Financial Risk Management

CODELCO is exposed to varying degrees to a variety of risks from related financial instruments.

The Corporation has created instances within its organization that seek to generate strategies to minimize the financial risks to which it may be exposed, through the Risk Management Committee. The Market Risk Management Committee is responsible for analyzing and proposing to the Corporation's Board of Directors financial hedging operations, issuing regulations and monitoring the execution of the authorizations granted by the Board of Directors.

Credit risk

This risk includes the possibility that a third party may not comply with its contractual obligations, thereby causing losses for the Corporation.

Given the Corporation's sales policy, mainly with cash and advance payments and through bank credits, the uncollectibility of the balances owed by customers is minimal. This is complemented by the Corporation's knowledge of its customers and the length of time it has operated with them. Therefore, the credit risk of these operations is not significant.

In general, the Corporation's other accounts receivable have a high credit quality according to the Corporation's assessments, based on the analysis of the solvency and payment history of each debtor.

The Corporation's accounts receivable do not include any clients with balances that could lead to a significant concentration of debt and determine a material exposure for Codelco. This exposure is distributed among a large number of clients and other counterparties.

Codelco works with top-tier banks with high national and international ratings and continually conducts evaluations of them, so the risk that would affect the availability of the Corporation's funds and financial instruments is not relevant.

Also, in some cases, in order to minimize credit risk, the Corporation has contracted credit insurance policies through which it transfers to third parties the risk associated with the commercial activity of some of its businesses.

As regards loans to employees, these are generated mainly by mortgage loans, according to programs arising from collective agreements, which are guaranteed by the mortgage of the homes, with payroll discounts.

Liquidity risk

The Corporation ensures that there are sufficient resources such as pre-approved lines of credit (including refinancing) in order to meet short-term requirements, after taking into consideration the working capital necessary for its operation as well as any other commitment it has.

In this regard, Codelco-Chile maintains sufficient resources, whether in cash, quick-settlement financial instruments and credit lines, to meet its obligations.

In addition, the Finance Department constantly monitors the company's cash flow projections based on short- and long-term projections and available financing alternatives. In addition, the Company estimates that it has sufficient room to increase the level of indebtedness for normal requirements of its operations and investments established in its development plan.

Market Risks

This is the risk that the fair values of financial instruments will fluctuate due to changes in market prices. The significant market risks to which the Corporation is exposed are foreign exchange risk, interest rate risk and product price risk.

Exchange rate risk

Codelco's activities that generate this exposure correspond to financing in UF, accounts payable and receivable in Chilean pesos, other foreign currencies for its commercial operations and its commitments to employees.

Of the operations carried out in currencies other than US$, the majority are denominated in Chilean pesos.

Codelco has hedged a portion of its exchange rate exposure by entering into forward foreign exchange contracts to cover against fluctuations in the UF-US dollar ratio for its UF-denominated bond position.

Interest rate risk

This risk is generated due to fluctuations in the interest rates of Codelco's investments and financing activities. This movement may affect future flows or the market value of those instruments that are at a fixed rate.

These rate variations refer to variations in the US dollar, mostly the LIBOR rate. Codelco manages this type of risk by maintaining an appropriate combination of fixed-rate and variable-rate debt, which is complemented by the possibility of using interest rate derivative instruments to maintain the strategic guidelines defined by Codelco's Finance Department.

Commodity price risk

As a result of the development of operations and commercial activities, the Corporation's results are mainly exposed to the volatility of copper prices and some by-products such as molybdenum, gold and silver.

Revenues associated with sales contracts that contemplate a provisional price at the date of shipment and whose final price is based on the London Metal Exchange (“LME”) price are adjusted to their market value and recorded in the results of the year.

In order to protect its cash flows and to adjust its sales contracts to its commercial policy when necessary, the Corporation carries out operations in futures markets, recording its results at the end of the operations. These results are added to or deducted from sales revenues. This addition, or deduction, is made because sales revenues incorporate the positive or negative effect of market prices.

No hedging transactions have been contracted with the specific objective of mitigating the price risk caused by fluctuations in the prices of inputs for production.

Derivatives Contract

CODELCO does not acquire or issue derivative financial instrument contracts for speculative purposes. These instruments are used to separate financing and treasury management decisions from exposure to fluctuations in commodity and currency prices and interest rates.