Codelco set to expand in competitive market

Denver — The world’s largest producer of copper, Corporacion Nacional del Cobre de Chile (Codelco), is scrambling to stay on top of the game following a recent spate of mergers.

The Chilean state-owned company has seen its position threatened by two transactions that boosted the status of the number-two and number-three producers.

In 1999, Phelps Dodge made offers to acquire both Cyprus Amax Minerals and Asarco, which would have enabled the Phoenix-based company to challenge Codelco in terms of annual production. Phelps Dodge was only able to capture Cyprus, which, in effect, cemented its position as number-two producer. Then Grupo Mexico entered the race, winning Asarco and vaulting into third place.

Phelps Dodge saw production jump nearly 35% to 1.1 million tonnes copper in 2000 as a result of its merger, Grupo Mexico nearly tripled its output to 915,000 tonnes, while Codelco held steady at 1.6 million tonnes for the year.

Codelco’s next move was to team up with Noranda (NOR-T) in a $1.5-billion bid for Rio Algom in August of last year. The two planned to divide the spoils equally, which consisted mainly of a 33.75% stake in the Antamina copper-zinc deposit in Peru and a 100% interest in the Spence deposit in northern Chile. However, the unsolicited bid was stymied when London’s Billiton swept in with a higher bid.

More recently, Billiton and Australia’s BHP (BHP-N) agreed to merge, which would create the largest mining company in the world, with a market capitalization of US$28 billion.

The transaction highlights what the market has been saying for some time: grow or risk being left behind. However, Codelco isn’t likely to grow by the same means, as consolidation is not as easy for state-owned companies. Any significant change in Codelco’s status as a state-owned company would require changing the Chilean constitution.

Codelco therefore believes its best opportunities lie on its own turf. Reuters reports that the company intends to invest US$3.6 billion over the next five years, which would, in effect, double its size. The value of future cash flow is pegged at US$18 billion.

Plans include upgrading and expanding three of its main operations and evaluating the potential of several development projects. Toward this end, the company will spend about US$750 million this year alone.

At the Andina operation, northeast of Santiago, Codelco intends to bump up production levels, which in 2000 exceeded 250,000 tonnes copper. Also, a new oxide project is planned at Chuquicamata, and US$35 million will be used to purchase mining trucks. Other priorities include proving up additional reserves at the Mansa Mina deposit and evaluating bioleaching applications on sulphide ores.

At the underground El Teniente operation, where the company restarted production from the Esmeralda deposit, Codelco intends to expand production to 480,000 tonnes copper per year. As part of the expansion, the Caletones gas reduction plant, inaugurated in January, is expected to reduce sulphur emissions by 95% over the next two years.

At the Radomiro Tomic mine, production is due to rise to 256,000 tonnes per year, beginning in late June.

Outside of its operating mines, the company expects to continue drilling at the Gaby deposit, 160 km south of Chuquicamata. Discovered in 1996, the deposit contains combined oxide and sulphide reserves of 900 million tonnes grading 0.5% copper, beneath 50 metres of gravel. Though small by Codelco’s standards, the deposit is deemed capable of producing up to 120,000 tonnes copper per year.

The company is also evaluating the new Toki discovery, which could host as much as 400 million tonnes of heap-leachable material averaging 0.5% copper. The company declined to give further information on this project.

Notwithstanding its significant investments at home, Codelco has broadened its outlook by signing exploration joint-venture agreements with Industrias Peoles in Sonora state, Mexico, and Grupo Mexico and Southern Peru Copper (PCU-N) in southern Peru and northern Chile.