As rivers dry up, Chile copper mines turn to the Pacific for water

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By Anthony Esposito and Fabian Cambero

CAIMANES, Chile, April 12 (Reuters) - Alvaro Badillo remembers a time when his dad would take him fishing in the stream just a stone's throw away from the dusty streets of their small hometown of Caimanes in central Chile.

Now (NYSE: DNOW - news) , like countless communities that dot the arid valleys north of the capital, Santiago, Caimanes is left with a dry riverbed.

The culprit? That depends on who you ask.

For many in the town of 1,200 people, the answer lies just a few miles upstream: a 470 foot tall wall that stretches nearly a half-mile straight across the valley. It is the tailings dam for Los Pelambres, Chilean miner Antofagasta Plc (Other OTC: ANFGF - news) 's flagship copper mine, which holds enough leftover processed rock to fill some 140,000 Olympic swimming pools.

For its part, Antofagasta blames an eight-year drought in Chile for the evaporation of already slim water resources, and says the canals it built to redirect rain water have minimized the impact on the stream.

Both sides have findings that support their arguments and are thrashing them out in a court battle that could stop work at one of the world's biggest copper mines.

The clash illustrates the challenges facing leading copper producer Chile as communities and water-intensive industries such as mining try to coexist and vie for shrinking water resources.

"I believe Pelambres is one of the best examples, if we look at everything that has happened, to figure out the weak points in (our) legislation and the way to do things differently," Antofagasta chief executive Diego Hernandez told Reuters.

Accounting for about a third of the world's copper supply, with output this year expected to reach 5.94 million tonnes, Chile's domestic conflicts reverberate through the global market. Any prolonged disruption at Los Pelambres could tip a finely balanced copper market into deficit, boosting prices, analysts said.

The issue of water shortages and strained relations with communities is sure to be a topic of heated discussion among the world's biggest copper miners attending the CRU Copper conference in Santiago this week. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic on Chile's copper industry, please see: http://graphics.thomsonreuters.com/15/chile-copper/index.html#section-2-chile-copper

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DELAYED, BLOCKED OR IN COURT

Some $100 billion is slated for investment in Chile's mining industry over the next decade, but almost half - $40 billion - is stuck in court or delayed because of permitting issues as local communities and environmental activists take legal action to block the projects.

Seeing little help from the state, Badillo and some 80 protesters took matters into their own hands earlier this year and blocked the main road leading to Los Pelambres' tailings dam for several weeks, he said. The blockade was eventually broken up by police.

In the neighboring Choapa valley, Los Pelambres struck a deal with other protesters blocking access to the mine. The agreement includes seeking a public-private partnership to develop a desalination plant and a commitment to use seawater should a planned expansion of the mine go ahead.

Juan Carlos Guajardo, executive director of mining consulting firm Plusmining, called on the government to work with both private companies and troubled communities to prevent recurring protests from hampering investment in the country, which has grown rapidly over three decades, due in large part to copper mining.

FROM SEA TO MOUNTAIN

Nestled between the Pacific Ocean and the Andes mountains, the Atacama desert in the Chilean north, where most of the copper mines are situated, has always been very dry. So dry in fact, that it is used by scientists to test Mars rovers because of its likeness to the barren red planet.

However, a drought since 2007 has dried up reservoirs and rivers, sucking into the water table and providing an ever greater challenge for those who live and work in the region.

Anglo American Plc (LSE: AAL.L - news) and BHP Billiton Ltd have said restrictions on water, used for everything from toilets for workers to separating the metals in the ore body from waste rock and tamping down dust that heavy trucks kick up, will hurt production.

Miners are increasingly turning to seawater desalination plants to meet their needs and those of surrounding communities. Some mines can use sea water without desalinization.

"There is no big mining project - we're talking world-class projects - that you can develop up north without using ocean water, desalinized or not, in the future," Hernandez said.

Nine desalination and direct sea water plants operating in Chile, along with 11 in development, will supply over a third of the water used by copper mines by 2025, according to state copper commission Cochilco.

Building the plants and pumping sea water to mines high up in the mountains drives up costs. BHP's Escondida, the world's largest copper mine, is spending $3.4 billion on a sea water desalination plant, due to start pumping in 2017.

To make matters worse, the longest copper price slump in years has hurt margins and forced drastic cost cutting amid concerns about demand from top consumer China.

Antofagasta said it wants to expand Los Pelambres, including building a $300 million to $400 million desalination plant, but it will not move ahead until it resolves issues involving Caimanes, including a judge's ruling to demolish the tailings dam. The company is appealing.

"We have to keep defending our rights in court, but we know that a win in court doesn't mean this problem is going to get resolved," Hernandez added. (Writing by Anthony Esposito; Editing by Rosalba O'Brien, Josephine Mason and Andre Grenon)