Scandal strikes lithium tender forcing deputy minister to resign

Chile's deputy mining minister Pablo Wagner was forced to resign on Tuesday in the wake of a snowballing scandal surrounding a lithium tender which was declared void by the government committee in charge of the process on Monday evening (Oct 1). Local miner SQM (NYSE: SQM) was awarded the country's first special lithium contract (CEOL) on September 24 with a 19.3bn-peso (currently US$40.7mn) offer. The declaration from the committee said that the entire process had been invalidated after rival bidder Posco Consortium claimed, correctly it appears, that SQM should not have participated in the tender as it is involved in several lawsuits with the Chilean state. One of the preconditions to bid was a sworn statement declaring that participants did not have any pending lawsuits with the state. Posco Consortium comprises South Korean companies Posco and Daewoo, Japan's Mitsui and South America-based Li3 Energy (OTC: LIEG). Its offer was 8.26bn pesos. "If I did not achieve the objective of awarding the tender, I must resign," Wagner said of a process he had called "exemplary" just last week. CONTROVERSY From the beginning, the CEOLs have been mired in different types of controversy. First of all, Wagner was put in charge of the process as mining minister Hernán de Solminihac had to step aside to avoid a conflict of interest since his brother is the executive VP of SQM, a fact that did not escape the attention of local press and opponents of the government's decision, made in February, to award the CEOLs despite the fact that lithium is considered a strategic mineral in Chile. Following the decision, politicians, union leaders and society have been divided over who should have the right to mine lithium. One sector of the population believes that awarding these contracts is tantamount to privatizing the resources and that the government should mine lithium through a state company. Others believe it is sensible to get specialized mining companies to develop the industry, especially since they will pay taxes and royalties for the privilege. Another point of contention was the decision to allow SQM, which is the biggest lithium producer in the world, to participate in the tender. SQM is one of only two lithium miners in Chile. The other is a subsidiary of US-based Rockwood Holdings (NYSE: ROC), Sociedad Chilena del Litio (SCL), and both hold concessions awarded before lithium was declared strategic 30 years ago. Due to its size and profitability, SQM has an unfair advantage over the junior miners that are currently exploring for lithium in Chile. Its inclusion and the subsequent awarding of the contract to SQM did not achieve the objective of opening up lithium mining but rather succeeded in ensuring the status quo. Meanwhile, the media pounced on the juicy but irrelevant fact that SQM is controlled by local businessman Julio Ponce Lerou, who is the former son in law of deceased dictator Augusto Pinochet. In a further twist, opposition senators and union leaders filed legal action in July in an effort to have the tender process declared null and void. Last week a Chilean appeals court admitted the legal measure and the case is ongoing. WHAT NEXT? The government is now evaluating what to do next regarding the CEOLs, according to chief of staff Cristián Larroulet. "We will study [the issue], a decision was just made yesterday and it is fitting to study exactly what are the actions [that need to be taken] to move forward," Larroulet told local press. Whatever these actions might be, they will need to be fast and decisive to quell the uneasy suspicion that all this was a tale foretold and that maybe the process was not as transparent as is expected in one of Latin American's most stable and legislatively respected countries.