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Corporacion Nacional del Cobre de Chile -- Moody's affirms Codelco's A3 ratings, changes outlook to negative

Rating Action: Moody's affirms Codelco's A3 ratings, changes outlook to negative

Global Credit Research - 26 Aug 2020

New York, August 26, 2020 -- Moody's Investors Service ("Moody's") affirmed Corporacion Nacional del Cobre de Chile's ("Codelco") A3 senior unsecured ratings and maintained the baseline credit assessment (BCA), which reflects its standalone credit strength, at ba1. The outlook changed to negative from stable.

Rating Actions:

Issuer: Corporacion Nacional del Cobre de Chile

.Senior Unsecured global bonds due 2020: affirmed at A3

.Senior Unsecured global bonds due 2021: affirmed at A3

.Senior Unsecured global bonds due 2022: affirmed at A3

.Senior Unsecured global notes due 2023: affirmed at A3

.Senior Unsecured global bonds due 2024: affirmed at A3

.Senior Unsecured global notes due 2025: affirmed at A3

.Senior Unsecured global bonds due 2027: affirmed at A3

.Senior Unsecured global notes due 2029: affirmed at A3

.Senior Unsecured global notes due 2030: affirmed at A3

.Senior Unsecured global notes due 2031: affirmed at A3

.Senior Unsecured global bonds due 2035: affirmed at A3

.Senior Unsecured global bonds due 2036: affirmed at A3

.Senior Unsecured euro medium term notes due 2039: affirmed at A3

.Senior Unsecured global bonds due 2042: affirmed at A3

.Senior Unsecured global notes due 2043: affirmed at A3

.Senior Unsecured global notes due 2044: affirmed at A3

.Senior Unsecured global bonds due 2047: affirmed at A3

.Senior Unsecured global notes due 2049: affirmed at A3

.Senior Unsecured global notes due 2050: affirmed at A3

The outlook for all ratings is negative

RATINGS RATIONALE

The change in Codelco's outlook to negative follows the change of Chile's sovereign outlook to negative from stable, which signals a weakening ability of the Chilean government to provide extraordinary support to Codelco. The negative outlook incorporates our expectation of persistently high leverage, with a gradual recovery in operating performance and debt amortizations only marginally reducing leverage in the next 12 to 18 months.

The A3 rating continues to reflect Codelco's status as a government related issuer ("GRI") and is based upon the following inputs: (i) the company's BCA (baseline credit assessment) at ba1, a measure of its intrinsic risk regardless of its controlling entity; (ii) the Chilean Government's A1 bond rating; and (iii) our assumptions of high support from the government of Chile and high dependence between Codelco and the government. The government's high level of support provides four notches of uplift to Codelco's BCA.

The ba1 BCA incorporates Codelco's need to maintain large capital spending at a moment that the industry faces declining ore grade, rising costs and lower productivity. Codelco's ratings also incorporate the company's position as the world's largest copper producer and the fourth largest molybdenum producer and its substantial reserve base, as well as the large exposure to copper prices. Despite the implications of covid-19 to Codelco's operations, production guidance of 1.6 million tons in 2020 remains unchanged and the company expects production to remain relatively stable in the near future.

Codelco is currently in the third quartile of the industry's cost curve, which enhances the need for continuous cost reduction and productivity improvements to support performance in the medium to long-term. With the transformation plan announced in November 2019, Codelco plans to reduce costs ($1 billion in operating expenses starting in 2021, $ 400 million in 2020) and capital expenditures (by about $8 billion in the next 10 years) and return to the second quartile of the industry's cost curve in the next couple of years.

We estimate average annual capital expenditures around $3.2 billion through at least 2022, reflecting projects already in progress, such as key structural projects, including the El Teniente new mine level, the Andina mine-plant transfer system and the Chuquicamata underground mine. Although capital expenditures will be lower in 2020 due to disruptions in construction projects as a consequence of the COVID-19 outbreak, capex will likely increase in 2021 as construction activity normalizes.

Codelco's liquidity profile has strengthened as the company raised debt to improve its liquidity cushion and pre-fund upcoming debt maturities. The company closed 2Q20 with a cash balance of $4 billion as a result of additional debt raised in the period ($3.5 billion in total, with 2.8 billion in proceeds from bonds), with total debt closing the semester at $20.5 billion. Medium-term refinancing risk is low, with cash covering debt maturities through 2024 on a pro-forma basis, and Codelco maintaining access to capital markets.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Positive pressure on Codelco's ratings or outlook could arise if copper prices improve significantly and are sustained at higher levels, leading to stronger cash flow, more robust liquidity and a lighter debt burden. Codelco's BCA could be raised with stronger credit metrics such that leverage (adjusted gross debt to EBITDA) remains below 2.75x, with interest coverage (adjusted EBIT/Interest expense) maintained above 4.5x and adjusted EBIT margins sustained above 15%.

Codelco's ratings or BCA could suffer negative pressure should earnings contract for a prolonged period, with an overall weakening in credit metrics and a marked deterioration in the company's liquidity position, or if Codelco is unable to improve its operating profile and return to the second quartile of the industry's cost curve. A lowering of the BCA could lead to a downgrade of Codelco's rating, while any indication of a decline in the level of support from the government of Chile would also put downward pressure on the company's ratings.

Codelco's credit profile remains vulnerable to the coronavirus outbreak continuing to spread given its high exposure to copper prices, and therefore, to China manufacturing and construction activity and overall global economic growth. Codelco's operations are also subject to disruptions as a consequence of possible lockdowns and social distancing measures. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

The methodologies used in these ratings were Mining published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Headquartered in Santiago, Chile, Corporacion Nacional del Cobre de Chile (Codelco) is 100% owned by the Chilean government and is the largest producer of copper globally, holding an approximate 8.1% share of mined copper production. The company ranks as the fourth largest global molybdenum producer (as a by-product of copper production) with a market share of approximately 8%. Codelco generated $11.8 billion in revenues in the twelve months ended June 2020.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Barbara Mattos, CFA Senior Vice President Corporate Finance Group Moody's America Latina Ltda. Avenida Nacoes Unidas, 12.551 16th Floor, Room 1601 Sao Paulo, SP 04578-903 Brazil JOURNALISTS: 0 800 891 2518 Client Service: 1 212 553 1653 Marianna Waltz, CFA MD - Corporate Finance Corporate Finance Group JOURNALISTS: 0 800 891 2518 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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