DBRS Confirms Codelco at “A” with a Stable Trend

DBRS today has confirmed the rating of Corporación Nacional del Cobre de Chile (Codelco or the Company) Senior Unsecured Debt at “A” with a Stable trend. Codelco remains the premier copper producer in the world, with a large resource base; cost-competitive, long-lived operations; and ample development opportunities. In addition, the importance of the Company to Chile’s economic development and the positive outlook for copper markets underpin the Company’s rating. Codelco’s financial profile has been strained by the 2009 downturn in copper and molybdenum prices and its obligations to provide cash to the Chilean state, but coverage metrics remain adequate for an “A”-rated mining company at a low point in the economic cycle.

Codelco’s earnings are closely tied to the price of copper. Codelco has performed well despite the volatility in copper prices brought on by the robust world economic growth for most of the 2000s and the price bubble in commodities in 2006, 2007 and the first half of 2008, followed by the economic collapse in late 2008 and early 2009. During the peak of the boom in 2006 and 2007, the Company generated average operating income of $9.8 billion (with the average copper price at $3.15 per pound). For the year ended September 30, 2009, which incorporated much of the downturn and a part of the current recovery, DBRS estimates the Company maintained operating income of $2.6 billion (with the average copper price at $2.03 per pound). DBRS views the ability of Codelco to generate positive operating income during the economic downturn as solid evidence of the competitiveness of the Company’s copper operations.

The strategic role of Codelco in the Chilean economy and the long-term support of the Republic of Chile (rated at A (high) by DBRS) are important factors in the Company’s rating. Codelco’s financial and other obligations are generally not guaranteed by the Chilean state, but the Company is (1) 100% state-owned, (2) is the largest company in the country (by sales) and (3) is a key contributor to the Chilean budget, making approximately $6.8 billion in payments to the government in 2008.

The Company’s thin capitalization (a result of its high payments to the government and lack of sources of equity capital) inhibits its ability to fund the development of its extensive resource base. The Company has historically carried a high level of debt relative to its capitalization (its leverage ratio is more than 50%), although the absolute amount of its debt is not high ($5.4 billion) compared with its productive asset base. Historically, Codelco’s coverage metrics have been strong, with cash flow-to-total debt greater than 0.5 times and EBITDA interest coverage at more than 20.0 times. The recent economic downturn has eroded these metrics (with cash flow-to-total debt at 0.3 times for the nine months ending September 30, 2009, and interest coverage at 17.0 times). DBRS views the weakening of Codelco’s coverage metrics as a temporary phenomenon associated with the economic downturn, which we believe bottomed out in 2009; therefore, they are acceptable for its current rating.

Over the longer term, Codelco’s large reserve and resource base and competitive operating assets can be expected to maintain the Company as a leading player in the copper markets. The ongoing industrialization and urbanization of China, India and other lesser-developed economies should provide ready markets for this widely used commodity.

Codelco will remain challenged in funding investment required to maintain and expand the productive capacity of its asset base. In strong copper markets, the bulk of the Company’s cash flow will be paid to the Chilean Treasury and there is no obligation for the state to fund Codelco if cash flow is reduced by weak copper markets. A significant escalation of leverage at Codelco or a protracted period of impairment of coverage metrics of the Company without support by the Chilean government could lead to a downgrade of the rating. Additionally, the impact of the results of the recent Chilean election remains uncertain at this stage, even though the new government has indicated it will review Codelco’s mandate.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Mining, which can be found on our website under Methodologies.

This is a Corporate (Natural Resources) rating.