April 23 (Bloomberg) -- Six months ago, BHP Billiton Ltd.'s Diego Hernandez let workers at the Spence mine walk off the job and endure a six-week strike in Chile's Atacama Desert, rather than cede to salary demands.
Hernandez's skills may be tested in his new job as chief executive officer at Codelco, the world's largest copper producer, where he will encounter entrenched labor unions at a state-owned company that needs $15 billion to revitalize century-old mines. Codelco's output has fallen from a peak in 2004 as BHP, Freeport-McMoRan Copper & Gold Inc. and Xstrata Plc ramped up production, according to company filings.
"He has a track record in labor negotiations," Hernan Guerrero, a union president at Codelco's Chuquicamata mine, said in an interview. "That has set alarm bells off among some workers."
His first challenge when he takes over in May will be to address workers' concerns that the government will sell some assets, such as Codelco's stake in Chilean energy company Empresa Electrica del Norte Grande SA, known as Edelnor.
Chilean President Sebastian Pinera, who took office last month, said April 12 he may sell the holding as the government pays for an estimated $9.3 billion to rebuild following the February earthquake. Copper Workers Federation President Raimundo Espinoza said April 20 unions will oppose the sale. Hernandez declined to comment.
Firm on Jobs
Workers would be "very firm" on any proposal by Hernandez to cut jobs, Espinoza, who represents workers on Codelco's board, told reporters at a conference in La Serena yesterday. Copper futures for July delivery rose 2.70 cents, or 0.8 percent, to $3.5335 a pound on the Comex in New York at 3:22 p.m. today.
Union leaders will seek talks with Mining Minister Laurence Golborne on the government's funding plans for Codelco, he said.
Hernandez, 61, will move from the glass-encased high-rise that houses BHP in Santiago's uptown financial district to the narrow streets of the city's downtown, where Codelco's copper- trimmed headquarters stands blocks from the nation's presidential palace.
He will also get a new boss, Pinera, and a culture that stands apart from that of Melbourne, Australia-based BHP. At BHP, a global company with a market value of $202.8 billion, Hernandez answered to shareholders and the board. At Codelco, the board submits a yearly investment plan for approval by the government.
Hernandez's appointment means Codelco will be run by a "mining expert" for the first time in its history, rather than politicians, the Chilean Institute of Mining Engineers said in an e-mailed statement today.
Codelco's financing needs are larger than what the government needs to pay for damage caused by the temblor that destroyed towns, ports and highways in central and southern Chile, outgoing CEO Jose Pablo Arellano told workers in La Serena, Chile on April 21.
While Codelco struggled with falling output at mines, copper has more than doubled in price since 2004 because of demand in China, the largest consumer of the metal used in power cables and electrical wire. Arellano said earlier this week the company faces an "enormous challenge" over the next five years as mineral grades drop and costs rise.
"Unfortunately all of our divisions need investment at the same time," Arellano said of Codelco, which produces about a tenth of the world's copper and owns the world's largest reserves. "He will have a lot of challenges in the future."
Power expenses more than doubled in the past five years and will stay high, Arellano said. Codelco's Ventanas refining division is more than five times as expensive to run as the lowest cost Chinese smelters, he said.
At BHP, Hernandez helped boost copper production 27 percent to 1.2 million tons in the year ended June 2009 from the same period in 2004, when he took over as head of its base metals division, according to company data. Production has climbed even as a decline in the quality of ore mined at Escondida, the world's largest copper mine majority owned by BHP, trimmed output there last year.
"He delivered with BHP's copper production," said Bart Melek, a commodities strategist at BMO Capital Markets in Toronto. "You have a lot of issues like ore-grade depletion. He is going to have to work very hard just to keep production at the same level."
Hernandez "has been able not just to maintain, but to increase production," said Cesar Perez-Novoa, managing director at Santiago-based brokerage Celfin Capital SA, who has researched metals markets since 1995. "He brings in a lot of experience."
Born in Santiago, Chile, Hernandez expanded Escondida and in 2006 began production at Spence, a $1 billion copper mine in the Chilean desert.
While he agreed to a 5 percent wage increase and a 14 million peso bonus ($26,800) for Escondida workers in 2009, he refused to match that at Spence, prompting the strike. The labor action ended with the workers getting a 4 percent raise and a 7 million peso bonus, according to the company.
Prior to working at BHP, Hernandez was executive director at Rio de Janeiro-based Vale SA overseeing products including copper, nickel and gold from 2001 to 2004. Vale is the world's largest iron ore producer.
Along with Portuguese, Hernandez speaks Spanish, English and French. He trained as a civil mining engineer at the Ecole Nationale Superieure des Mines de Paris, according to a resume published on BHP's Web site. He also oversaw the development and expansion from 1996 to 2001 of Collahuasi, a Chilean mine controlled by Xstrata and Anglo American Plc.
"Hernandez will likely attack productivity," Perez-Novoa said. "That means increasing output and reducing operating costs."