Codelco Operator Series: Extending the life of historic mines

Chilean state copper producer Codelco plans to invest US$39bn in its structural projects over the next 10 years to maintain production levels and extend the life of its mines for at least 40 years.

To do so, the company must tackle challenges including rising cash costs, declining ore grades, and bigger community and environmental concerns. In that sense, the coming decade will be heavily focused on operational excellence.

"How are we going to face the challenges of the legal framework and the harsh reality that ore grades are declining? Productivity. That is the only way to survive," said Codelco CEO Nelson Pizarro during the company's 2Q18 earnings conference. "We are talking about productivity of labor and productivity associated with investments and modernizations."

"We need to look for new ways of doing mining. We cannot keep repeating the mining of the past. We have to move forward in introducing new technologies in process controls and business models," Pizarro added.

Codelco has been successful in increasing productivity the past few years with many initiatives, Moody's senior VP Barbara Mattos, told BNamericas.

"They've made changes in the processes at the mines, the way they control it and its activities; for instance, using driverless trucks and having remote control centers. They've also made changes in management. That brings efficiency," said Mattos.

In terms of labor productivity, Codelco's 1H18 report shows the company has increased productivity 19% in the last three years, going from 43t per person in 2014 to 51.2t per person in 2017. 

According to a recent report published by study group Clapes UC, Codelco's labor productivity in monetary terms averaged around 282mn pesos (US$422,200) per worker from 2000-2016, compared to the 264mn pesos per worker average of the national copper mining industry.

The concretion of its structural projects will undoubtedly increase the company's productivity, according to Gustavo Lagos, mining professor at Universidad Católica.

"Let it not be said that Codelco can't have operations with high productivity. Ministro Hales competes with the best mines in Chile. What happens is that Codelco has very old operations, some of its plants are difficult to replace, and therefore [the company] has a baggage that lowers productivity. But this will have to improve; they have a lot of ground to improve," Lagos told BNamericas.

FIRST OR SECOND QUARTILE?

One of the biggest strategic challenges for Codelco is to maintain its position on the cost curve and become a company which can navigate all copper price scenarios, analysts agree.

Codelco currently is in the second quartile of the cost curve and has space to improve.

"If everything goes well with the structural projects, from now to five or even 10 years, I would expect Codelco to be a competitive company," Lagos said. "I don't know if it will be able to be in the first quartile of the cost curve, but surely between the second and the first quartile. And that's very competitive."

Codelco has been able to reduce its cash costs over the last several years from US$1.631/lb in 2013 to US$1.359/lb in 2017, when the national industry average without Codelco went from US$1.479/lb to US$1.469/lb.

"What we will probably see over time with its structural projects is Codelco at least maintaining its cost position in the second quartile or even improve. We are going to see more efficient production, meaning lower-cost production at higher volumes," said Mattos.

She noted that the entire mining industry will continue to battle upward cost pressures: inflation, exchange rates, energy costs, water scarcity and labor costs. "The ability of a company to maintain its position on the cost curve is a challenge for Codelco and the industry as a whole."

PROJECTS FOR THE FUTURE

Codelco has three well-advanced structural projects and three more brownfield projects under evaluation: Chuquicamata Underground, El Teniente New Level Mine, and Andina Plant Reallocation are already in the construction phase, while Rajo Inca, Andina Development, and Distrito Norte desalination plant are in the phase of early works.

Alejandro Sanhueza, Codelco finance manager, said at a recent Moody's conference in Santiago: "Projects for Codelco are vital. Codelco is producing 1.7Mt and if we don't go ahead with these projects we are going to be down to less than 1Mt. These projects basically allow the extension of the useful life of the deposits for more than 100 years."

For the next three to four years, Codelco's investments will serve only to maintain production volumes, without generating any increase in production in the short or medium term.

"The investments are required to assure that the company will continue to develop its reserves and grow in the future. As of now, we are going to see pretty much maintenance of production levels, but they are necessary to create the conditions for expansion in the future," said Mattos.

CHUQUICAMATA UNDERGROUND

Chuquicamata Underground will convert the world's largest open pit and extend the life of the deposit by 39 years.

Codelco's board approved the reformulation of the project in August. The new US$5.5bn project contains 1.7Bt of reserves with an ore grade of 0.69% copper and 512ppm of molybdenum. Throughput capacity will be 140,000t/d after a seven-year ramp-up period set to start in 2019. Progress is at 65%.

