CHAIRMAN'S REVIEW

It would like to start by highlighting that 2011 was an excellent year for Codelco. Pretax profits and Reserve law totalled US$ 7.033 billion, figure that represents a 21.2% increase over 2010, equivalent to US$ 5.799 billion. These pre-tax profits are among the three highest in company history.

These higher pre-tax profits were mainly because of an increase in copper prices in 2011 that averaged 399.7 c/lb in the London Metal Exchange, up approximately 17% from the average 342.0 c/lb in 2010.

In 2011, the global economy continued to recover from the financial crisis, the world GDP expanded at a rate of approximately 3.8%; whilst refined copper demand expanded at a more moderate rate. However, in terms of supply, producers continued to have difficulties growing and keeping up with demand.

Another aspect that caused the increase in pre-tax profits was copper production; this year it reached record results. The company, excluding its 49% share in El Abra, produced 1,735,000 metric tonnes of fine copper; these results are the best in the company's history and up 2.7% from 2010 output. If we add Codelco's share in Minera El Abra, the company's total output was 1,796,000 metric tonnes of fine copper, up 2% from the prior year output. This record result reflects the quality of the company's assets and the correct strategy of maximising output to take advantage of the high price cycle.

The progress and consolidation of Codelco's Strategic Plan, defined in 2010 with Management and with the alignment of all employees, has also been essential in helping to achieve these positive results. Here, I would like to refer to the company's priority strategic goals:

During 2011, Codelco focused on advancing each strategic goal and I would like to refer to the most relevant goals. Respect for the life and dignity of people is one of most important pillars of the strategy and it is included in Codelco's Value Statement. In 2011, the company had the lowest disabling injury frequency rate in its history, the total rate was 1.39 accidents per million hours worked. During the year, implementation of the new Occupational Health and Safety Structural Project, which aims to close the gap Codelco has in this area, has been fundamental in creating changes to manage and achieve better results.

Sadly, a negative point this year was the death of 4 workers, Danny Cruz, Luis González, Sergio Machuca and Juan Troncoso, rest in peace. Our sincere condolences go out to their families.

Despite reducing the number of fatalities compared to the seven fatalities in 2010, we are not satisfied and we must continue working to achieve our goal of zero fatal accidents.

In sustainability, the Environment and Communities Structural Project was launched in 2011. Its main objective is to close or mitigate the critical gaps in this matter, transforming worker management to ensure excellence in the future and position Codelco as a leader and benchmark in sustainability in the medium and long term.

Furthermore, the Board reaffirmed our commitment to improve its performance in sustainability by approving to enter the International Council on Mining and Metals (ICMM), which is the most important world association in this field. We want to be accepted and admired by all our stakeholders and be seen as a leading company in sustainability, that its priority interest is to look after the environment and develop the communities close to its operations.

In development and growth, 2011 was critical for Codelco. I would like to emphasise that the Board approved El Teniente New Mine Level project and the implementation of the early works for the Chuquicamata Underground Mine project.

As for El Teniente New Mine Level, the Board approved a US$ 3.039 billion investment for its construction. With this initiative, the world's largest underground mine will be able to extend its useful life by 70 years, after being in operation for over a century. The project includes the construction of a new mine level, under the current mine level, highly automated and remotely operated from the city of Rancagua. When construction is completed, at the end of 2018, the New Mine Level will allow El Teniente to maintain its current treatment capacity at 137,000 tonnes per day.

In the case of the Chuquicamata Underground project, in 2011 the Board approved a US$ 875 million investment to implement early works. The decision enables Codelco to start building the initial infrastructure of this development that will transform the world's largest open-pit mine into a giant underground operation with output rates similar to El Teniente. This project will mine part of the reserves under the current deposit, which have been assessed to have approximately 1.7 billion tonnes of copper ore. The decision also gives economic viability to the Chuquicamata Division for approximately 50 years.

With these decisions, three structural projects start to become a reality, after deciding to invest in the Ministro Hales project in 2010. This is a very promising sign that we are moving in the right direction to ensure the company's sustainability.

In order to finance these and future investments, in 2011 the Board decided to sell Codelco's stake in the electricity company E-CL, retaining 100% of the earnings. The sale was for more than US$ 1 billion. The Shareholders' Meeting approved the capitalisation of profits for US$ 376 million, equivalent to 20% of 2010 profits.

Additionally the Company successfully issued US$ 1.15 billion in bonds, a record in Codelco's history and with the lowest interest rates obtained by a Latin American company. This acknowledges Codelco's credit rating in an environment characterised by the strong volatility of the international financial markets.

As for improving competitiveness, the Board has continued supporting advancements in different areas such as contractor management, World Class Supplier Programme at and technological development. This point, I would briefly like to highlight the progress we have made in human resources, especial in generation change and talent management.

One of the main priorities set out in the Strategic Plan was the need for generation change in order to improve efficiency and be ready to face future challenges. In late 2011, approximately 2,450 employees chose the Retirement Plans implemented in 2010. The Company also continued to incorporate younger professionals and employees into the company to reduce the average age and be closer to the mining industry average.

In talent management, Codelco continues to develop and implement Graduate and Apprenticeship Programmes. Additionally, Succession Plans were prepared and a new Performance Management System was implemented to align Codelco employees with a high performance and continuous improvement culture.

At this point, I would like to stop to express my satisfaction with the progress and achievements in 2011. This year we have started to see concrete results after implementing the Strategic Plan. We know we still have several challenges, but we are very optimistic that we will be able to face them and successfully solve them.

In 2012, global economic perspectives look more promising than the previous year; therefore we expect a very positive trend in the copper market, again with a new supply deficit that will support prices. Despite this confidence, we know that forecasts may vary and we are alert to market conditions, since, even though during the last few months volatility has declined, the global economy still has risks, especially in developing countries.

In a more long-term perspective, we believe that copper demand will remain robust over the coming years due to the strong drive of urban development and industrialisation in China and other developing countries. Codelco's commitment has been and will be fundamental to provide the copper required for the growth and development of these countries.

I would also like to refer to Codelco's right to buy a 49% stake in Anglo American Sur S.A. We are convinced that it is wrong. From the moment Anglo American officially communicates to Codelco that the 49% stake in Anglo American Sur S.A. is available to exercise its right to buy these shares, it indicates the estimated price of this stake and attaches the financial data for Codelco to make a decision; Anglo American cannot sell those shares. That official communication was carried out in accordance with the Contract, on 29 July 2011.

Therefore, the sale by Anglo American of 24.5% of Anglo American Sur S.A. subsequent to sending this communication, having been notified that Codelco had the intention and that it had decided to exercise its right to buy a 49% stake in said company, within the time frame agreed in the contract; therefore, intending to, as it reported, reduce Codelco's right, clearly constitutes a violation of the option contract.

In other words, Anglo American cannot sell the shares in order to adversely affect Codelco's right to buy and, even less so, once the exercise process has commenced. If Anglo American's argument were accepted, it would be a contract that could not be at all effective in practice.

For this reason, we have decided to defend the option to buy a 49% stake in Anglo American Sur S.A. at the Court of Justice. We are not clear how long the legal dispute will last, but we are very confident that we are going to have a satisfactory result, safeguarding the right that corresponds to Codelco and every Chilean.

I would like to finish by asking all our employees to continue giving their best so that all the country takes pride in Codelco. We are fully committed to the company's leadership in the national and world mining industry, in order to contribute to Chile's progress. Let's continue doing our work with enthusiasm, excellence and high safety standards, taking care of sustainability and maximising the profits delivered by Codelco to its owner, the State of Chile.

Gerardo Jofré M.

Chairman of the board
 

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