Codelco could tap sovereign wealth fund for needed mine expansions

Codelco’s El Teniente, the world’s largest underground copper mine.

Chile’s state-owned copper producer Codelco needs to invest roughly $30 billion in the next decade to counter dwindling ore grades in its massive mines and deposits, and has not ruled out turning to its sovereign wealth fund to finance such investment, CEO Thomas Keller told Minería Chilena (in Spanish).

The company, which produces about 10% of the world’s copper supply, said that Chile’s sovereign wealth fund reached about US$23 billion by the end of February and that it wouldn’t be the first time Codelco has to make use of those funds.

During President Michelle Bachelet’s previous administration, the fund was used to limit the financial hit to the country during the recent “great recession” that dropped copper prices to historic lows.

In the last two years the company invested over $8 billion, using a mixture of bonds and reinvested profit.

Prices for copper have fallen more than 9% this year, hitting a three-and-a-half year low last month, as the first Chinese domestic corporate bond default sparked fears of instability in the country’s banking system.

Some Asian firms use copper to obtain low-interest loans and invest the funds in higher yielding local instruments, which is why investors believe falling copper prices could spark a downward spiral in the market, where borrowers are forced to sell more copper to cover losses or raise money.

But chief executive of Chilean miner Antofagasta (LON:ANTO), Diego Hernandez, who led Codelco from 2010 to 2012, thinks such a scenario is unlikely.

In an interview with The Wall Street Journal last week, the executive said the recent drop has demonstrated companies are more than willing to hold on to their copper these days, even amid a drop in prices.