Top copper supplier Codelco is starting to win over investors on signs that a long-awaited production recovery will help keep the Chilean state firm’s debt levels in check.

In the past month, Codelco dollar bonds have been one of the best performers among Chilean companies and other global miners after lagging both peer groups in the previous year.

The change of fortunes for the company’s debt of about $22-billion comes on the back of a string of positive news. Last month, Chairman Maximo Pacheco said Codelco registered its best December since the pandemic, capping a slight increase in annual output as part of management’s multi-year recovery plan. Then earlier this month, Chile posted record export revenue from copper for January, indicating that heavyweight producers like Codelco consolidated that recovery.

“For now, it looks like the worst is behind us,” said William Snead, an analyst at Banco Bilbao Vizcaya Argentaria in New York. He recommends the company’s bonds due in 2036. “Codelco remains a good option to grab some extra spread over sovereign bonds.”

Codelco bonds due 2042 have returned 2.83% in the last month, while the notes due in 2036 have returned 1.87% and currently have a 66.7 basis points spread over similar government bonds.

TURN AROUND

CEO Ruben Alvarado has shaken up management at the heavily indebted company since his appointment a year-and-a-half ago. He is now pushing to finish projects that were late and over-budget, but which are key to tapping richer areas of its aging mines after decades of underinvestment.

Falling copper grades and operational and project setbacks saw Codelco’s output slump to the lowest in a quarter century in 2023, threatening its status as the world’s biggest supplier.

The revamped Salvador mine is now finally ramping back up production, new areas of the El Teniente underground mine are coming on line, while the Radomiro Tomic openpit has returned to normal after stoppages caused by a fatal accident.

“While production levels are still below previous years, at least the declining trend has been reversed,” Snead said.

Codelco mines churned out 1.33-million metric tons last year, compared with a high of 1.74-million tons in 2011, government data show.

HEAVY BURDEN

To be sure, the financial burden on Codelco will remain heavy as it continues to plow more than $4-billion a year into overhauling its mines.

In addition, question marks remain over the company’s ability to execute on project development after years of disappointments.

“We see capex remaining very high around $4-billion for at least the next few years, which will result in free cash flow deficits, requiring financing to cover them,” said Amalia Bulacios, director at S&P Global Ratings.

Offsetting that pressure on Codelco’s debt are rebounding metal prices as the world transitions to clean energy supplies that require more copper, and on the boom in data centers amid the clamor for artificial intelligence. Copper futures are up about 15% this year in New York, although part of that is due to an up-tick in buying ahead of possible tariffs.

Management will be looking to reinvest as much profit as possible to avoid going back to the bond market this year after raising $1.5-billion in January. Banks offer another financing alternative to more bonds sales. The company doesn’t have any significant maturities coming up until 2027.

Supporting the longer term production outlook for Codelco are two recent deals — one to buy a stake in Teck Resources’s Quebrada Blanca mine and another to jointly develop one of its mines with an adjacent operation owned by Anglo American. Chairman Pacheco is leaning on partnerships with other major mining companies for the next growth phase.

Also in Codelco’s favor is a likely shift toward support for more investor friendly politicians heading into this year’s general elections, said Gustavo Medeiros, head of research at Ashmore Group.

“The political winds are helpful for Chilean assets,” he said. “Good governance and high copper prices should be good for bonds. Codelco is interesting.”