Bloomberg News

Codelco Weighs Bond Sale for Record $4 Billion Copper Expansions

July 08, 2011

July 8 (Bloomberg) -- Codelco, the world’s largest copper producer, will seek to sell bonds within 12 months to help finance a record $4 billion investment in its Chilean mines next year, Chief Executive Officer Diego Hernandez said.

The state-owned copper company probably will raise part of the investment in U.S. dollar-denominated bonds as well as using amortization and retention of profits, Hernandez said in an interview in Bloomberg’s Santiago office yesterday.

“From the fourth quarter through the first half we have to secure the debt we need for our 2012 program” of investments, Hernandez said. He declined to say how much the company will seek to raise in debt markets.

Codelco will spend at least $20 billion this decade to replace falling output and boost annual production to more than 2 million metric tons from less than 1.8 million tons now, Hernandez said. Without the investment, Codelco’s production would halve over that same period, he said.

Codelco doesn’t need to raise further funds for this year’s investments after selling its stake in power producer E.CL SA and reinvesting a fifth, or $376 million, of last year’s profit.

Codelco sold $1 billion of 10-year bonds in October. The company sold the notes to yield 3.965 percent, 130 basis points more than similar-maturity U.S. Treasuries, in a transaction arranged by Deutsche Bank AG and HSBC Holdings Plc.

The extra yield, or spread, investors demand to buy Codelco’s bonds due in 2020 dropped to 133 basis points yesterday from 139 a month ago, according to data compiled by Bloomberg. The bonds yield 4.35 percent.

Supply Constraints

The copper market “remains relatively tight” as supply constraints offset any sign of demand weakness, Hernandez said. Chinese purchases accelerated in the past three to four weeks, he said.

“There are strong signs that stocks in China have declined,” Hernandez said. “China will have to come back and buy in a more aggressive way.”

China purchases more than a third of the world’s copper. Prices on the London Metal Exchange rose 47 percent in the past year on prospects that supply won’t keep up with emerging market-led demand growth. The trend should continue, leading to a global shortfall this year, Hernandez said.

China’s factory index fell last week to the lowest level since February 2009, adding to concerns that 12 reserve- requirement increases and four interest-rate rises since the start of 2010 are curbing growth in the second biggest economy. Codelco sold 42 percent of its copper to China last year.

Rio de Janeiro-based Vale SA, the world’s largest iron- exporter, sees no slowdown in demand from China as the country seeks to build 36 million low-income houses in the next five years, Chief Financial Officer Guilherme Cavalcanti said.

Mine Disruptions

Hernandez said a company-wide workers strike scheduled for July 11 will probably reduce output by 4,500 metric tons. Disruptions at Codelco’s El Teniente mine last month cost the company a further 11,000 tons of lost output, he said.

Output disruptions may exacerbate a shortage this year that the International Copper Study Group estimates at 377,000 tons.

--Editors: James Attwood, Robin Saponar

To contact the reporter on this story: Matthew Craze at mcraze@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net


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