Chile: Further Capex Cuts


BMI View: Antofagasta , one of Chile ' s largest mining firms , announced it was cancelling its now US$1.7bn Antucoya copper project in the wake of rising costs. The move was the latest in a series of announcements regarding capital expenditure cuts for mining firms, a trend we have highlighted. Antofagasta ' s action reaffirm s our view that the mining sector will continue seeing cuts to capital expenditure plans as costs rise and prices fall .

We previously highlighted our view that capital expenditure plans would fall through the end of 2012 ( see our online service, 'Capital Expenditure To Slow', October 29, 2012 ) on the back of slower global economic growth and lower industrial metal prices. Brazil ' s Vale , the world ' s largest iron ore producer, announce d it was scaling back its 2013 capital expenditure outlook due to lower demand, and hence lower prices, for its key mined products. The company reduced its spending plans by US1.2bn earlier this month with weak demand growth and lower prices weighing on the company's revenues and profits.

Antofagasta 's announcement comes as the Antucoya project's development costs rise above US$1.7bn. The company cited concerns about the level of capital and operating costs associated with the project. Chile currently producers about one third of the world ' s copper but is seeing declining ore grades at ex isting mines, increasing operating costs. Given these developments and declining demand growth due to continued macroeconomic weakness in both the developed world and in China, we forecast Chilean copper production to increase just 1.3% in 2013. Though Chinese economic growth is expected to accelerate in the first half of 2013, we anticipate a slowdown by H213 as stimulus measures wane. Other project delay s or cancellations could pose a downside risk to our forecasts for Chilean copper production in the years ahead.

At the same time c osts for both expanding current mines and developing greenfield projects are rising , copper prices are falling , reducing potential margins . Indeed, we forecast copper prices to average US$7,400/tonne in 2013 and US$7,200/tonne in 2014. Given our below consensus views on other industrial metal prices, and our expectation for rising mining costs to continue, we anticipate other firms will reduce capital expenditure outlooks in the coming months.

Firmly Below Consensus
BMI 2013 Average Price Forecasts vs Bloomberg Consensus, % Difference
This article is tagged to:
Sector: Mining
Geography: Chile

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