PRESIDENT & CEO�S REVIEW

The Company strived to ensure the achievement of production, costs and pre-tax profit goals in the short run, in order to take advantage of a very favourable copper market scenario and, to a lesser extent, the molybdenum market.

The London Metal Exchange copper prices reached an average value of 399.7 c/lb in 2011, up 17% from 2010, mainly because of higher demand in China and other emerging countries in a restricted supply context. Whereas molybdenum was quoted at a higher rate than its long-term average price.

In 2011, as a result of these higher prices and efforts to increase productivity and cost control, Codelco generated US$ 7.033 billion in profits, before tax and Reserve Law, one of the highest since the company was created. Therefore, the pre-tax profits generated by Codelco in the last eight years totalled US$ 55.1 billion, in 2011 currency, accounting for 16% of tax revenues. Since 1971, Codelco has generated more than US$ 98.4 billion, in 2011 currency.

Codelco�s own copper production, including divisions and its subsidiary Minera Gaby SpA, had a record output, totalling 1,735,000 metric tonnes of fine copper (mtf). This result is very commendable since it was obtained during a period when the treated ore grade was one of the lowest in the Company�s history. If we include Codelco�s stake in Minera El Abra, production increases to 1,796,000 mtf. Codelco continued to maintain its undisputed leadership, as the top producer among the mining companies that operate in Chile and the world�s top copper producer.

Direct cash cost (C1) reached 116.4 c/lb, up 12 c/lb over 2010. Like the rest of the mining industry operating in Chile, Codelco�s costs continue to be adversely affected by a falling exchange rate and by a price increase in practically all inputs that significantly influence the cost structure, primarily energy and fuel. Although Codelco�s costs increased, in percentage terms, it was lower compared to the cost increase of the main national operations in 2011.

As for accident rate, Codelco achieved its lowest injury frequency rate in its history with 1.39 lost time injuries per million hours worked. However, we had to regret the death of four workers, two employees and two contractors.

In light of the number of fatalities that have occurred in recent years, and inspired by the company�s Vision and Value Statement, during 2011 we started and launched the Occupational Health and Safety Structural Project. We defined 12 fatality control standards applied across the company; and 7 standards that have special guides, with minimum compliance conditions concerning people, organisation, equipment and facilities. We made progress in diagnosing the gaps with regard to historical practices; we established a new method to report fatal, serious and highly potential accidents, and we developed a leadership programme on safety for all first line supervisors. Our goal is to have zero fatalities in 2012.

During this period, we defined and solved several critical conditions in occupational health at all divisions; and 12 minimum health standards at work were established. Our goal is to work and solve more critical occupational health issues in 2012.

With regard to business relations with suppliers and contractors during the year, Codelco carried out business deals for US $9.307 billion, this figure includes signing long-term electricity contracts (US$ 2.487 billion) and fuel supply contracts (US$ 176 million). As for the range of companies, Codelco closed deals with 3,941 suppliers, 3,575 Chilean suppliers and 366 foreign suppliers.

The value of goods and services consumption dropped 49% compared to the previous period, this is mainly because we had fewer electricity and fuel supply tenders than in 2010. Isolating the effect of energy and fuel, the number of business deals signed by the Company increase by 64%.

In addition to taking advantage of the favourable market conditions of copper and molybdenum, during the year we continued to advance the other goals of Codelco�s Strategic Plan. One of the priorities is the development of the largest investment programme in its history to continue transforming its significant reserves into wealth for Chile. The program includes the implementation of structural projects which are among the world�s most important and that consolidate the Company�s leadership in the industry.

The implementation of these Mining Structural Projects, in addition to the investments in other development projects, i.e., mine development and deferred charges, replacement and refurbishment of our facilities, environment and safety, and other investments, require an unprecedented volume of resources for the Company. In 2011, for the fifth consecutive year, Codelco made investments that are a new company record (US$ 2.625 billion).

