30 Oct Codelco’s pending tasks
There are several challenges that Codelco will have to face to stay competitive in this new decade that is just beginning. Given the new market demands in terms of copper traceability, and of the society to have sustainable and sustained mining, there is a need, in the case of the company, to have stable financing that allows it to specify its portfolio of projects.
This is made difficult by the current context the company is going through, where its surpluses today play a fundamental role for Chile to face the crisis derived from the pandemic, in addition to a considerable increase in its net debt, which has exceeded US$ 17 billion in the first half of 2020.
To analyze possible exits in this scenario, we spoke with the former minister of Finance Rodrigo Valdés, and the former president of the Board of Codelco, Marcos Lima and Óscar Landerretche, to find out their views on three edges that have put the state company to the test.
Financing: the stumbling block
According to information from the Chilean Copper Commission (Cochilco), Codelco has 8 projects in the portfolio for the 2020-2029 period, for an estimated amount of US$23,683 million. And specifically, for this year, in March an investment plan was approved that was around US$3,650 million, destined mainly for its structural projects, Andes Norte, Traspaso Andina, and Chuquicamata Subterránea.
This ambitious plan has been altered by the pandemic, having to temporarily paralyze part of its works. Also, the state company has again gone out to seek resources in the market to finance its investments, especially due to a scenario where the possibility of capitalizing Codelco is diminished given the needs of the Treasury to finance different policies in response to the health crisis.
“Codelco is at a disadvantage if the owner does not support it”, says the former Minister of Finance and academic from the School of Government of the Catholic University of Chile, Rodrigo Valdés. “Unfortunately, it is tempting for the Ministry of Finance to force all profits to be distributed”.
“At least I, when it was my turn to be a minister, and possibly sensitized by my time at Banco Estado, I tried not to do it”, reflects Valdés. “We also reversed by law a reduction in cash that was triggered by the application of the reserved copper law, which made no sense. Perhaps it is time to have a range of percentage of the profits that, to be distributed, must be approved by the board of directors”.
Given the increase in debt that the state company has had in recent times, the former minister believes that “Codelco has to demonstrate with facts, containing costs, advancing in the investment calendar, that for the State it is good business to take care of it and make it grow. With the level of debt that the central government will have in the coming years, it is difficult to simply capitalize with fresh resources, as has been done in the past. But I do believe that it is possible to agree to reinvest part of the profits”.
In this sense, Codelco has sought different ways to reduce costs, increase productivity and increase production, which has led it to create the Transformation Plan, with which it is intended, among other things, to ensure the financing and development of structural projects, without having to increase debt levels, and not having to depend in a relevant way on capitalization by the State (see inset).
A Corporate Governance that is on political cycles
Ten years after its entry into force, the evaluation made by the former president of Codelco’s Board of Directors during the period 1996 and 2000, Marcos Lima, is that the Corporate Governance of the state company has made significant progress concerning what existed before, but there are still several aspects to improve.
The executive, who returned as a member of the company’s Board of Directors between 2010 and 2015, points out that, from an indirect point of view, Codelco continues to depend on the policies of the Ministry of Finance, both from the point of view of indebtedness, as well as from the point of view of the withdrawal of dividends, which works against the company. But perhaps that is not the responsibility of the Board. It is the governments, the three governments that have passed in these 10 years of operation of corporate governance, which have not allowed the financial autonomy of the company. There continues to be a need to negotiate year after year with the Ministry of Finance”. In this sense, Codelco is at a disadvantage when making investment decisions regarding other companies in the field, especially the reinvestment of profits.
“What seems serious to me is that governments have not become aware of what it means to run a company with the characteristics of Codelco”, says Lima. “There are few Chileans with the experience to manage these types of companies. Mining companies are not managed like a retail company, they do not resemble those in the financial sector, nor are they airlines. Although it is true the Board must have people of different origins, managing these companies is complex, so a high level of rigor is required in the election of its board, which has occurred in the selection of directors by the Council Public Management”.
According to Law 20,392 that modified Codelco’s Corporate Governance model, the President of the Republic can elect three directors and can elect the president of the board. Another four directors are elected from a shortlist proposed by the Council of Public Management.
In evaluating this, Lima points out that “I would like the election of the members of the Board of Directors to resemble the Council of the Central Bank, where the election of directors has been exemplary. Hopefully, not only the four directors of the shortlist of Senior Public Management were chosen like this, but that all the candidates for directors would go through a rigorous process, regardless of who proposes them”.
Regarding the role of the executive president, Lima explains that today he has less power than when he was in charge, “but he is still the most relevant executive character, and the directors and especially the president of the Board must understand that it is not their role to intervene in management. His task is to lead, the strategic task, but the day-to-day task is that of the manager or executive president. Being a director is not the same as being an executive, the roles are different, but sometimes that gets confused, and this complicates the task of the administration”.
Lima insists that it must be recognized that current corporate governance is better than what existed before, that it has a good code that must be followed, where the roles of each are defined, with a structure that has the appropriate counterweights (checks and balances) where the board of directors has certain responsibilities and the Administration (its executive president) takes charge of others. “However, something that I think is important to mention, even if it is not politically correct, is the interference of the Government, in all governments, around the appointment of the Executive President, which is the worst of the signs that can be given. If the government wants to change a director, let it do it, but it must be the Board that appoints and removes the executive president, without pressure and let alone when these are political”.
Regarding the areas that can be improved, the current academic from the University of Chile and the Catholic University of Chile points out that a more autonomous corporate government is required, where “Finance, once and for all, except in special situations such as the current, define certain rules on financing and dividends and do not force the Board of Directors to have a discussion about them from year to year. That is something fundamental, giving the Board of Directors autonomy and responsibility for the financial management of the company”.
