Mining

1. Securing and strengthening the Core Business

Michilla

Michilla has approved an extension of its mine plan through to 2012 with expected production of 40,000 tonnes in 2010. Michilla is a sulphide and oxide deposit located in Chile’s Antofagasta Region, 1,500 km north of Santiago. It produces copper cathodes using a heap-leach and solvent-extraction electro-winning process.

Revenue at Michilla for 2009 was US$170.5 million, against US$332.7 million in 2008, as a result of a lower realised copper price and reduced production volumes.

Total annual production in 2009 was 40,600 tonnes of copper cathodes, ahead of the original forecast for the year of 38,000 tonnes, although lower than the 2008 production of 47,700 tonnes. The reduction compared with the prior year was mainly due to the decision at the start of 2009 to suspend operations at the higher cost Lince open pit mine and certain third-party workings, given the weak copper price environment at that point. Accordingly, ore throughput averaged 15,100 tonnes per day compared to 15,500 tonnes in 2008. Ore grades were 0.96% compared with 1.06% in 2008, partly due to the decision to process lower-grade ore stockpiles which became economic as the copper price strengthened during the year.

Realised copper prices in the period were 195.7 cents per pound, a significant reduction compared with the 317.7 cents per pound realised in 2008. This was predominantly due to the lower average LME copper price over the course of the year, which in 2009 averaged 234.2 cents per pound, compared with 315.3 cents in 2008. In addition, realised losses of US$45.8 million in respect of copper derivatives which had been put in place in late 2008 and early 2009,and which matured during the course of the year, also decreased the realised price. These effects were partly offset by positive provisional pricing adjustments of US$11.8 million. Further details of the effects of commodity hedging instruments in place are given in the Financial Review under “Treasury Management and Hedging” and in Note 25(e) to the financial statements.

Cash costs averaged 157.6 cents per pound during 2009, compared with 191.1 cents in 2008. This was mainly due to cost savings from the suspension of the Lince open pit, lower electricity prices and the weakening of the Chilean peso. Costs increased during the course of the year, partly as a result of the improving copper price. Michilla purchases a portion of the ore which it processes through its plant from third parties and the price paid for some of those materials was linked to the market value of the contained copper. High copper prices in the year accordingly resulted in higher materials cost. The decision to process lower-grade ore stockpiles given the increasing copper price also resulted in higher operating costs.

Operating profit at Michilla was US$21.7 million, compared with US$71.3 million in 2008. The prior year results included a one-off impairment charge of US$28.3 million, and the 2008 results excluding this charge were a profit of US$99.6 million. The lower profit in 2009 reflected the reduction in the realised copper price and the lower production volumes, partly offset by the lower cash costs.

Cathode production in 2010 is expected to be approximately 40,000 tonnes. 80% of this expected 2010 production was hedged during the first half of 2009 through futures and min-max instruments. Further details are given in Note 25(e) to the financial statements. During the year Michilla approved an extension of its mine plan through to 2012, which includes the remnant reserves from the final stage of the Lince pit. Michilla is currently carrying out studies to examine the potential to extend the life of the operation to 2018.

In 2010 cash costs are expected to be approximately 162 cents per pound, a slight increase compared with the 157.6 cents per pound in 2009. Increased costs due to the reopening of the Lince open pit and other operational and market factors are expected to be largely offset by a significant reduction in the contracted price for sulphuric acid.

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