Aug '13

Jurisdictions

Will Pascua-Lama fines have chilling effect on mining in Chile?

By Ivan Grbešic and Patricio Leyton

When Barrick Gold Corporation was fined $16.4 million in May by Chile’s Superintendent of the Environment (SMA) for nearly two dozen violations of its environmental impact agreement, many in the mining industry were surprised. Not only was the fine levied against the world’s largest gold miner, but the amount levied set a record for Chile. SMA also passed a resolution requiring Barrick to complete Pascua-Lama’s water management system in accordance with the project’s environmental permit before resuming construction activities. Barrick ultimately paid $11.6 million under a provision that grants a 25 per cent discount if the fine is paid within five working days.

This kind of decision has the potential to scare away foreign investment, particularly in a sector that is already under stress from declining gold prices. The decision and fine will initially make foreign investors nervous about their ability to develop and operate in Chile – traditionally considered one of the best jurisdictions for mining in the world. But while that initial reaction is understandable, a deeper review of the issue suggests that any broad industry concern is overdone.

The fine applied to Pascua-Lama must be taken in context. The environmental legislation in Chile is fairly young; the government only enacted the Environmental Framework Law in 1994. The Environmental Impact Assessment System (EIAS) began operating in 1997, following the president’s approval of its regulations. This system has been praised because it significantly raised the environmental standards required of new mining projects in Chile. SMA ’ s fine against Barrick was in respect of breaches of Pascua-Lama’s environmental permit that had been received following the EIAS process.

When Chile was a contender to join the Organization for Economic Co-operation and Development in 2005, it sought to implement an improved environmental compliance assurance system. The Chilean government approved significant reforms to the legislation five years later by creating a Ministry of Environment, an environmental assessment agency, environmental courts and a compliance agency – the SMA. The maximum fine per infraction rose from US$20,000 to almost US$9 million. SMA became operational in December 2012, significantly enhancing environmental enforcement in the country.

The Pascua-Lama fine is the first under this new system, so it has wider implications because it does set a precedent and a base standard. However, the fine is very much specific to ­Barrick and its failure to comply with its environmental ­commitments. Indeed, rather than contesting the fine, Barrick recognized 22 of the 23 charges and promptly paid the reduced fine available in Chile for quick payment. This is neither a situation of heavy-handed or arbitrary regulatory action nor, as is increasingly common, fallout from the enactment of new adverse legislation – resource-nationalism-rooted or not. Rather, it is the rule of law in action and an industry giant being held accountable for failure to abide by its legal commitments.

The lasting impact of the Pascua-Lama fine will be subject to debate. For domestic or foreign investors, the message from the newly empowered SMA is that Chile will take environmental enforcement seriously, and will not shy away from seeking compliance from the largest global companies. However, will this enforcement deter foreign mining companies from seeing Chile as a preferred destination for mining investment? Probably not.

It is also important to note that Chile’s environmental law considers the financial resources of the entity committing the infraction – fines should be proportionate to the nature of the infraction. In this case, the fine was high because the infractions were significant and numerous, and the investment in the project is close to US$9 billion. Investors should not view the Pascua-Lama fine as a precedent for multi-million-dollar fines for small infractions.

Nevertheless, SMA has sent a clear message to the industry that environmental enforcement in Chile is coming of age.


Ivan Grbešic (left) is a partner in Stikeman Elliott’s Toronto office practising corporate and securities law, with emphasis on corporate finance transactions, mergers and acquisitions, and corporate reorganizations. Patricio Leyton is a partner of FerradaNehme, based in Santiago, Chile.

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