Chief Executive Officer’s Review

In terms of the institutional structure, the new Board assumed its role on 1 March, pursuant to the new Corporate Governance Law that incorporates the best practices of similar companies worldwide and to which are applied the rights, obligations, responsibilities and prohibitions under the Public Company Law.

On 11 May, the President of the Republic directly appointed three new Board members and named Gerardo Jofré Miranda as Chairman of the Board.

When I took over as CEO of Codelco, one of the first tasks we addressed was to ensure production, cost and profit goals were achieved in the short term, so as to benefit from the very favourable scenario of the copper and molybdenum market we experienced in 2010.

In fact, the London Metals Exchange copper price reached an annual average price of 342 ¢/lb, up 46% from 2009, mainly due to a strong demand for copper in China and other emerging countries amid supply constraints.

Additionally, molybdenum prices increased from 24.5 US$/kg in 2009 to 34.8 US$/kg in 2010.

As a result of these higher prices and efforts to increase productivity and control costs, in 2010 Codelco generated US$ 5.799 billion in profits, before taxes and Reserve Law tax.

Therefore, between 2004 and 2010, Codelco’s profits totalled more than US$ 44 billion, in 2010 currency. This significant amount is, in real terms, more than half of the total profits generated by the Company since 1976.

Own and subsidiary copper output totalled 1, 689,000 metric tonnes of fine copper (mtf), in line with 2009 output. If Codelco’s stake in El Abra Mine is included, output increases to 1.760.000 mtf. Hence, Codelco continues to be the world’s top producer.

Direct cash cost (C1) was 104.4 ¢/lb, higher than 92.9 ¢/lb in 2009. This cost increase was influenced by higher remunerations due to incentives related to copper and molybdenum prices; the continued upward pressure on main input prices and a lower exchange rate affected local currency expenses.

As for work safety, in 2010 Codelco achieved the lowest accident frequency rate in the Company’s history, 2.04 accidents per million hours worked.

However, we had to regret the death of seven workers, three employees and four contract workers in four work accidents. This result evidences the need to redouble our efforts to eliminate from operations events that result in worker injuries or deaths, by adopting a new standardised safety system within Codelco, which we shall implement in 2011.

Codelco was from the very beginning actively involved in the rescue of the 33 miners trapped at the San José Mine, near Copiapó. In total, more than a hundred workers and professionals helped in the highly complex task, which was led by the Minister of Mining. We took pride in leading the technical team in charge of this task and in participating, together with other mining and service companies, in this great effort that will be recorded in the history of Chilean mining.

During 2010, Codelco worked with 2,243 goods suppliers, 1,292 service suppliers and 357 suppliers who provide both goods and services. The total amount assigned was US$ 18.157 billion; this includes signing long-term electricity supply contracts (US$ 12.303 billion) and fuel supply contracts (US$ 1.807 billion).

Goods and services consumption was up 14% from 2009, due to new projects in operation, increased activity of our operations and price increase of an important number of goods and services.

During this period, in addition to benefiting from the favourable conditions of the copper and molybdenum market, we prepared a new Corporate Strategic Plan. A fundamental priority of this Plan is to implement the Structural Plans, based on the promised timeline, budget and quality, capacity and results. These are conditions required to ensure the long-term future of Codelco and to recapture the enormous potential of its deposits. The President of the Republic has expressed the Government’s support to the Company’s Investment Plans.

The implementation of the Structural Projects, which in addition to investments in other development projects such as mine development and deferred charges, replacement and refurbishment of our facilities, environment and safety and in other investments, required an unprecedented amount of resources in the history of Codelco.

During 2010, for the fourth consecutive year, the Company made record capital investments: US$ 2.616 billion.

In 2010, Codelco turned to the capital market to partially finance its Investment Plan and pay debt maturing during the year. In October, it sold 10-year bonds overseas for US$1 billion, the lowest coupon ever for Latin American corporate bonds.

