Codelco sticks with ambitious plans

Codelco is defying gloom in commodities markets and embarking on a make-or-break series of investments, endeavouring to regain the Chilean state-owned copper miner’s lead as the world’s largest producer of the industrial metal.

Most global miners, accused of being reckless with shareholders’ money during the boom years of the past decade, have switched into ultra-cautious mode with their investment programmes. Capital for growth has rarely been more difficult to winkle out of mining boardrooms.

But even as the copper price weakens, Codelco plans more than $23bn of investments between now and 2018. More than half of that money, $12bn, is for seven projects, including some of the world’s largest and oldest mines.

Oscar Landerretche, Codelco’s chairman, is the first to admit the lack of logic in trying to do so much at once. “There is no reason we should be doing these seven structural projects at the same time,” he says. Some have been on the drawing board for the best part of two decades.

But he is adamant that the state-owned group has no choice but to jump into the complex investment programme – a jigsaw puzzle of resources and labour that he likens to a military campaign.

“It is like a country mobilising for war – it is that kind of level,” he says.

Codelco is in this position because it, and the Chilean government, have for years delayed decisions to spend money on maintaining and expanding production. Only now has Chile’s government under Michelle Bachelet, elected this year for a second stint as president, authorised a $4bn injection of capital into Codelco – which otherwise has to pass profits back to the government – to help fund the capex programme.

Chile is the dominant global force in copper – producing almost one-third of world supply each year – and Codelco itself accounts for about 10 per cent of global supply. But production has been flat for years, resulting in private producers such as Freeport-McMoRan and Glencore now rivalling Codelco’s output.

If Codelco’s expansion targets are met, says Mr Landerretche, its output could rise from 1.7m tonnes of copper annually to 2.5m tonnes by 2030 – with a consequent boost to Chilean government accounts. But without any investment, he says the picture is much darker. Supply could dwindle to about 200,000 or 300,000 tonnes by 2030.

“The really ugly part of what happens in the next six to seven years if we do not do this,” he says, warning that production could halve. “There is no way around it.”

Some of the mines where Codelco must invest are among the oldest in the world. El Teniente first produced copper in 1905 and has 2,400km of underground tunnels. Chuquicamata, the world’s largest “open-pit” mine in terms of the amount of ore and waste extracted, is now a hole 850m deep: Codelco is preparing to construct an even deeper underground mine that will extend mining here for decades.

Bringing in foreign partners for these older mines is not an option: only Codelco can run these mines since the industry was nationalised in the 1970s, although joint ventures are possible for newer projects.

It is not just Codelco’s investment programme that will be taxing. Chile’s energy costs are among the highest faced by copper miners anywhere, while Codelco’s powerful trade unions are seen as another barrier to improving competitiveness.

Mr Landerretche, an economist and academic, is a political appointee this year. He was an aide to Ms Bachelet on her previous campaign and says “it was basically an order” from the president to take the job at Codelco. The miner also has a new chief executive after Thomas Keller was ousted this year.

Mr Landerretche is adamant Codelco needs to improve its corporate governance, all the more so given the capital commitment made on behalf of taxpayers. “Codelco is the only world-class company in Chile . . . we have to have world class controls,” he says. “The country has given us all this money.”

There are glimmers of light. With few miners investing, Codelco is finding that the engineering talent it needs may cost less in salaries than in mining’s boom years. Subcontractors are also cheaper. And there is a chance that when Codelco’s higher output hits the market, copper prices might be better than they are in today’s lightly oversupplied market.

“It was not by design,” says Mr Landerretche, “but that procrastination might serve us well”.