SQM, the world's second-largest producer of lithium, led the sector lower on May 17 after its shares suddenly plunged more than 10 per cent.
Why the sudden plunge in lithium's leading share prices?
What is going on in Chile?
Chile's center-right ruling coalition, Progressive Chile, suffered a heavy defeat in local elections and the election of members of the "constituent assembly" on Tuesday, according to the latest news from CCTV News. The ruling center-right coalition, Progressive Chile, failed to get one third of the seats in the "constituent assembly" that will be responsible for drafting new constitutional provisions.
According to 98.3% of the vote counted by Chile's electoral commission, Chile Forward won just 37 of the 155 seats in the Constituent Assembly. Independent candidates and representatives of center-left opposition parties won strong support in their contests for the assembly's seats.
The 155-member "constituent assembly" will have nine months to write a new constitution that will be approved by a national referendum.
The coalition's defeat leaves the drafting of a new constitution largely in the hands of the opposition, which means the chances of a new royalty bill being passed have increased.
In late March, Chile's lower house of Congress approved a royalty bill proposed by the opposition.
The bill proposes an AD valorem 3 per cent royalty on the value of mined minerals for companies that produce more than 50,000 tonnes of lithium carbonate and 12,000 tonnes of copper.
Mining companies in Chile currently pay a corporate tax of 27%, with mining taxes ranging from 5-14% based on profits produced, depending on productivity.
According to the analysis, if the new royalty system is implemented, the tax rate of enterprises will be as high as 44%.
Chile's ruling coalition, mining associations and mining companies have all raised objections to the new royalty bill.
"If the proposal becomes law, mines with copper sales of more than 12,000 tonnes a year and lithium sales of more than 50,000 tonnes a year will pay a combined 82 per cent in royalties and taxes, significantly higher than in other big mining countries," said Juan Carlos Jobet, Chile's minister of mines and energy.
"The proposed tax, if implemented, would be beyond the realm of reason."
He said the proposal violated constitutional principles and said the government of President Sebastian Pinera would oppose it.
Manuel Viera, president of the Chilean Chamber of Mines, also opposed the bill, saying it would affect the country's legal stability.
Diego Hernandez, head of Chile's Soname Mining Association, said: "If the tax is imposed under the new mining royalty proposal, 12 of the country's top 15 mining companies will be severely affected and lose money."
"This proposal would really cause considerable disruption to the industry," Ragnar Ud, head of BHP's Latin America headquarters, said in an interview. "It would kill the goose that lays the golden egg for mining development."
Ivan Arriagada, chief executive of Antofagasta Minerals, said some of the company's mines could even be forced to suspend due to debt if the proposal was approved.
The bill still needs to be voted on in the Senate, and its future is uncertain.
However, Chilean media have previously reported that President Pinera's government may try to block the Constitutional Court's approval of the royalty bill even if it is approved by the Senate.
However, the current situation is that the ruling coalition of Chile has been defeated in the election of members of the "constituent assembly", and the opposition party has gained more public support and will probably lead the drafting of the new constitution, which means that the possibility of the new royalty bill to win the final "victory" has been greatly improved.
The royalty bill, if passed and implemented, will boost the government's finances in the short term, but hurt mining companies in the long term.
In addition, high taxes will lead to a decrease in new investment, which is not conducive to the sustainable development of the country's mining industry.
