Codelco will name its third CEO in a year in the coming weeks as Chile’s state-owned copper company struggles to turn around a slump in output and earnings. With debt at $19-billion and rising, the stakes are getting higher for bondholders.

Production has hit the lowest in a quarter century, costs have surged and ore grades keep on falling, jeopardizing its status as the world’s No. 1 producer. That’s sent debt metrics to the worst in years despite copper prices staying more than 20% above the average of the last decade.

The task of digging the state behemoth out of its hole was too much for Andre Sougarret, who resigned as CEO after less than a year, citing difficulties in reconciling the demands with those of his personal life. His replacement needs to steady the ship or debt could balloon to $30 billion in four years, pushing leverage to the limit, according to a report this month by research center Cesco. Analysts are starting to take an interest in Codelco bonds, until now seen as the safest of the safe.

“If production does not improve it would be concerning,” said Oren Barack, managing director of fixed income at New York-based Alliance Global Partners. But it remains “an interesting credit, especially as spreads widen to the sovereign.”

Codelco dollar debt is one of the worst performers among peers since late July when the company cut its annual output guidance and raised cost estimates. The gap between the firm’s yields and those of US Treasuries widened 13 basis points in that span, more than double the move by Chilean sovereign bonds.

ANNUS HORRIBILIS
Behind Codelco’s year to forget are a series of setbacks at its aging mines, plus delays and cost overruns at projects designed to address deteriorating ore quality. Amid the struggles, key personnel have departed, including two CEOs in a year.

Its debt has now jumped to more than five times earnings before items, making it one of the most leveraged major copper producers. That’s not helped by Codelco still having to give 10% of its revenue to the state, draining it of resources and pushing it to raise more and more debt.

“If production promises and costs of these projects are not completed, debt levels could reach such high levels that they could drag the company into insolvency, jeopardizing its financial viability,” Cesco wrote earlier this month.

While declining ore grades and project delays are industry-wide phenomena, the state miner is facing bigger challenges than most of its peers as it plays catchup after years of under-investment.

Codelco is juggling several big projects at a time of lingering supply chain disruptions, inflation and construction bottlenecks. The task is made more difficult by decision making that’s less nimble than the private sector.

Still, Chairman Maximo Pacheco expects production to begin to recover next year and says the company’s heavy investment burden will ensure Codelco’s output over the next 50 years.

If that happens, and copper prices stay firm, debt levels may not deteriorate much further. As a fully state-owned entity, Codelco would also have the backing of the Chilean state, one of the least indebted countries in the region.

The drop in the company’s bonds has some investors starting to smell an opportunity.

“There are some points of the curve where the increase in spreads has been bigger and could offer entry points to investors, as is the case with the 2027 bond,” said Josefina Valdivia, fixed income manager at Credicorp Capital.

Still, analysts at Cesco are less confident, calling on the company to reassess the feasibility of projects as well as its governance practices, “before moving further down a path of investment and indebtedness that jeopardizes economic sustainability.”