UPDATE: Chile's Mining Sector Faces Rising Labor Costs -Antofagasta

Cost inflation in the Chilean mining industry is a growing concern particularly in terms of sourcing skilled labor, said a senior executive at Chilean miner Antofagasta PLC (ANTO.LN) Thursday.

"I think labor will be a key driver" in the future, Hussein Barma, the chief financial officer of Antofagasta's London office, told an audience at the Jefferies copper conference here.

"There is a big investment pipeline in Chile" that will be developed over the coming decade, he said. This pipeline is already driving up the cost of skilled labor. "Competition is high," he said.

Labor accounts for a little over 10% of Antofagasta's total cost base, Barma said, and a limited pool of skilled labor is already having an affect on Antofagasta's operations.

The group's Chief Financial Officer Alejandro Rivera said Tuesday the U.K.-listed miner is about a month away from completing negotiations with four contractors that will determine how much it will cost to develop its $1.3 billion Antucoya copper project in Chile. The mine will be able to produce 80,000 tons of copper annually and will start production in the second half of 2014, Barma said. Although negotiations haven't been finalized yet, Rivera said the company already expects the project's total capital cost to rise.

In a similar vein, the limited pool of skilled labor has prompted Antofagasta to stagger the construction of its Telegrafo and Caracoles projects in Chile, Barma said. Each project has the potential to produce as much copper annually as the recently commissioned Esperanza mine, or 150,000 tons of copper a year, but the limited labor pool has played a role in Antofagasta decision to prioritize the construction of Telegrafo and then Caracoles in order to use one project team to develop both mines, Barma said.

The Telegrafo project is forecast to start construction in 2014 and copper production in 2017.

"The quality of engineering is a big [issue]," said Barma, referring to the difficulty in finding skilled labor for projects.

Barma also said rising costs for energy, sulfuric acid, explosives and other input material were also putting upward pressure on mining costs.

He wasn't able to say at what rate costs are likely to rise in the future but he said cash costs, excluding credits from the sale of by-products such as gold, have been rising at around an average of 7% to 10% a year historically.

Water scarcity in Chile is also an issue, he noted. The company is seeking to address this by pumping sea water to mines such as Esperanza. While the sea water is basically free, the energy cost involved in pumping up the water is notable.

Antofagasta has committed about 40 megawatts or a third of its 120 megawatt of power generation capacity to pump sea water 140 kilometers inland and up 2,200 meters to Esperanza, Barma said.

The cost of building that infrastructure was about $300 million or roughly 10% of the overall capital expenditure for the Esperanza project, he added.

-By Alex MacDonald, Dow Jones Newswires; [phone]; [e-mail]