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Global Credit Research - 26 Oct 2010
New York, October 26, 2010 -- Moody's Investors Service assigned an A1 foreign currency rating to Corporacion
Nacional del Cobre de Chile's (CODELCO) proposed senior unsecured note
issue. Proceeds will be used to partially finance capital expenditures
and refinance existing debt obligations. At the same time,
Moody's affirmed CODELCO's existing A1 senior unsecured foreign currency
ratings. The rating outlook is stable.
CODELCO is 100% owned by the Chilean government and qualifies as
a government-related issuer (GRI) under Moody's methodology
for such entities ("The Application of Joint Default Analysis to
Government-Related Issuers, originally published in April
2005 and updated on July 22, 2010). The A1 rating on the
foreign currency notes is a function of the following inputs:
Baseline credit assessment (BCA) with a 5-7 range on a scale of
1 to 21
Aa3 Government bond rating of the Chilean government
CODELCO's BCA, at the low end of the 5-7 range,
and resultant foreign currency rating reflects its position as the world's
largest copper producer (approximately 1.8 million metric tons
in 2009 or roughly 10% of global copper production), including
its share of El Abra, its competitive cost position, and its
solid reserve base, approximately 70 years at current production
levels. CODELCO's multiple mine operating profile, which
reduces the degree of operational risk, together with its vertical
integration, which encompasses SX/EW and conventional smelting facilities
further support its BCA ranking. This footprint contributes to
robust operating performance in a strong copper market and acceptable
performance during cyclical downturns.
With the recovery in copper prices since early 2009, CODELCO's
performance through June 30, 2010 has strengthened considerably,
with pre-tax profit advancing to $2.6 billion from
$714 million at June 30, 2009. However, the
BCA incorporates the large investment requirements, roughly $15
billion over the next 5 years, to increase production, and
improve ore grades, efficiency and cost position. Given the
level of earnings paid out to the government, Moody's anticipates
that leverage will increase over the medium term. However,
the company's strategic growth investments, competitive cost
position, and production levels support performance over the medium
CODELCO's ownership by the Chilean State and the framework in which it
operates are also important considerations in the rating. Historically
CODELCO has transferred its net income to the Chilean Treasury.
Additionally, the company pays significant amounts in export,
royalty and income taxes. Therefore, its cash flow available
to cover capital expenditures and debt repayments has been limited to
depreciation and other non cash-add backs. As a consequence,
the increase in debt to cover the planned investment program could be
However, reflective of the importance of CODELCO within the Chilean
economy, and the company's strategic development requirements,
the government has, in recent years, agreed that a portion
of CODELCO's earnings can be retained to support the capital spending
profile and maintain a more balanced level of debt in the capital structure
(in 2009 a $1 billion equity investment was made). However
the amount to be retained is determined on a year-to-year
basis and no funds will be retained by CODELCO on its 2010 performance.
Additional factors considered in the rating include challenges facing
the company with respect to energy and its availability, given the
tight supply situation within Chile as well as water availability.
CODELCO operates under Decree Law 1.350 and is required to submit
its proposed annual budget to the Ministries of Mining and Finance for
approval. As part of the annual budget, CODELCO must include
a debt amortization budget, inclusive of interest and principal.
In addition, CODELCO can propose to retain a portion of its earnings,
although there is no assurance that such a request would be approved.
Upside adjustment in the BCA is unlikely due to the company's ongoing
reinvestment requirements and the expectation for increased leverage in
a business that will continue to exhibit variability in copper supply
and demand balances, copper price volatility and input cost challenges.
The BCA and CODELCO's senior unsecured foreign currency ratings
could be negatively impacted should earnings contract for a prolonged
period of time such that EBIT margins were to be below 22%,
interest coverage below 9% or debt/EBITDA above 2.5x.
In addition, ratings could also be negatively impacted by increases
in royalties, environmental compliance costs or other regulatory
..Issuer: Corporacion Nacional del Cobre de Chile
....Senior Unsecured Regular Bond/Debenture,
The last rating action on CODELCO was June 17, 2010, when
the outlook was changed to stable from positive.
The principal methodology used in rating CODELCO was Moody's Global
Mining Industry rating methodology published in May 2009 and available
on www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating methodologies sub-directory on Moody's
Headquartered in Santiago, Chile, CODELCO, a mining,
industrial and commercial state-owned enterprise, active
primarily in the production of copper, had revenues of $12
billion in 2009.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns A1 rating to CODELCO's note issue; Outlook stable
250 Greenwich Street
New York, NY 10007
No Related Data.
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