The most recent economic reports from the Chilean state copper company raised alarm bells. Low production, high costs and a dragging debt are the panorama with which the firm has dealt in 2023. What could save it? That the international price of copper continues to rise, something that until now does not seem completely certain.
The recently assumed president of Asimet, the Chilean metalworking union, Fernando García, met this week with Máximo Pacheco, the president of the board of directors of Codelco to ask that Chile's exploitation of copper and lithium consider the generation of value-added products and privilege the productive chain with national manufacturing.
At the meeting, García also announced a survey carried out among the union's companies, in which the partners stated that, being a state company, the mining company should have a policy of giving priority, or advantageous conditions, to national suppliers. .
It is one of the most recent news from the Chilean state mining company, a few days after its latest financial report was released, in which Codelco recognizes a delay in structural projects and various operational difficulties, as well as worse climatic and environmental conditions.
Specifically, Codelco announced a contribution to the Treasury for US$ 770 million, which is 6% above what was committed to the Ministry of Finance, and reported surpluses of US$ 329 million plus an Ebitda of US$ 1,775 million.
The drop in surpluses compared to the same period in 2022 is explained – as stated by the firm itself – by a lower sales volume (11%), due to lower production of its own copper (14%); a 3% drop in the realization price of copper sales compared to the same period of the previous year, with a value of 390.2 cents per pound (c/lb) versus 402.6 c/lb—, and the increase in sales costs, associated with the variation in production costs.
The Ebitda figure, meanwhile, would show a margin of 21% and a difference of 53.3% in relation to the previous year, which was US$ 3,805, affected by similar reasons as the surpluses.
In light of these figures, local analysts have not been kind to the recent news from the National Copper Corporation.
Tomás Casanegra, a Chilean economist critical of the Boric government and with a large base of followers on social networks, highlighted that what Codelco called “surpluses of US$ 329 million” are less than what was paid in interest by the state company, with a flow of negative free cash of almost US$1,000 million.
Therefore, his conclusion on Twitter was lapidary: “They did not generate surpluses.”
“These are disappointing results, because there is a reduction in production compared to last year and that is key, because what basically determines profits is production and price and, of course, costs. But if production decreases, costs increase, then the only possibility of better results is for the price of copper to rise, but this price has not increased compared to last year," Gustavo Lagos, Professor of the Department of Economics, summarizes to AméricaEconomía. Mining Engineering, from the Pontifical Catholic University of Chile (PUC).
The state entity recognized on its website, where it published the figures on July 28, that "operational conditions and delays in the projects led to a production of 633 thousand tons of copper between January and June, with a drop of 14% in relation to the same period in 2022. Total production, adding the associates El Abra and Anglo American Sur, reached 684 thousand tons.”
Likewise, it explained that the lower production was mainly due to lower ore feed grades in its plants, as well as operational problems in others.
Added to this is that on June 13, for personal reasons, André Sougarret presented his resignation from the executive presidency of Codelco, which will become effective as of September 1, adding to the bad news.
“This situation, added to the disruptions that occurred in the first semester, implied a downward adjustment in the annual copper production forecast to the approximate range between 1 million 310 thousand fine metric tons and 1 million 350 thousand fine metric tons. This, in a year that marks the bottom of the company's production curve in the decade," the company said on its website.
The little that the state entity can show that is positive, then, has to do with the value of copper.
“The price [of copper] is now better than expected, otherwise the situation would have been very complex (…) obviously Codelco is in a complex moment and I believe that the only thing that can support it at this moment, because There is still no light on the other side of the tunnel, it is the price of copper,” says Lagos.
FIELDS WITH PROBLEMS
Low production has a multi-causal origin, some of which have to do with the design of its operations, which are not so easy to resolve.
"In the case of the Ministerio Hales mine they have problems with the robustness of the rock and, therefore, they cannot meet the production quotas," indicates the academic.
In general, the deposits with problems are underground Chuquicamata, where there is a part of the mine that has not produced what was planned. This has led to more exploitation of the Chuquicamata open pit (surface), while at El Teniente there have been recent problems in the stability of the rock.
In Gabriela Mistral, this is due to changes in the extraction sequence that affected the first quarter of this year and in El Salvador, due to the delay of the Rajo Inca project that will begin operating in 2024. Meanwhile, Andina and El Teniente carried out their major maintenance annual in this period and were affected by a climatic event at the end of June that impacted the central area of the country.
