* Codelco January-September copper output falls 5 pct * Lower ore grades slam state miner * Codelco Jan-Sept profit jumps 27.3 pct on Anglo stake buy * CEO says copper market cautious, still healthy * Sees 2013 output higher, Chuqui labor talks loom By Alexandra Ulmer SANTIAGO, Nov 22 (Reuters) - Copper production at Chile's Codelco slipped 5 percent in the January to September period from a year earlier to 1.189 million tonnes, the world No.1 copper miner said on Thursday, as dwindling ore grades at ageing deposits dampened output. The state-run miner now expects to produce a little under 1.7 million tonnes of copper this year, from a previous forecast of around 1.7 million tonnes, ebbing from 2011's levels as ore grades stubbornly decline. Codelco said profits before tax and extraordinary items jumped 27.3 percent during the period from a year earlier to $6.777 billion, boosted by its purchase of a stake in Anglo American's Sur properties in Chile. "(This year's production) will be below 1.7 million tonnes, fundamentally due to lower ore grades," CEO Thomas Keller said during a press conference to present the results. Ore grades dropped around 9 percent on average, though they tumbled more than 19 percent at the Chuquicamata mine, Codelco said. Century-old, massive Chuquicamata is emblematic of world No.1 copper producer Chile's tired deposits. The mine produced 249,000 tonnes of copper in the January to September period of this year, a 23.6 percent tumble in output compared with the same period of 2011. Codelco has an ambitious plan to invest $27 billion from 2012 to 2016 to increase annual copper production to over 2 million tonnes. "We're still using similar projections in terms of the cost of our projects," Keller said on Thursday. Codelco forecasts its 2013 output of the red metal will top this year's as the new Ministro Hales mine comes on line. "In 2013 we are not expecting much additional growth from Codelco or indeed Chile as a whole," said Macquarie analyst Ryan Belshaw, adding that Codelco's January to September production figures were broadly in line with estimates. "Chuquicamata hasn't been the only Chilean mine to experience worse than expected grades this year, Collahuasi and Los Bronces have also come in lower than guidance, all of which has kept a cap (on) copper supply growth in 2012." Codelco is also gearing up for labor negotiations at Chuquicamata in 2013. "We're approaching this collective labor negotiation with seriousness and optimism," Keller added. In addition to lower grades, Codelco was also hit by steeper energy and fuel prices and lower prices for molybdenum, a by-product of copper. The company's direct cash costs were $1.567 per pound of copper in the January to September period, a 40.4 percent increase compared with 2011 levels. If the extraordinary gain stemming from the purchase of a slice of Anglo's coveted Sur deposit is discounted, Codelco's profit before tax and extraordinary items falls to $3.260 billion, a 38.8 percent decrease from the same period of 2011. The hefty drop is due to lower prices for copper, falling ore grades, steeper costs and a fall in production, the firm said. CAUTIOUS, HEALTHY MARKET Copper has struggled over the past two months to break a downtrend, giving up 8 percent since touching a peak of $8,422 on Sept. 19. "We're seeing a more cautious market, but with levels of interest that remain fairly solid, and don't indicate a significant deterioration in market conditions," Keller said. Copper stocks in China's bonded warehouses hit a record high of over one million tonnes late last week and inventories are expected to rise by around 100,000 tonnes by the end of the year due to weak domestic demand, traders said on Tuesday. "It's something we follow closely," Keller said of the stocks. The percentage of copper sold to Chinese buyers increased to 36 percent in the nine-month period compared with 34 percent a year ago. But only 18 percent of copper went to Europe, down from 22 percent, which Keller attributed to the debt crisis that is plaguing the continent.