CEO’s Expletive-Laced Dig Shows Why Investors Shun Codelco

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  • Miner’s bonds have declined as leverage soars to a record high
  • Codelco is struggling to replace aging mines amid copper slump

Codelco’s deteriorating finances are turning off bond investors despite the copper giant’s unquestioned backing from the Chilean government.

The $11.2 billion of Codelco’s dollar notes included in a Bloomberg Barclays index have slumped an average 1.4 percent since Aug. 23. That was when Chief Executive Officer Nelson Pizarro said “there isn’t a single f-----g peso” as he highlighted the urgency of cost and spending cuts to shore up the state-owned company’s finances. Latin American dollar bonds have gained 0.8 percent in the same span.

While Chile’s implicit backing of Codelco’s bonds means the company is in no danger of missing payments, the debt-laden miner will continue to struggle as it replaces aging copper mines and prices for the metal remain 54 percent below their peak in 2011. That means bond investors are better off staying away from the world’s largest copper producer, said Maria Eugenia Diaz, a credit analyst at Credicorp Capital.

“Some way or another the Chilean government will help Codelco but the timing isn’t clear,” she said from Santiago. “The company is in a bind and needs a capital injection. Its credit outlook could be affected.”

On Tuesday, Mining Minister Aurora Williams said the government may decide in November how much capital it will inject into Codelco, which is rated A3 by Moody’s Investors Service with a negative outlook. Pizarro has said he’s confident the government will authorize an $800 million capital boost. 

Still, Diario Financiero reported on Aug. 30 that the government was considering a much smaller injection, between $300 million and $400 million.

Alejandro Rivera, Codelco’s vice president of management and finance, said the falling bonds can be explained by a drop in the price of copper to $2.07 per pound from $2.22 per pound by mid-August. "Codelco’s bonds have experienced a loss, as well as those of other mining companies," Rivera said by e-mail.