Editorial: Debt-heavy Codelco forecasts muted growth

Two highlights of the copper calendar — Cesco Week and CRU’s World Copper Conference, both held in Santiago, Chile in early April — have come to a close, with attendees reporting a sense of cautious optimism among the world’s top copper producers and refiners, as supply growth starts to level off and copper prices modestly rebound.

Santiago-based Cesco (from Centro de Estudios del Cobre y la Minería, or Centre for Copper and Mining Studies) was founded in 1984 as a private, non-profit organization, and describes itself as “independent and plural … promoting social legitimacy and confidence in Chile’s mining industry as a development engine,” and seeks to monitor and provide “information and quality analysis in novel formats.” Each year the organization puts on Cesco Week, including the Cesco Dinner, as well as the similar Asia Copper Week in Shanghai.

While much talk in the copper community over the first quarter focused on short-term supply disruptions at the world’s three largest copper mines — Escondida in Chile, Grasberg in Indonesia and Cerro Verde in Peru — the presentations in Santiago tackled some of the industry’s longer-term problems, including lower head grades, deepening mines with harder rock, water shortages and sociopolitical challenges.

Chilean state-owned Codelco — the world’s largest copper producer, headquartered in the world’s largest copper-producing nation — best exemplifies the industry’s current spirit of planning for growth while recognizing financial and technical constraints. (Codelco has unique challenges as a state-owned enterprise, though, including the sticky fact that 10% of its sales must go to the Chilean military — a law that has held it back from operating in regional rival Peru where its private-sector competitors have been so active.)

Like its private competitors, Codelco has sharply lowered mining costs in recent years but has avoided major strikes like those seen recently at Escondida and Cerro Verde, and negotiated more than a dozen labour deals with Codelco workers in the past year.

Codelco is still on track to achieve its goal of US$2 billion in cost savings by 2020, and has seen cash costs fall 8–9% annually for the last three years. The copper mining giant wants to start the next decade in the lowest quartile for costs amongst global copper miners — a feat that would be in defiance of the common argument that government-owned companies can never be cost-conscious.

The possibility of more strikes at Chile’s copper mines still looms large, however, with more than 15 contracts up for negotiation this year, including at Codelco.

Codelco is also intent on repairing a balance sheet that deteriorated over the five years of the global commodities downturn that reached its nadir just over a year ago, when copper traded at a low of US$4,300 per tonne (US$1.95 per pound).

Codelco’s debt is US$15 billion, and it has stated it would like to keep this number at US$14 billion in the coming years, even as it invests heavily to maintain and expand its roster of mines in Chile.

In figures released at the CRU conference, between 2016 and 2025, there are 37 copper projects due to be developed in Chile at a cost of US$49 billion. While only eight of these are Codelco projects, they account for US$21.6 billion over this period, or 44% of the total. If Codelco wants to keep its debt below current levels, Scotiabank analysts point out that it’s not clear how the company will finance the planned investments, which is another indicator for future constrained mine supply and is bullish for copper prices.

Countering this trend in Chile is Peru, whose Energy and Mines Minister Gonzalo Tamayo told the CRU conference that the country expects to boost its copper output 32% to 3.1 million tonnes by 2021.

Peru surpassed China as the world’s second-largest copper producer in 2016, thanks to rising output from MMG Ltd.’s Las Bambas mine and an expansion at Freeport-McMoRan’s Cerro Verde mine.