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 Stable trends. The rating confirmations and Stable trends primarily reflect the continuing implicit support of Codelco’s 100% owner, the Republic of Chile (Chile), rated AA (low) with Stable trend by DBRS. The rating also reflects the fact that the debt issued by Codelco is not guaranteed by Chile.

Codelco is the largest copper producer in world. The Company plays a strategic role in Chile’s economic development and is a key revenue contributor to the Chilean Treasury. The mining sector is one of the pillars of Chile’s economy and copper accounts for a significant part of government income. Since Codelco has no access to the equity market, the financing of its substantial capital expenditure (capex) program has to be funded with its own debt issuances and financial support by the Chilean government in the forms of (1) equity injection and (2) reduction of dividends. The Stable trends reflect DBRS’s expectation that the Chilean government will provide a strong level of financial support going forward.

Assessing Codelco from a stand-alone perspective, the Company’s business risk profile is viewed as strong, underpinned by its large copper reserves, cost competiveness and strong production profile. However, its financial risk profile has deteriorated over the past few years because of weaker cash flows and rising debt levels to finance the Company’s substantial capex program and the resulting free cash flow deficits. In the first nine months to September 30, 2015, most of the Company’s credit metrics fell into DBRS’s BB range.

Global copper inventories have declined substantially and production surplus in 2016 is expected to be significantly lower than in 2015; however, weaker demand from China, challenging macro-economic conditions in other Emerging Markets, the pessimistic outlook among momentum investors and the strong U.S. dollar are likely to keep prices depressed in 2016. As a result, Codelco’s cash flows and EBITDA are not expected to improve from 2015 levels. In addition, given Codelco’s large capex program of $21.0 billion to $22.0 billion over the next several years, DBRS expects Codelco’s free cash flow deficit to remain substantial. DBRS notes that, in late 2014, Chile’s congress approved a special capital contribution of $4.0 billion consisting of $3.0 billion in the form of a capital injection by the Chilean Treasury and $1.0 billion of retained earnings for the period between 2014 and 2018 to assist in the Company’s extensive capex program; the first instalment of $600 million was approved in October 2015. While this should help to support the balance sheet, given the estimated free cash flow deficits during this period, DBRS expects debt levels to continue to rise, negatively affecting Codelco’s credit metrics. Consequently, continuing financial support and commitments from the Chilean government are key to maintaining the current rating for Codelco.

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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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