Protests threaten energy-hungry Chile mines

TOTORAL, Chile Mon Apr 16, 2012 10:29am EDT

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TOTORAL, Chile (Reuters) - It took just a handful of fishermen and artisans from this tiny village in northern Chile to threaten a $5 billion coal-fired thermoelectric plant desperately needed by nearby copper mines.

The remote, verdant village of Totoral's bid to block Brazilian billionaire Eike Batista's huge Central Castilla power project on environmental grounds is now in the hands of the Supreme Court.

The plant aims to provide power to major mining projects in the Atacama desert region, but residents say its emissions will harm air quality and that the temperature of water released back into the ocean will hurt fish and marine life.

Their case is seen as a litmus test for a string of other potential flashpoints in Chile, the world's top copper producer.

Protest groups are challenging high inequality in Chile - for long Latin America's poster child economy - and demanding that the benefits of its long mining boom be spread more widely.

They also want stricter environmental protections across Chile, from the Atacama desert in the north to Patagonia in the south, and the challenges have put major projects at risk.

Chile's shaky energy grid needs significant new investment after years of neglect, exacerbated by a devastating 2010 earthquake and droughts. But the mounting opposition to hydro-power, coal-fired thermoelectric plants and wind farm projects is worrying investors.

"There's a very significant supply problem so if investment is delayed ... we could have a very sharp energy crisis in the coming years," said Jorge Rodriguez, president of electric firm Guacolda.

A former mining minister and board president of the state-owned mining giant Codelco, Rodriguez said protests against energy projects could cause serious damage to the economy and push mining firms to look elsewhere for their next projects.

"These appeals appear excessive to me. They're lengthening processes and this will end up prejudicing people."

Mining executives say they already face soaring energy prices and even steeper future costs as supply lags demand.

"With delays in some energy projects, the situation is much tighter. The government needs to take swift decisions so this doesn't brake future economic growth," said John MacKenzie, head of copper at the Anglo American mining firm, which has huge projects in Chile.

PROTESTS

Batista's MPX Energia and giant German utility E.ON set up Central Castilla with a goal of providing 2,100 megawatts to mining firms in Atacama. These could include Antofagasta Minerals' Los Pelambres mine, the Cerro Casale project owned by Barrick Gold and Kinross , and Lumina Copper's Caserones mine.

But villagers fought against the project roughly 25 km away from Totoral and won a key battle at an appeals court.

"They thought we wouldn't be able to defend ourselves," said Elena Marin, an outspoken Totoral artisan of indigenous descent who makes olive oil and rosemary-based soaps. "At first, we thought we were lost. But then we leaped to defend ourselves."

The chipped walls of makeshift wooden houses are draped with posters advocating a nature-first lifestyle while school children used rocks to spell out 'No to Castilla' on a barren hill looming over the village.

Residents pluck figs from orchards, grow bulrush and catch shellfish in the Pacific Ocean but they aren't even connected to Chile's energy grid, instead relying on a handful of solar panels. The humble but fertile village is nestled in Atacama's arid hills miles from other villages.

It is broadly made up of four families, with residents moving in and out of each other's houses without knocking. Much of the younger generation has for the nearby town of Copiapo, and clusters of middle-aged women are the most common sight on Totoral's sun-bathed streets.

Lucio Cuenca, the director of environmental group OLCA, which advises Totoral in its legal battle, said the appeals court decision it its favor reflects a "new kind of thinking".

"They aren't insensitive to what's happening to many of these communities," he said of the courts and referring to energy blackouts and water supply cuts.

MPX declined to comment for this article.

It is not the only company facing serious challenges.

Goldcorp, Canada's No. 2 gold miner, had its environmental permit for the $3.9 billion El Morro copper project struck down in February at the request of an indigenous agricultural community, and the case is now also in Supreme Court hands.

An environmental impact study for expansion plans to potentially double output at Collahuasi, the world's No.3 copper mine owned jointly by Anglo American and Xstrata, is also seen at risk from local opposition when it is presented in May.

Potential new mines or expansions of current ones to access better ore grades, which many old mines in northern Chile need to remain efficient, are also at risk of challenges from residents upset over their own scarce water and energy supply.

