Pizarro: Codelco to Keep its Foot on the Brake
The situation at Codelco became dire last year. In August 2016, while speaking to a reporter for El Mercurio, a popular daily newspaper in Chile, in Spanish he said, “Codelco does not have a [expletive] peso.” The paper ran with it and it set the tone for negotiations with organized labor and budget cuts for future capital projects. It was a reality check for a sovereign wealth fund whose value is tied to the copper market.
More recently, copper prices have rebounded after six years of steady decline, which makes copper miners in Chile (and around the word) hopeful. Pizzaro reminded a very large crowd of mostly mine managers and mining engineers who live and work in the Antofagasta region that Codelco has a long way to go. He admitted that a better copper price would improve cash flow, but he intended to keep his foot firmly on the brake when it comes to costs. “We don’t want to be the biggest [copper] company in the world, we just want to generate maximum returns for the state of Chile,” Pizzaro said.
During his presentation, Mining Investment Projects in Chile, he noted that the average copper price for 2016 was the lowest of the last six years. Meanwhile, Codelco has maintained copper production near historic levels despite the prices and declining grades. Head grades dropped 9% from 0.8% to 0.7%. In 2016, Codelco produced 1,827,000 metric tons (mt) of copper at a cash cost of ¢126/lb.
Codelco, however, was facing a crisis, Pizarro explained. “Most of the divisions did not fulfill production quotas,” Pizarro said. “So, we talked to our people and we launched an unpleasant campaign to cut costs. The plan focused on [key performance indicators], such as steel, energy and labor and those KPIs are being better managed in 2017 and 2018.” If all goes as planned, Codelco will reduce costs by $1.2 billion in 2017.
Shortly after the El Mercurio piece, Pizarro met with the 13 unions that represent about 8,000 workers. He described the collective bargaining process as “brutal, but the message was loud and clear.” They settled for 40% of their historical bonuses and production remained on track.
“We were scraping the bottom of the barrel, trying to identify bottlenecks and productivity improvements,” Pizarro said. “Now we are establishing goals and metrics. This is allowing me for the first time to see real participation from Codelco’s miners and management to improve productivity.” Citing shift changes at the mines, he said he is seeing a real difference in communications with all of the white helmets present.
“We are committed to resolving problems and to make an impact on results,” Pizarro said. “We are building a persistent culture of perseverance for planned projects.” Talking about a previously announced plan to invest $5 billion per year for five years on projects, Pizzaro referred to that plan as an “unattainable dream.”
Calling it a $49 billion moment of sobriety, Pizzaro and his team embarked on an optimization plan that postponed or canceled many projects. He asked rhetorically: Were these projects really ready to mobilize? Were they well-designed or were they dreams based on unachievable recoveries? “Investment spending was projected to grow despite falling copper prices,” Pizarro said. “If we didn’t act, Codelco would be unable to fulfill its obligation. We are not interested in being the biggest copper producer. We want to be the biggest revenue generator for Chile.”
Today, Codelco is currently working toward the completion of a shortened list of projects such as the New Mine Level (Nuevo Nivel Mina) at El Teniente, Chuquicamata Underground, a mine-plant transfer system at Andina, among others. “Chuqui Underground has achieved 43% of its progress,” Pizarro said. “We will transform the biggest open pit mine in the world into a massive underground operation, with an expected life of some 38 years.”
With 1.7 billion mt of copper, grading 0.68%, Chuqui Underground is expected to produce 332,000 mt/year (mt/y) and mine startup is planned for 2019. “We will invest $2.4 billion within the next two years, to complete this project,” Pizarro said.
Codelco has determined six key items
for the future of the company, which
• Keep the financial strength of the company through price cycles;
• A program to control operating costs focused on operating excellence and enhanced productivity in all divisions;
• Develop solid mining plans with a district- oriented view of business;
• Progress with the optimized investment plan to reduce risks and maximize value capture from our base of resources;
• Strong commitment with research and development, focused on solving productivity challenges; and
• A long-term program aimed to convert Codelco into a benchmark on sustainable copper production.
Codelco is now looking at a sequential implementation of projects that will allow it to continue to reduce costs.