"One of the biggest challenges is the transition from the current open pit mine to the actual operations of the new one, the plan of enlistment. How do I assure myself that the operators, the operations management team, the SAG systems, the types of contracts, all who know how to run an open pit, take over an underground operation?" Francisco Carrasco, manager of strategic planning at Chuquicamata Underground, told BNamericas.

The company is training some 100 people from the open pit at the underground El Teniente division, he added.

NEW LEVEL MINE

Another project that will allow the maintenance of Codelco's production volumes is El Teniente New Level Mine, which will extend the life of the deposit by 50 years.

The project is 48% complete and expected to begin production in 2023 at a throughput of 35,000t/d, ramping up to 137,000t/d.

New Level Mine went through geotechnical difficulties related to rock explosions that caused fatal accidents during construction. This led the company to seek alternatives, eventually opting for the construction of three new sectors.

The project has suffered significant delays and is now six to seven years behind schedule, and capex has gone from the approved US$3bn in 2011 to US$5bn this year.

ANDINA PLANT REALLOCATION

Andina Plant Reallocation is 56.9% complete and consists of setting up a new crushing line to maintain the current 88,000t/d capacity of Codelco's Andina division.

The US$1.3bn project will extend the division's life by 30 years.

RAJO INCA

Rajo Inca is one of Codelco's projects under evaluation. It aims to mine the nearby Indio Muerto deposit to extend the life of the Salvador division by 40 years.

Sergio Gaete, manager of Andina Expansion said at a mining conference in Santiago: "Salvador will be left with no reserves in 2021. That means that if we are not capable of building a project, the division should close. Rajo Inca is an urgent project."

Rajo Inca is finishing its feasibility study and the company will submit an EIA within the next days, added Gaete. The US$800mn Rajo Inca has 2,800Mt of reserves with 0.43% copper and its throughput will be 37,000t/d.

ANDINA DEVELOPMENT

Codelco's US$2bn Andina development project is one of the few initiatives that will add to copper production, by 65,000t/d in addition to the existing 88,000t/d.

Formerly known as Andina Expansion 244, it previously stalled in environmental evaluation and is being reformulated to create a less capital-intensive alternative. The project recently started its feasibility study and will have a life of 27 years.

DISTRITO NORTE DESALINATION PLANT             

This plant will supply the northern divisions – Chuquicamata, Radomiro Tomic, Ministro Hales, Gabriela Mistral – with desalinated seawater starting in 2021.

In 2017, the company started an international tender process, which it hopes to conclude in 2018.

OUTLOOK

Over the last decade, Codelco's highly ambitious investment plans have suffered delays, cost inflation, reformulations and socio-environmental opposition; its ageing mines have seen grades decline – though they remain attractive – putting pressure on costs and propelling the company to seek operational improvements.   

All things considered, Codelco has a good track record in finalizing investments, according to Mattos. "If we look at these projects, they are very complex. Codelco is working on five projects at the same time and that's really hard to do. It involves technology and operational complexity. But I think the company has been able to manage it in a very efficient way."

To some degree, the company has had no choice but to push ahead. As Chile's state-owned cash cow, declining production is not an option, and privatization is certainly off the table.

Codelco also faces labor challenges especially at Chuquicamata, where the underground conversion will require 1,700 layoffs by 2022.

In July, unionized workers at the mine started a strike demanding to participate in decisions about retirement plans, employability proposals, and Chuquicamata's transformation to an underground operation. And Andina division's Suplant 83 workers-union has been more than one month on strike after rejecting the company's last offer as part of collective contract negotiations.

There are many labor difficulties, but the persistence in the company's policies will prevail, said Lagos. "People will understand that this is not optional [Chuquicamata underground], that it has to be done."

Another challenge is the company's financing. CEO Pizarro said at the last earnings conference that net profit is not enough to help the company finance and develop the projects that can give it a future of 40 or more years.

Codelco's financing comes from a combination of its own cash flow, debt and government-approved reinvestment. Maintaining a healthy debt ratio will continue to be a focus.

"Funding will continue to come from the same sources that we have seen in the past. Codelco has a good quality of credit. It's an investment grade A company," Mattos said. "So far, the company has been able to access the market."