SHORT ON JUICE

Chile aims to boost copper output from last year's 5.24 million tones to over 7 million tones by 2020, but it needs to ensure mines have enough electricity.

Without that, it could lose ground to rivals like Peru or Mongolia, although Peru - the world's No. 2 producer of copper, zinc and silver - has similar problems of ensuring power supplies compounded by stiff environmental opposition to new transmission lines and generation plants.

Chile's power matrix has a capacity of 17,000 megawatts and the government aims to add another 8,000 megawatts by 2020.

But only about 2,296 megawatts of environmentally-approved energy projects since 2003 are currently being built, according to Central Energia, a Chilean portal on energy, suggesting delays due in part to long, costly legal procedures. Should the Castilla project be struck down, Chile would lose more than a quarter of the extra power the government is hoping to bring on line in the next eight years.

Mines consume 38 percent of Chile's energy supply and are already battling dwindling ore grades, freak weather and an uptick in strikes brought on by high global prices for copper.

Chile has about 28 percent of world copper reserves and needs to avoid blackouts like one in September 2011 that hit major mines and cost Codelco over 1,400 tones in lost output.

If energy supplies aren't beefed up, the country could lose between 2 and 3 million tones of potential production a year from 2015, said Juan Ignacio Guzman, mining professor at the Universidad Catolica in Santiago.

"The mining sector will just stop growing if there isn't more energy," he said.

Some see unsolved energy woes in mining powerhouse South Africa as a cautionary tale. Its national grid nearly collapsed in early 2008, forcing mines and smelters to shut for days, and some firms have begun to expand elsewhere in the continent to minimize their dependence on South Africa.

BHP Billiton base metals president Peter Beaven says Chile's costly energy and fragile electricity grid could hurt investment although BHP is sticking to its plans and may consider building the approved Kelar thermoelectric plant, a project shelved amid the 2007-2009 financial crisis, as it seeks energy alternatives.

Other miners have already made similar moves. Codelco and French energy giant GDF Suez jointly run an LNG terminal in Mejillones in northern Chile.

Codelco, which provides 11 percent of world copper, said its direct cash costs jumped 11 percent to $1.16 per pound of copper in 2011, mainly on higher fuel and energy costs.

POLITICAL PRESSURE

Chile's central-southern grid is supplied by hydroelectric and thermal generation, and is seen as more vulnerable than the northern grid which runs almost entirely on thermal generation.

President Sebastian Pinera has promised to overhaul the network, which will likely include building a transmission line to link the two grids, but concrete measures have not yet been taken. Political turnover is part of the problem with Jorge Bunster recently becoming the fifth energy minister of Pinera's two-year administration.

While Chile grew 6 percent last year, it was rated the most economically unequal country of the 34-member state Organization for Economic Cooperation and Development, or OECD.

Social discontent has become more vocal under Pinera, a conservative billionaire who is the most unpopular president since Gen. Augusto Pinochet's dictatorship ended in 1990.

A series of often violent street protests over the high cost of education rocked the country last year, and a spike in unrest also hit the mining industry.

Output from Escondida, the world's largest copper mine, plummeted 24.6 percent in 2011 to its lowest level in nearly a decade on sinking ore grades and a two-week strike.

Until recently, environmental demands against major projects rarely went far but more are now making it to the Supreme Court.

Earlier this year, it paralyzed a wind farm project on the remote island of Chiloe because the company failed to acknowledge indigenous communities' complaints that the park was to be built on an ancient tribal cemetery.

Two weeks ago, the Supreme Court rejected appeals against the $3.5 billion HidroAysen hydro-power project, which involves damming two major rivers and building five power stations in the wild Patagonia region.

The 2,750 megawatt project, a joint venture between leading generator Endesa Chile and partner Colbun, still needs environmental approval for a 1,250-mile (2,000-km) planned transmission line to channel power to Santiago.

No one doubts that major projects face greater environmental scrutiny and legal challenges.

"There are more suits than there were five or 10 years ago," said Joaquin Villarino, head of the country's Mining Council that represents the biggest miners in Chile. "There's absolutely no doubt that the way communities express themselves is changing. You can agree or disagree, but it's happening."

(Writing by Alexandra Ulmer; Editing Simon Gardner, Kieran Murray and Sofina Mirza-Reid)

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