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Report on Business Chile’s state miner Codelco cancels major contract with SNC-Lavalin

A general view shows Chile's Chuquicamata copper mine, which is owned by Chile's state-run copper producer Codelco, near Calama city, Chile, April 1, 2011.

Ivan Alvarado/Reuters

Chile’s state miner Codelco has cancelled a major contract with SNC-Lavalin Group Inc., another potential blow for the Canadian engineering firm as it battles to move past legal issues tied to corruption allegations.

Codelco, the world’s biggest copper producer, said Monday it terminated a US$260-million contract with Montreal-based SNC-Lavalin because of what it called a “serious breach of contractual milestones” by the Canadian firm in the construction of two sulphuric-acid plants at the giant Chuquicamata copper smelter complex in Chile’s northern Antofagasta region.

"Among the non-compliances are the delay in payments to its subcontractors, delays in the execution of the project and problems in the quality of the works, among others," Codelco said in a news release translated from Spanish.

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The development is another complication in SNC-Lavalin chief executive Neil Bruce’s effort to steer a new course for SNC-Lavalin that involves growing the company to $15-billion in annual sales and adjusted profit of $5 a share by 2020. In addition to the Chilean trouble, he’s been stymied in that effort by criminal bribery and fraud charges against the company related to its past business dealings in Libya, as well as trouble with its oil and gas business.

Shares in SNC-Lavalin dipped 0.6 per cent on the Toronto Stock Exchange Monday to close at $34.35. They’ve lost 25 per cent of their value since the beginning of the year.

Confidence in SNC management was shaken on Jan. 28, when the company first disclosed what it called “serious problems” with the Codelco contract, warning that trouble on the project would hurt profit for fiscal 2018. At the time, the company said costs on the work had climbed substantially and that it could not agree with the client to the point where it could meet International Financial Reporting Standards for revenue recognition.

SNC booked a forecasted loss of about $356-million on the project in its fourth-quarter earnings reported Feb. 22. It has said it expects to recoup a “significant” amount of that as the two parties enter an accelerated arbitration process to settle the dispute.

The crux of the problem as explained by Mr. Bruce boils down to SNC giving the green light to its subcontractors to do work that Codelco hadn’t approved. In addition, there were also unexpected site conditions to deal with, as well as environmental and safety challenges, the company has said. SNC had expected to complete the project sometime before the end of June.

“The Chilean project, we shot ourselves in the foot on that in terms of the outcome,” Mr. Bruce told The Globe and Mail in an interview in Toronto on March 20. “We’re not blaming anybody on that. That is on us.”

In a statement released Monday evening, SNC-Lavalin confirmed the contract termination, adding that it was taken aback by Codelco’s decision given the project is so close to completion. The miner has started drawing down on about US$42-million in bank guarantees, SNC said.

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“We are appalled and surprised by the decision taken by Codelco today,” SNC said. “We had reached an agreement in good faith on February 1st, 2019 regarding the full completion of the project and a process for a fast track dispute resolution of previously announced unresolved issues through accelerated arbitration. As we are nearing the end of the project completion, the client's actions will put the completion and commissioning date, as stated in good faith by SNC-Lavalin last week, further at risk.”

“We believe that this termination is unwarranted and in breach of good faith agreements reached by the Parties. It should be noted that Codelco has reached this decision after SNC-Lavalin openly informed Codelco of the status of the execution of the works, as requested by Codelco, which showed delays caused by site conditions that were the responsibility of Codelco, and the poor and unjustified acts by the main construction subcontractors.”

SNC said it is pulling out of the job site immediately and weighing the legal and financial impact of Codelco’s decision. It said it will push to recover as much as possible of previously announced losses, which it says are “due directly to our client and to poor sub-contractor performance.” It plans to provide an update on the next earnings call.

It remains unclear what the scope of the fallout now will be, including potential effects on a separate contract SNC has with Codelco to replace an effluent-treatment plant at the Chuquicamata smelter.

“It’s not good,” said Chris Murray, analyst at AltaCorp Capital, adding that there could be additional cash-flow problems and financial penalties for SNC. “The question always was: What is the magnitude of the recoverability of the deal?”

Codelco said in its statement that it sent a letter to SNC-Lavalin Monday morning reproaching the company for a “serious and repeated breach of the obligations imposed by the contract.” The miner said it made “several attempts to resolve the difficulties the project was experiencing,” most recently in February.

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SNC-Lavalin did not disclose the identity of the troubled project at first. But Mr. Bruce confirmed in an interview with The Globe on Feb. 7 that the trouble was related to construction of the two Codelco sulphuric-acid plants, adding that the project trouble is “an isolated case” in its overall operations.

SNC won the project, aimed at treating gas emissions from the smelter with technology from DuPont subsidiary MECS Inc., in 2016.

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