Codelco looks to private capital in slump

Chile’s Codelco is “looking at all the options” in the face of low copper prices, including joint ventures with the private sector and even downsizing, said Óscar Landerretche, chairman of the state-owned miner.

The world’s largest copper miner is the latest stated-owned company to turn to the private sector as it goes through the “agony and pain” of adapting to the end of the commodity boom, he said.

With copper prices halving since 2011, Mr Landerretche says Codelco is taking “extreme” actions to make the company viable and cut costs, following moves by Mexican oil monopoly Pemex and Saudi Arabia’s Aramco to seek support from private capital.  

“We’re looking at all the options,” Mr Landerretche told the Financial Times. “It’s all on the table. We have to find the correct mix that makes the company financially sustainable and competitive,” he said, adding that he expects to present a “coherent” financing plan in the coming months.  

Codelco is struggling to sustain production, which amounts to around a tenth of global supply and has helped convert Chile from one of the poorest countries in the region to one of the richest over the past 40 years.  

But after suffering consistent decapitalisation since it was established in 1976, with the government keeping the bulk of the company’s profits, Codelco is slashing capital expenditure and looking at joint ventures with the private sector, debt, hybrid bonds and “even downsizing” as ways to keep the company afloat, said Mr Landerretche.  

While he expected copper prices to rebound, “we’re in a world of immense volatility and every day brings new fuel — today it is Brexit, but soon it will be the Fed, then Trump, and then who knows,” he said. “There is a flock of black swans coming at us.”

The move towards the private sector — which Mr Landerretche said could include a joint venture to pump water to mines in Chile’s northern Atacama Desert that could be “killed” by drought — is at odds with the general thrust of Michelle Bachelet’s leftist government, which has otherwise moved to strengthen the state’s role in the economy.  

But for now, a debate over whether Codelco should resort to selling stakes in the company to private shareholders is unlikely to be resolved, after Sebastián Piñera ditched unpopular campaign proposals to sell a 20 per cent stake before being elected president in 2010.  

We’re in a world of immense volatility and every day brings new fuel — today it is Brexit, but soon it will be the Fed, then Trump, and then who knows. There is a flock of black swans coming at us

“It is a controversial but also a constitutional issue,” said Mr Landerretche. “It’s an interesting discussion, but it’s impossible to resolve [in the short term].”  

The government has injected $600m of capital into Codelco, which hands over all its profits to the state and has received only 10 per cent of its surplus over the past decade. Private companies in the sector reinvest an average of about 40 per cent of their profits.  

But Mr Landerretche says it will be difficult to solve this problem quickly at a time when the government itself is facing cash flow problems and struggling to reactivate a languid economy. Meanwhile, Ms Bachelet’s popularity has sunk to record lows as her reform programme stalls.  

“It took 40 years to decapitalise Codelco. To solve that in 10 years would be fantastic,” said Mr Landerretche. He advocates a capital requirement similar to the government’s fiscal rule that obliges it to save in years of plenty so that it can spend in the lean years. “But that doesn’t solve the short-term problems — we need to do that too.”  

For now, Codelco has been forced to slash plans for capital expenditure over the next five years from $25bn to $19bn. The company is “in the process of streamlining even more”, said Mr Landerretche. It is prioritising its oldest and largest projects, singling out Chuquicamata, El Teniente and Andina. “Everything else that is more dependent on the prospects of the market and prices, we are taking another look.”  

Mr Landerretche admits that Codelco is in a tight spot. “As a standalone company Codelco wouldn’t look very good, but everyone knows that’s to do with the owner,” he said, referring to the Chilean government. “Analysts would be ill-advised to look at Codelco as a standalone [private sector] company until that status is achieved.”

The silver lining for Codelco is that copper prices are expected to rebound to about $3 per pound in the medium term from $2.15 now, according to Mr Landerretche. Recent price volatility has not altered the fundamentals that determine demand. “The long-term prospects for copper remain the same,” he said, arguing that there will be a couple of years of excess supply, and by 2018-19 there will be a period of excess demand.  

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