Progress of major projects during this period is as follows:

• Completed implementation and start-up of the Rodomiro Tomic Sulphide Deposit Phase I, Andina Development Plan Phase I and Pilar Norte (El Teniente); these are key projects in order to meet our short and medium-term production goals.
• Completed implementation and start-up of Gaby Phase II.
• Implementation of the Ministro Hales Project approved by the Board.
• Continued feasibility studies for the Chuquicamata Underground Mine, El Teniente New Mine Level and Andina Expansion Phase II projects.
• Progress in technical and economic studies for the Radomiro Tomic Sulphide II.
• Board agreed to revert the decision to close mining operations at Salvador Division (initially scheduled for December 2011), given the improved prospects of the copper market; started planning its medium-term operations, and identifying long-term development opportunities. Also at this Division, priority was given to the pre-investment study for the San Antonio Project.

From a long-term perspective, progress was made in the mining and exploration base. Mineral reserves (proven and probable) considered in the Business and Development Plan (BDP) 2011, measured in fine copper content, were up 8.4% from the BDP 2010, despite consuming around 1.7 million tonnes of fine copper as annual output in 2010.

In 2010, the exploration strategy was focused on brownfields, i.e., it looked for new reserves in the area next to mining deposits. The most important results were in the District of Andina, where significant molybdenum and copper sulphide mineralisation was found in a new district called Cerro Negro. These results suggest a very attractive potential.

In El Teniente District, mineralisation was found in two new zones by surface and underground drilling.

Internationally, the Company agreed joint ventures with Xstrata and Pan Brasil, in the Carajas mining district, which includes five mining property groups and we began exploration drilling at the end of the year.

Additionally, in Ecuador the Company continued prospecting within the framework of the Agreement with Enami EP, legal successor for this purpose of the Ministry of Mining and Petroleum, enabling Codelco to have access to an important number of areas of interest and maintain an active prospect portfolio.

In technology, Codelco has continued to look for and develop innovations in mining-metallurgical processes. During the year, the company invested US$ 78 million in different projects, programmes, initiatives and contributions to technological subsidiaries in which it has a stake.

Key corporate programmes which showed important progress were: continuous underground mining, open-pit mining, mineral processing (efficient water and energy use), continuous smelting operations, sulphide mineral concentrate bioleaching, in-situ mining and automation. Codelco continues to develop innovative solutions for mining through its technological companies BioSigma, IM2, Kairos Mining, MiCoMo, MIRS and Ecometales. In 2010, another key priority for Codelco management and for its new Strategic Plan was the implementation of organisational changes, aimed at greater efficiency and focus on managing the different operations and businesses; more coordination and communication between the different corporate departments, and a structure suitable to successfully face future challenges.

Key changes were:

• Creation of North Operations and Centre-South Operations Vice- Presidencies, and their main mission is to ensure safety and sustainable development, prepare and meet production and cost goals; and be the operational counterpart for development projects or alternatives.
• Creation of Administration and Finance Vice-Presidency, as the only financial counterpart of the Company’s operations and projects.
• Restructuring of Codelco Norte Division, created Chuquicamata and Radomiro Tomic divisions in order to focus efforts and tasks of these operations that have different challenges.
• Creation of Ministro Hales Division, in order to promote the development of the project, ensure a flawless startup and operate the deposit based on the best management standards available in the industry.
• Strengthening of the Human Resources Vice-Presidency, with emphasis on establishing a dynamic relationship with trade unions, talent attraction and retention, people recruitment and mobility, knowledge management, staff renewal and improvement of work practices.

Organisational changes required the appointment of new executives in senior management and staff for senior structures. This process was carried out through focused and selective searches for outstanding professionals in the national and international mining sector and by promoting our own professionals.

The average age of Codelco’s workforce was 47, significantly higher than our competition. To address the challenge of an aging workforce and to move forwards in a generation renewal process, during the period the Workforce Early Retirement Plans were implemented for divisions and Head Office, which were agreed with the corresponding union leaderships. At the end of 2010, around 2,200 people opted for this programme, which considers knowledge retention measures for critical positions. Hence, the average age dropped to just over 45.

