Codelco earnings inch up sequentially in Q3

Chilean state copper producer Codelco reported a pre-tax profit of US$79mn in the third quarter compared with US$342mn in the year-ago period.

The quarter was the second consecutive one with positive results, after reporting figures in the red in the previous two periods. For Q2, the company reported pre-tax earnings of US$54mn.

CEO Nelson Pizarro said the break in the trend was the result of the company's productivity and cost-containment plans, in place since January last year.

"We're happy, calm, to have finally been able to reverse the trend," Pizarro told reporters during a press conference.

However, for the January-September period, Codelco reported a pre-tax loss of US$18mn compared with a US$1.279bn pre-tax profit for January-September 2015, attributed to the steady decline in metal prices and a strengthening of the peso against the US dollar.

Pizarro said that weak copper prices accounted for US$863mn in lower earnings in the January-September comparison, while the weaker dollar was responsible for cutting profits by US$692mn, both of which were partly offset by US$318mn in savings associated with the productivity and cost-containment plans.

The CEO said the company is on track to meet its cost savings target for the year of US$400mn, after having saved US$318mn in the first nine months. For next year, the company is targeting US$200mn in extra savings.

In the first nine months, Codelco output from its own mines rose 1.2%, while the firm posted an 8% drop in C1 costs to US$1.271/lb.

Pizarro said that during the third quarter the average price of copper fell 17% year-on-year to US$2.14/lb. The price of molybdenum, the company's most important byproduct, dropped 13% to US$14.2/kg.

For the January-September period, Codelco saw C3 costs go up 9% to US$2.063/lb.

Revenue in the first nine months was down 7.1% to US$8.104bn, with sales from Codelco's own copper production down 5.8% to US$6.095bn, while those from its JVs at El Abra and Anglo American Sur (AAS) was 14.5% lower at US$1.310bn. Molybdenum sales were down 5.4% to US$296mn, the company said in a statement sent to securities regulator SVS.

As a state company that hands over all its earnings to the national treasury, Codelco puts an emphasis on pre-tax profits.

For comparison purposes, it also calculates what its profits would be if it were subject to the same tax conditions as a publicly traded company. In that case the company would have reported losses of US$105mn in the quarter compared to earnings of US$29.1mn in 3Q15.

PRODUCTION

The company managed to boost production from its own mines by 1.19% in the first nine months to 1.27Mt. When including its share of production from its 20% in AAS and its 49% in Freeport-McMoRan's El Abra mine, production was down 0.94% to 1.38Mt.

The El Teniente and Radomiro Tomic divisions were the top producing units with 353,000t and 235,000t, respectively, followed by the Chuquicamata, Ministro Hales, Andina, Gabriela Mistral and Salvador mines.

All of Codelco's divisions reported growth in production with the exception of El Teniente and Andina, which reported drops of 0.84% and 15.6%, respectively.

Pizarro reiterated that Andina has had a rough year and is unlikely to meet its production targets for 2016 because of several issues that have affected operations, though he said he was confident the mine will increase output to expected levels in 2017.

This year there have been two environmental accidents at the mine which resulted in the suspension of production. In February the company reported a leak in one of Andina's mineral ducts, while in April heavy rain caused a landslide that blocked a canal.

Output at Andina last year was 224,000t.

COPPER PRICES

The chief executive said the surge in copper prices in recent weeks was unexpected good news.

"In November we've been jubilant, we're very happy for what's taking place, but we're still all hands on deck doing what we need to do, which is bringing C3 costs below the price of copper," Pizarro said.

He said the steep price rise was surprising, noting that it can be partly attributed to market speculation related to the announcement made by US president-elect Donald Trump of a major infrastructure drive during his term in office.

However, Pizarro said there are also structural issues that back the price behavior, largely better-than-expected consumption patterns in China related to the government's efforts to expand the electricity grid.

The CEO said Codelco, the world's largest copper producer, is forecasting the price of copper will average US$2.26/lb next year.

However, he added that the company is still cash-strapped, and that despite the recent price surge, Codelco's cash needs are not yet able to be satisfied by the price of copper alone.

Asked about a pending capital input from the government, Pizarro said he is confident that an announcement on the issue will be made in the coming weeks.