Copper king vows to resist rushing projects as prices surge
The world’s biggest copper producer has some good news for bulls: it won’t be tempted into speeding up projects as prices rally.
What’s more, Codelco chairperson Oscar Landerretche says a series of natural obstacles facing the industry will also prevent other miners from piling in.“It’s going to be very difficult for the industry to respond even if it wanted to,
” Landerretche said Tuesday in an interview at the BMO Capital Markets mining conference in Florida. “It’s becoming very, very hard to do new projects.”
Existing mine reserves are deteriorating while the industry has yet to experience its own “shale gas moment,” in which technology unlocks supply previously deemed unfeasible, Landerretche said. Meanwhile, the global regulatory environment has become tougher.
At the same conference, BHP Billiton CEO Andrew Mackenzie said copper tightness could be exacerbated by a reluctance to invest after years of low prices. That sentiment was echoed by Swedish-Canadian commodities entrepreneur Lukas Lundin, who called the industry “gun shy.”
Supply constraints, coupled with healthy demand -- which he sees increasing 3.5% this year compared with a 2% projection six months ago – should support prices of $2.60 to $2.70 a pound this year, he said. Longer-term, the Santiago-based miner sees copper closer to $3 as the market moves into a deficit, starting with a 100 000 to 200 000 metric ton shortfall in 2018.
For most of his time at state-owned Codelco, Landerretche has had to deal with conditions that were less than ideal. The Massachusetts Institute of Technology-trained economist was appointed to Codelco’s board by President Michelle Bachelet in 2014, the second of three years when prices fell.
Landerretche and Chief Executive Officer Nelson Pizarro have overseen cost and budget cuts to cope with a slump in metal prices at a time when the state producer was engaged in a record investment program to overhaul its aging deposits after years of under-investment. A multiyear investment plan has been whittled back to $18 billion from $25 billion.
In the past six months, copper futures have risen more than 30% and they traded at $2.7580 a pound on Wednesday. A strike at BHP’s Escondida in Chile and a dispute at Freeport-McMoRan Inc.’s Grasberg mine in Indonesia have been restricting shipments at a time when increased infrastructure spending in China and US President Donald Trump’s spending pledges boost the demand outlook.
Now that prices are rising, Codelco still plans to keep to its current course by advancing a series of initiatives aimed at replacing depleting orebodies, Landerretche said. Over the next 20 years, production should be flat at 1.6-million to 1.7-million tons a year, he said. Before trimming its project budgets, the company had projected getting to 2 million tons.
“The balancing act has to do with realizing the investments that the company needs to do to continue to be a leader in copper production,” he said. “But we want to do it without increasing our debt.”
Along with cost reductions, the board under Landerretche has worked to ease what had been one of the heaviest debt burdens in the industry. Codelco’s debt now sits at about $14.3 billion, and his intention is to have it stable at that level when his term ends in May 2018.
Codelco would only increase it if the Chilean government failed to fulfill its recapitalization promises, copper prices fell significantly below $3 a pound, or efforts to reduce costs failed, Landerretche said.
Projections are for copper to move up, not down. At the BMO conference, executives including Mackenzie and Lundin opened the door to the market posting a small deficit this year, its first in six years.
Prices of the metal, often seen as a guide to the world economy’s health, may climb above $8 000 a ton before the end of the decade amid rising demand, waning output and a lack of investment in new operations, Citigroup forecasts, from about $6 000 now. BHP sees a deficit emerging in the 2020s, and David Lilley, co-founder of RK Capital Management, this week threw his weight behind bets on a growing shortage.
Last month, Landerretche was the victim of a letter bomb at his residence in Santiago, escaping with minor injuries. The incident – responsibility for which was claimed by a little known group of environmental extremists – shook a country where attacks on executives or politicians are rare, and where the murder rate is the second-lowest in the Americas, after Canada.
The attack is still under investigation but it increasingly looks to have been caused by a sophisticated operation, Landerretche said, adding that he believes it is highly improbable it was the work of amateur environmentalists. A logical motive would seem to be Codelco’s efforts to improve corporate governance, Landerretche said. “We have implemented an enormous amount of reforms to assure our citizens that Codelco is not captured by special interests.”
As part of efforts to reduce debt, Landerretche also spearheaded the latest push to repeal a law requiring Codelco to give 10% of its sales to the military. Asked if the mail bomb could have been in response to that, he declined to speculate, but said Codelco will continue the process of ensuring it represents the best interests of the Chilean people by resisting pressure from special interests.
“When I’m talking about special interests, I mean all sorts,” he said. “We’re talking about businessmen that have contracts with us, we’re talking about labour leaders, we’re talking about communities, we’re talking about institutions that believe they own the company.http://www.miningweekly.com/article/copper-king-vows-to-resist-rushing-projects-as-prices-surge-2017-03-01