Local firm Andes Iron wanted to extract millions of tons of the metal in the northern Coquimbo region and build a new port to ship it out.
A committee of ministers said the project did not offer sufficient environmental guarantees, echoing warnings by environmental groups.
“The compensation measures were insufficient and could not guarantee the protection of species of concern,” such as the Humboldt penguin, said Environment Minister Marcelo Mena.
“We are not against economic development or projects that are necessary for the country’s growth, but they must offer adequate solutions for the impact they will have.”
Coquimbo lies on the coast south of the three islands that make up the National Humboldt Penguin Reserve, home to numerous wildlife species.
Among them is the endangered Humboldt penguin, distinguished by pink rings round its eyes and a black stripe across its chest.
Estimates of the overall number of Humboldt penguins vary, but there are estimated to be several thousand in the reserve.
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