Chileans are vigorously debating whether to privatize the crown jewel of their economy, world No. 1 copper producer Codelco -- and the issue could be a central theme in presidential campaigns next year.

Political and union leaders are already lobbying to defend their turf over the fate of the state company which was nationalized in 1971 and grew into the world leader.

Codelco has been credited with helping lift Chile out of poverty and transform it over the past three decades into the most prosperous country in Latin America.

But it is now facing national and even global scrutiny as its output fell during a time of near-record copper prices. Critics say the company would be more efficient under private-sector management.

Changes in market conditions, in the industry, are making the need for reform at Codelco more evident with each day that passes, said Juan Carlos Guajardo, executive director of Chile's copper industry think-tank CESCO.

CESCO will host a debate later this month entitled The Future of Codelco, where company executives, Chile Mine Minister Santiago Gonzalez and Codelco union chief Raimundo Espinoza will face off against proponents for privatization.

Sebastian Pinera -- a billionaire and likely presidential candidate for the Chilean right in elections next year -- said this week he was in favor of selling 20 percent of Codelco to local pension funds.


The debate is a delicate one, not least of all because it involves the country's biggest cash cow.

Codelco pays 10 percent of its revenue to the influential armed forces, or $1.39 billion in 2007. All of its before-tax profit, some $8.5 billion last year, goes to government coffers and comprises a hefty portion of the federal budget.

Chile is the world's largest copper producer and copper revenues are a pillar of the economy. But Codelco's output has suffered.

In 2007 Codelco produced 1.665 million tonnes of copper. By comparison, in 2004 it produced 1.840 million tonnes.

Codelco is not taking advantage of its huge reserves, Juan Villarzu, a former chief executive of Codelco, recently told Chile's leading broad-sheet, El Mercurio.

It needs to be able to capitalize on reserves at a faster pace. That's what is best for the company and for the country.

Codelco's production shortfall comes at a time when the global copper market is in a rare megacycle, with high prices staying high well beyond expectations.

The bonanza has seen Codelco's competitors blossom and expand quickly through mergers. Several appear poised to take over the pole position as the world's top copper company.

This week Brazilian mining giant Vale was reported to be working on a major takeover bid worth more than $30 billion. On Tuesday the company's board of directors approved a share offering worth up to $15 billion to help finance its investment plans.

Vale, once a slow-moving state company, was privatized in the 1990s.


If you look at the way that Vale is going over in Brazil ... the Chileans are looking over and thinking, 'we are on the wrong track over here,' said Jon Bergthiel, an analyst with JPMorgan Chase in London.

It's a very powerful group from which to build something global, he said.

Codelco is making moves to modernize, but it says privatization is not on the cards.

There is a bill in Congress to revamp the company's structure by putting more independent members on its board.

Reformers say that in its present state the company is too slow to react to market conditions as its board is made up of politicians who only think as far ahead as their terms last.

We understand that Codelco needs modification in its corporate governance to give it a more agile administration on a par with international companies, said Chile Mine Minister Santiago Gonzalez.

What I would do if I had a Codelco, a mine manager at one of Chile's top private-sector mining companies said wistfully when asked about Codelco's potential. (Additional reporting by Pratima Desai in London, editing by Matthew Lewis)

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