Letter President & Chief Executive Officer

During 2006, Codelco generated US$9.215 billion in pre–tax profits for the Chilean State, a figure that marks a new record in the history of the Corporation and that practically doubles the profits of 2005. An important part of this result is explained by the copper price that reached an annual average of US$3.05/lb, way above forecasts. Nevertheless, it is also the product of a sustained effort during the past few years to increase production and to improve the company’s processes. During 2006, Codelco produced almost 50% more copper than at the beginning of the 1990s, reaching 1,675,916 tonnes of copper.

This figure is slightly lower to that obtained in 2005 but it reflects a good performance if one takes into account that it was achieved in a year when the company had to face incidents such as the collapse of the M1 transfer station at Codelco Norte and the dangers of landslides in zone 3 of the Chuquicamata pit. Faced with these difficult situations, those that work in Codelco demonstrated a response capacity to initiate extraordinary programs that allowed it to take advantage of the exceptional market conditions and minimize the fall in production.

This year we have also updated the Strategic Project for 2006 - 2010, that must prepare Codelco to operate at copper prices that, in the future, will not be as favourable as those of recent years. The biggest goal is maximizing the surplus for our shareholders, every Chilean, and that is why we have defined two key axes: growth and competitiveness. Growth because Codelco has the world’s largest copper reserves and resources, and the ability to make them profitable in a way that maintains its medium and long term industry leadership. For this reason we are investing significant resources in geological exploration and the development of new technologies, strategic initiatives that are already demonstrating important results.

Competitiveness, because we are facing a strong cost pressure, derived, among other factors, from deteriorating mining variables, the aging of our deposits and a strong increase in the cost of key inputs. The containment of this increase is a priority so that Codelco can position itself in the first quartile of industry costs. Towards this end, we must refine our strategy if we want to strengthen coppers’ role in Chile’s development.

In order to grow it is necessary to invest and, that is why the Board and Government decided to assign part of the 2006 surplus to its capitalization and to a reserve fund, which will contribute to financing the investment plan. Nevertheless, not only resources are required to undertake investments in a flawless way, but the ability of the Corporation to execute projects, must be strengthened. For this, a new Capital Investment System was started in 2006 that was designed after a long study to identify best industry practices. This will help us to execute the investment projects contained in the company’s Business & Development Plan (PND), in accordance with best management standards.

In light of this, I want to highlight the completion and start–up of operations at the Expansión Norte Mina Sur project; the conclusion of the feasibility study and the start of work to increase mine capacity at the Andina Division from its present 72,000 tonnes of mineral per day to 92,000 tonnes; and the continuation of the pre–feasibility study for the New Andina project, whose long-term aim is to increase production to over 200,000 tonnes of mineral per day. Added to this, the El Teniente development plan was consolidated and engineering studies for development of the New Mine Level began. Finally, during 2006, the Board approved the start of the Gaby project, with a production capacity of 150,000 tonnes of fine copper per year, whose start–up is forecast for the first semester of 2008.

Looking further ahead, during the period we identified a new mineralized body named Miranda, located to the east of the Toki deposit, in Region II, and concluded the advanced exploration of the Inca de Oro deposit, located in the mining district of the same name, in Region III.

Also, in 2006 Codelco invested US$17 million in its project portfolio and research and technological innovation programmes, to which were added US$25 million in contributions to technological companies. In addition, we continued advancing underground mining, mineral processing and sulphide mineral bioleaching technology programmes that are key to ensure the company’s long–term competitiveness. Codelco´s growth with competitiveness strategy is based upon cooperation with its workers. For that, we have proposed the definition of a new stage in the Strategic Alliance between the administration and the workers, represented by the Copper Workers Federation (FTC) and the National Association of Copper Supervisors (FESUC). 2006 was a period of analysis and dialogue oriented to share the challenges and opportunities Codelco faces in the coming years.

An example of the capability to cooperate and build agreements was the successful conclusion of ten collective negotiation processes during the year without conflicts that produced new collective work contracts in Ventanas, Salvador, El Teniente, Andina and Codelco Norte.

To the productive effort and investments we must add commercial management based on a close and stable relationship with our main clients, the maintenance of an adequate premium policy and the consolidation of our sales in those markets that give better yields. The positioning obtained by the company in China’s market is especially relevant given that today, as everyone knows, it is the main copper consumer in the industry. The Free Trade Agreement with this country puts Codelco in the best position to continue optimizing this relationship.

Another reason to be proud is the qualification, for the third consecutive year, of being the “most socially responsible company of the country,” according to a MORI survey.

Several years ago, Codelco defined sustainability as one of the key levers of its development strategy.

Therefore, in August 2006, Codelco signed a Clean Production Agreement (APL) with the National Council of Clean Production. The agreement was also signed by the Ministry of Mining and Energy, the Superintendent of Sanitary Services, the Energy Efficiency Country Program and the National Environment Commission. Through this agreement, Codelco committed, among other things, to reduce the concentration of molybdenum in the effluent in the Carén tailings dam (RIL Carén), to gradually obtain, lower values as demanded by the norm applicable to Codelco’s El Teniente Division (Supreme Decree 80 of 2006).

In December 2006 the company approved its corporate commitments towards biodiversity. In these, we commit to take measures and apply criteria in our operations and territories that contribute to biodiversity conservation.

During 2006, all Divisions and the Head Office maintained their respective certifications based on the Environmental Management System ISO 14001 and the Environmental, Security and Occupational Health Management System OHSAS 18001. Nevertheless, we also recognize weaknesses. We suffered environmental accidents that mean we must redouble our efforts towards sustainability. We are especially concerned about the security and health of workers, both those that have direct contracts with Codelco and those that work for collaborating companies. We regret the death of three of our workers in 2006 and three workers at contractor companies, which obliges us to make greater efforts to prevent these types of accidents from happening again.

Finally, I wish to highlight two developments related to management transparency and improving Codelco’s corporative governance. We established more restrictions in the area of conflicts of interest in our Code of Conduct. Along with this, on March 8, 2007, Her Excellency the President of the Republic sent to the National Congress a bill to modernize our corporative governance. The new legal framework applies the norms that govern public companies to Codelco and introduces modifications in the composition and function of the Board of Directors. The initiative has special relevance because the actual institutional framework of Codelco was created more than thirty years ago. Updating the legal framework will contribute, in our opinion, to add more value to the company and place it in a better competitive position for the next decades.

To end, I would like to thank the women and men of Codelco who have accompanied me since I had the honour to assume the leadership of this company at the start of 2006. Their commitment, ability, responsibility and desire to do things well has made it possible to obtain the results that we present today.

I think it is also fair to recognize those that throughout the company’s history, have contributed to make these achievements reality as they are the product of the planning and work undertaken for more than a decade. Without a doubt, there are reasons to be proud and we have new challenges that we must now undertake with the objective of ensuring the success of Codelco and its fundamental contribution for the present and future of Chile.











JOSÉ PABLO ARELLANO
PRESIDENT & CEO