and guaranteed that
there would be no discriminatory taxes and no increase
in taxes or other charges. Otherwise, the government
merely raised the basic tax rate for the Chile Explora-
tion Company from 50 to 52:.5 percent and replaced the
old surcharge of 25 percent with a variable surcharge
of 33 percent: based on 1955 production. Under the
new arrangements, the tax rate for the Chuquicamata
mine was 58 percent at the 1967 level of production,
compared with a 62-percent average during 1960-66.
The tax rate for Anaconda's other subsidiary, Andes
Mining, remained at 50 percent--the preferential rate
allowed for the new mines under the 1955 "New Deal."
17. The Chilean Government probably would not
have profited more had Anaconda decided on an arrange-
ment like Kennecott's. It would have had to pay $300-
350 million over four years for a 51-percent interest
in Anaconda's mines, and Anaconda could have loaned
these payments to the joint company in lieu of bring-
ing in about $225 million in new funds. Moreover, a
different profit-sharing plan would have been required
because a 72.5/27.5-percent split such as was arranged
with Kennecott as an incentive to Chileanize would
have reduced net profits for Anaconda.
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19. Since the signing of the copper agreements,
both Chile's and the companies' gains from the industry
have been greater than expected, mainly because of the
continued rise in the copper export price. The balance
of payments has improved as a result of the increased
export earnings and a higher level of foreign invest-
ment under the copper expansion program. Government
revenues from copper did not decline even temporarily
because high prices offset reduced tax rates. Net com-
pany profits have increased markedly.
20. After a late start, the investment program
has moved ahead quickly. By the end of 1968, $275 mil-
lion already had been invested under the $620 million
Gran Mineria program. Of this amount the Anaconda sub-
sidiaries had invested $121 million (52 percent of their
planned program), Kennecott and the Chilean Government
$91 million (39 percent of the program), and Cerro $64
Effects of the Copper Agreements
18. The investment agreement in 1966 with
Cerro Corporation was the culmination of more than
a decade of negotiations, the company having acquired
its option on the Rio Blanco copper deposit in 1955.
The original agreement gave the Chilean Government
a 25-percent interest in the company and authorized
an investment of $89 million to develop an annual pro-
duction capacity of 59,000 metric tons of copper con-
centrate. Cerro agreed to invest $22.5 million, the
Chilean Government $7..5 million, and Export-Import
Bank $35 million. The remaining $24 million was pro-
vided by a group of Japanese smelters, which are to
receive a large share of the mine's production when
it comes into operation in 1971. Unforeseen engineer-
ing problems and sharply rising labor and material
costs forced refinancing of the project in September
1968. Total costs now are estimated at $157 million,
with Cerro providing an additional $21 million, the
Chilean Government $7 million, Export-Import Bank $21
million, and the group of Japanese smelters and other
sources $19 million'. The Chilean Government exacted
an additional. 5-percent interest and other concessions
from Cerro in, return for authorization to refinance the
project. (Details of the government's investment agree-
ments with all members of the Gran Mineria are presented
in Table 1.)
Controlled Dissem
No Foreign Disseem'RBBaaFckground Use Only
Approved For Release 1999/09 0*.&TRDP71 T00730R000200040009-8
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1,