EY in Chile generates a tenth of its revenues from the mining industry.
Could you please give an overview of EY’s Mining & Metals group?
EY has a global Mining & Metals group that is based in Australia. We have a local mining group in Chile with around 80 professionals within different service lines that are fully dedicated to the mining industry, and there are other specialists who help us during peak workloads. There are around nine partners in this group; we get together to discuss mining industry issues and then we brainstorm to see how we can help with those issues. It is a fun way to work because specialists from different service lines work together around business and operational issues to find the best way to help our clients.
How does EY help optimize its clients’ expenditures?
After many of the mining companies implemented the obvious measures to optimize expenditures, not all of them continued to the next phase of understanding how to get the most productivity out of their assets nor did they focus on working capital. For example, some of our clients focused mainly on accounts payable and receivable, but they did not understand that they needed to also focus on their inventory to optimize their working capital. We shared insights on how to review your inventory as a powerful tool to improve your working capital.
How have you seen the capital raising environment change over the past few years?
Companies are always looking for new ideas to fund their projects and they are getting more creative since banks are more reluctant to take risks in the mining industry. They are looking for different types of financing, including royalties, metal streaming, and minority partnerships. At EY, we have seen an increase in companies inquiring about how metal streaming could work in Chile. However, the regulatory environment in Chile is not ready for that and it is not clear what the tax implications would be for metal streaming.
As the market has begun to recover, have you noticed an increase in consolidation?
The M&A deals we have seen have been very difficult to close because there is typically a mismatch in expectations. Some companies are willing to sell an asset for a lower price, but not as low as the buyers would like. It shows optimism within the industry that companies are not liquidating assets, but rather choosing to sit on them and wait as the market improves and perhaps operate them themselves later on.
Regarding regulations, how transparent is Chile compared to other jurisdictions?
In my opinion Chile has standard regulations in terms of transparency; there is space for improvement. Recently, there was news regarding one-to-one bids, granting large contracts in a selective manner. Situation like that do not benefit our market. There has been a change over the last five years, but I do not think we are at our capacity regarding transparency. I believe that it would bring benefit for the mining industry to be even more transparent. That kind of transparency would allow the citizens to see what these companies are spending within the communities and the overall benefits in employment.
Do you think Chile’s lack of tax exemptions deters foreign investment?
I believe Chile is not as attractive to foreign investors as it was before the tax reforms of the last ten years. It has been getting increasingly expensive to do business in Chile, particularly for the mining industry. However, compared to other countries, mining companies pay similar taxes, and Chile is a relatively stable country. Chile is still quite competitive, but I also think the latest tax and labor reforms make doing business more difficult. Chile is now facing a new presidential election, so there could be more reforms to come; it may be the case that some changes implemented by the current government will not last.
If you were to design the new tax reform, what are the key points you would highlight?
After the reform, there will be two systems. One is the attributed system, in which companies pay 35% taxes whether they distribute profits to final shareholders or keep the fund within the company. I would take that away, as it creates a disincentive for companies to invest and spend within Chile. The second system is the semi-integrated system, in which companies get credit for corporate taxes paid against final taxes to shareholders only when profits are actually distributed to final shareholders. Companies used to get a 100% credit, but now, unless a foreign shareholder has a tax treaty with Chile, they can only credit 65%. I think that is very unfair to local shareholders (individuals) or foreign shareholders in jurisdictions without a tax treaty. Chile should go back to the previous system that allows a deferral of final taxes and also allows everyone to have that 100% credit, not only because it is fair, but also because it was a system that made companies want to invest within Chile.
What makes EY’s Mining & Metals group the go-to advisory solution?
EY’s advisory team, which is a very strong pillar for our whole group, includes people from all service lines and is quite futuristic, meaning they are forward thinkers who have a lot of experience, particularly abroad. They are bringing ideas and solutions into Chile that are new to us, including the use of data analytics for predictive maintenance and remote mine operations. They also have systems to help large companies think about how they supply everything, as well as analyze what they buy and from which country. EY has a strong mine-to-market approach, which is like a manufacturer approach but applied to the mining industry. Mining is very important to EY Chile’s overall portfolio; this year almost 10% of our revenue comes from the mining industry.
What advice do you have for our investor readership?
Investors need to understand regulations to really understand how to invest better. There are many things to think about besides the specific assets, and they need to model things out to every detail and in a tangible way. For example, they should model out how they structure their investment, how are things going to work if they engage in a joint venture, or how they are going to take their profits out of the country, not just in two years, but in twenty years.