“I would say that Codelco's problems cannot be solved overnight. Not even from one month to the next. The ideal would be that something important could be done in terms of production recovery this year so that 2024 is better,” explains Gustavo Lagos. “If they are not in a position to say that they can improve production next year, the only thing that can lead to better results is that the price of copper improves and that does not depend on Codelco itself, but rather on the world market,” think.
Even so, the firm assured positive progress of structural projects in its communication at the end of July, such as the continuity phase of Level 1 in Chuquicamata underground that reached 36.3% and phase 2 of the same level is in definition, together with 79% progress in the Teniente Project Portfolio, and 99.2% progress in Traspaso Andina, with only minor works remaining for the closure of the project.
In Rajo Inca, meanwhile, prestripping works restarted in April – a process that consists of extracting the rock with no commercial value or waste that is covering the mineral reserves. And progress continues in the works to optimize and increase the useful life of the concentrator and hydrometallurgical plants and the tailings deposit.
A DEBT THAT DRAWS
If low production is a problem, the more serious the debt of the state entity is perceived.
“Codelco's debt has been increasing very significantly in some governments and in the last Piñera government it increased quite a bit, and it has continued like this because the contributions from the treasury have been practically zero for several years: the treasury does not reinvest in its principal company,” emphasizes Lagos.
This debt is quite significant. It is said that there are almost US$ 17,000 million and that the interest accrued in the first semester was US$ 380 million, US$ 50 million more than its surpluses. Professor Lagos sees the possibility of this liability increasing further: "The debt will reach US$30 billion soon," he warns.
Even so, so far this has not significantly changed the rating of the state copper company, which in September last year was evaluated at A3 with a stable outlook by the agency Moody's, an entity that also improved its Base Credit Assessment (BCA) to baa3. from ba1.
On that date, Moody's changed Codelco's outlook to stable from negative, following the Chilean Government's downgrade to A2 from A1 and change of outlook to stable.
"Codelco's A3 rating reflects its status as a government-related issuer and is based on the company's baa3 BCA, a measure of its intrinsic solvency regardless of its control," the rating agency reported.
“The rating [of Codelco] is still relatively good and the investment is relatively good, because Chile has a good investment grade,” adds Professor Lagos.
Moody's BCA baa3, in that sense, incorporates the company's position as the world's largest copper producer and fourth largest molybdenum producer, and its significant reserve base, as well as its high exposure to a single commodity ( copper) for a large portion of your cash flow.
This assessment, Moody's says, has taken into account Codelco's large capital expenditure needs to maintain production levels. “In about 10 years, these projects represent around 65% of Codelco's total annual copper production.”
For this reason, the entity stressed that it could lower the rating of Codelco or BCA “if its profits contract for a prolonged period, with a general weakening in credit metrics and a marked deterioration in the company's liquidity, or operating performance. of Codelco deteriorates, with decreased production levels and higher costs.
Thus, a downgrade of the BCA could lead to a downgrade of Codelco's rating, while any indication of a drop in the level of support from the Chilean Government would also put downward pressure on the rating.
The red flags for the rating entity consider leverage (Moody's adjusted gross debt/EBITDA) that remains at 2.75x or more on a sustained basis, a drop in interest coverage towards 4.5x or less and an adjusted EBIT margin of 15 % or less.
PRODUCTION OF COPPER…AND LITHIUM?
In any case, it has been a challenging year for mining and it has not only attacked Codelco.
The mining company Anglo American, for example, recorded a net profit attributed to the parent entity of US$ 1,262 million in the first half of 2023, which represents a decrease of 66% compared to the same period of the previous year, when it earned US$ 3,680 million.
Likewise, the firm's semiannual income reached US$ 15,674 million, which represents 13% less than the US$ 18,111 million registered a year earlier.
The chief economist of JPMorgan's southern cone, Diego Pereira, highlighted this week that the general economic activity indicator for June rose 0.5%, ending the sequence of four consecutive monthly falls.
“The main factor that helped increase monthly activity was mining, which gained 4.5% and contributed 0.6% to overall activity. Therefore, overall activity closed the second quarter of 2023 with a drop of -2.2% quarter-on-quarter, just a little below our forecast of -2.1%. On a higher basis than the previous year, in the general period mining activity fell -1.4% annually,” he indicated in his analysis.
