|
PRE-TAX PROFITS AND THE COPPER PRICE The pre–tax profits generated by the company during 2006 were US$9.215 billion, a figure 88% above the US$4.901 billion of 2005. This income refers to earnings before income tax and application of Law Nº 13,196, which charges 10% on returns in foreign currency resulting from sales of copper and by–products abroad. Operating revenues reached US$17.077 billion, up 63% from 2005. The higher copper price was the main factor that positively impacted income from exploitation. In 2006, the average copper price on the London Metal Exchange reached 305.3 cents per pound, up 138.2 cents per pound over the previous year. 
The price of molybdenum, the main by–product from copper, averaged US$54.60 per kilo according to Metals Week compared to US$70.40 per kilo the previous year. EBITDA (calculated as operating income plus depreciation and amortization) was US$10.261 billion in 2006, well above the US$6.052 billion in 2005. CONTRIBUTION TO THE TREASURY In 2006, Codelco contributed US$8.334 billion to the national treasury, up from US$4.442 billion the previous year. This takes the form of income tax, contributions under Law 13,196 and dividends paid out.  PRODUCTION In 2006, Codelco’s own copper production reached 1,675,916 metric tons, that increases to above 1,783,038 metric tons including the 49% share from El Abra. Some 52,000 fine metric tons less copper were produced compared to the previous year, mainly due to an increase in the work–in–progress at the Codelco Norte Division, in addition to lower mineral ore grades at the Andina and El Teniente divisions. In 2006, the mineral treated inside the company amounted to 210 million dry metric tons, with an average grade of 0.93%. With regard to the production of molybdenum, 27,204 fine metric tons were produced in 2006. With this, Codelco consolidated its position as one of the main producers of this metal in the world.  COSTS Total costs increased by 17.8 cents per pound of copper mainly due to higher depreciation and amortization, the lower average exchange rate, an increase in the cost of principle inputs, together with higher provisions, write offs and financial costs. The corporate net cathode cost (that includes depreciation and financial costs) was 68.4 cents per pound compared to 38.1 cents per pound in the same period of the previous year. The cash cost was 37.4 cents a pound, higher than the 11.6 cents per pound in 2005. The biggest increase with respect to the total cost is due to the lower price and sales of molybdenum of this main by-product.  SALES In 2006, the total income from copper and by–product sales was US$17.077 billion.  Physical sales of fine copper, Codelco’s own as well as third–party, reached 2.011 million metric tons with the following regional distributions: 
Income from copper sales in 2006 reached US$13.959 billion. By–products contributed US$3.118 billion to company income and molybdenum provided US$1.657 billion. Market development In 2006, the average daily price of copper on the London Metal Exchange reached its highest nominal value in its history: 305.3 cents per pound. This value is 85% more than the average of the previous year. The high prices registered are explained by the low level of inventories in exchange warehouses, a positive world outlook, numerous events with regard to labour seen in the industry and the difficulties of many producers to achieve their production targets. This generated an important shortage that drove the price rise. In real terms, the 2006 price is not much higher than the last 100 years, given that in this period it has registered higher prices on several occasions. However, it was the highest price reached within the last 36 years. THE COPPER PRICE The copper price maintained a bullish trend during the first half of 2006, registering its highest historic level during May. In effect, on May 12 it reached 398.61 cents per pound. From June, prices were highly volatile depending upon labour conflicts, published indicators or news that impacted the availability or consumption of copper. In the fourth quarter, the price trend continued to decline in tune with an increase in inventories and a balance in the market with expectations towards a surplus.   Comparing the evolution of the copper price with that of the other metals traded on the London Metal Exchange; they all maintained a similar rise during the first half of 2006, driven by global economic conditions. Market fundamentals –different for each metal– influenced the direction and intensity of the price change, and only in the case of copper can a reduction in its price be detected in contrast to what occurred with the prices of other metals during the second half of 2006. FINANCING During 2006, Codelco accessed American, European, Asian and Chilean capital markets, and a base of more than 450 investors, with securities outstanding worth more than US$3.1 billion, maturing between 2009 and 2036. Five major risk rating agencies (Fitch, Feller, Standard & Poor’s, Moody’s and DBRS) have continously evaluated the company and since 2002 it has also been registered with Chile’s Superintendence of Securities and Insurance (Superintendencia de Valores y Seguros, SVS). INTERNATIONAL MARKET BOND ISSUE In 2006, Codelco turned to the financial market with the aim of partially financing its investment plan. It issued US$500 million internationally, maturing in 30 years, obtaining the best conditions by a Latin American company in 2006. This translates into a spread of 128 base points over the US 30–year treasury rate and an interest coupon set at 6.15% per annum. The spread obtained at the moment of its issue was two base points less than the level at which the bond Codelco issued in 2005 that matures in 2035 traded. The difference in spread between 2005 and 2006 compares very favourably with the conditions obtained by other international companies of similar risk classification. The 30–year term has allowed the company to take advantage of a low historic interest rate level and reduced the differential between 10– and 30–year terms, to significantly extend the maturity of its debt to better fit the long–term nature of the mining business. One of the main achievements during recent years is that, despite almost doubling the level of debt, the risk classification of Codelco has not only not deteriorated, but has improved, which is explained by an excellent communication of the risk and future of Codelco to the risk classification agencies. RISK FACTORS The copper price Codelco’s financial results are significantly affected by the copper price. To deal with these fluctuations, Codelco obtains partial hedging from the metal futures markets, supported by physical production, with the aim of protecting or minimizing the inherent risks of price fluctuations, operations that must be approved by the Board. The policy of hedging seeks, on the one hand, to protect the expected cash flows from operations from the sale of products by fixing a price for the sale of part of future production, as well as ensuring physical sales contracts conform to the commercial policy. The transactions realized look to take advantages the market provides without which, a risk is implied for the company. In other words, Codelco realizes futures operations, to adjust when it is necessary, some physical sales contracts to its commercial policy, as well as to protect future cash flows. Sales from these operations coincide with the accounting of the corresponding transactions and as a consequence, following notification of the execution of sales commitments, the results between the sales and futures contracts are compensated. Foreign exchange parities and interest rates The company has defined policies for covering foreign exchange parities and interest rates. Coverage of the former involves insurance against future changes in the Unidad de Fomento (an inflation-indexed accounting unit) against the dollar, while interest rate hedging involves contracts setting rates on future obligations. As with the copper price, these operations do not involve speculation. INSURANCE Codelco has all its assets and the interruption of business permanently insured, as follows: • Insured assets: all facilities used for its main business purposes within Chilean territory. • Type of coverage: all risk policy against loss due to material damage combined with interruption of activities, to a maximum loss of US$900 million. |
|||||||||
