Chairman’s Review

First, I would like to highlight that in 2010 Codelco delivered one of the best financial performances of its history. It achieved annual profits of US$ 5.799 billion, before tax and Reserve Law tax; an amount that has only been exceeded in 2006 and 2007. This figure represents a 47 % growth compared to 2009 pre-tax profits.

These positive results were mainly influenced by the strong rise in international copper and molybdenum prices.

In 2010, the London Metal Exchange average copper price was at 342 c/lb, 46% higher than the average 234.2 c/lb in 2009.

In 2010, the world economy continued to recover from the global financial crisis and, according to the IMF, the GDP growth rate was over 4.5%. The demand for copper was particularly reinforced by the strong demand in China and the recovery of copper consumption in the rest of the developed and emerging countries, which suffered a sharp fall in 2009 due to the global financial crisis. Therefore in 2010, the global growth rate of refined copper consumption increased around 10 %.

Copper producers are still facing difficulties to continue increasing supplies at the same pace as the rising world demand. At the end of the year, inventories were at around a 2.5 week high, therefore stocks were down.

However, not everything was positive in 2010. Unfortunately, in terms of safety, we deeply regret the death of seven workers, three Codelco employees and four contract workers, which is clearly below our expectations, as both Board and management, and it leaves us completely unsatisfied. An unacceptable tragedy for their families, colleagues and Codelco management.

This is one of the most significant areas where we will have to makes changes to our management.

In this respect, we would like to mention Codelco’s participation in the rescue of the 33 miners trapped at the San José mine in Copiapó. Codelco provided more than 100 people, who helped at different stages and in different tasks, showing the world the capacity and commitment of its engineers and technicians. This makes us think that we can still improve our safety performance and achieve our goal of zero fatalities.

2010 was a key year in terms of Codelco’s Corporate Governance. Towards the end of 2009, the amendments to Decree Law 1.350 (Codelco Law) were enacted which set out important changes to both Corporate Governance and decision-making mechanisms related to the corporate management processes. This new Corporate Governance incorporates the best practices of world-class companies.

On 10 May 2010, after the new Board assumed its role, I was honoured to be appointed Chairman of the Board by His Excellency the President of the Republic. Therefore, I have had the unique opportunity to preside a Board of excellence that aims to make Codelco an increasingly better company for the benefit of all Chileans, as they are the ultimate owners.

This effort has focused on defining, together with management, medium and long-term strategies, and shortterm plans, with strong emphasis on structural projects in order to ensure Codelco’s value in the long term for the benefit of Chile and all its inhabitants.

Another important task for the Board has been to define the Corporate Governance instruments and practices that give sustainable development in the long term to the Board’s mission, as the top management structure in the company, in keeping with international best practices. I would like to mention some of the key milestones in 2010 that have been an important part of the Board’s operation and work:

• Selection and Appointment of Chief Executive Officer, Diego Hernández, on 19 May.
• Approval of Corporate Governance Code.
• Approval of Triennial Plan and 2010 Development and Business Plan. > Approval of Codelco Strategic Plan 2011-2015.
• Approval of 2011 Budget.
• Definition of a medium and longterm financing and investment policy for the company. This policy considers the Government’s absolute authority, in its role assigned by law as Shareholders’ Meeting representative of the company’s owners, who are all Chileans, in order to define the company’s dividend distribution policy and capitalisation of its earnings, as a general standard of public companies in the private sector. In exercising this exclusive power, the Government has stated it fully supports the company’s Investment Plan for its structural projects, and it will authorise any capitalisation required for the company to maintain its solvency and investment level. As this policy was immediately applicable, the Government defined that gains from selling off Codelco’s main nonessential asset, that the Board had decided to sell – its minority interest in E-CL Power Company –will be capitalised in full and, also, other earnings will be capitalised equivalent to the tax payable for this operation.
• Approval of the above sale – Codelco’s 40% stake in E-CL Power Company – in order to use 100% of the earnings from this operation to finance part of its investment plans.
• Approval to build the Ministro Hales greenfield project. This is the Company’s first structural project to start its implementation stage and the only one to develop a new deposit.
• Agreement to extend the useful life of Salvador Division.
• Approval of Codelco’s senior management structure and appointment of Vice-Presidents and General Managers.
• Approval of Codelco Statement of Values.
• Approval of Codelco’s new Strategic Plan for the period 2011-2015.

The 2011 market prospects look quite promising. China, the driving force behind the demand for copper, has maintained a solid consumption, and economic projections by different organisations such as the IMF, indicate that the GDP growth rate will probably be over 9 percent.

However, the Board and management team are also aware of the risks that currently threaten the economy, such as Europe’s sovereign debt crisis, the slow recovery of the United States, rapid inflation in emerging countries, geopolitical factors that may impact important supplies such as petroleum and the recent catastrophe that hit Japan.

In a long-term horizon, both the economic and urban development of emerging economies should continue to have a positive impact on all commodity prices and the mining industry. Undoubtedly, 2011 will bring important challenges for Codelco. We have a Vision to face them. We want to continue to be the world’s largest copper producer and the company that contributes the most to the Chilean economy.

To make this Vision a reality, we have a clear strategy that emphasises our priorities: sustainability and maintenance of a licence to operate: optimal implementation of structural projects to make the most of our mining base potential; increase competitiveness; renovation and human capital management; financing assurance through a collaborative relationship with the owner; development of new growth opportunities; organisational and cultural changes required.

These structural projects are very important to Codelco’s future strategy. These projects practically mean reestablishing current operations.

Thereby, the Chuquicamata mine will change from an open pit mine to a huge underground mine; El Teniente mine will have a new level, 300 metres deeper, with a similar mining system, but the mineral ore will be lifted to the plant on a continuous conveyor belt system, and not on a railway batch process; Andina Division will develop its new Phase and therefore it will become Codelco’s largest mine; Salvador Division will once again have its own large-scale production, and the Ministro Hales project, already approved by the Board and by all the relevant government authorities, will become a new mining Division at Codelco.

Productivity is also a challenge. Codelco has to achieve the world’s highest productivity and efficiency standards, and to do so, the Board is sure that every employee is fully committed.

Our Strategic Plan gives a strong boost to sustainability issues, so as to take operations to a new excellence level in terms of the environment and also to take our employees’ safety to the highest levels of the world mining industry, including our goal of zero fatalities or serious accidents.

The Board, which I have the honour to preside, is convinced that the Company has the people, capacities, organisational structure and financial flexibility to take advantage of current opportunities and continue creating value for shareholders in the medium and long term.

I would like to finish by stating our total commitment, together with the entire management team and employees, in order to succeed despite the enormous challenges Codelco will face in the coming years, in order to ensure that Chile continues to have the world’s largest copper producing company with a world-class management.