SNC-Lavalin Group Inc. chief executive officer Neil Bruce flew to Chile in late January and came back thinking he had a deal with state miner Codelco to salvage what was left of a US$260-million contract that was behind schedule and going badly.
The aim, one insider said, was to make things right. Then Codelco tore up the pact.
“Codelco informed this morning its decision to terminate the contract with SNC-Lavalin early on, due to the serious breach of contractual milestones,” the miner said in a statement on March 25 that outlined its intention to take over the work on two new sulphuric acid plants at its giant Chuquicamata copper mine site. The problems included construction delays, slow payments to subcontractors and “problems in the quality of the works, among others,” it said.
The mining blowup marks a rare operational blunder under Mr. Bruce, who has reshaped SNC-Lavalin over a four-year tenure by widening its geographic footprint and lowering its exposure to riskier fixed-price contracts. But how a multiyear relationship between Canada’s biggest engineering and construction firm and the world’s biggest copper producer came undone so quickly remains baffling to many analysts and observers alike.
A falling out between SNC and its main construction subcontractors was certainly central to the drama. The Canadian company alleges that its local Chilean partners did “poor” work that contributed to delays in the project.
But intense pressure by the state on Codelco to complete the job as part of a multibillion overhaul of its aging mines – an overhaul that includes complying with new environmental standards – also appears to be a factor. And in that sense, the Canadian company was once again caught up in a wider dynamic, driven by government actions.
There are a lot of political influences at play, said a financial analyst based in Santiago, who was granted anonymity because he is not authorized to speak to the media on this issue. Codelco profits go directly to the national government, which has a big social agenda to finance, he said.
Codelco is carrying out a sweeping, US$39-billion modernization of its mining infrastructure. The plan is the biggest investment program in the company’s history and includes US$5.5-billion to breathe new life into its Chuquicamata copper operation by shifting the open pit mine underground. The site’s smelter is also getting upgrades in order to meet new environmental regulations requiring it to capture 95 per cent of emissions.
The effort is incredibly ambitious, in both scale and sum. Analysts say it is also overdue given some of Chuquicamata’s infrastructure is obsolete. The mine site is more than 100 years old and it sits at the heart of the Atacama desert, one of the driest places on earth. The mine itself is nearly five kilometres long and 1.1 kilometres deep. It takes a truck as long as 1 1/2 hours to circle down the pit to reach the bottom, according to Bloomberg.
Codelco hired SNC-Lavalin in 2012 for an initial contract to upgrade the ore crushers at Chuquicamata, known colloquially as Chuqui. Four years later, it won two other contracts for work at the site: one to provide engineering and construction for a new effluent treatment plant and another US$260-million job to build two sulphuric acid plants at the mine’s smelter as part of Codelco’s compliance effort. By the end of last year, only the acid plants project remained to complete.
Codelco announced in October, 2018, that it had fallen behind in the emissions compliance effort, saying it planned to suspend operations at two of its four smelters starting Dec. 13 while the work gets done. The Chuquicamata smelter was one of those affected, with Codelco saying it would stop operations at the facility for 75 days.
There have been other problems in the effort to modernize the mine and extend its life, cranking up pressure on Codelco.
Workers demanding negotiations on redundancy packages and labour conditions have blocked access points to Chuqui at least three times since last July, forcing the government-owned producer to slash production. Severe rains and storms in early February also temporarily halted operations at Chuqui and forced a cleanup around the new acid plants. The mine is Codelco’s third-largest operation as measured by output.
SNC first alerted investors to trouble with the US$260-million contract with Codelco on Jan. 28, when it flagged “a serious problem” related to an unidentified mining project in South America that would materially affect earnings for 2018. SNC said at the time it failed to achieve the level of agreement with the client in order to meet International Financial Reporting Standards for revenue recognition and that there was also a dispute over major cost overruns.
Two weeks later, SNC said it couldn’t agree with the client on terms to settle the quarrel and so the parties accepted to move to accelerated arbitration. SNC cut its profit outlook again and said it negotiated new debt covenant terms with its lenders, including that the projected loss on the project be treated as a non-recurring item up to a maximum of $310-million.
At the time, SNC said challenges on the project were mainly a result of unexpected site conditions, greater than expected environmental and safety measures and underperformance from contractors. The company said it believed it would recover some revenue and that the write-downs should not be considered permanent until arbitration ended.
To fix the issues, Mr. Bruce replaced the project manager and suspended all future bidding on lump-sum mining contracts. He vowed the acid plant work would be completed sometime in the second quarter, meaning between April and the end of June.
But that was weeks behind schedule. Under the revised plan communicated by Codelco in October, the Chuqui smelter was slated to begin operations at the end of February. In March, Chile’s Mining Minister, Baldo Prokurica, said reactivation of the facility will take more time than expected because of issues related to SNC.
