Chile’s Codelco may slash copper output as it further cuts costs to the bone

Chile’s Codelco, the world’s top copper miner, may soon change its focus from cost reductions to output cuts, as the state-owned miner faces what its chief executive called the “worst crisis ever” since created in 1976.

Announcing fresh cost-cutting measures to save $242 million this year, CEO Nelson Pizarro said last week (in Spanish) that slumping copper prices, high debt, rising costs and lower productivity have brought Codelco to “an extreme” situation.

Among the urgent actions proposed by Pizarro, who not long ago said he would rather rein in costs than curb output to navigate the slump in copper prices, there is a further $2.5 billion-cut to the state-owned miner’s multi-billion investment plan.

The figure, though significant, is minor when taken in the context of Codelco’s ambitious investment plan, originally pegged at $25 billion (now sitting at $18bn), aimed at upgrading its aging mines and dealing with dwindling ore grades.

While the board has yet to make a decision on the recommended investment cut, sources familiar with the matter told MINING.com a resolution is likely to be announced after the board meeting scheduled for August 25.

Output impacts

Further slashing investment will severely impact Codelco’s production targets, once tallied at 2.5 million tonnes by 2025, but reduced last year to 2 million tonnes by 2020.

According to MINING.com’s sources, the company may just decide to keep its current production of 1.7 million tonnes as target, though “scaling down to 1.5 million or lower has not been ruled out just yet.”

What is clear is that Codelco plans to cut a minimum of $500 million a year, to save a total of $2 billion by 2020. It also expects to increase productivity by 18% at the end of 2018 and 20% by the end of the decade.

Chile’s government has injected $600 million of capital into the copper giant, which hands over all its profits to the state and has received only 10% of its surplus over the past decade. In comparison, private copper miners reinvest an average of about 40% of their profits.

The miner’s output amounts to around a tenth of global supply and it has been one of the main forces behind Chile’s transition from one of Latin America’s poorest countries to one of the richest over the past 40 years.

The red metal climbed just above one-month lows on Monday as slowing economic activity in top consumer China highlighted weak demand growth prospects, with softer US dollar providing some support.

Benchmark copper on the London Metal Exchange traded at an unchanged $4,761 tonnes in official rings. On Friday, the industrial metal hit $4,750.50 a tonne, its lowest since July 12.