Commodities Investing: An IPO for Chile’s Codelco?

Posted January 4, 2008

‘The SSE chair said “there’s something in the air” right now that’s making exchange officials hopeful for a public offer. Your guess is as good as mine, as to what that “something” is… perhaps Yrarrazabal has finally found the right government official to bribe or maybe his team won against the Chilean securities ministry in this week’s softball tournament. ‘ — Stephanie Grimmett.

by Stephanie Grimmett

Baltimore – (TFN): You know times have changed when Chile is learning its open market practices from China.

Pablo Yrarrazabal, president of the Santiago Stock Exchange (SSE), is calling on Chilean mining company Corporacion Nacional del Cobre de Chile to list shares on the exchange.

Corporacion Nacional del Cobre de Chile, or Codelco, as it’s known, is the largest copper producer in the world. The company controls 20% of the world’s known copper reserves and mines approximately 1.8 million tons of copper each year.

Yrarrazabal said he didn’t think the state-owned mining company should be privatized. Instead the SSE head is promoting the Chinese idea of taking state companies public. The Chilean government would sell a small percentage of Codelco to the public, while still retaining control of the company.

China has done the same thing with its resource companies, selling shares in PetroChina, CNOOC Ltd and Chinalco to investors in the last decade. All three of those companies have flourished with their public debuts. And investors, including those who took our advice and grabbed PetroChina before it IPOd on the mainland last year, have made a pretty penny on the stocks.

Chile could benefit from the same structure to its state-controlled corporations. The introduction of Codelco shares would give the country’s investors a direct incentive in seeing the copper company thrive. And a public offer would give Codelco access to local financing.

Codelco turns all of its earnings over to the government, meaning it must search for financing each year to support its investment plans. For the first time last year, the Chilean Finance Ministry permitted Codelco to reinvest $315 million from its 2006 profits. And the company is trying to find a $400 million syndicated loan (a loan from a group of lenders instead of just one) to support it in 2008.

The government has said it has no plans to list a portion of the mining company on any public bourse, but Codelco’s former CEO Juan Villarzu floated the idea of listing the company while he was in office a few years ago.

Villarzu asked Goldman Sachs to value the company in early 2006. After weighing its EBITDA (earnings before interest, taxes, depreciation and amortization), cash costs and investments through 2010 and projected international copper prices, the investment company gave Codelco a $27.5 billion price tag two years ago.

But government officials and the country’s mining unions did not take too kindly to the idea of selling shares, saying it was out-and-out privatization. Apparently, the Chilean government is less market savvy than China and doesn’t understand the concept of majority ownership. And for some reason the unions don’t like the idea of their workers getting a cut in the company.

Yrarrazabal recognized that the possibility is slim, but the SSE chair said “there’s something in the air” right now that’s making exchange officials hopeful for a public offer. Your guess is as good as mine, as to what that “something” is… perhaps Yrarrazabal has finally found the right government official to bribe or maybe his team won against the Chilean securities ministry in this week’s softball tournament.

Bringing Codelco public would be a boon for investors, whether in Chile or the United States.

Investing in Chile is easy for Americans. It’s rated as one of the 10 most reliable and transparent countries to do business worldwide. According to the Securities and Insurance Supervisor (Chile’s version of the SEC) foreign investors only have to register to trade and pay a special tax.

And now that we know that, we’ll have more information on Chile’s mining industry in future postings. Chile has the largest copper mines in the world. And they’re set to pull in more gains as the commodities supercycle winds up to its peak in the next year.

****Make sure you sign up for our FREE TFN News Feed for breaking news, special reports and new financial videos. You can pick your favorite reader. Or if you prefer, you can have the feed delivered to your email.