Latin Finance - May 2008 - 81

eduardo elsztain Seeking Energy Alternatives As Chile’s main energy consumer, Codelco has benefitted from low-cost energy for several decades, thanks to the development of hydroelectric power in the country and, more recently, the expansion of thermo power by the use of natural gas sourced from Argentina. However, Arellano says this model has broken down and Chile must look for alternative sources of energy. “The new hydroelectric plants are having problems, among other reasons for environmental considerations, and the Argentine gas has practically dried up,” says Arellano. Codelco, like many Chilean companies, suffered greatly in 2007 when Argentina cut natural gas exports to the country because of its own energy crisis. “The lesson we have learnt after the shortage of Argentine natural gas is that as a company and as a country we have to maintain diversified sources of energy,” Arellano says. Part of Codelco’s energy supply comes from diesel generators at a very high cost. “In the medium-term, Codelco is opting for the development of coal-fired thermoelectric plants that should be operational at the start of the next decade,” says Arellano. A new LNG project will meet the demand of thermoelectric stations in the north of the country from the start of 2010. Both projects require an investment of $1.8 billion, he adds. Constrained by a Culture by Jason Mitchell Foreign investors are skeptical that Argentina can free itself from recurring bust. But optimism is strong locally. ne of Argentina’s most important businessmen, Eduardo Elsztain, believes some good may come from the recent farmers’ strike that left the country paralyzed and created the worst social unrest in seven years. “After the tension, good things come,” says Elsztain, who is chairman of Argentina’s biggest shopping mall group, IRSA, and also of the country’s largest land owner, Cresud. “December 2001 was a disaster for the country; what we saw afterwards was enormously positive. If you ask me what Argentina will be like in the end, I think the whole market will be very dynamic,” he tells LatinFinance. Elsztain declines to comment on whether the government made a mistake by introducing a sliding tax scale for soya exports in March, precipitating the worst farm strikes Argentina has ever witnessed. “We are in a situation where we have to rebuild the trust lost during the last big crisis experienced six years ago,” he says. “The process of rebuilding trust in Argentina will take a long time and much effort but once fully reconstructed this will become an incredible economy.” Elsztain believes inflation, which local economists estimate is around 20%, is the main challenge for the economy. “A society that has suffered two hyperinflations in the past knows the damage that this means.” The executive adds that the country should maintain a positive fiscal balance, “especially after having had 30 years in which it was in deficit”. Most important for Argentina is maintaining macroeconomic stability so that it can move on from merely producing basic products, says Elsztain. The country should move swiftly on to making industrial food associated products, with added value for consumers. O Bargain Financing In 2007, Codelco invested around $1.7 billion, financed through its own means, capitalization of some of its profits, and a $400 million seven year amortizing syndicated loan. The deal through BBVA had a margin of just 12.5 basis points over Libor, stepping up to 20 basis points in the final year. “The group achieved the best conditions for financing in the markets that it has ever had in the whole of its history,” says Arellano. This year, Codelco plans to invest a similar sum and is analyzing how to complete its financing. The high grade quasisovereign plans to invest $5 billion during the next five years to modernize ageing mines and bring new ones onstream. During the past two decades, the mineral base of the company has declined by an average of 25%. “In other words for Codelco today, it is much more difficult to produce a ton of refined copper than it was five or 10 years ago,” says Arellano. This is a normal process in mines that are over 100 years old, like El Teniente or Chuquicamata, which date from pre-Hispanic times. “The good news is that all except Salvador contain considerable mineral reserves and, if we make investments, we will continue to be able to exploit them for a long period,” says Arellano. At Chuquicamata, the project must be transformed from the world’s biggest opencast mine to a subterranean pit that can operate at 1,300 meters in depth. Codelco is investigating whether this is feasible and the project should be functional by 2018. “Codelco possesses the biggest level of known copper reserves on the planet,” says Arellano. “It is estimated that, at current production levels, the mines we exploit today have a useful life of more than 70 years.” He adds that Codelco is also exploring in Brazil and Mexico. LF Moving up the Supply Chain According to Elsztain, a big component of the opportunity for his company relates to ascending the food supply chain, going from cattle grazing and agricultural farming to feedlots and food processing. “This value added upgrade can only be achieved when there is macroeconomic stability,” he says. “So, if you ask me if there is any restriction today, it is only the restriction in our culture May 2008 LATINFINANCE 81

Latin Finance - May 2008

Table of Contents for the Digital Edition of Latin Finance - May 2008