“[SNC-Lavalin] is a company that has had problems at an international level and the deadline they had was March, which they rescheduled,” Mr. Prokurica told reporters on March 19. “Apparently it is not going to materialize.”
It’s unclear what problems the minister was referring to. In addition to issues in Chile, SNC also faces uncertain prospects in Saudi Arabia due to souring diplomatic relation between Canada and the Middle East kingdom.
For two months, the company has also been at the centre of a political affair at home that has damaged the government of Prime Minister Justin Trudeau more than any other since it took office. The row, which has cost Mr. Trudeau two ministers, a top aide and a senior bureaucrat, centres on the extent to which the Prime Minister’s Office put pressure on the former attorney-general to direct federal prosecutors to grant SNC a settlement to end a corruption prosecution against the company.
SNC faces criminal charges in Canada on allegations it bribed officials in Libya to win contracts between 2001 and 2011. Although SNC denies it has done anything wrong as a company and says it has reformed its business practices, the allegations are affecting sales opportunities as some clients and bidding partners recoil from the corporation. Chileans, who pay close attention to Codelco, are also aware of SNC’s predicament in Canada, judging by local news coverage in February and March.
As the drama was unfolding at home, Mr. Bruce continued to insist that everything was fine in Latin America. “The issues in Chile are behind us,” the CEO said in one of several media interviews he gave in Toronto on March 20 to discuss the bribery charges and other matters.
Six days later, Codelco cut SNC loose and the deal lay in tatters.
It’s possible Codelco simply couldn’t live with SNC’s new timeline and had to be seen as taking decisive action quickly in order to protect what Chileans view as “the people’s money.” The acid plant delay was acting as a “bottleneck” preventing the delivery of other modernization work, Chile’s Diario Financiero business news site reported, citing unnamed industry sources.
But there’s some truth to the notion that it’s easier to pin the blame on a foreign company when in fact the responsibility is likely shared, the Santiago analyst said.
Discord like that is often resolved between a customer and contractor who have long-term relationships, especially if the supplier has enough clout through a sizable local presence and work force. Chile has evolved to become a key commercial market for Canada in the southern hemisphere, with companies such as Bank of Nova Scotia and Teck Resources Ltd. increasing investments in the country in recent years.
But SNC’s presence in Chile has been declining. Sales from Latin America totalled barely 3 per cent of revenue in 2018, down from 10 per cent in 2013, filings show.
This isn’t the first time Codelco has fallen out with a contractor. Last year, the miner clashed with Italy’s Astaldi over the company’s finances, which Codelco worried could harm its initiatives in Chile, Santiago-based newspaper La Tercera reported. Codelco also had a conflict with Prado Group in another contract for its Salvador division, the newspaper said.
Mr. Prokurica declined a request by The Globe and Mail to comment for this story. Copper is Chile’s top export and provides 20 per cent of government revenue, according to data from the U.S. Central Intelligence Agency.
SNC says it was floored by the turn of events, affirming in a statement it was “appalled and surprised” by Codelco’s decision. When Mr. Bruce travelled to Chile to try to smooth things over, he left thinking he had an agreement in good faith with the miner on Feb. 1 to finish the project and resolve differences through arbitration.
SNC won’t get a chance to complete what it started. The company has pulled out of the site and is weighing its legal options. It said it recently gave Codelco a project progress update, which said delays caused by site conditions that were the responsibility of Codelco and the “poor and unjustified acts” by the main construction subcontractors.
Chief among those subcontractors was the industrials unit of Chile-based Echeverria Izquierdo, said a source familiar with the situation. SNC called out the subcontractor for poor workmanship, poor productivity and even vandalism stretching back almost to the very beginning of the contract, said the person, who was granted anonymity because they were not authorized to discuss that information.
SNC had to redo a lot of the work done by Echeverria, the person said. In August of last year, SNC tried to switch the subcontractor’s way of working to a more rigorous “time and materials” system, thinking productivity would improve. But there was no change, the person said.
That reality of that situation was lost on Codelco or overlooked, the source said, because there is a clubby atmosphere between local players. SNC hired Echeverria at Codelco’s insistence, the person said. The fact SNC has been in the news almost daily over the past two months because of its legal trouble also didn’t help matters for the company and left it more vulnerable, the source said.
Daniela Pizzuto, a spokeswoman for SNC, declined to comment. Codelco also declined to comment beyond its initial statement and did not respond to follow-up questions sent April 4.
Alejandro Bascur, a spokesman for Echeverria, said the company was no longer acting as a subcontractor for SNC when Codelco made the decision to take over the project. He said all Echeverria’s contracts with SNC-Lavalin were finished by the end of 2018 and that Echeverria “had to resort to an arbitration” last January to recover money it believes it is owed by SNC.
“Regarding the situation of SNC-Lavalin in Chile and worldwide, the facts known these days speak for themselves,” Mr. Bascur said via e-mail. He declined to elaborate further, citing a continuing legal process.