Codelco woes mount with potential rating cut by Moody’s

Chile’s Codelco, the world’s largest copper producer, has just added a new item to its already long list of challenges as Moody’s Investors Service has placed the state-owned miner under review for a potential ratings downgrade.

The ratings agency, which currently gives Codelco an A3 investment grade — its fourth-lowest —, said on Tuesday that the copper giant’s major operational challenges and structural declines in ore grades may lead to a credit rating cut. 

“The review for downgrade reflects the likelihood that production volumes will not materially improve in the short term and will remain below historical levels in the next 12 to 18 months, which will weigh on Codelco’s profitability, leverage and coverage metrics,” Moody’s said in a note to clients.

The Santiago-based company, which will welcome a new chief executive officer this Friday, has had a difficult year. On top of registering a surprisingly steep drop in copper production that prompted it to lower 2023 guidance to the lowest level in 25 years, Codelco is also struggling to cut ballooning costs.

The miner, which has also recently been tasked with leading Chile’s new public-private model to for lithium exploitation, is also struggling to keep its debt levels under check.

Codelco faces the risk that its $19 billion-debt jumps to $30 billion in 2027, putting it at risk of insolvency, according to a report published mid-August by Chile’s Centre for Copper and Mining Studies (CESCO).

The influential industry body said Codelco’s output dropped despite investing $15 billion in flagship projects such at El Teniente’s ongoing expansion, where costs have so far overrun by 75% and Chuquicamata underground section, where the declared cost overrun is 53%.

As most mining companies in the South American country, the copper giant’s current reality includes declining ore grades, new deposits getting harder and costlier to develop, supply chain disruptions, inflation and construction bottlenecks. 

In an effort to offset some of these challenges, Codelco is investing about $3.5 billion a year in four major upgrade projects that have been hit by delays and cost blowouts.

The miner holds vast copper deposits, accounting for 10% of the world’s known proven and probable reserves and about 11% of the global annual copper output. 

Last year, it churned out 1.46 million tonnes of copper, equivalent to 28% of Chile’s total output of 5.33 million tonnes. Global copper supplies totalled around 25 million tonnes.

For 2023, the company now expects to produce between 1.31 million and 1.35 million tonnes of copper from a previous guidance of 1.35 million to 1.42 million. 

As a state-run miner, however, Codelco hands over all of its profits to the Chilean government.