Mining

1. Securing and strengthening the Core Business

Los Pelambres

Completion of the Los Pelambres plant expansion is expected to increase plant throughput by approximately 30%, from the current 130,000 tonnes per day level to a 175,000 tonnes per day level in 2010. As a result, the production of payable copper is expected to be 407,000 tonnes in 2010, compared with 311,600 tonnes in 2009.

Los Pelambres is a sulphide deposit located in Chile’s Coquimbo Region, 240 km north-east of Santiago. It produces copper concentrate (containing gold and silver) and molybdenum concentrate, through a milling and flotation process.

Revenue at Los Pelambres in 2009 was US$2,081.5 million, slightly below the US$2,172.0 million achieved in 2008. The reduction reflected a decrease in copper volumes and the lower molybdenum price, largely offset by an increase in the realised copper price.

Los Pelambres produced 311,600 tonnes of payable copper in 2009, a reduction compared to the 2008 full year production of 339,200 tonnes, although ahead of the original forecast for the year of 300,000 tonnes. The decrease in production compared to 2008 was mainly due to lower plant throughput due to the higher level of harder primary ore and a marginal decrease in ore grades. Ore throughput averaged 129,200 tonnes per day (2008 – 136,800 tonnes per day), while the ore grade in the area of the open pit mined during the year was 0.74% copper (2008 – 0.76%). Molybdenum production was unchanged from 2008 at 7,800 tonnes, with marginally higher ore grades and metallurgical recoveries offsetting the lower plant throughput.

Realised copper prices at Los Pelambres were 286.8 cents per pound, 16% higher than the 2008 realised price of 246.5 cents per pound. This was despite the average LME price for the year of 234.2 cents per pound actually being 26% lower than in the previous year (2008 – 315.3 cents per pound). The general increase in the copper price during 2009 resulted in positive pricing adjustments of US$380.3 million, reflecting both the settlement of open sales in the year and the impact of mark-to-market adjustments at the beginning and end of the year. Conversely, the sharp fall in the copper price in the second half of 2008 resulted in negative adjustments of US$541.9 million in 2008. Realised molybdenum prices were US$11.3 per pound (2008 – US$23.9 per pound) which was broadly in line with the average market price of US$11.1 per pound (2008 – US$28.9 per pound). Further details of pricing adjustments for both copper and molybdenum are given in the Financial Review and in Note 25(d) to the financial statements.

Cash costs for 2009, which are stated net of by-product credits and include tolling charges, were 80.4 cents per pound compared with 57.3 cents per pound for 2008, an increase of 23.1 cents. This was mainly due to a 25.1 cents per pound decrease in by-products credits as a result of lower molybdenum market prices. There was a decrease of 4.2 cents in on-site and shipping costs compared with 2008, mainly due to lower shipping costs and energy prices offset by the effect of the lower production. Tolling charges were 2.2 cents per pound higher than in 2008. The individual components of Los Pelambres’ cash costs are set out in Mining Production and Sales, Transport and Water Statistics in the Other Information section.

Los Pelambres achieved an operating profit of US$1,280.7 million in 2009, 5.0% below 2008, reflecting the lower copper production and reduced molybdenum prices as well as increased depreciation charges, partly offset by higher realised copper prices and lower on-site and shipping costs.

Between December 2009 and January 2010 Los Pelambres entered into new corporate loan facilities for US$750 million, partly to fund costs associated with the plant expansion and also to refinance existing short-term facilities. This comprised a five-year commercial bank facility for US$505 million in December 2009 and a seven-year facility with Japan Bank for International Cooperation (“JBIC”) in January 2010, which is expected to be drawn down during the first quarter of 2010. Total borrowings (net of deferred financing costs) at the end of 2009 were US$821.9 million (2008 – US$376.6 million).

The Mauro tailings dam, which started up in November 2008, became fully operational in the first quarter of 2009. As previously disclosed, in late 2008 Los Pelambres became aware of legal proceedings which had been initiated in first instance courts in Santiago and in Los Vilos by certain members of the Caimanes community located near the Mauro valley. These claims, several of which have now been rejected by the relevant courts, seek to prevent the continued operation of the Mauro tailings dam. Los Pelambres continues to take necessary steps to protect its position and remains confident of its rights to continue the operation of the dam.

Total capital expenditure during 2009 was US$475 million. This expenditure predominantly related to the expansion of the plant’s throughput capacity to 175,000 tonnes per day, through additional infrastructure including a third SAG mill and sixth ball mill. The construction work on the expansion was substantially complete by the end of 2009. The expansion remains on budget at approximately US$1 billion. Cumulative expenditure on this project at the end of 2009 was approximately U$920 million, of which US$400 million was incurred in 2009. The capitalised expenditure in respect of the plant expansion will start to be depreciated during 2010, resulting in increased depreciation at Los Pelambres. The additional throughput is expected to increase production of payable copper by an annual average of 90,000 tonnes over the next 15 years.

As explained below Los Pelambres is also continuing to review options for the long-term development of the mine. The total mineral resources base for Los Pelambres is 6.2 billion tonnes, compared with the 1.5 billion tonnes of ore reserves reported. This will present opportunities for longer-term planning either to extend the existing mine life or by enabling Los Pelambres to consider possibilities for long-term future growth.

During the recent earthquake near Concepción on 27 February 2010, Los Pelambres suffered a brief stoppage to production as a result of interruption to power supply, but operations were successfully restarted the following day. Repairs are required to facilities which provide the power requirements for the additional production at the plant expansion. Some workers and contractors involved in the commissioning process who have families in affected areas have also been given assistance in temporarily returning home. Accordingly the 175,000 tonnes per day level is expected to be reached in the second quarter of this year rather than at the end of the first quarter as was originally anticipated. Nevertheless, the plant is expected to be able to run in excess of this level in the second half of the year, and hence the ore processing level is expected to average 175,000 tonnes per day for the year as a whole, which represents the annual limit under existing environmental permits.

The ore grade for the year is expected to average 0.72%. Accordingly, forecast production of payable copper for 2010 is expected to remain at approximately 407,000 tonnes, a 30% increase on 2009.

Molybdenum production is also expected to be significantly higher than 2009 at 9,500 tonnes, due to the higher plant throughput, although the increased throughput is expected to be partly offset by slightly lower molybdenum grades of approximately 0.019%.

On-site and shipping costs are expected to remain broadly stable in 2010 at approximately 95 cents per pound compared with 95.3 cents in 2009, with economies of scale from the plant expansion expected to offset general cost inflation. Tolling charges are also expected to remain largely flat at approximately 19 cents against 19.2 cents in 2009, with the lower benchmark terms for 2010 offset by the averaging effect of the brick system, although tolling charges in a small portion of contracts will be impacted by changes in the copper price. Cash costs before by-product credits are, therefore, expected to remain largely unchanged at approximately 114 cents per pound compared with the 114.5 cents per pound in 2009. Based on a molybdenum price of approximately US$13 per pound, by-product credits are expected to be around 33 cents per pound, compared with 34.1 cents in 2009, which would give net cash costs of approximately 81 cents in 2010, compared with 80.4 cents in 2009.

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