Beyond the quarterly evolution, it is worth noting that this year to date, mining has actually gained 0.2% compared to December 2022. “That is, activity has been stagnant rather than contracting, based on a trend,” Pereira stressed.
Something endorsed by the INE Statistics Institute, which highlighted that the Mining Production Index (IPMin) contracted 0.4% compared to the same month of the previous year and had an impact of -0.178 percentage points on the Industrial Production Index (IPI).
This is due to the lower activity recorded in the three types of mining that make up the index, especially non-metallic mining, given the decrease in lithium carbonate production. Meanwhile, metal mining presented a variation of 0.0% and had an impact of -0.030 pp. in the result of the general index, due to a decrease in copper extraction and processing.
The latter, due to less treatment and a low mining grade, in accordance with what is recognized by Codelco and the analysts.
All in all, hopes are pinned on a rebound in production, as well as a better metal price. But so far it could just be wishful thinking, as the data is inconclusive.
Just a week ago, the Chilean Copper Commission (Cochilco) announced the main conclusions of the Copper Market Trends Report, corresponding to the second quarter of 2023, which contains projections on the price of copper, demand and supply of the metal for the years 2023 and 2024.
The executive vice president of Cochilco, Joaquín Morales, pointed out that the price of copper is expected to average US$3.85 per pound in 2023, a lower estimate than expected in the last report. While by 2024, the Institution estimates that it will close at US$3.75 per pound, also lower than the previous forecast.
However, Professor Lagos considers that in the coming years it is most likely that the price will be higher, "because the supply is not going to be as interesting in relation to the demand and that, in part, is due to Chile since it has not been [producing] up to par,” he warns.
In terms of demand, Cochilco is betting that, despite China's weak macroeconomic indicators, refined copper consumption will continue to grow compared to last year, reaching 14.3 million tons in 2023 and 14.7 million tons in 2024, equivalent to an increase of 2.1% and 2.4%, respectively.
Regarding the variables that are favoring the price of the metal, the executive vice president of this entity pointed out that inventories in official stock exchanges are at historically low levels, inflation in the United States maintains its downward trend, copper consumption in China remains positive, and world copper production continues to show, as of May, lower figures than forecast.
Thus, "for Chile, mine copper production is expected to be 5.4 million tons in 2023, 1% higher than last year's figure. Meanwhile, an increase of 4.3% is projected for 2024. ", reaching 5.6 million tons. And by 2024, it is projected that the growth of the supply of refined copper will reach 4% and demand will reach 3.1%, also generating a surplus condition of 368 thousand tons," the report says.
On the other hand, Codelco's foray into the lithium market could make up for the decline in copper, possibly in the medium term.
Last May, the company reported the creation of two new companies to explore and exploit lithium: Salares de Chile and Minera Tarar. Days later, the state company announced the completion of the exploration campaign in Maricunga with auspicious results, since its lithium concentrations place it as the second best deposit, after the Salar de Atacama.
While a few days ago, Máximo Pacheco aimed to have an agreement by August. In this regard, the local Diario Financiero reported, without citing sources, that Codelco had already made its proposal to SQM for the contract in the Salar de Atacama, after nine meetings with Ponce Lerou's firm.
From the point of view of copper production, the good news for the market has been the recent association of Codelco and Rio Tinto to jointly explore copper deposits in Atacama, the joint venture called Agua de la Falda, where Codelco owns 42.26 % of the society.
The analyzes of both Codelco and Rio Tinto – the second largest mining conglomerate in the world – indicate that there is interesting exploration potential to discover copper deposits, which will be the new and main focus of ADLF.
For his part, the executive president of Rio Tinto, Jakob Stausholm , said that "Chile is and will continue to be one of the most important sources of copper supply worldwide, in a scenario in which demand for copper is expected to increase due to to the development of renewable energies and electrification.
“I think that private mining will rebound in the second half of this year and I think that the contribution of mining will be positive and will be better than the rest of the economy (…) I wish Codelco would undertake more actions like this one from ADLF in association with private Río Tinto is a great company and its foray into this project will be beneficial,” concluded Gustavo Lagos.
