DBRS Confirms Codelco at “A” with a Stable Trend

DBRS has today confirmed the Issuer and Senior Unsecured Debt ratings of the Corporación Nacional del Cobre de Chile (Codelco or the Company) at “A” with a Stable trends. The rating confirmations and Stable trends reflect Codelco’s position as a world-leading and cost-competitive copper producer, with large reserve and resource bases. The Company’s recent acquisition of 24.5% of Anglo American Sur SA (AA Sur) modestly enhances its business profile.

Codelco is wholly owned by the Republic of Chile (rated A (high), Positive trend by DBRS), but its debt is not guaranteed by the Chilean government. In addition, as a state-owned entity, Codelco faces higher payments to the government than a normal, non-government company (more than 80% of EBITDA for the past five years), making the Company reliant on the government or external debt to fund growth capital. Codelco’s rating accordingly also incorporates the support of the Republic of Chile.

With its high level of payments to the government and growing expansion capital needs, Codelco’s total debt has increased by more than 70% since the end of 2007. Gross debt leverage currently is more than 50% as a result of the Company’s thin capitalization. Nonetheless, Codelco’s coverage metrics, although weakened by lower copper prices and higher costs, remain in line with current ratings. Codelco’s earnings have been influenced by strong copper prices reflecting its single product focus as well as significant cost pressures, particularly since 2007. Direct cash costs of production per pound have risen from $0.40 in 2007 to $1.48 in the first half of 2012, while overall copper production has been largely flat, remaining within 10% of 2007 production levels over the same period. As a result, operating income has declined from $8.6 billion in 2007 to a current annualized rate of $5.0 billion. Codelco’s earnings in the near term are expected to continue to deteriorate in the face of a price/cost squeeze, partially offset by income from its recent investment in AA Sur.

Codelco’s business model, in which it returns its net income to the state except for depreciation, amortization and deferred taxes, requires special consideration in times when the Company is seeking to expand operations. It also results in relatively high debt leverage, as equity financing is unavailable and dividend payouts tend to be high, reducing the equity base. On average, over the five years ending 2011, capital expenditures have exceeded average depreciation and amortization by about $1.6 billion per year, leading to the need to seek external financing and other means to fund programs. The result has been increasing debt levels. During the same period, strong earnings have produced strong coverage metrics, but these have weakened following a decline of copper prices from record levels in early 2011. Codelco’s near-term credit metrics are expected to weaken as a result of lower copper prices, a continued rise in costs and potentially more debt to fund expansion programs.

Over the next five years, Codelco plans to invest approximately $27 billion in capital expenditures, aimed at increasing copper production to 2.0 million tonnes by 2017 (2011: 1.8 million tonnes). Although the outlook for copper markets is among the best for the base metals, the uncertainty caused by slowing economic growth in developing countries and sovereign financial crises in Europe and elsewhere, leads to the expectation of volatile copper prices. As a result, the need for additional funding is expected during this expansionary period. In addition, as seen with the Anglo Sur investment, acquisitions cannot be ruled out. DBRS therefore expects the Chilean government to continue to provide financial support for Codelco’s expansion plans and its funding needs.

Over the longer term, Codelco’s large reserve and resource bases 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.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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