Codelco open flanks that threaten its leadership and future surpluses
Uncertainty in permanent financing, doubts in the corporate governance structure, higher costs and copper prices loom as major threats
Codelco has not lived happy days. The recent slam the Ministry of Finance (Treasury) gave the state copper company to capitalize with fresh resources and for the amount the same company announced that it needed (U.S. $ 1,200 million), was a setback, indicated near the company.
To this it must be added a series of events that shaped who is at risk Codelco’s leadership in global copper production, due to the possible postponement of some structural projects.
1. – Corporate Governance Structure
There’s a phrase said by Thomas Keller, CEO of Codelco to Capital Magazine in April and is revealing: “this time will be interesting to test the operation of the corporate governance model and see if it can decouple the political times in the country with the management of the company. This is vital when the company is implementing the most important long-term investments plan in its history “.
Indeed, the same executive of Codelco did not hide his discomfort once it was confirmed that Codelco would not be capitalized this 2013 with fresh money, and said that the financing system of the company “is poor” and should be improved.
The executive director of the Studies Center for Copper and Mining (Cesco), Juan Carlos Guajardo, said from China that the problem occurred with funding “the only thing it reveals is that we are still in limbo. On one hand Codelco we treat it as a public company, and on the other side is been treated as a private company, “he said, adding that” the law of corporate governance is an attempt to give a framework to Codelco politically viable, strengthening its autonomy. However, what is happening with financing, is one leg of that model. “As a proposal, Guajardo said that “just as the country has set up an institutional framework in sensitive areas it has characteristics of autonomy and long-term view, such as monetary policy from the autonomous Central Bank, to finance Codelco should have a corporate position that would allow state functioning within a level of autonomy and long-term vision that has not yet.
2.-Uninsured Liquid Financing
The state support for Codelco into debt remains, however, “with a look that goes beyond one year, it becomes more difficult Codelco’s financial situation becomes inevitable Codelco and go more strongly to debt, and becomes inevitable come more strongly to debt, considering that it is already relatively high. Codelco is in a compromising position forward, “Guajardo said.
Considering the need to issue debt, mainly in overseas markets, the current scenario is not the best: low mining margins, increased costs, together with the already known interest rate hikes. Without referring specifically to Codelco, Alberto Salas, Sonami’s President, said the market “is more restrictive than two years ago, companies are lowering their costs, improving productivity, and the financial side is part of that adjustment process”.
Guajardo stated that “not having a policy of long-term capitalization in Codelco, is a thing that is making crisis at the moment, and it is a danger to corporate governance law which was passed and for proper functioning of Codelco.
3.- Copper price down and delayed projects
According to Gustavo Lagos, director of UC Mining Center,”copper prices next year will be lower than that of 2013 and then there will continue to lower prices until the end of this decade. All this will produce more tightness in the financing. “
Lagos complemented that “if investment plans be delayed, obviously that 2021 production targets also be delayed, costs will be higher and this will influence the business results delivered in five or six years by the company.”
Juan Carlos Guajardo said that the administration of the company will have to adjust the timing of their projects so that resources that are not going to get now do not impact structural projects forward. “If the current capitalization policy is not accompanied in the coming years and if the debt grows, investment projections could have a change,” he said.
4.- Loss of leadership in profits
During the first quarter of this year, Codelco ceased to be the more profits mining in the country. The state Company revealed a comparable gain of $ 665 million, while Escondida, linked to BHP Billiton reported that earned a net profit of U.S. $ 856.3 million during the same period. While the state Company said it expects to resume its leadership in this field when submitting annual results, the mission is complicated, if you consider that without adequate funding there is not projects and, precisely, the new structural developments will allow Codelco to have most utilities that will ultimately contribute to the Treasury.
5.- Managing Energy Costs
A Codelco’s senior source told DF that the state Company has the “hands tied” in giving a solution to high energy costs that the power generators will pass on to the minings. The same source said the gas generation project that has Codelco-in folder to be operated by a third-Luz Minera (760 MW), is completely “inert”, especially if they are at risk now structural projects which are the priority. Felipe Valenzuela, CEO’s DMO Minerals and chairman of the Mining Committee of the Institute for Liberty, said: “Codelco should accelerate into something that stride. It is important for them to advance bids which allow them to autogenerate important part of the energy they need. “
Mark Prats, Falcon consultant’s Country Manager, indicated that high marginal costs is difficult to Codelco to motivate based generators to sign contracts at based generation prices, and suggested that the state company “have lacked waist movement in negotiation strategies of power “. Prats added that in 2004 Codelco tried to realize the construction of a power plant itself, to ensure at good price supply of inexpensive generation. “In that sense pioneered about what they are doing private mining today. The main difference is that in this case, private minings do, however Codelco analyzed, talked, negotiated, and finally, under political pressure, not implemented. And today is paying marginal cost, “he said.
6.- Major gap between wages and productivity
According to data compiled by the Mining Council, between 2006 and 2012, the wage index of mining increased by 65%, while in the same period, labor productivity fell 34%, expressed as copper production per worker. Codelco is no exception to this reality. According to Thomas Keller he found on a presentation made at the Universidad Finis Terrae, “in the Chilean mining sector salaries are paid in absolute and comparative terms, which are greater than those of our competitors in the U.S. and Canada.”
Meanwhile, Juan Carlos Guajardo, noted that in Codelco the power of some unions “has been very high and have generated some benefits that are totally out of the market logic. Codelco should advance in all its divisions into a much more in line with the market situation. “
Valenzuela, meanwhile, argues that it is necessary to advance in space efficiency, and above all “optimize on issues having to do with the outsourced services and compensation costs. If that does not happen, long term projected scenario instead of generating surpluses will generate losses, “adding that” mining pays very good wages, but Codelco still pay above that level of wages, therefore, no space to adjust. “
Source: Diario Financiero
