Codelco Waning Copper Pressures $17.5 Billion Bet to Catch Boom – by Matt Craze (Bloomberg Markets Magazine – May 2011)

Bloomberg Markets magazine brings the inside view of professional investing with unparalleled access to the most influential people in global business and finance.

(Bloomberg) — Diego Hernandez, chief executive officer of Codelco, talks with Bloomberg’s Matthew Craze about the company’s financing plans and the outlook for the copper market. The world’s largest copper producer, may seek bank loans to raise the $600 million it needs to finance expansions at its Chilean copper mines this year, Hernandez said. (Source: Bloomberg)

Andres Avendano steps out of his Toyota Hilux pickup halfway down a 20-kilometer-long tunnel under Chile’s Chuquicamata copper mine. He lifts a cylindrical chunk of rock from the diamond-bit-studded drilling machine that extracted the sample.

“The copper is quite disseminated,” Avendano says, adjusting the light from his white hard hat to identify a sprinkling of gold-colored specks. In the mine’s early days, a similar specimen would have been brimming with the metal, he says.

Avendano, 33, who is in charge of mine design, and geologists from government-owned copper giant Codelco are searching around the clock for new deposits at Chuquicamata, Bloomberg Markets magazine reports in its June issue. The complex, 1,650 kilometers (1,025 miles) north of Santiago in the Atacama Desert, is so massive the open pit is visible from space.

The copper they’re hunting is becoming scarcer — and more expensive — just as more people in the developing world are demanding cars, TVs and modern trappings like iPads that use it and builders are relying on its ability to conduct electricity and heat for new houses and offices.

Chile, the world’s biggest copper producer, risks missing out unless Codelco can update mines built in the early 1900s. For the past 30 years, the country has let Chuquicamata and three other copper mines languish.

‘Slow to Make Decisions’

Australian giant BHP Billiton Ltd. (BHP)’s Escondida mine overtook Chuquicamata as Chile’s largest in 1996. Escondida now produces more than 1 million tons a year on Chilean soil, about double Chuquicamata’s output. Annual production at Codelco, which sits on 10 percent of the world’s copper reserves, has fallen in five of the past six years.

“They are very slow to make decisions,” says Wayne Atwell, managing director at New York-based Casimir Capital LP, who has visited Chilean mines 10 times in the past 30 years. “Their middle management probably has two to three times as many people as they should have.”

China’s copper appetite is driving the boom. Prices soared to a record $10,190 a metric ton on Feb. 15. On April 28, copper was trading at $9,320. It may drop as low as $8,500 before rocketing to $11,000 by Dec. 31 amid the biggest shortages since 2004, according to a Bloomberg survey of 24 analysts and traders.

China already consumes about 40 percent of the global supply. It will use 8 percent more this year as it begins constructing 36 million affordable homes and expanding its urban footprint, state research firm Beijing Antaike Information Development Co. predicts.

‘We Can’t Delay’

“There are not a lot of copper deposits in the world,” says Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. “When you find one, it does take time to develop and bring production onstream.”

Diego Hernandez, the new Codelco chief executive officer that Chile’s billionaire President Sebastian Pinera recruited from BHP in April 2010, says he has overhauled senior management and is moving down the ranks. Now, the task is to make up for chronic underinvestment.

“We can’t delay anything; we have to do it now,” says Hernandez, 62, in Codelco’s Santiago office, which has displays of prehistoric tradable copper ingots.

Pharaonic Feats

Pinera is backing the copper revival. While unveiling an expansion at the El Teniente mine in the Andes Mountains on Sept. 8, he promised to invest $15 billion in Codelco during the next five years. Hernandez has since said Codelco needs $17.5 billion.

As ore diminishes in Chuquicamata’s pit and the threat of landslides makes further digging less profitable, Codelco will spend $2.2 billion through 2019 to develop deposits below ground. Without the money, Chuquicamata will run out of copper by decade’s end, Avendano says.

To prevent that calamity, Hernandez is proposing pharaonic feats. Codelco will build two 7-kilometer-long tunnels to tap ore buried as deep as the height of two and a half Eiffel Towers beneath the current pit. Underground crushers will break up 140,000 tons of rock a day. The industry’s longest conveyor will haul rock to the surface. The largest air-injection system in mining will ventilate the shaft at a rate of 8 million cubic feet (230,000 cubic meters) per minute. More than 4,000 workers will man the site.

Mine Rescue

Chile’s mining endeavors riveted global attention last year when 33 men were trapped half a mile below the Atacama for more than two months. They all were saved in the world’s longest- running mine rescue effort. Codelco engineers led a government team in charge of the mission.

Hernandez’s expansion plan requires more than extraordinary manpower and engineering. Codelco and Chile’s government will have to break with their past neglect, says Grimaldo Ponce, a supervisors union leader who is retiring this year after more than three decades at Chuquicamata.

Ponce, 69, says he’s not sure the new plan will actually happen.

“We have always had this problem that the money isn’t there to invest,” he says. “Codelco is slowly dying every day because there is no money.”

BB&T’s Hellwig is betting that Codelco’s copper will stay underground for lack of investment.

‘Game Is Called China’

“Like all state-owned enterprises, they exist to provide cash flow to the government,” he says of Codelco. “All too frequently, that is at the expense of the business.”

Chile’s government taps Codelco revenue that topped $13 billion last year to fund social programs and boost its sovereign wealth funds, which totaled $16.6 billion in 2010.

Juan Villarzu, who ran Codelco from 1994 to 1996 and from 2000 to 2006, says the board blocked him from expanding even after he saw in 2003 that China was on the verge of explosive growth.

“I said, ‘Look, guys, the game is called China,’” he recalls telling the board. Directors at the time included Chile’s finance minister and members of the armed forces, which get 10 percent of Codelco’s sales.

Chile is already enmeshed in another rebuilding project following the 8.8-magnitude earthquake that struck on Feb. 27, 2010, a week before Pinera became president. Pinera has been using sovereign-wealth-fund money, raising taxes and selling state assets to come up with $8.4 billion for reconstruction.

Cash Machine

Codelco is a tempting cash machine in lean economic times. It generates about 13 percent of government revenue, Hernandez says. Even with its mines depleted, Codelco sold $13.5 billion of copper last year, 30 percent more than the $10.3 billion in 2009.

The revenue is helping put Chile on course to become Latin America’s most prosperous nation. It will have Latin America’s highest gross domestic product per capita this year, leapfrogging Uruguay, the International Monetary Fund says.

Pinera says his support for Codelco will proceed — even amid national hardships.

“We need to find the equilibrium in making that investment and not holding back and leaving the riches below the earth,” he said in September. “Codelco is a company with a lot of experience, but above all, it’s a company with a big future.”

Raising Debt

Still, Pinera isn’t handing over the cash. Instead, he has told Codelco to raise capital in international financial markets before the government considers reinvesting profits back into the company.

“Where raising debt is possible, while maintaining our investment grade, we are going to make that the first alternative,” Mining and Energy Minister Laurence Golborne says.
Copper buyers in China — and the rest of the world — are counting on Codelco.

“There is a demand for copper, and a company like Codelco needs to invest so that it’s doing more than just replacing its declining volumes,” says Joe Bormann, a Chicago-based managing director at Fitch Ratings.

For  the rest of this article, please go to Bloomburg Markets Magazine website: http://www.bloomberg.com/news/2011-05-01/codelco-waning-copper-pressures-17-5-billion-bet-to-catch-boom.html

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