André Sougarret won global acclaim in 2010 as the chief engineer on a rescue of 33 Chilean miners who’d spent more than two months trapped 2,300 feet underground. Now, as chief executive officer of Codelco, he must attempt another difficult feat: digging the world’s No. 1 copper producer out of its current hole.
At the state-owned behemoth, output is running at its lowest in a quarter century, costs have surged, and profit has slumped—all at a time when Chile’s government needs more money to fight festering inequalities and the world needs more copper for batteries and electric grids as it transitions away from fossil fuels.
Codelco’s production is down by about a fifth from only six years ago. After a double-digit-percentage drop in 2022, it’s expected to fall as much as 7% this year, to 1.35 million metric tons.
Ore quality is deteriorating around the world as existing deposits are depleted and new ones are more difficult and costly to develop. “There’s no easy mining left—not in Chile nor the rest of the world,” said Sougarret at a shareholders meeting on May 2.
Because Codelco is the world’s biggest copper supplier, its production wobbles have greater impact on a market where warehouse inventories are near their lowest levels in 18 years. The company’s travails also have tremendous impact on Chile’s economy: Copper accounts for more than half of the country’s exports and a significant share of the government’s income. President Gabriel Boric’s administration is budgeting a 40% drop in tax revenue from Codelco in 2023 at a time when it’s trying to boost social spending.
At least some of Codelco’s predicament is historical. US-owned mines nationalized by Chilean President Salvador Allende in 1971 weren’t returned to their owners after his overthrow two years later in a military coup. Instead, General Augusto Pinochet used them to create Codelco in 1976. Democratically elected governments since then have milked the state-owned company for cash, which at times has constrained its ability to invest in projects to tap richer veins of its giant deposits.
Codelco is putting in about $3.5 billion a year and will need to accelerate that over the next decade to reverse the production slump. Much of the money is going into revamping century-old mines that are running out of profitable ore. At Chuquicamata—the largest open-pit copper mine in the world—the company is investing a total of about $7 billion to go deep underground, using a relatively new technique called block caving. At El Teniente, it’s budgeted $8 billion to add to the 2,800 miles of tunnels built since the underground operation began in 1905.
Codelco is juggling four major upgrade projects at a cost of up to $19 billion, according to slides from a May 2 presentation. That’s a daunting undertaking for any company, especially one in a small economy and in an industry that continues to grapple with supply chain disruptions, inflation, and engineering and construction bottlenecks.
Project delays are a big reason that Codelco’s decline in output has accelerated. Another factor has been the mishaps at some of its mines, which include a rockfall, equipment malfunctions and a freeze at a dam that restricted water supplies. Sougarret and Chairman Máximo Pacheco are trying to get projects back on track by streamlining decision-making, spreading the load throughout the company and working with consultants in areas where it has skills deficits.
The administration of Boric, Chile’s most left-leaning president since Allende, is looking to bolster Codelco’s finances. Although previous governments allocated funds according to other budget priorities, Boric has agreed to let the company reinvest 30% of its profit, thereby reducing borrowing needs. But “the key restriction is not funds, it’s execution,” Pacheco said in an interview with Bloomberg News in April. At a recent event at the University of Chile in Santiago, he said: “If tomorrow the finance minister sent us another $6 billion to do projects, we’d send it back.”
Adding to Codelco’s load, the government has entrusted it with managing public-private partnerships to exploit the country’s world-beating reserves of lithium—a metal that’s much in demand because it’s a key component in the batteries that power electric vehicles and a wide assortment of electronics.
The company’s new role in lithium production risks becoming a distraction, says Rafael Prohens, a legislator from the opposition Renovación Nacional party who sits on the Senate Mining Committee. “Codelco’s output is decreasing strongly and remains far from its potential,” he says. “If on top of that we add responsibilities like lithium, we can easily lose more market share in copper and be displaced as a global copper power.”
Codelco management says it won’t divert resources from other areas to lithium and has the financial support, international reputation and mining experience to perform both roles.
Pacheco in the interview said the company was traveling through “a valley” but would emerge stronger. “I hope—it’s in our plan—that before the end of this decade, we’re going to be back” producing in the 1.7 million-metric-ton range, he said, a level last attained in 2018.
Returning to that level and beyond will be key if the world is to avoid a shortage of copper. At the shareholder meeting earlier this month, Sougarret displayed a slide that showed an 8 million-metric-ton deficit in the next decade, as growth in demand, stoked by the energy transition, outpaces supply.
“We are committed to continue to be the leaders of this industry,” Pacheco says. “So when you are a leader, you have a lot of responsibilities, and we feel that on our shoulders.”Read next: ‘Nearshoring’ Push Is Fueling Tech Job Demand in Latin America
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