Chile’s Codelco to issue $2.5 billion in bonds amid copper prices collapse

Chile’s Codelco to issue $2.5 billion in bonds amid copper prices collapse

The copper giant is in the midst of executing a $25 billion investment plan aimed to expand its aging mines and search for new high-grade deposits.

Chile's Codelco, the world’s No.1 copper producer, is about to issue a bond deal of up to $2.5 billion over the coming weeks, although it is not clear yet whether it would be in U.S. dollars or Euros, mine minister Aurora Williams said Thursday.

Williams confirmed the state-owned miner is currently evaluating what the best option may be and that an official announcement is coming soon, local newspaper Diario Financiero reports (in Spanish).

Analysts think Codelco should have no trouble finding buyers in spite of weaker copper prices. "There are always headwinds, but (Codelco) is a strong credit," a banker told Diario Financiero.

The copper giant, in the midst of executing a $25 billion investment plan aimed to expand its aging mines and search for new high-grade deposits, was promised a $225 million cash injection from the government last week.

The funds will come from the company’s own 2014 profits, since all of the miner’s proceeds got to the State’s coffers.

A big thorn in Codelco’s side

Though very few talk about it, Codelco is still suffering the consequences of a deal it signed with China's Minmetals back in 2006.

According to that contract, Codelco agreed to sell Minmetal 55,750 tonnes of copper a year — or about 3% of its annual sales — until 2021, at prices equivalent to what the red metal was trading for in 2005.

Chile’s Codelco to issue $2.5 billion in bonds amid copper prices collapse

A new mine level being constructed at Codelco’s El Teniente will extend the mine’s life by 50 years.

The miner is still trying to wriggle out of such deal, but chief executive Nelson Pizarro doesn’t think the solution is that simple. "I do not think a contract review would be easy (…) I also think it is unlikely to happen soon,” he was quoted as saying by El Pulso (in Spanish).

Copper was trading around $1.50 a pound at the time versus a market price of roughly $2.56 today, which means the tonnage is currently worth over $310 million versus $182 million 10 years ago.

Last year, a parliamentary commission of inquire into the deal said Codelco should renegotiate the terms of the contract or plainly abandon it. "It was a terrible deal for our country, because it meant losing billions,” said opposition deputy Felipe Ward to El Pulso.

The company holds vast copper deposits, accounting for 9% of the world's known proven and probable reserves and about 11% of the global annual copper output with 1.8 million metric tons of production.

Copper accounts for 60% of Chile's exports and 15% of gross domestic product.

The government has said it would evaluate during the second half of the year "how the investment plan has moved forward to define how much additional capital (will be given to Codelco) this year."