These investments have been funded thanks to the Chilean State�s support and Codelco�s credit rating. Key funding sources are as follows:

In relation the progress of mining projects, we are satisfied that today we have three Structural Projects in progress: at Ministro Hales, we have successfully carried out pre-stripping, and identified leachable resources in addition to those included in the project authorisation, organisation of the mine and management areas has been implemented, and we have carried out intensive work with the local communities; at Chuquicamata Underground Mine, early works were approved and implementation is underway, and at New Mine Level, the project was approved and the construction process is underway.

Additionally, I would like to highlight:

In relation to more long-term issues, I would like to highlight the achievements in developing the mineral base and exploration. The ore reserves (proved and probable) included in the 2012 Business and Development Plan, measured as fine copper content, increased by 6% compared to the 2011 Plan, despite consuming 1.7 million tonnes of fine copper as 2011 annual output.

During this period, Codelco intensified exploration, continuing to mostly focus on mining districts of current production centres. The most important results were in the Andina district, where the discovery of Cerro Negro was confirmed, an ore body that has a potential of approximately 1 billion tonnes of ore grading 0.7% copper and 0.02% molybdenum, which is in addition to the discovery of La Americana in 2009; this adds in the vicinity of this mine operation more than 12 million tonnes of additional fine copper, reaffirming that this district contains copper resources unique in the world.

Internationally, we continue exploring in Brazil, Ecuador and Colombia.

Furthermore, Codelco defined a 2012- 2015 Innovation & Technology Strategic Plan, in order to develop and implement key technologies that contribute to the Company�s competitiveness. Codelco will focus its investments on research and development of new technologies aimed at our main business and also to capture the best developments available on the market for support areas.

In the framework of this strategy, our short-term priorities are focused on underground mining, performance of metallurgical processes (concentrate leaching and bioleaching of low grade ore), performance of smelter and refinery operations and sustainability.

Additionally, we continue working on the World Class Supplier Development Programme; we implemented 10 projects with different companies that supply goods and services, in order to solve specific problems in our operations and projects.

At the current stage of our strategy, human resources development is a critical factor for success. Our current challenges entail focusing on human capital development; generation change; talent attraction, development, retention and projection; all in all, achieve excellence in human resources, that is open to change and to the new way of doing things that we are currently promoting at Codelco.

In the framework of the generation change process, in 2011 we successfully concluded the early retirement plans at all divisions and Head Office, totalling 2,453 people by December 2011.

In relation to Staff recruitment, 4,512 job opportunities were created during this period, 61% were covered by Codelco employees and 39% by the market.

In line with our talent attraction goal, in 2011 we continued to develop our Graduate Programme, incorporating 188 new professional staff out of 4,500 applicants. 40% of these applicants came from geo-mining-metallurgical backgrounds and 23% were women. Likewise, our divisions incorporated 50 apprentices.

In the field of people development, Development Committees were established in divisions and vice-presidencies, in order to design career planning and development initiatives for supervisors, professionals and executives. Succession Plans were prepared for 220 critical positions, each with Individual Development Plans. The Corporate Leadership Programme was also launched.

Finally, in line with creating a high performance and feedback culture through ongoing improvement, a Performance Management Cycle was developed, including 99.2% of professional staff, supervisors, managers and executives.

As part of labour relations, during 2011 we successfully concluded collective bargaining processes at Head Office and at El Teniente, Ministro Hales, Chuquicamata and Radomiro Tomic divisions.

In an area closely related to people, we celebrated the first year since our Value Statement was announced and applied, with various activities during the week called Codelco Lives its Values. All the company�s work centres reaffirmed their commitment with a management style based on values, as the basis to how things are done in the Company. Especially significant has been the incorporation of the Value Statement in the human resources subsystems (recruitment and selection, job induction and management).

Additionally, during this period, we launched and distributed to all company employees the New Code of Business Conduct, which launched its application across the Company. The Code and the Value Statement are top priority documents within the organisation and provide clear criteria for the appropriate behaviour of people, in line with the objective to make Codelco the main mining company of Chile.

