World’s biggest copper miner insists it can reverse production slump

The new boss of Codelco, the world’s biggest copper miner, insisted the Chilean state-owned group would reverse a severe production slump this year, even as it struggles with a $20bn debt pile.

Production at the company, which faces delays on four major projects needed to extend the life of its ageing mines, plunged from 1.618mn tonnes in 2021 to 1.325mn in 2023, the lowest level in 25 years.

But Rubén Alvarado, who became chief executive last September, told the Financial Times in an interview at El Teniente, the world’s largest underground copper mine: “We believe 2023 was the year we bottomed out.”

“In 2024 we will be slightly higher than in 2023 and by 2030 we will reach 1.7mn metric tonnes.” 

Falling production at Codelco has coincided with a series of supply problems for other copper miners just as demand for the metal, a key component in power grids, wind turbines and electric vehicles, is surging. Prices recently hit a record high above $11,000 a tonne and analysts predict they could reach $15,000 in the next few years.

It was these economics that encouraged the world’s largest mining group BHP to try to buy Anglo American, which operates highly profitable mines in Chile and Peru. In the end, the takeover approach failed.

Last year El Teniente, which first opened in 1905 and contains 4.5km of tunnels, suffered its biggest ever rock blast, an unpredictable phenomenon where built-up pressure causes rock to crack.

These and other seismic events have plagued the construction of a new level of the mine, which will be accessed by a 8km tunnel and is needed to compensate for dwindling reserves higher up and keep production running for another 50 years.

Originally planned for completion in 2018, the new level was later reformulated into three projects now scheduled to finish in 2026, 2029 and 2030.

Around 300 metres above, at the current mine level, hulking trucks with 2m-wide wheels trundle along pitch black shafts, and haul away chunks of rock that contain, on average, 0.88 per cent copper. The company has extended the life of this section, El Pacífico, originally due to be shuttered in 2022, to 2027, to compensate for the delay.

Codelco’s mammoth reserves — the world’s largest — have historically allowed it to make up for temporary drops in one area by tapping capacity elsewhere, keeping overall production steady.

But that has proved impossible as the company tries to balance not only El Teniente’s expansion, but also the transformation of its open-pit Chuquicamata mine into an underground facility, and overhauls at its Andina and Salvador mines.

Each project has suffered years of delays because of accidents, which have killed six workers since 2021, design problems, and other operational setbacks. Budget overruns are in the billions.

Boosting global copper production is vital to avoid future shortages. The International Energy Agency predicts that supply from existing mines and projects under construction — which take 15 years on average on build — will meet only 80 per cent of demand by 2030.

Codelco’s deposits are among the most technologically difficult to extract in the world. According to analysts, successive Chilean governments have exacerbated the challenge by refusing to allow the fully state-owned firm to reinvest profits, leading to a pile up of maintenance and extension projects starting in the 2000s, and mounting debt.

Bar an exceptional licence to reinvest 30 per cent of profits for 2021-2024 — which has so far brought in just $346mn — Codelco relies solely on market financing for expansion projects, which are costing around $4bn a year.

The firm’s current debt pile of around $20bn — against $16.4bn of revenue in 2023 — is likely to exceed $30bn by 2027, analysts said.

“Codelco’s structural problem is that . . . it has been dramatically underinvested throughout its history, spending far less than a normal mining company on both maintenance and expansion,” said Jorge Bande, director emeritus of copper research centre Cesco and a Codelco executive from 2006 to 2013.

Successive leadership changes — Codelco has had six CEOs and four board chairs since 2010 — have also been disruptive, he added.

“We have suffered very big management challenges [around mega projects], which finally has translated into this production dip,” Alvarado said. He added that avoiding further delays was “fundamental”.

He believes that the company also has “room to grow” via joint ventures with private sector firms, such as the one signed last year with Rio Tinto to explore for copper in Chile’s Atacama region.

In the meantime, officials said output, which continued falling in the first quarter of 2024 and into April, will be boosted in the second half by production starting at a new section of the Salvador mine, increased production at the underground section of Chuquicamata, and operational improvements at the Andina and Ministro Hales sites.

Industry analysts agreed that the structural projects should start to pay off in increased production soon. But some worry that the changes made by Alvarado and chair Máximo Pacheco, including a simplified leadership structure, would not be enough to resolve Codelco’s longer-term problems of rising debts, under-investment and declining ore grades.

“I don’t see clear plans to tackle those problems in a deep way. I see some contingencies, small changes at the margins,” said Juan Carlos Guajardo, founder of consultancy Plusmining. “When you have entered a crisis of this scale, it is very hard to get out without major changes.”

Bande said: “I think the whole business needs to be rethought. Perhaps [Chile] should have a smaller company, but a more profitable company.”

Codelco also faces a new challenge. President Gabriel Boric has tasked it with representing the state in new public-private partnerships to mine lithium, another essential metal for the energy transition, in which the company has no experience.

Alvarado rejected the idea that this would be a distraction, adding that lithium would be a “good business” for Codelco.

Ongoing demand for copper also helps. This year’s record-breaking rally has eased but prices are expected to stay high in the coming years amid globally tight supply.

Alvarado said the higher prices would reduce financing needs and how much Codelco would have to pay on new debt.

“We will enter a virtuous circle where we can sustainably finance our operations with the market, while also growing our production,” he said. “That’s how we’re designing our strategy.”

Additional reporting by Harry Dempsey

This article has been updated to say El Teniente has 4,500 km of tunnels and not 4.5km of tunnels as a previous version said.