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Santiago, Chile • President Michelle Bachelet rolled to victory last year on pledges to ramp up spending on education. Now she's in a race against time to revive the government's biggest source of revenue, copper producer Codelco.
With executives of the state-owned company warning that output could drop by almost half in six years, Bachelet has given clearance for Codelco to spend $23.5 billion to revamp century-old mines that are running out of profitable ore, and has pledged to sell $4 billion of bonds for additional funding.
While Bachelet is pushing through $8.2 billion of tax increases to pay for an initial boost in education outlays, ensuring Codelco's viability is crucial for addressing a growing middle class's demands for better public services in Latin America's wealthiest country. Copper generates 20 percent of government revenue and 60 percent of all Chilean exports.
"The government is taking on a significant bet that will be important for Chile and its fiscal revenue," said Santiago Gonzalez, a former mining minister and vice-rector of the Universidad Central in Santiago. "If Codelco doesn't make these investments, production will fall."
Gonzalez served as Chile's mining minister between 2008 and 2010, during Bachelet's first term, amid the height of a global commodities boom that was delivering windfall profits for Codelco. Copper prices more than quadrupled in the decade through 2010 as part of a so-called super-cycle as Chinese demand for everything from power cables to pipes surged.
The South American country's copper boon became a focal point for unrest during the government of President Sebastian Pinera between 2010 and 2014, when thousands of protesting students demanded the government tap $23.7 billion of sovereign wealth savings to provide free education for all Chileans.
Bachelet was re-elected to govern for a second term in December 2013 on pledges to reduce inequality that ranks the highest among the Organization for Economic Cooperation and Development's 34 nations.
The president's office referring a request for comment to the Mining Ministry. Officials there didn't immediately return requests for comment sent by e-mail.
This time around, copper prices are slumping while Codelco's costs have more than doubled over five years as the company runs out of profitable ore to mine. Fiscal revenue from the company fell 1.8 percent in the first half of the year to $741 million, according to a July 30 budget report. The government cut its 2014 economic growth forecast on July 14 to 3.2 percent from a previous estimate of 3.4 percent.
Copper sank 1.6 percent Monday to $3.042 per pound.
The magnitude of Codelco's planned overhaul is already evident at century-old Chuquicamata, the biggest open pit copper mine, where the company has begun work on a deep ventilation hole that will be the world's largest, Gerhard Von Borries, head of projects at Codelco, said in an interview in Santiago.
Codelco will invest about $4.7 billion a year between 2014 and 2018 with the aim of helping the company produce 2 million tons a year for the first time ever in 2023, Von Borries said.
"These works are unparalleled, at least in the underground mining industry," he said. Without the investment, production would slump to 1 million metric tons a year from about 1.7 million tons now, he said.
Bachelet sent Codelco's multi-year funding bill to congress last month for approval.
"We have undeniable riches," she told the annual dinner of Sonami, a 131-year mining lobby group, on Aug. 29 in Santiago. "It's a beautiful and challenging vocation, it is part of our identity, and it is also essential for our future."