The giant open-pit mine, set to be the Chilean state-run miner's biggest by output this year, is undergoing a complex $5 billion-plus transformation into an underground shaft mine in a bid to extend the century-old prospect's lifespan.

Chile's President Sebastian Pinera is expected to formally cut the ribbon on the revamped copper mine, often referred to as 'Chuqui', in coming months.

This year, ores from the new project will be added to the existing open-pit operations, giving Chuqui overall production of 459,000 tonnes - its highest since 2010 - the previously unreported 2019 forecast shows.

But as Codelco scales down and ultimately shutters open pit extraction next year, while the underground project still ramps up, output will drop sharply, the figures show - down 182,000 tonnes by 2021 versus 2019.

That will drive overall Codelco production down 4% by 2021, according to the long-term business development plan. That would be steeper were it not for a planned production hike at the miner's Radomiro Tomic prospect.

Codelco said in a statement in response to Reuters questions that it expected to maintain production levels over the next decade by "progressively and systematically replacing existing operations."

The changes at Chuqui underscore the risk to Codelco's global dominance amid a $39 billion overhaul of its key operations to try and counteract rapidly falling ore grades that are hitting top copper exporter Chile more broadly.

"We're going to see a lengthy process to bring production to a level similar to that of the pit," said Juan Carlos Guajardo, head of consultancy Plusmining. The above-ground 'pit' is the size of over 3,000 American football fields.

Guajardo projected a seven-year "ramp up" period. The internal presentation seen by Reuters shows production at Chuqui dropping sharply to 277,000 tonnes by 2021 before climbing back to a peak of 416,000 tonnes in 2024.


(Graphic: Codelco's Chuqui braces for drop -

"SCISSOR HANDS"

Chuqui is also facing a battle with simmering worker tensions and technical delays, hampering prospects at the mine.

Plans for the underground project were drawn up early in the decade when copper prices were hitting all-time highs, then scaled back by chief executive Nelson Pizarro, known as "scissor-hands" for his focus on costs.

Copper prices are now being hit by a whipsawing trade standoff between the United States and China. They have fallen for five straight weeks and are near several-month lows.

"The challenge remains to ensure future viability, modifying the work culture and applying new work practices and technology," Pizarro told Reuters in a recent interview, adding Codelco needed to improve productivity without lifting costs.

That could mean pain for Chuqui workers, with some 1,700 expected to lose their jobs in coming years, putting Codelco's powerful unions on edge.

A January negotiation round on the layoffs ended in an impasse and differences still loom large during an ongoing second round of talks with top unions. Some fear the conflict will provoke strikes, further hitting production.

Unions at Chuqui rejected on Sunday a management proposal for a quick end to contract negotiations.

"The old workers of Chuqui have benefits that are above the rest of the entire company and the cost is immense," said Gustavo Lagos, a Santiago-based professor at the mining center of the Pontifical Catholic University of Chile.


(Graphic: Codelco's copper outlook -

MUTED START

The first extraction of copper ore from the underground mine, a major milestone for the project, was announced in April via a brief statement, a low-profile start sources at or close to the firm said was due to the tough environment at Chuqui.

An automated conveyor belt system to transport the extracted material to a concentrator plant will only be ready by the last quarter of 2019, according to Pizarro, forcing the firm to use slower trucks to move the ore.

With the lower output at Chuqui, Codelco's total copper production is expected to fall to 1.66 million tonnes in 2021, from the 1.73 million expected this year, the firm's internal forecast shows. Only by 2027 would it again top 2019 levels.

The forecast also showed that Codelco's short-term estimate for the period 2019-2025 had slipped versus its outlook in 2018, though it had raised its longer term production estimate.

Barbara Mattos, an analyst at ratings agency Moody's, said the overhaul was nonetheless key for Codelco to support its levels of production and ensure "the viability of the company as a relevant actor in the copper industry in the long term."


(Graphic: Short-term pain, long-term gain? -

(Reporting by Fabian Cambero; Writing by Christian Plumb; Editing by Adam Jourdan and Rosalba O'Brien)

By Fabian Cambero