Codelco pre-tax profits surge despite lower output

Chilean state copper giant Codelco saw its H1 pre-tax profits surge to US$1.02bn, compared to a US$97mn pre-tax loss reported in the year ago period, as a result of higher prices and despite weaker output.

The average price of the red metal in the first half was US$2.61/lb, 22.3% higher than the US$2.13/lb reported in the year-ago period.

CEO Nelson Pizarro said that he's confident about the long-term fundamentals for the copper industry, as demand continues to be higher in China. However, the executive said that he's not convinced prices would reach the highs of US$4.0/lb seen at the peak of the commodities supercycle in 2011-12.

As a state company that hands over all its earnings to the national treasury, Codelco puts an emphasis on pre-tax profits. For comparison, Codelco calculated 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 a profit of US$745mn in the first half compared to a US$71mn loss in 1H16.

PRODUCTION DOWN DUE TO LOWER GRADES

Codelco's production from its own mines in the January-June period was down to 798,000t from 813,000t in 1H16, though in line with its guidance for the year, Nelson Pizarro told reporters during a press conference.

The company kept its guidance for the full year at 1.7Mt.

The drop in production was largely the result in the decline in ore grades that the entire Chilean mining industry has been seeing. Since 2013, Codelco has seen an 11% decline in average ore grades across its mines to 0.69%, which Pizarro said would the normal head grade for Chilean mines in the future.

The best producers for Codelco were its flagship El Teniente mine (pictured), which produced 219,000t in the first half, and Radomiro Tomic, with output of 152,000t, followed by Chuquicamata (116,000t), Ministro Hales (113,000t), Andina (112,000t), Gabriela Mistral (60,000t) and Salvador (27,000t).

First half revenue was up 10.8% to US$5.99bn, with sales from Codelco's own copper production up 14% to US$4.59bn, the company said in a statement sent to securities regulator SVS.

When including its 20% stake in Anglo American Sur (AAS) and 49% at Freeport-McMoRan's El Abra mine, first half production was 851,000t, down 6% from 906,000t in January-June 2016. Revenue from its JVs at El Abra and AAS was 4% higher at US$927mn. Molybdenum sales were up 27% to US$235mn

Codelco's C1 costs rose 3% in H1 to US$1.32/lb, while C3 costs were down 3% to US$2.04/lb in the same comparison. Total cash costs and expenses were around US$2.15/lb compared to US$2.17/lb the year before.

Pizarro attributed the increase in C1 costs to weaker output, the impact of foreign exchange, as well as an increase in supply costs. Despite the increase, the company remains among the lowest cost producers in Chile's mining industry.