Codelco: A State Giant On The Cusp Of Change

Thomas Keller | Photo courtesy of Codelco

SANTIAGO – Thomas Keller could hardly have chosen a more challenging moment to take over as CEO of Chile’s Codelco.

The 55 year-old stepped into the job on June 1 after his predecessor Diego Hernandez quit due to tensions with the board. Keller’s first task is to oversee talks with Anglo American over the two companies’ disputed ownership of Anglo American Sur (AAS). The bitter row has been rumbling on for months, and the stakes are high: The assets in question are worth $22 billion. They include the Los Bronces mine in central Chile, which has the potential to be the fifth largest copper mine in the world, and two untapped copper deposits high in the Andes mountains.

But that is not Keller’s only concern. Codelco, which is state owned, has embarked on an ambitious expansion plan at all its main divisions, designed to consolidate its position as the world’s largest copper mining company.

It is turning Chuquicamata, the biggest open pit copper mine in the world, into an underground operation. After a century of exploitation, this huge hole in the Atacama Desert, known affectionately as “Chuqui”, is proving ever less productive and needs a dramatic facelift. The upgrade won’t be complete until 2019.

A thousand kilometers further south, Codelco is starting the second phase of expansion at its Andina mine. Once completed –it is currently only at the feasibility stage– the mine is forecast to produce more than 600,000 tonnes of copper a year, well over twice its current total. It will become Codelco’s flagship project, with a working life extended to at least 2060, and it might well eclipse Escondida, in northern Chile, to become the most productive copper mine in the world.

Further south again, Codelco owns El Teniente, the world’s largest underground copper mine. It has been in production since 1904 and, like Chuqui, needs an overhaul. So Codelco is tunneling a second, lower level to the mine to extend its life and increase production.

In addition, the company will start production at a new mine, Ministro Hales, in the second half of next year. When it hits working capacity in 2014 it will produce 160,000 tonnes of refined copper and 300 tonnes of silver annually.

All of this, the company hopes, will cement Codelco’s leadership in the industry. It already produces 11 percent of the world’s copper and sits on millions of tonnes of reserves for future use.

Keller, the son of German immigrants, says Codelco also wants to expand outside Chile. It is reaching out to partners across Latin America with the aim of tapping new deposits.

“The most significant progress we’ve made so far has been in Brazil and Ecuador, but in the medium term we plan to expand into Colombia and Mexico too,” he told Latin Trade. “For now our principal focus will continue to be large copper deposits, but we haven’t ruled out investment in medium-sized mines or in other metals.”

The outcome of the dispute with Anglo could have major implications not only for Codelco but for investment in mining across Chile, which produces a third of the world’s copper.

The row started last October when Codelco said it would exercise a long-standing option to buy a 49 percent stake in AAS, and secured a $6.75 billion loan from Japan’s Mitsui to pay for it. But Anglo struck back, selling a 24.5 percent stake of AAS to Japanese trading house Mitsubishi and telling Codelco it would have to settle for a smaller share. Negotiations were still underway when this edition went to print.

Some observers have suggested Codelco was naive to reveal its hand to Anglo as early as October, a charge Keller categorically refutes.

“Anyone who thinks that a deal like that can be done in secret doesn’t understand how the markets work,” he said. “Both Codelco and Mitsui were obliged to disclose the fact they’d signed a financing contract. What’s more, Codelco was about to issue $1.15 billion in bonds, and failing to reveal that to the market would have damaged the trust we have with our bondholders.”

Last year, Codelco made $7.03 billion for the Chilean state, an increase of 21.2 percent from 2010. It was the third best result in its history. If it were a private company and paid tax on its earnings, it would have made a net profit of $5.25 billion, making it the most lucrative company in the country.

But that 21.2 percent gain was due mostly to lofty copper prices. Output increased only slightly, although at 1.735 million tonnes in 2011, it was still the best result in the company’s 36 year history. If world (and Chinese) economic growth slows in 2013 and the copper price drops, so will Codelco’s earnings.

With that in mind, the firm is on the lookout for new opportunities. Keller said that with the number of attractive exploration projects diminishing by the year, Codelco has not ruled out aquisitions, although he noted the company traditionally has shied away from them.

The El Teniente copper mine and processing plant, owned and operated by Corporacion Nacional del Cobre de Chile (Codelco) | Photo: Bloomberg via Getty Images

Like most copper miners, Codelco is suffering declining ore grades, which makes every tonne of copper more expensive to produce.

It lost another 22,000 tonnes to industrial action, and is likely to face further union combativeness in the future, particularly from its army of subcontracted workers, who are looking for many of the benefits the company’s own employees enjoy.

Labor shortages are another potential hazard in the near term. Chile is operating at near full employment and many mining companies say they are struggling to find the skilled workers they need.

And, energy shortfalls are another issue that Keller will have to face. With virtually no oil or gas of its own, Chile has a chronic energy problem that is likely to get worse before it gets better. Keller says Codelco has signed a series of long-term contracts with suppliers to ensure that its mines receive the electricity they need to maintain uninterrupted output and expand as planned.

“We´ve guaranteed the supply of energy for our current operations and we have plans in place to meet the needs of our (future) operations whenever necessary”, Keller told Latin Trade. “Codelco has taken measures to ensure that none of its projects experiences delays due to a lack of energy”.

If there is one issue Keller won’t have to face, it’s privatisation. While there have been calls in the past for the Chilean state to sell off at least part of Codelco to make it more competitive, the Anglo dispute has turned local opinion, and even fueled calls for resource nationalization. The current mood in Chile, which has witnessed a wave of social unrest over the past year, is by no means conducive to privatisation.

“The ownership of the company is not an issue for the administrators but for the owners (i.e the Chilean state),” the executive said. “So it is not for us to comment on it. What I can say is that the current government has been very clear in saying that a change in Codelco’s ownership doesn’t figure into its plans.”

Codelco, then, will remain in state hands, just as socialist President Salvador Allende envisaged when he nationalized the industry back in 1971. Chileans refer to copper as “Chile’s salary” and they see Codelco as their main breadwinner. As things stand, they are not about to hand over this most quintessentially Chilean company to the private sector.