Financial Risk Management

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Financial Risk Management

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Financial Risk Management

CODELCO is exposed in varying degrees to a variety of financial instrument related risks. Codelco has created committees within its organization to generate strategies with which to minimize the financial risks to which it may be exposed. The Market Risk Management Committee is also responsible for analyzing and proposing financial hedging operations to the Corporation’s Board of Directors, to issue standards and to control the execution of the authorizations given by the Board.

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Credit Risk

This risk comprises the possibility that a third party does not fulfill its contractual obligations, thereby causing a loss for the Corporation.

Given the Corporation’s sales policy, principally with cash and advance payments and bank letters of credit, the uncollectibility of client debt balances is minimal. This is complemented by the familiarity the Corporation has with its clients and the length of time it has operated with them. Therefore, the credit risk of these transactions is not significant.

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

The Corporation’s accounts receivable do not include customers with balances that could be classified as a significant concentration of debt and would represent a material exposure for Codelco. This exposure is distributed among a large number of clients and other counterparties.

Codelco works with major banks, which have high national and international ratings, and continually assesses them; therefore, the risk that could affect the availability of the Corporation’s funds and financial instruments is not significant.

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

Personnel loans are mainly generated by mortgage loans, according to programs included in collective agreements, which are guaranteed by housing mortgages which are paid for through payroll discounts.

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Liquidity Risk

The Corporation ensures that it has sufficient resources, such as pre-approved credit lines (including refinancing), in order to meet short-term requirements, after considering the necessary working capital for its operations and any other commitments it has.

In this sense, Codelco Chile maintains resources at its disposal, whether in cash, liquid financial instruments and credit facilities those are sufficient 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 enough room to increase the level of borrowing for the normal requirements of its operations and investments established in its development plan.

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Market Risk

This is the risk that financial instrument fair values will fluctuate owing to changes in market price. The significant market risks to which the Corporation is exposed are foreign exchange risk, interest rate risk and commodity price risk.

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Exchange rate risk

Codelco’s activities that generate this exposure correspond to funding in UF, accounts payable and receivable in Chilean pesos, other foreign currencies used in its business operations and obligations with employees.

The majority of transactions in currencies other than US$ are denominated in Chilean pesos.

Codelco has hedged a portion of its exchange rate exposure by entering into forward exchange contracts to hedge against fluctuations in UF to US dollar exchange rate for its outstanding UF-denominated bonds.

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Interest rate risk

This risk is generated by interest rate fluctuations in Codelco’s investment and financing activities. This movement can affect future cash flows or the market value of fixed rate financial instruments.

These rate variations refer to U.S. dollar variations, mostly with respect to the LIBOR rate. To manage this risk, Codelco maintains an adequate combination of fixed and variable rate debt, which is complemented by the possibility of using interest-rate derivatives to meet the strategic guidelines defined by Codelco’s Corporate Finance Department.

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Commodity price risk

As a result of its commercial operations and activities, the Corporation’s income is mainly exposed to the volatility of copper prices and certain sub-products such as molybdenum, gold and silver.

Revenues associated with sales contracts that provide for a provisional price at the date of shipment and whose final price is based on the price of the London Metal Exchange ("LME") are adjusted to their market value and recorded in net income for the period.

In order to protect its cash flows and, if necessary, adjust its sales contracts to its commercial policy, the Corporation performs transactions in the futures market, recording their earnings at maturity. These earnings are added or subtracted from sales revenue. This addition or subtraction is made because sales revenue incorporates the positive or negative effect of market prices.

No hedging contracts have been entered into for the specific purpose of mitigating the price risk caused by fluctuations in the price of production supplies.

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CODELCO does not acquire or issue derivative financial instruments for trading or speculative purposes. Such instruments are used to separate funding and cash management decisions from price and currency exposure and interest rate management.