Penniless Copper Giant Sells Bonds as Output Drop Looms

  • Codelco sold 10-year inflation-linked bonds to yield 2.09%
  • State-owned company is seeking funds for output expansion

Chile’s state-owned Codelco, the world’s largest copper producer, sold its first bond in the local market in about a decade to pay down debt and fund expansion plans as it seeks to maintain production from its aging mines amid a slump in the metal’s price.

The company sold the equivalent of $390 million in 10-year, inflation-linked bullet bonds Thursday to yield 2.09 percent, according to data from the Santiago stock exchange.

"There’s no money, understand. There isn’t a single f-----g peso," Codelco Chief Executive Officer Nelson Pizarro said at a conference this week when he outlined the urgency of cost and spending cuts. His statement was backed by Finance Minister Rodrigo Valdes who told reporters that "Pizarro is absolutely right by telling the country the truth: Codelco today has very, very little resources."

Funding for the company’s expansion plans at a time of diminishing returns has hit Codelco’s debt metrics. The ratio of net debt to earnings before interest, depreciation and amortization, or Ebitda, surged to 8.8 at the end of last year, from 3.4 times a year earlier. Credit rating agencies have said that the government’s support is key to maintaining the company’s A+ investment grade rating.

"The spread was really low versus government bonds mostly because of excess liquidity in the local market," Jaime Achondo, head trader at FYNSA International, said by phone from Santiago. "Investors ignored the CEO’s comments on cash because the company is a semi-sovereign." The yield on government 10-year inflation-linked bonds has reached 1.28 percent, according to data compiled by Bloomberg.

Codelco, which accounts for about 10 percent of mined copper globally, is overhauling its aging mines to maintain production as competitors cut spending and some output to survive the price slump. Copper prices have halved from a 2011 peak as Chinese demand for the metal used in wiring and plumbing slows.

While Pizarro has managed to bring down costs, his efforts are being diluted by a spending program that was originally budgeted at more than $20 billion. Without the new projects, the company’s record production levels will begin to slide.

Revised Estimates

As recently as May, Codelco said it aimed to increase annual output to about 2 million tons a year by 2022, from about 1.7 million tons now. That target has been revised as projects are slowed and scaled back. Now it estimates output will fluctuate between 1.6 million tons and 1.8 million tons through the next decade, except 2023 when it will dip to about 1.4 million tons, according to a presentation delivered by Pizarro at a conference this month.

Codelco’s role as a cash-cow for the state is reflected in the fact the government has reinvested $10.1 billion of the company’s profits in the past 40 years, while Codelco has handed about $98.9 billion to the state in taxes and dividends, according to La Tercera.

Augusto Pinochet, the military dictator who seized power in 1973, created Codelco three years later from a series of mines confiscated from their owners during the Socialist administration of Salvador Allende earlier in the decade. Democratically elected governments since have used Codelco profits to help make Chile the wealthiest country in the region and the highest-rated.

Asked today if the government would invest more in Codelco, Valdes limited himself to saying previous investments had been “a good deal for Chileans.”

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