LatinFinance - May/June 2015 - 31

larly sharp. In late April, high-grade copper
was trading at $2.68 per pound, down from
a recent high of $3.20 in July and $4.50 in
2011. To make matters worse, Codelco's
century-old mines are increasingly depleted and its ores are degrading.
Today the miner is at a crossroad: either
invest in capital improvements now, or
become irrelevant in the future.
"The company faces the biggest challenges for the next years and decades,"
Ignacio Moreno, Chile's undersecretary of
mining, told LatinFinance. "Older deposits
mean harder rocks. This, among other
structural factors, makes it difficult not only
to increase production, but to keep current
levels."
Aside from degrading ore, a whole range
of other issues affected the Chilean mining landscape. Michael Widmer, metals
strategist at Bank of America-Merrill Lynch,
points to Codelco's wages, already among
the most expensive in the copper mining industry. Costs of energy and water - Codelco
has invested in desalinization plants - also
add up. "That has made it a little bit less attractive to investors," observes the analyst.
Meanwhile, Freeport-McMoRan, a
major competitor from the US, has announced that by 2016 it would take over as
the world's largest copper producer. That
notwithstanding, Moreno argues that the
problems facing Codelco are hardly unique.
"These challenges are not exclusive to
Codelco, but are similar to the challenges
most mining companies are facing all over
the world."
Digging uphill
To this day, Codelco - or National Copper
Corporation of Chile - is the country's flagship mining company. That's a grand title in
a country that has long relied on this sector:
today, copper accounts for just under half
of Chile's total exports.
Formed in 1976 from the nationalization of foreign-owned copper companies,
Codelco is fully government-owned, and
rated A1/AA-/A+. It accounts for 10% of
global copper production annually, and sits
on over 9% of the world's reserves. Codelco
is also the globe's second largest molybdenum producer.
The company had already headed off
some of the looming troubles with an aggressive $23.5 billion five-year investment
plan.
"It is a historical investment," says Moreno. "Never before has Codelco devoted
such resources to project development."

The company defined seven new structural
projects, with one - the Ministro Hales mine
- already operative. It is increasing budgets
for exploration, infrastructure, machinery, engineering and a plan to access new
grades of ore. The outcome will decide the
future not only of Codelco, but also suppliers of services and products that orbit
around the giant.
That's why the fall of copper prices
couldn't come at a worse
moment. Héctor EspiNarrowing gap
noza, former interim
Codelco's production costs and market price of copper
chief financial officer at
$4.50
Codelco, stressed during
the conference that prof$4.00
its this year could shrink
$3.50
even further, to between
$2 billion and $2.3 bil$3.00
lion, if copper prices stay
$2.50
between $2.50 and $2.70
per pound, "not because
$2.00
of costs, not because of
$1.50
output, but due to the
copper price factor".
$1.00
LME copper price ($/lb)
Circumstances have
$0.50
forced Codelco to focus
Production cost ($/lb)
on cost containment and
$0.00
capex investment at the
2010
2011
2012
2013
2014
same time. In addition to
Source: Codelco
a $600 million cost saving achieved in the past
two years, the company
Profit slump
expects to cut another $1
Codelco production and profits
billion during 2015.
Pre-tax profits ($bn, right scale)

1.86

$9.00

Fine copper output (metric tons, millions, left scale)
1.84
1.82
1.8
1.78
1.76
1.74
1.72
1.7

2010
Source: Codelco

2011

2012

2013

New management
Part of the costs of expan$7.00
sion will be borne by debt
the company is expected
$6.00
to issue in the second half
$5.00
of the year. Here, there
is little question that
$4.00
creditors will participate.
$3.00
Asked whether a bond
from Codelco would
$2.00
still appeal to investors,
$1.00
Jonathan Lemco, princi$0.00
pal and senior analyst in
2014
Vanguard's taxable credit
research group, says
that he would consider participating "if the
pricing was attractive and offered a decent
premium".
Jason Trujillo, fixed income senior analyst at Invesco, points as well to "copper
price, prospects for demand in the sector
and the company's capex needs".
Traditionally, changes in management
tend to worry investors, but most seem
$8.00

May/June 2015 - L ATINFINA NCE.COM 31

http://www.LATINFINANCE.COM

LatinFinance - May/June 2015

Table of Contents for the Digital Edition of LatinFinance - May/June 2015