A Challenging Journey for Codelco

Codelco is the only remaining State-owned mining company in the world since the nationalist wave of the 60s. Today, after decades of enjoying high grades, developing new mines and generating large profits, it faces a dramatically different and very complex situation.

There is a strong cost pressure due to the fall of ore grades, deeper deposits, harder ore and impurities that are more complex to process, together with increasingly stringent environmental regulations and access to water resources. Codelco´s operation is becoming more and more expensive coupled with the need for large investments to complete the so-called “structural projects” and improve very old infrastructure: plants and smelters, among others. An evidence of these problems is a fall of 106.000 mt or 12% in Codelco´s output in the first semester 2019, compared with the same period of last year.

The lack of adequate funding of the company due to the withdrawal of all its profits by the State, has caused critical competitive disadvantages, compared to the practices of an adequate financial strategy and business management of other large mining companies.
Thus, to the deterioration of the natural conditions, one must add the difficulties of managing this new reality due to a State policy that has not changed since the creation of the company. The owner of Codelco refuses to see this new scenario and continues to demand the same benefits as always, through the extraction of profits.

This is a very difficult equation to be solved. On the one hand, Codelco is required to behave as an institution subject to all the restrictions of a public service, and on the other have the performance of a competitive company, with very low levels of political freedom for the company´s management to adapt to the new demands of the market.

The need for a major national agreement to continue to improve Codelco´s Corporate Governance is evident, so that the company can take advantage of its enormous potential being the company with the largest copper reserves in the world. This agreement should provide Codelco with the political and financial tools to operate and invest according to a defined development plan and, at the same time, put in place powerful, rigorous and effective mechanisms to control and evaluate the company´s performance.

The recent appointment of Octavio Araneda as Codelco´s CEO, simultaneously with the repeal of the Reserved Copper Law, constitutes an excellent opportunity to think about the future of the company from a continuity and change perspective.

Major changes are required to reverse the trend in Codelco’s competitiveness, quite deteriorated in recent years despite the efforts made. Generating the necessary trust means improving internal management as a priority, which will require political support to cause the willingness to change. To the extent that progress is made, financial support will be critical, in order to alleviate Codelco’s financial situation, severely deteriorated, to face the development and completion of its structural projects and the interest payments on the existing high debt.

The outstanding career of Octavio Araneda in Codelco, his deep knowledge of the reality of the company and of the positive aspects that must be maintained, are essential to seriously undertake the required transformation.