“Another thing that I think is very important that should be improved is that the relationship with the control bodies has to be clarified”, says Lima. “Either it is Cochilco, or it is the Comptroller’s Office, one of the two”. To this, the executive adds that “hopefully it will be settled once and for all that those who work at Codelco must be governed by the Labor Code and not by the Administrative Statute, which governs public employees because if not, the company totally loses the possibility of competing”.
“Codelco is a worldwide company, and therefore cannot be subject to the Comptroller’s Office, nor to the procedures of the public sector. And of course, less from Parliament. What should be there is a single body that reviews public companies, and that is the one that gives the account to the political authorities”, proposes the academic. “But doing it directly, demanding that the executive president transform himself into a politician who has to go and give an account of his actions to the Parliament, it seems to me that it takes him out of his business role. We have to understand that once and for all”.
A business model that is committed to sustainability and technology
For the former president of the Codelco Board of Directors and academic from the Faculty of Economics and Business of the University of Chile, Óscar Landerretche, the conditions that Codelco faces today are relatively good. “The truth is that the pre-pandemic scenario was one of a good balance, where demand for copper was quite stable and with the absence of large supply discoveries, they led to the price being parked, so there are good conditions for the copper business in general, and going forward it also looks like this.”
However, there are certain strategic problems that the state company will have to face, which, in the words of the economist, are related to technology and the business model. “One of them has already been solved, which is the transformation of Chuquicamata from an open pit to an underground pit, to see if that pit could be given 50 more years with that, and it is resolved. I would say the next big question is, and that the company is in the process of solving, is deep-sea mining at El Teniente. There are still things to solve there. And the sustainability of Andina, which is inevitably associated with reaching an understanding with Los Bronces, which has not been possible”.
For Landerretche, other threats to Codelco must also be addressed, such as market demands for copper traceability. “When we created the Cobre Verde (Green Copper) initiative, the idea was to promote a new market, there was a strategic move behind it. Of course, it was going to be resisted, and I couldn’t get the government to back me up to ask the London Metal Exchange to officially implement it, and for it to be something that we would lead and capitalize on that”.
In addition to this, the academic mentions the situation of the state’s smelters. “The truth is that the diagnosis is super clear. The diagnosis for me is that Codelco should build three giant smelters, one in Mejillones, another in Barquitos, and another one in the fifth region or above in El Teniente, and close all the old ones. And one possibility of financing it is with debt and doing it, and well, that did not work, and that attempt, that of the National Smelters Commission, was a failure. We were not able to make the country understand that we should take that strategic step”.
Regarding the emphasis that the company must make in the future to remain competitive, the academic points out that “Codelco has to become a multi-metal multinational. Also, it has to continue on its way to becoming one of the most efficient companies in the world in copper production, for which the keyword is technology, which is why the closure of Codelco Tech is more regrettable”.
Landerretche points out that, thanks to the size of the state-owned company, it should play a role in leveraging the technological and business development of more businesses. “With Codelco Tech, basically the model that I followed, it was the Csiro model, from Australia, and Codelco has to do that, and there are not many companies that can do it. There is Codelco, Enap, Concha y Toro, Latam, but Chile does not have so many companies, and it is key that the State uses them to develop other sectors”.
“That is how productive development is carried out, one does not carry out productive development by choosing products, that is “we are going to go from copper concentrates to making copper cables”. Copper wire is made anywhere. No.. It’s going from copper concentrate to robots”,says Landerretche. “It is going from copper concentrate to the use of technologies, of biogenetics to clean the tailings deposits. Those are the steps that we must take, it is what Codelco has to leverage and there the state company is going to become an instrument, precisely so that Chile stops being only copper and natural resources”, he concludes.
The ambitious plan to position Codelco towards the future
During a recent talk organized by Industrial Engineering of the Universidad de Chile, the Executive President of Codelco, Octavio Araneda, presented the details that make up the ambitious “Transformation Plan”, an initiative that aims, as its name says, to profoundly transform the state company for the future.
The backbone of the plan is made up of structural projects, where it is expected that in 10 years they will already be completed, profoundly reconfiguring the corporation.
“We have considered it necessary, depending on the company’s strategy, to make a profound transformation in management,” Araneda said during his presentation. “This is because when we look at our processes, and review the technical limits of our operations, in the different process lines, we see that there are large areas for improvement, in terms of reducing costs and increasing productivity. Through this, we have identifiedduring 2019, a strategic plan that is made up of many transversal initiatives, which seek a couple of large objectives, which are numerical, but beyond that, there are other transformations and cultural management objectives”.
These objectives are that starting in 2021, the company increases its surpluses by US$ 1 billion compared to the performance base it had in 2018, where increasing productivity and production, and reducing costs, will be key to achieving this goal.
The second big goal is to reduce project costs. “We have a portfolio for the next 10 years of US$ 40,000 million of CAPEX, and we set ourselves the objective of reducing it by 20%. That means saving US$ 8,000 million, which will allow us to achieve two objectives: first, it allows us to position ourselves fully in the second quartile of costs, and second, it allows us to ensure the financing and development of our structural projects, without having to increase debt levels, and not have to depend significantly on capitalizations by the State”, said the executive.
Araneda explained that the plan has three levers for capturing value: operations excellence, non-mining asset management to maximize their contribution, and also reforming the smelters and refineries to be competitive and run as if they were independent smelters, which it has been established through the creation of the Vice Presidency of Smelters and Refineries, which allows them to be measured and evaluated as independent businesses.
To this is added a series of goals for 2030 in terms of sustainability, which have not yet been announced, and which, according to the company, “will be deployed in five dimensions associated with the execution of 16 business cases with economic feasibility, documented and with a high social impact, aiming at reducing emissions, reducing consumption of continental water, recycling waste, managing tailings dams, and providing social value to communities”.