DBRS Confirms Codelco at “A” with a Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of the Corporación Nacional del Cobre de Chile (Codelco or the Company) at “A” with a Stable trend. The rating confirmations and Stable trend reflect the credit strength of Codelco’s owner, the Republic of Chile (rated AA (low) by DBRS), as well as Codelco’s position as a world-leading and cost-competitive copper producer with large reserve and resource bases.

Codelco is a state-owned mining, industrial and commercial enterprise with its own legal personality and capital, and 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, making it reliant on the government or external debt to fund its ambitious capital investment program. As such, Codelco’s rating incorporates the support of the Republic of Chile. Codelco’s financial metrics are skewed by the high level of payments it makes to the Chilean government, which result in thin capitalization, high debt leverage and limited internally generated funds being retained for investment and renewal.

The Company’s copper sales have remained close to the five-year average of 2.0 million tonnes per year (tpy). However, its earnings before non-recurring items (as determined by DBRS) have been volatile, recovering strongly from the 2008/2009 recession low of $1.2 billion to a $1.9 billion peak in 2011 but dropping back in 2013 to a level below the 2009 interim low ($1.1 billion) as copper prices rose and fell and unit costs rose. Codelco has stabilized its costs, and production volumes are up in 2014, but weak copper prices continue to erode earnings.

Codelco earnings are expected to decline in 2015 as copper prices are pushed downward by excessive supply growth. Molybdenum prices have also slumped recently. These pressures are expected to be only partially offset by higher sales as Ministro Hales ramps up and lower costs. Cost savings programs supplemented by a weaker peso and lower oil costs are expected to help stabilize/reduce its copper unit direct net cash cost.

The sharp decline in copper prices from record levels in 2011 and rapidly escalating costs (now stabilized) have significantly weakened the Company’s credit metrics, which are now well below those of an independent “A”-rated company. At the same time, DBRS’s sovereign rating for Chile was upgraded to AA (low) from A (high) in 2013. The Company’s weak credit metrics are expected to be further challenged: copper prices are currently well below $3.00 per pound and are expected to remain weak throughout 2015.

In addition, Codelco has more than $23 billion of investments planned for 2014 to 2018 to modernize operations and to access new mining zones in order to maintain level copper output. In the absence of the Company’s investment program, copper production can be expected to drop sharply, and unit production costs would rise, materially reducing Codelco’s cost competitiveness and weakening its business profile.

This large investment program is expected to require additional external funding as well as continued supplemental funding from the Chilean government. Even though the Chilean government recently approved special capital contributions of $4.0 billion between 2014 and 2018, and the Company has recently raised additional funds through a $980 million debt issue in the fourth quarter of 2014, the negotiation of further bilateral loans and other arrangements, it will require additional funding for its capital projects program between 2014 and 2018.

Accordingly, DBRS’s ratings for Codelco are based on the expectation of ongoing support from the Chilean government.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.