Chile’s Codelco at risk of insolvency as debt grows, CESCO report says

By Julian Luk

LONDON (Reuters) – Chile’s Codelco, the world’s largest producer, is at risk of insolvency due to rising costs and a growing debt pile stemming from projects that missed output targets, Chile’s Centre for Copper and Mining Studies (CESCO) said in a report seen by Reuters.

In a rare intervention, the influential industry body – funded by revenue from events it organises – said cost overruns on projects to upgrade five of Codelco’s mines, known as “structural projects”, could mean its debt is likely to reach $30 billion by 2030 from $18 billion now.

“Codelco maintains a solid financial position and broad access to financial markets, as confirmed by our high credit rating,” Codelco said in response to a request for comment.

“Controlling future growth in debt is an important focus of attention that…is determined by the evolution of investment projects and the performance of operations, areas where we are putting the greatest effort.”

The report, published to CESCO’s members earlier this month, comes after the resignation in June of Codelco Chief Executive Andre Sougarret, who steps down at the end of August, only a year after he took on the role. Sougarret cited “complexities” around the business.

At the heart of Chile’s mining industry, Codelco needs to revive it’s copper production from a 25-year low.

Last year’s production of 1.46 million metric tons amounted to 28% of Chile’s total output of 5.33 million tons. Global copper supplies totalled around 25 million tons.

CESCO said Codelco’s output dropped despite $15 billion of investment in flagship products including El Teniente where costs have so far overrun by 75% and Chuquicamata where the declared cost overrun is 53%.

Codelco did not comment on the figures.

“The most appropriate thing to do today is to know the technical feasibility of the projects to see if it is possible to achieve the production goals committed,” CESCO said.

This should happen “even before continuing with the investments decisions since…the costs in terms of indebtedness jeopardise the financial viability and the value of the main asset of our country”.

CESCO also highlighted Codelco’s plans to get involved in lithium mining as a problem which could mean loss of focus on copper, key for the global energy transition and where demand projections suggest a unique wealth opportunity.

“Codelco has explained…it will not redirect its focus from copper production or divert resources from other areas,” Codelco said in an emailed response.

Chile’s future prosperity is tied to Codelco’s fortunes, CESCO said, and the state-owned miner needs to focus on efficiencies in governance, administrative structure and supervision before resuming investment and accruing more debt.

“Codelco is probably experiencing one of the most complex moments in its 52-year history,” the report said.

“Debt levels could reach such high levels that they could drag the company into insolvency, endangering its financial viability if the production and cost promises of these (structural) projects are not fulfilled.”

Codelco’s production in the first half of 2023 was 633,000 metric tons of copper, the lowest in 25 years. Over the past five years, its copper production has dropped 17% and is expected to keep falling until 2025.