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Voting on the US$2.5bn initiative, submitted by local group Andes Iron, was split equally at six for and six against, with regional governor Claudio Ibáñez casting the deciding vote against the project.
Dominga has been facing strong opposition from environmental groups, which claim it will have a negative impact on the biodiversity of the area.
The project has been in the news in recent days after radio station Biobío reported that a private investment fund partly owned by former president Sebastián Piñera (2010-14) was one of the early investors in the project. The allegation was dismissed by Andes Iron.
Dominga is a 25-year iron ore project, with copper as its main byproduct. Planned production is 12Mt/y of iron ore and 150,000t/y of copper in concentrates.
The project envisions two open pit areas, Rajo Norte and Rajo Sur, as well as a processing facility, a dump site, a thickened tailings dam and auxiliary facilities, including a desalination plant and a new port to export output.
Andes Iron did not immediately reply when contacted by BNamericas.