Codelco strives to modernize

Three decades on from its creation, the Chilean government wants Codelco, the world’s largest copper producer, to operate more like its privately owned rivals. But despite offers, the government is loath to relinquish control.

On Jan. 30th, Chilean president Michelle Bachelet inaugurated a new bio-leaching plant at Codelco’s Andina mine, 4,000 metres up in the Andes mountains.

The state-owned mining company hopes that the technology used in the plant — specifically three ore-consuming bacteria identified and patented by Biosigma, a research and development joint venture with Japan’s Nippon Mining and Metals — will allow it to leach sulphide ores much more quickly and cheaply.

Further ahead, Biosigma plans to move beyond identifying the bugs involved in breaking down sulphide ores and use biotechnology to intervene in their genetic structure to produce ever more effective strains.

If successful, Codelco executives reckon the company will be able to process millions of tonnes of ore once considered too low grade for production, effectively doubling the size of the company’s copper reserves, already the world’s largest.

The president praised the initiative “as something out of science fiction,” noting that it symbolized how the technology was transforming the copper miner’s business.

With innovations at its operations such as driverless trucks at Radomiro Tomic, remote-controlled power tools at El Teniente as well as Andina’s genetically selected bacteria, Codelco sees new technology playing a major part in its next stage of expansion. The company expects production to rise to 2.5 million tonnes a year sometime next decade from 1.8 million tonnes a year currently.

But while Codelco’s operations may be at the cutting edge of mining technology, experts both inside and outside the company fear that its corporate structure may be long overdue for a major shake-up.

Created in 1976 under the military government of General Augusto Pinochet, the aim of Codelco was to consolidate state control of the U.S.-owned copper mines expropriated by socialist President Salvador Allende five years earlier.

The years after nationalization were tumultuous as the mining companies were rocked by battles between workers’ unions and ideologically driven management, legal battles with the former U.S. owners and the emigration of many top managers, fleeing economic and political chaos at home.

Aiming to reassert central control over the mines, the late dictator concentrated power in the hands of a powerful executive chairman, named directly by the president, to whom the 7-man board of directors — packed with more presidential appointments, including the ministers for finance and mining — acted more like advisers than overseers.

Time for a change

The model appears to have worked well over the last three decades — Codelco is today considered one of South America’s best-run state companies in a continent full of monuments to graft and inefficiency. But as the company enters a period of massive expansion and investment, experts say it is time for a change.

Accusations of major projects running over schedule and over budget and of contracts being awarded without tender to government supporters or executives’ family members suggest that Codelco’s directors have not provided the degree of oversight Chileans want at the country’s largest company.

Meanwhile, executives complain that Codelco’s complicated regulatory structure, where budgets and projects are subject to scrutiny by not only the Finance Ministry but also the Chilean Copper Commission and Congress, hinders the company’s ability to move quickly in a dynamic market.

Former executive chairman Juan Villarzu claimed it could take the company up to eighteen months to win approval to buy a new truck.

Now after months of discussions between Codelco and the government, Chile’s finance ministry has unveiled plans to reform the company’s corporate government that will go before Congress in March.

Under the reformed law, the board will be given the same powers and responsibilities as directors in private companies in Chile, giving them a sharp financial incentive to ensure the company is well managed.

Directors will sit for successive 3-year stints, rather than changing with each new government, in an effort to develop experience and continuity on the board.

In addition, two independent directors, to be chosen through the same method for appointing senior civil servants, will also join the board, replacing a representative of the armed forces and one of two workers’ representatives will be scrapped.

The other four directors will be presidential appointments, although it will no longer be mandatory that the mining and finance ministers sit on the board.

Codelco will also have to abide by the same rules as private companies, enforced by Chile’s securities regulator, norms the company already obeys because of debt issued in Santiago’s growing financial market.

The change should have a significant effect on the company’s internal workings, reducing the role of executive chairman to that of a CEO who could be sacked by directors.

Days later, the finance ministry also announced that Codelco would be allowed to reinvest up to US$700 million of profits in its operations during 2007, or the US$2 billion it expects to invest this year.

The money will go a long way to reassuring executives concerned that Codelco, which traditionally hands over all its profits to the treasury, could soon no longer be able to raise funds competitively through debt and bond issues.

But it partly reflects current financial circumstances.

The figure represents less than 10% of Codelco’s profits of more than US$9 billion last year; after two years of booming copper prices, the Chilean government has so much cash on its hands it is squirrelling billions abroad for a rainy day and to keep an already strong peso from harming non-copper exports.

The ministry made no mention of future financing arrangements, and whether the government will be so generous in future remains to be seen.

The reforms were quickly welcomed by serving executive chairman Jose Pablo Arellano, who espoused a modernization of Codelco’s corporate structure on assuming the post in March last year.

The plans have also received the thumbs-up from Raimundo Espinoza, who, as head of Codelco’s largest workers’ union, has a powerful influence on how the mining firm is run.

But it does not go as far as many of Codelco’s critics would like.

With four out of seven directors appointed by the president, the government will retain majority control of the company.

Critics say government interests prevent Codelco from acting in its own best interest, for instance, delaying the closure of its aging Salvador division for the sake of preserving jobs in an area heavily dependent on mining.

The upcoming debate will almost certainly spark fresh calls for the copper producer’s privatization, still an anathema to the overwhelming majority of Chileans, but a policy pushed by both of President Bachelet’s right-wing opponents in last year’s elections.

However, Bachelet has indicated that this is not in the cards.

Speaking to mineworkers at Andina, she revealed that Mining Minister Karen Poniachik had been approached at last month’s World Economic Forum by a group of powerful businessmen interested in buying the firm.

“The good news is that there are investors interested in Codelco; the bad news, for them, is that Codelco is not for sale,” she said.

— The author is a freelance writer based in Santiago, Chile.