24 June 2019

Chinalco crosses fingers copper rewire can fire up core business

A copper mine in the desolate wilderness of Peru now holds the key to Aluminum Corp. of China’s (Chinalco) endeavor to diversify away from the financial quagmire of its electrolytic aluminum business.

Chinalco hopes the Peruvian Toromocho Project, which began initial operations this month, is the answer to the company’s lackluster core business. But there is no way of telling, given this is the first time a Chinese company has set up a major mining project in Latin America from scratch. 

Chinalco bought the open-pit copper project in 2007 for US$860 million from a Canadian mining company but spent years digging itself out of various holes. When Chinalco’s own aluminum business began to hit rock bottom in 2008, it realized the mine, the world’s third-largest pre-production copper project as measured by average planned annual production, might give it a solid footing to cross over into other non-ferrous metals.

Chinalco said earlier this year that the project’s proved and portable reserves had an estimated 7.3 million metric tons of copper and 290,000 metric tons of molybdenum, with a production life of 36 years, dwarfing all similar projects in China.

The project’s minable copper is equivalent to 19 percent of China’s entire reserves and its operation cost — forecast at US$1,508.8 per metric ton — will be just a fraction of that of major mines in Peru, the Economic Observer reports, citing a source close to Chinalco.

With the international copper spot price shooting past US$7,200 per metric ton this year, Chinalco can rest assured that the project will eventually get into full swing and benefit from a forecast steady climb in prices.

Nevertheless, as Chinalco president Xiong Weiping {熊維平} told CCTV’s finance channel, kicking-start the project was no mean feat.

The company reportedly had to outlay US$300 million, six times the original estimate, to relocate affected residents and navigate a way through the Peruvian regulatory maze to secure more than 270 licenses. It also took 13 months for Chinalco to gain approval for an environmental impact assessment report and get the final go-ahead. When Chinalco was about to launch trial production, power shortages cut output by more than 20 percent.

Its overall investment in the project has soared to 24.3 billion yuan, prompting the flotation of subsidiary Chinalco Mining Corporation International (03668.HK) earlier this year as the major operator of the mine. More than 30 percent of the US$400 million raised was used to quench Chinalco’s capital thirst for the project. But Xiong can now heave a sigh of relief as most challenges have been overcome and China still has a strong appetite for copper.

The country has alone consumed almost 40 percent of the world’s total copper output in recent years. Media reports say inventories of the metal at futures exchanges like the London Metal Exchange have hit new lows since May 2012 and China’s imports soared 27 percent year on year in October. As long as the Chinese economy keeps humming, demand for copper for cables, electronic parts and construction materials will rise, with some tipping shortages next year.

Yet analysts still have some reservations about Chinalco’s bold overseas copper venture. One major concern is that the cost of shipping copper concentrates back to China across the Pacific will erode earnings. Others suggest that it should have focused more on Yunnan Copper Co., Ltd. (000878.CN), a major metal producer that Chinalco bought for 9.5 billion yuan in 2007.

– Contact the writer at [email protected]



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