CEPAL Review no. 124

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CEPAL Review N° 124 • April 2018 109 (b) Return on exploration expenditure To correct for the return on capital that is required in exploration activities, the WB GMP-10 mining rent must be reduced by the exploration expenses that private mining companies are forced to incur to sustain their activity over time. This expense is considered ex-ante, in other words the expected returns must include the probability of succeeding or failing in the exploration activities, in the planning stage. As noted by López and Figueroa (2014), companies should be allowed to legitimately appropriate part of the profits or mining rent, in order to undertake mining exploration activities. The portion in question must be calculated on the basis of the expected profitability of the exploration performed, including the probability of success of the activity. Bartrop and Guj (2009) define a typology of mining exploration activities. To avoid the economic rent being overestimated; and, following these two authors, Chile’s GMP-10 has been typified as an industry that has carried out and permanently undertakes exploration work in search of large deposits in unexplored areas. It is also considered that exploration faces a high level of risk because there is little previous work, the geology is poorly known, the explorable areas are remote, and large-scale exploration programmes are required. The lowest value of the probability of success is 2.5%, which could be considered excessively low for Chile, given current knowledge of the geology of certain areas and the amount of copper thought to exist in the subsoil of certain areas of the country, for example. Nonetheless, this assumption makes it possible to maintain conceptual consistency and avoid the risk of overestimation when calculating the net GMP-10 rent. In view of the above, the premium, ex ante, turns exploration expenditure into an investment needed to sustain the mining activity. Figure 4 reports the annual exploration expenditure of all private mining firms in Chile, which here are assumed to be equivalent to GMP-10, according to the data provided by COCHILCO (2015). It also displays the premium for exploration expenditure, which in the case of this study corresponds to three times the declared expenditure, given a 10% normal rate of return and a 2.5% probability of success. Figure 4 Chile: annual GMP-10 exploration expenditure and the compensatory return required by this activity, 2005-2014 (Billions of dollars) a 5 4 3 2.75 3.16 2.72 2 1.79 1.82 2.25 1.28 1.19 0.92 1.05 0.91 1 0.64 0.77 0.60 0.61 0.75 0.43 0.40 0.21 0.26 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Reported exploration expenditure Exploration expenditure premium Source: Prepared by the author, on the basis of COCHILCO (Chilean Copper Commission), Anuario de estadísticas del cobre y otros minerales, 1996-2015, Santiago, 2015. a At October 2016 prices. Gino Sturla Zerene, Ramón E. López, Eugenio Figueroa B. and Simón Accorsi O.
110 CEPAL Review N° 124 • April 2018 This way of measuring exploration expenses has the potential for overestimation, especially since the data used to calculate them comes from what the firms themselves declare; and the firms have incentives to inflate them artificially. Unfortunately, this is the only available source of data on exploration expenses. (c) Return for copper price volatility The price of copper has fluctuated widely over the last 45 years, including a strong upswing at the start of the twenty-first century. This section uses a 45-year series of copper prices spanning 1970-2014, together with time series tools, to determine a long-term or trend price for copper in 2005-2014. The aim is to recalculate the GMP-10 mining rent, using a long-term copper price series, from which the cyclical component has been removed. In other words, the copper prices observed each year are turned into a smoothed long-term trend series, from which short-term fluctuations have been eliminated. There are several tools available to decompose trend cycles, of which the most basic is linear regression. The time-series literature provides sophisticated statistical methodologies that have computer packages that can be applied to observed time series. The most widely used and validated methodology is probably the HP filter (Hodrick and Prescott, 1997). The present study uses the HP-100 filter, which is recommended for the annual series, to extract a trend price from the observed series. The HP-100 filter makes it possible to decompose the observed price series into a cyclical component and a trend component. Thus, the trend series of the price can be interpreted as the time sequence of the longterm price. Figure 5 shows the evolution of the observed copper price with a solid black line and the long-term trend price with a dashed grey line. Figure 5 International observed copper price and long-term price obtained using the Hodrick and Prescott filter, 1970-2015 (Dollars per pound) a 5 4 3 2 1 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: Prepared by the authors. a At October 2016 prices. Observed price HP-100 trend price The wealth gifted to the large-scale copper mining industry in Chile: new estimates, 2005-2014
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APRIL • 2018 More unequal or less
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Alicia Bárcena Executive Secretary
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Explanatory notes - Three dots (...
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Publicaciones recientes de la CEPAL
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estudios del cambio climático en a
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EDITORIAL BOARD Osvaldo Sunkel Chai
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