| Codelco's Chuquicamata copper mine in Chile, pictured above, is among the mining giant's older operations. Source: Diego Delso/Earthworks. |
Chilean copper giant Codelco will struggle to maintain current production rates and freshly minted CEO Ruben Alvarado faces a daunting task in executing a massive expansion plan as the company bulks up on debt, analysts said.
The state-owned miner has guided for 2023 production in the range of 1.31 million to 1.35 million metric tons (MMt), down 29.7% from a peak of 1.89 MMt in 2015, based on the 2023 guidance midpoint, and at its lowest annual level since 1998. Codelco estimated 2023 costs of between $2.20 and $2.35 per pound of copper, more than doubling from 2010 and far outpacing inflation.
As Codelco looks to arrest its declining production levels, the state miner's noncurrent long-term debt has ballooned 173.5% to $16.85 billion in 2022 from $6.16 billion in 2010, according to S&P Global Market Intelligence data, and it may be closer to $19 billion after Codelco raised $2 billion in bonds earlier in September.
Alvarado started as CEO on Sept. 1 after André Sougarret abruptly resigned following barely a year in the top job. Alvarado must manage a $40 billion investment strategy that was first outlined in 2017 and convert that cash into higher copper production. Codelco has promised to restore copper output closer to its past levels of 1.7 MMt, which is no easy feat, according to analysts.
"Alvarado certainly has his work cut out for him," David Davidson, a base metals mining analyst at Paradigm Capital, said in an email. "Managing expectations internally will be his first priority. Then [comes] making sure any investment provides a decent rate of return."
Restoring production
Just holding production steady will be tough for Codelco, as output slips at its older mines, analysts said.
Codelco's proven and probable copper reserves contained 49.3 MMt of copper grading an average 0.63% in 2022, down from
Codelco has successfully offset some declining production in recent years, in particular by building the massive Ministro Hales copper mine, which it officially inaugurated in early 2016 after delays in ramping up production. The mine produced 152,167 metric tons of copper in 2022, according to Market Intelligence data. But massive builds like these have not been enough to completely stem falling production at other mines like Chuquicamata, where Codelco is expanding production underground, and a slower-than-expected expansion at El Teniente, Codelco's biggest copper mine in 2022.
In the near term, Codelco's core objectives are to continue to expand production at the El Teniente, Chuquicamata and Salvador mines, as it looks to offset declining output from aging operations that have been running for decades. But obstacles include falling copper grades, rising capital expenditures, competition for scarce mine-building funds, new responsibilities to expand into lithium and growing concerns over the miner's debt levels, analysts say.
Analysts have concerns about Codelco's ability to pull off the ambitious project.
"[Codelco's] execution of projects has been underwhelming both going underground at Chuquicamata and deep at El Teniente," Davidson said, noting that Codelco has gone over budget on projects that did not produce as much copper as expected.
New mines or expansions will be different beasts than Codelco's legacy assets, said Joe Mazumdar, publisher and editor of Exploration Insights, and Stefan Ioannou, a mining analyst at Cormark Securities. Copper discoveries have waned in recent decades as demand grows and supply heads for growing deficits into the 2030s amid the unfolding energy transition. Meanwhile, copper ore grades have declined as miners tap bigger and lower-grade deposits.
"We've got to say that the grades are going to be much lower," Mazumdar said.
Greenfield discovery is off the table to buoy production within the next few years, as lead times from discovery to production typically run well over a decade, averaging 15.7 years, according to a recent Commodity Insights analysis. Codelco also faces a crowded field of competitors in Chile, both for exploration and producing assets.
"Because Chile's so well geologically endowed, there are a lot of players that have already picked up the good projects and pieces of land, so Codelco can't just stake these things," Ioannou said.
Mounting debt
Codelco's production issues and appetite for debt have raised eyebrows, according to media reports. The Centre for Copper and Mining Studies, a Chilean industry group also known as CESCO, said in an August report that Codelco risked hitting unsustainable levels of debt amid production problems, Reuters reported.
Codelco said
At a Sept. 13 congressional hearing, Codelco Chairman Maximo Pacheco chalked up the company's burgeoning debt to the fact that the miner's profits have ended up in state coffers for over half a century and pointed out that Chile authorized Codelco to go into debt. Pacheco batted away concerns over default.
"Any of you actually believe that Codelco is really at risk of insolvency? I want to tell you that I think that's a joke," Pacheco said, noting Codelco's revenues remain strong and Chile's Boric government has allowed Codelco to reinvest 30% of profits into the company until 2024.
Several analysts told Commodity Insights that they doubt Codelco risks a debt default, in large part because the company is state-owned.
"Codelco's debt is implicitly backed by the state of Chile," Juan Carlos Guajardo, founder and executive director of the Santiago-based Plusmining consultancy, said in an email, adding that he doubted Chile's support for Codelco would change. "So insolvency is unlikely to occur even if debt indicators are as high as they are now or higher."
Codelco is to Chile what the auto industry is to the US, only more so as a state-owned company, said Mazumdar, pointing to how the US extended financial support to automakers amid the 2007-2009 global financial crisis. "And this is a state miner. This is definitely one that can't fail," Mazumdar said.
Moody's recently put Codelco under review for a possible ratings downgrade over the miner's financial health. But big international banks appear unfazed, having flocked to buy bonds in Codelco's recent $2 billion raise, analysts noted. The company trimmed 10% of its headquarters staff in August.
Amid the ongoing production woes, Codelco has sought to reshape long-term contracts with Chinese customers to cut down on previously agreed copper concentrate sales, according to a Sept. 17 Reuters report that cited unnamed Codelco customers. Codelco wants to make the changes due to the possibility it may not produce enough concentrate to meet the agreements, the unnamed sources said.
Codelco said some of the changes stemmed from typical handling of the company's contract portfolio, and not lower copper output, in a response to Reuters.
This "is likely to raise some uncertainty among market participants on whether Codelco can meet contractual obligations with ongoing production issues expected to see production levels lowered further this year," Colin Hamilton, a mining analyst and managing director of BMO Capital Markets' commodities research, said in a Sept. 18 note.
"I believe that this year, 2023, will be the lowest year of production," Pacheco said during the Sept. 13 congressional hearing. "And from here on, Codelco's production will start to increase to reach levels of [1.7 MMt] by the end of this decade."
Pacheco acknowledged Codelco was having a "very hard time" amid production problems and the complex execution of mining projects. Pacheco flagged issues including equipment maintenance and availability.
Still, Codelco has some major advantages, according to analysts. Chief among them is that the company holds lots of ground in Chile, which is widely considered to remain highly prospective for the base metal.
"The good thing for Codelco is they happen to be in the country with the best copper options and quality," Ioannou said.
S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.