Likewise during 2011, the Complaint Hotline continued operating, which enables any employee anonymously, safely and confidentially to report potential infringements of the Code of Business Conduct via internet or a telephone call. During the year, we received 120 complaints; therefore, this is a very efficient tool to promote transparency.

During the year, Codelco promoted a new vision in terms of sustainability, which is focused on the protection of our employee�s life and health; respect for the environment and development of communities close to each operation and project. In this context, we launched the Environment and Community Structural Project, which conducted a survey and started to control socio-environmental vulnerabilities of Codelco; compliance of the Environmental Classification Resolution commitments were defined, classified and advanced; 11 key environmental and community standards were defined; and a new Sustainable Development Policy was prepared and ratified by the Board.

Notwithstanding the above, the following are also key achievements in 2011:

Furthermore, Codelco has corporate guidelines for recording, classifying and investigating incidents with environmental consequences. In March 2011, there was an unexpected environmental event that impacted the Escuela de La Greda School, in the district of Puchuncav�, affecting the health of both adults and children.

Since then, we have made important investments and actions have been taken at our Ventanas Smelter to mitigate the impact our operations could have on the town of La Greda. Since March, we have invested US$ 10 million in order to confine our concentrate collection centres and mitigate emission dispersion.

Codelco continues to have a major role in promoting and developing markets, strongly supporting the marketing branch of the industry, the International Copper Association, ICA. In 2011, Codelco actively participated in the board, regional councils and committees that manage the work programmes, approving the 2012-2016 Strategic Plan. The new strategy aims to generate an additional demand for copper, between 0.9 and 1.6 million tonnes by 2016. Furthermore, Codelco, its subsidiary INCuBA S.A. and other partners, launched into the market fabric with copper fibres and copper alloy horseshoes. Likewise, the subsidiary EcoSea continued marketing copper cages for fish farming, taking advantage of it antimicrobial properties. Finally, including, but not limited to, antimicrobial copper parts were designed to install in intensive care units at public hospitals.

I would also like to briefly refer to the decision made by Codelco to exercise its right to buy 49% of Anglo American Sur S.A., and ensure funding for this operation.

The timeline of the main events related to the decision is clear. The option emerged in 1978 in the contract whereby Enami sold Compa��a Minera Disputada de Las Condes to Exxon. In 2002, Anglo American bought Disputada (today Anglo American Sur S.A.) and ratified this contract, including the option. In 2008, Codelco acquired the option from Enami.

In January 2012, a window is opened when Codelco materially exercises the option. Anglo American informed, on 20 July 2011, that a 49% stake in Anglo American Sur S.A. (AAS) is available and reports its estimated value. Subsequently, the English company tries to purchase Codelco�s right to buy 49% of AAS, but an agreement was not reached. In October 2011, Codelco expresses its decision to materially exercise its right to 49% of AAS in January 2012. On 9 November 2011, Anglo American announced the sale of a 24.5% interest in AAS to Mitsubishi Corp., stating that with this, it reduced Codelco�s right. Then, Anglo American completely ignores Codelco�s right and even tries to render the contract null and void before the Court of Justice.

As a result of the foregoing and the situation generated during the last few months, it is our obligation to defend the interest of our shareholders, particularly when the shareholders are all Chileans, the Chilean State and the country. Contracts are made to be effective, they have to be respected and act in good faith.

The decision to defend the option to buy 49% of Anglo American Sur S.A. before the Court of Justice, was made under the conviction that Codelco is right and we are very confident that we are going to able to enforce the contract and exercise our right.

Once again I would like to say that during 2011, the Company obtained important achievements in nearly all management areas, evidencing its tremendous capacity as a company.

Codelco is much stronger than a year ago and the pace of change has been outstanding. We are committed to maximising our contribution to the country and also supporting sustainable development in the regions and communities where we work. The force of our commitment to continue boosting our contribution is reflected in the substantial Investment Plan we have for the coming years, which will enable us to not only maintain our production capacity, but also increase it, so as to continue being the world�s top copper producer and the pride of everyone.

Diego Hernández C.

President & CEO
 

↑ Go Up