Another strategic priority is talent attraction, retention and management. In 2010, in this context, 245 critical positions were identified in the Company, and 124 correspond to the metallurgical-mining-geological area.

In 2011, we hope to replace the number of exits, with a strategy that includes trainee, graduate, expert and emerging leader programmes. A common element in these programmes is to attract young talent.

As for labour relations, we reached agreements, without any conflicts, negotiated in collective bargaining with the trade unions at Salvador (Union A and Union B), Radomiro Tomic (Union B), Chuquicamata (Mining Union B) and El Teniente (Union A) divisions.

Additionally, we launched numerous initiatives to promote productivity and quality of work life, especially focused on educational, self-care, healthy eating and physical activity programmes. These programmes have resulted in lower absenteeism and overtime rates.

At Codelco, sustainability and social responsibility form an integral part of the Strategic Plan and its business management. To date, the Company has managed these areas based on a model that incorporates safety, occupational health, environment, territory, community management; as well as efficient use of natural resources and market defence and development.

In 2010, investments in occupational health and safety totalled US$ 145.6 million and US$ 61.6 million in environmental and decontamination projects.

Besides these projects, we have also made progress in this area:

• In relation to the framework of the Global Programme for the Elimination of Silicosis from the world by 2030, Codelco held a seminar “Mining without Silicosis,” in order to promote the Global Programme, review the current situation of Codelco’s operations and consolidate a coordination authority to address this issue.
• Reviewed and updated the Master Plan for Corporate Water Resources and created a specific programme to implement these resources at each Division.
• Initiated Phase II of Cerro El Minero Mine Closure Plan (El Teniente Division), it includes the withdrawal, transfer and disposal of stable arsenic waste.
• Reduced general inventory of the Company’s liquid waste discharge: from 25 discharges in December 2009 to just 15 in 2010.
• Continued implementing the Energy Efficiency Plan.
• Approval of action plans to implement Corporate Glacier Strategy.
• Compliance with the requirements set out by the European Union to allow the entry of chemical substances to that region (REACH) and the classification and labelling system of dangerous substances.
• Updated life cycle inventory for key copper products.
• Developed and updated corporate management of mine closure.
• Divisions, explorations and Head Office developed more than 400 social projects, in alliance with public and private institutions, totalling more than US$ 6 million.

Codelco has also continued to have a leading role in market promotion and development, strongly supporting the International Copper Association (ICA), the marketing arm of the copper industry. An important milestone in 2010 was the creation and registration of the Antimicrobial Copper Cu+ brand, developed by ICA, highlighting the bactericidal properties of copper and promoting its use worldwide. Codelco’s Head Office is the first building in Chile that incorporated copper Cu+ into touch surfaces in its public areas.

Through its subsidiary INCuBA, Codelco has consolidated this entrepreneurship for new copper uses in agriculture, having significant commercial and technological development, with 60 active systems in salmon farming and with clear growth potential in both Chile and abroad.

One of the most important achievements of this period was the development of the Codelco Statement of Values and the revision of the Code of Conduct and Business Ethics, top priority documents within the organisation.

The final document of the Statement of Values, released in December, includes the values and principles that should guide Codelco management and each employee. In order to develop these values, Codelco carried out a highly participatory process, in which around 4 thousand employees were involved directly or through our intranet during the month of October.

The Code of Ethics and Business Conduct, among other components, has an associated Hotline to report anti-ethical actions that since October 2010, is publicly available through our webpage www.codelco.com.

In brief, during 2010 the Company made important progress, practically in every management area, which shows its tremendous capacity as a company. We implemented significant changes in how we organise ourselves and address different tasks, which will enable us in 2011 to move forward at a faster pace and with clear and defined objectives.

I’m sure that, with the trust and support of the Board and its Owner, and with the commitment of each employee and professional, we shall continue developing our capacities and strengths to expand our leadership in the world copper industry. Therefore, Codelco will continue to increase its contribution to the development of Chile.