Codelco dispute puts focus on copper
Every morning, 4,200m above sea level in the Chilean Andes, an engineer from Codelco drives into “no-man’s-land” to meet his counterpart from Anglo American’s mine next door.
The meetings are essential: avalanches pose a regular threat for mountain top miners, and the two companies meet to co-ordinate planned explosions. They are also cordial: “The mining world is small, so most of us are old school friends,” says Ricardo Matus, an official at Codelco’s Andina division.
Q&A: Anglo-Codelco dispute
From the copper mines to the courtroom: A guide to the disagreement between Chile’s state-owned copper miner and London-listed Anglo American
In air less thin, however, the companies are barely speaking. The mine next door is Los Bronces, the focus of an acrimonious dispute between Codelco, Chile’s state-owned copper miner, and London-listed Anglo.
The disagreement, which erupted last November when Anglo sold a stake in the division that includes Los Bronces, has thrust Codelco, previously little known outside the mining industry, on to the world stage. It is likely to be in focus once again this week as a scheduled court hearing on Tuesday opens the way for either a rapprochement or further hostilities.
Either way, the dispute has also cast a light on the transformation of a company whose future could determine the direction of the global copper market. Codelco, created by the nationalisation of Chile’s copper industry in the 1970s, accounts for 11 per cent of global copper output and is crucial to Latin American-Chinese trade.
After decades of operating as a cash cow for the Chilean government – 10 per cent of its revenues are still sent directly to fund the armed forces – the company is now embarking on a programme of investment as ambitious as any in the private sector.
It plans to spend $36bn in the next 12 years – in the process building what will be some of the world’s largest copper mines. It is also venturing abroad for the first time, investing in exploration in Brazil, Ecuador and Colombia.
“We have invested, in today’s money, $1bn per year for the last 40 years – now we are tripling that,” says Diego Hernández, chief executive, at Codelco’s Santiago headquarters. “It’s a big challenge.”
The transformation, or as Mr Hernández calls it, the “refounding” of Codelco, is essential to the company’s survival and the world’s copper market.
Without it, Codelco’s production would fall from 1.7m tonnes currently to just 800,000 tonnes in 2020. For the first time in its 36-year history, the company, which describes itself as “the pride of Chile”, faces the prospect of losing its status as the world’s largest copper miner. Among the challengers for the crown are Freeport-McMoRan of the US and the combination of Glencore and Xstrata, should their proposed merger go ahead.
The plight of Codelco is emblematic of the broader copper mining industry: production at its largest mines, giants such as Chuquicamata and El Teniente, is falling after decades of supplying the world with copper.
“Being a state company, the trend is to try to under invest or postpone investments. Our current situation is we can’t postpone any more,” Mr Hernández says.
But now Codelco is investing with gusto. The company plans to convert Chuquicamata, one of the world’s largest open pit mines, into an enormous underground operation. It will dig 300 metres below the deepest level of El Teniente, already the world’s largest underground mine.
And at Andina it is launching one of the largest investments in the entire copper industry, spending $6.3bn to almost treble production.
The transformation of Chile’s copper giant helps explain how a company that only a few years ago was run as a branch of government has come to be engaged in a bitter dispute with a FTSE 100 company. Mr Hernández – who was head of base metals at BHP Billiton and also worked at Anglo for 13 years – has brought a more commercial outlook to traditionally bureaucratic state-owned company, observers and insiders agree.
Appointed in 2010, Mr Hernández is the company’s first chief executive to have a mining background. In his first year in charge, he cut 11 per cent of Codelco’s workforce. Gustavo Lagos, professor of mining at Santiago’s Universidad Católica, says there was been a change in culture at Codelco. “Three or four years ago it was very difficult to do anything without the unions,” he says, adding that now “the trade unions understand it is a new environment”.
Mr Hernández’s approach to the Anglo dispute has been just as unsentimental. He started working on a complex funding package to allow Codelco to exercise a longstanding option to buy a stake in Los Bronces as soon as he took charge in May 2010.
Asked how the two companies could work together given the deterioration in relations in the past six months, he replies: “We will take the decisions that give the most value to our shareholders [the government] irrespective of our sentiments – I learnt that when I worked for Anglo.”
At Andina, the rivalry between the two companies is hard to ignore. From a small shelter on the exposed mountainside that offers a stunning panorama of the Andes, the miners can also look down into Los Bronces, just a few kilometres away. Asked which of the two mines is better managed, Mr Matus pauses. “Los Bronces is more efficient because it is larger,” he says – “for now”.