State-owned Codelco struggles to maintain output

In October, the wheels started turning on one of the world’s largest conveyor systems. Once in full operation, 14 km of belts will bring 140,000 tonnes of ore a day to surface from huge tunnels carved out beneath Codelco’s giant Chuquicamata pit in northern Chile.

The operation represents the future of Chile’s mining industry, Chilean President Sebastian Pinera said at its inauguration in August.

“This is a leap forward, not just in terms of the 140,000 tonnes a day, but how it is produced,” Pinera said.

Highly automated and run from a state-of-the-art control centre, the US$5-billion project is the latest investment by Chile’s state copper company to keep its giant mines in production for decades to come.

But despite the celebratory mood at Chuquicamata, Codelco’s future looks more uncertain than ever.

The company’s output (1.7 million tonnes annually) could fall by more than half in less than a decade unless it undertakes gigantic projects at its aging mines, management warns.

“It is key to Codelco to realize these structural projects in order to continue contributing to the country for the next 50 years,” the company’s CEO Octavio Araneda stated recently.

The company has plenty of copper left to dig up — almost 7 billion tonnes of reserves, according to its latest estimate.

In the past, these huge figures have tempted Codelco executives to dream of expansion. In 2006, then CEO Juan Villarzu predicted production could hit 2 million tonnes annually by 2016. But his successors have repeatedly pushed back that target, first to 2019, then 2021, and most recently 2026, before scrapping it altogether.

Why? For a start, aging infrastructure (Chuquicamata and El Teniente are both more than a century old) and falling ore grades mean that it is a struggle for Codelco to keep producing the same amount of copper year after year, explains Gustavo Lagos, professor of mine engineering at Chile’s Pontificate Catholic University.

This year, the company faced freak floods in the Atacama desert, lengthy maintenance shutdowns at two smelters and a two-week strike at Chuquicamata.

“The struggle each year is to produce the same. It is not as easy as people imagine,” Lagos says.

Meanwhile, the technical challenges at its main projects are immense. Work to build a new level at El Teniente, already the world’s largest underground copper mine, was held up more than two years after a fatal rockburst in 2014 revealed serious flaws in its geotechnical design. The project is now expected to enter production in 2023.

An ambitious project to triple production at Andina was shelved in 2014 because of public fears of its impact on local water supplies. Codelco is working on a more modest design, which would not touch the glaciers that surround the mountaintop operation.

After numerous delays, executives admit that the best the company can hope for now is to maintain production at current levels.

But the most serious brake on Codelco’s ambitions is a lack of cash.

Required by law to hand over all its profits to the Chilean state — more than US$100 billion since nationalization in 1971 — successive governments have returned less than 10% of this amount to the miner.

In comparison, most large mining companies invest at least half of their profits, notes Juan Olguin, president of the Federation of Copper Workers, the umbrella organization for Codelco’s workers’ unions.

Pinera’s predecessor tried to improve the situation. After changes to Codelco’s corporate governance in 2009, Michelle Bachelet agreed to inject US$3 billion into the company between 2014 and 2019, allowing it to continue investing through the slump in metal prices.

But further capitalizations look unlikely. Huge anti-government protests since October have forced Pinera to ramp up welfare spending to quell the unrest, straining government finances.

“Faced with increased social demands, where the state needs to find fresh resources, the situation does not look very promising for Codelco,” says Alejandra Wood, executive director of CESCO, a mining think tank.

While the state is not Codelco’s only source of financing, the alternatives are limited. Underfunded by its owner, the company’s debts have soared to almost US$15 billion. Further increases could harm its investment-grade credit rating, some analysts say.

The company could sell assets or bring in partners to build infrastructure. In November, Japan’s Marubeni Corp. won a US$1-billion contract for a desalination plant to supply water to its Chuquicamata and Radomiro Tomic mines.

But bringing private capital into its core mining business is prohibited under the Chilean Constitution and opposed by its powerful unions and the general public. Almost 70% of Chileans oppose any privatization of the company, according to a 2018 poll conducted by Mori on public attitudes to the mining industry.

As a result, Codelco’s limited options could mean hard choices in the future.

“Without investment from the state, Codelco will probably have to decide which projects it wants to develop,” says the Federation of Copper Workers’ Olguin.

Alert to the hard times ahead, the company has promised to try harder. In November, Araneda unveiled a target to boost profits another US$1 billion from 2021, through cost-cutting and increasing productivity.

Management is also striving to cut the cost of its huge investment program. By reducing projects and adopting lean design principles, Araneda said at a press conference in late November that investment over the next decade could be cut by as much as 20%, or US$8 billion.

By making Codelco leaner and meaner, management hopes to convince the government to put its trust in the company again.

“We want to ensure the financing of these projects,” Araneda explained.

But rather than another cash injection, what Codelco really needs is a long-term commitment from the state to match the scale of its projects, says Juan Carlos Guajardo of PlusMining, a consulting company.

It is not just a question of finances.

Take, for example, Codelco’s copper smelters. Decades old, dirty and largely lossmaking, some of the company’s executives would like to close them but face opposition from unions.

At the start of the decade, the government enacted tighter emission standards that required Codelco to invest over US$2 billion in environmental upgrades, which were only completed in 2019 after some difficulty.

But less than six months after the rules came into force, amid an outcry over air quality, the government imposed even stricter limits on its Ventanas smelter, which could require further investments or its permanent closure.

Meanwhile, Codelco is locked in a legal battle with Chile’s General Comptroller, a government regulator, which wants to subject the mining company to the same scrutiny as it does ministries, municipal governments and other public bodies.

The move could seriously hinder Codelco’s ability to function as a commercial business, Guajardo says.

The government is working on legislation to clarify Codelco’s status, but together with criticism levelled at the high salaries paid to the company’s executives, and accusations of corruption, Guajardo says, hopes of reaching a consensus on the company look slim.

Compared to the other pressing issues facing Chile’s politicians — expanding the welfare state, stabilizing government finances and agreeing on a new constitution — Codelco is not a priority.

But without action, the source of much of Chile’s recent prosperity could soon be at risk.

“There is a lack of long-term vision for this milk cow, which grows thinner with each year that passes,” Wood laments. “We are almost on the threshold of an emergency.”

Earlier this month, Codelco announced that it was taking advantage of low interest rates to raise US$2 billion via bond issues in New York for debt refinancing and mine expansions. The company sold US$1 billion in 10-year bonds at 3.175% and another US$1 billion in 30-year bonds at 3.958%.