Chile struggles to maintain copper production as coronavirus spreads

Workers at Chile’s giant copper mines are caught between the urge to protect themselves and pressure to keep the country’s economy moving.

Since declaring a state of emergency in March to deal with the Covid-19 pandemic, the Chilean government has tried to maintain a difficult balance between slowing the spread of the disease and shielding the economy through the inevitable downturn. Mining companies, the backbone of the economy, were urged to keep producing while taking drastic measures to reduce the risk of infections for employees.

As well as distributing facemasks and alcohol gel and disinfecting worksites, companies have sought to ensure social distancing by dramatically reducing personnel on site, largely by suspending activities not essential to production, such as mine development, exploration and maintenance.

Work on major projects, such as Teck Resource’s (TSX: TECK.B; NYSE: TECK) Quebrada Blanca 2 and an expansion of Antofagasta’s Los Pelambres mine, was halted for several weeks while sanitary measures were worked out.

By July, the number of mineworkers on site in the country had fallen to 123,000, down 45% from the start of the year, Mining Minister Baldo Prokurica told lawmakers on July 6.

Despite the massive reduction in personnel, mine output appears so far to be holding up. Copper production during the first five months of the year hit 2.4 million tonnes, up 3.5% from last year, largely reflecting the impact of flooding and maintenance shutdowns on output during the early part of 2019.

Data produced by the Chilean Copper Commission (Cochilco), a government agency, showed that production has risen at most mines this year. Only Anglo American (LSE: AAL), among the country’s leading producers, has reported a steep fall, down 17.9% year on year in the first five months of the year, reflecting a water shortage at its Los Bronces operation.

By the end of 2020, the government estimates Chile’s annual copper production will fall by 200,000 tonnes from last year’s output of 5.8 million tonnes.

“At least until two weeks ago the industry appeared to have achieved a good balance between health and economic concerns,” says Juan Carlos Guajardo, head of Santiago-based industry consultancy PlusMining.

However, since mid-June a rise in the number of infections among mineworkers has put Chile’s strategy under severe strain.

A portal for the Andes Norte expansion project at Codelco’s El Teniente copper mine in Chile. Credit: Codelco.

From a couple of hundred in May, the number of workers infected with the disease is now fast approaching 5,000, or more than 2% of the total workforce. Some clusters are reaching alarming levels. In the O’Higgins Region, home to the giant El Teniente mine, more than 6% of miners have been infected, according to ministry data.

The situation in the mining industry mirrors the development of the pandemic nationally.

President Sebastián Piñera had been preparing to reopen schools and shopping malls before the number of new cases reported daily jumped from a few hundred in April to a few thousand by mid-May. Instead, strict lockdowns were quickly imposed across Santiago and other major cities and the 90-day state of emergency has now been extended until September.

With reports of the first deaths of mineworkers from the disease (twelve have died so far, according to the Mining Ministry), unions began demanding management and government take more drastic measures to protect members from infection or risk workers walking out.

“If there are operations which cannot meet the minimum legal standards, then they must be closed,” Patricio Elgueta, the top union official at state-owned mining firm Codelco, told The Northern Miner.

Fearing an acceleration of the outbreak and wildcat stoppages, mining companies have stepped up their efforts to slow the rate of infection.

Since June, Codelco has halted all construction projects at its operations in northern Chile, including the new underground mine at Chuquicamata and shut the smelter at the mine. It has also pledged to use only local staff at the complex.

At El Teniente, Codelco’s largest by production, the company has switched to a 14 days on-14 days off shift cycle, giving more time for sick workers to be identified before they return to work. Construction of the new mine level, a multibillion-dollar investment vital for sustaining output for decades to come, has also been suspended.

Multinationals have followed suit. BHP (NYSE: BHP; LSE: BHP) has announced that workers at its Spence mine would no longer move through the Calama airport, which normally handles thousands of fly-in, fly-out mineworkers every week.

Such measures show that Codelco and other mining companies are putting the health of their workers above all other considerations, says Cochilco’s executive vice-president, Marco Riveros.

As the number of cases continues to climb, the industry is now praying that its latest measures will be sufficient to keep a lid on the pandemic.

“If they manage to get through the next two to three weeks, they will be in a much better position to maintain production at these levels.” explains Erik Heimlich, a Santiago-based analyst at CRU Group.

But if the number of deaths keep rising or local health services struggle to cope, then more radical measures could be required. Copper prices have scaled to six-month highs above US$2.80 a pound on fears that efforts could disrupt supplies from the world’s largest producer.

The key will be convincing workers to keep clocking in.

In recent statements, Codelco has appealed to workers’ patriotism, arguing that its profits are vital for funding Chile’s fight against the pandemic and reviving the economy in its aftermath.

After Chile’s economy contracted by an unprecedented 14% year-on-year in April, Central Bank president Mario Marcel highlighted that the carnage had been much worse in neighbouring Peru, where the majority of mines had been shut.

Already working longer shifts and doubling for colleagues, mineworkers feel under pressure.

“We know we are the backbone of the Chilean economy,” says union boss Elgueta, “but it cannot be at any cost.”

Unions accuse companies of taking advantage of the crisis to slash almost 40,000 jobs since the start of the year.

While Freeport McMoRan (NYSE: FCX) has slowed output at its El Abra mine, BHP has begun winding down its Cerro Colorado mine, which is set to close in 2023, and launched a new early retirement scheme for workers at the giant Escondida mine, the world’s biggest.

BHP Billiton’s Escondida copper mine in Chile. Credit: BHP Billiton.

“Our workers are afraid of getting ill but also of losing their job. The level of stress among the workers is alarming,” says Elgueta.

Lower output could also hit mineworkers’ productivity bonuses, a big part of worker income at some operations.

Hoping to calm tensions, Mining Minister Baldo Prokurica called this week on mining companies “to do everything possible” to prevent more cuts, noting that the industry is faring much better than the rest of the economy.

Whether or not the industry survives the coming months without a major shutdown, the impact of the pandemic will continue to be felt over the coming quarters even as mines return to normal, says Cesar Perez, head of equity at investment bank BTG Pactual.

The suspension of development and maintenance work, high grading in some mines and delays to construction projects, such as the new concentrator at Spence, is expected to weigh on production next year.

“Whatever a mine’s capacity was last year is not going to be its 2021 capacity,” commented Colin Hamilton, a managing director at BMO Capital Markets.