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Codelco's next CEO faces delicate balancing act with Chilean unions

By Alexandra Ulmer and Fabian Cambero

SANTIAGO (Reuters) - The next CEO at Codelco, the world’s No.1 copper producer, will have to walk a tightrope between avoiding conflict with its powerful unions over expected layoffs while pursuing aggressive investment and cost-cutting plans.

The board of the Chilean state-owned mining company, reformed under new center-left president Michelle Bachelet, earlier this month sacked chief executive Thomas Keller, a tough businessman seen close to the former conservative government.

Codelco [CODEL.UL] is now on the hunt for a CEO with strong mining credentials as well as the ability to work with the company's workforce and unions.

The company has stressed it is striving to mend tense relations with unions via dialogue but that "sacrifices" will be required "on all sides," without giving details. Union leaders have welcomed the detente.

The future CEO's acid test will be the $4.2 billion transformation of the giant open-pit Chuquicamata mine into an underground mine, a costly and complex operation which would harm the poor, mining-dependent city of Calama.

The jobs of about 2,150 workers, or about a third of the current workforce, are poised to be gradually phased out by 2016 as falling ore grades make the open pit unprofitable.

Chuquicamata's workers in 2012 agreed to a new contract, including bonuses and loans worth about $42,000 for each worker, in return for signing off on a voluntary layoff package.

The catch is that only a couple of hundred workers have since volunteered under the layoff program, which means that at the current rate the company will fall well short of its job cuts target. It is unclear whether the future CEO will be open to sweetening the exit package on offer, which varies based on a worker's profile, and just how much that would cost Codelco.

There is no obvious candidate to take the reins of Codelco. Analysts have floated the names of Nelson Pizarro, a respected industry veteran who runs Lumina Copper’s new Caserones mine project; former Codelco executive Sergio Jarpa, who has good relations with mining unions; and current Codelco executive Juan Medel.

DAUNTING TASK

Many mining analysts say greater efficiency can be achieved at most of Codelco's mines in collaboration with unions, but that avoiding a long-expected confrontation at century-old Chuquicamata is a daunting task.

"I think good relations can be maintained at all mines save for Chuquicamata," said Gustavo Lagos, mining professor at the Universidad Catolica. "The (efficiency) aims in the other mines aren't hard to reach. But in Chuquicamata they're infinitely far away," he said in reference to what he deems a bloated workforce and unsustainable benefits they receive.

Challenges at Codelco, which produces more than 1.6 million tonnes of copper a year, are far greater and far more pressing than ever before, and come at a time of weakening metal prices.

Copper has fallen around 10 percent this year, hurt by concerns over the strength of demand from China, which consumes 40 percent of the metal.

If Codelco doesn't overhaul its tired mines to access richer mineral pockets, dwindling ore grades will slice output in half, according to a company estimate. The plan is to propel production to over 2 million tonnes of copper per year to satisfy long-term construction demand in China and India.

New board head Oscar Landerretche told Reuters last Wednesday that forging ahead with the company’s roughly $30 billion dollar investment plan is urgent, and isn't contradictory with being fair to workers.

Unions say that while they have to fight for their members' well-being, they know Codelco must redesign many of its mines to remain viable.

"If we sit down to talk I think we the workers will be able to contribute what we need to contribute," said Victor Galleguillos, a board member of the umbrella FTC union.

Codelco's management and miners have in the past reached agreements over layoffs and pay cuts.

But some disagreements have triggered major strikes, including a 24-hour halt of all Codelco’s operations in 2013 to pressure Keller on safety issues and to scale back use of contract workers.

Codelco has around 19,000 employees, plus some contract workers.

The company is in the second quartile of production costs in the mining industry, faring worse than most of its fellow private miners in Chile due largely to costlier operations at its older mines. Labor and energy costs are high across the industry. Keller managed to cut some non-labor costs and boost efficiency.

WEIGHING OPTIONS

Potential options at Chuquicamata include a more appealing layoff package, though that would come at a financial cost to the company. It could also delay a decision on transforming the mine or re-route workers to adjacent deposits to avert layoffs. Drawn-out strikes or community protests are possible, so deft negotiating skills will be essential.

"The game will play out with the layoff package," said Juan Carlos Guajardo, head of the CESCO mining think tank. "Where will they put the limit?" he said, referring to the maximum Codelco will have to offer workers to get them to volunteer to leave. He said he was skeptical there will be a harmonious changeover at Chuquicamata, though he was more upbeat about relations at other mines.

The predicament highlights tensions at the core of being a state miner. Much of Chile's copper was nationalized under socialist president Salvador Allende in 1971, and the red metal is a key engine of economic growth and development.

But any move to reduce Codelco's workforce comes with a political cost, so Bachelet will tread very carefully to minimize clashes at Chuquicamata.

What Bachelet has going for her is that center-left governments have historically been more palatable to workers, making it easier to reach agreements.

Augusto Pinochet's bloody military dictatorship cracked down on labor activists, and many union leaders today remain hostile toward conservative parties that are still partly run by a cluster of junta-era politicians.

Public opinion might come down on the unions. Many Chileans, who have been clamoring for years for improved education, health and pensions, see miners as pampered.

Most observers see the change in Codelco as more style than substance, in line with Bachelet's overarching aim of fostering more inclusiveness in Chile, ranked the most economically unequal country in the Organisation for Economic Co-operation and Development.

"What we have here is a declaration of good intentions," said political analyst Guillermo Holzmann.

"At the moment the idea is to improve relations, create a space for dialogue and bring positions closer, but it doesn't seem like anything deeper than that," he added.

(Reporting by Alexandra Ulmer and Fabian Cambero; Editing by Simon Gardner and Martin Howell)

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