Chile’s copper miner Codelco is set to lose its position as the world’s top producer of the metal this year, as delays in upgrades and expansion projects caused by measures to stop the spread of the novel coronavirus add to the impact of low prices, lack of funding.
The miner, which hands all its
revenue to the state, was in the midst of implementing a $40 billion, 10-year modernization
of its mines, aimed at maintaining output despite rapidly falling ore grades.
A sustained drop in copper prices — down 22% so far this year — and the lack of readily available government funding while the country deals with ongoing unrest, has cast doubts on Codelco’s ability to keep up production rates.
The impact of the current pandemic will negatively tip the scale, experts say.
Colin Hamilton, managing director of commodities research at BMO Capital Markets, anticipates the miner will have to sell non-core assets. “Any thoughts of shutting unprofitable operations, however, are off the agenda for now given the need to ensure employment,” he notes.
The analyst also sees potential delays at the key El Teniente mine’s new level, which is expected to boost mine’s production to 500,000 tonnes a year, positioning it among the world’s five largest copper operations.
“While operationally the company
continues to surprise on the upside, Codelco is looking increasingly unlikely
to be the world’s largest copper miner from this year forward, as depletion and
restrictions prove to be headwinds that are too strong,” Hamilton says, adding
that the impact of the current pandemic will negatively tip the scale.
With the electoral calendar likely
being pushed back into the last quarter of the year — including April’s highly-anticipated
constitutional referendum — and bleak prospects for short-term economic
recovery, Chile’s position as a leading investment destination will face yet
another critical test, says Mariano Pablo Machado, senior Americas analyst at
global risk consultancy Verisk Maplecroft.
Although the country’s government has taken proactive measures to contain the
economic and health impacts of the covid-19, the ripple effects of a copper
supply shock remain to be seen, Machado says.
“Disruption in mining will cascades
throughout the scarcely diversified economy and it can have a long-lasting
impact if the state’s policies fail to deliver the intended stimulus,” the expert
says.
According to BMO’s figures, the implications
of the current quarantine-led restrictions in top copper producing nations, particularly
in Chile and Peru, remain manageable.
“If we take total Chilean and
Peruvian production of ~8mtpa copper contained, the current two-week quarantine
would affect ~310kt of copper,” Hamilton estimates. “Currently, we are taking
these losses within our disruption allowance, which at 1.4mt is roughly 50%
higher than we would run in a ‘normal’ year, to account for the risk to supply
chains this year.”
Codelco operates seven mines and
four smelters, all located in Chile. Its assets account for 10% of the world’s
known proven and probable reserves and about 11% of the global annual copper
output with 1.8 million tonnes of production.