Annual Report 2002 Produciendo Futuro During 2002, world mine copper production reached 10.7 million tons. Of these, 15% were produced by Codelco, which makes it the first copper producer in the Western World. The American continent produces 7.6 million tons of copper a year. The main producers in the region are: Chile, United States, Peru, Canada and Mexico. II Region Codelco Norte Division Chuquicamata Mine Latitude 22.3º South; 68.9º East Radomiro Tomic Mine Latitude 22.2º South; 68.88º East III Region Salvador Division Latitude 26.25º South; 69.55º East V Region Andina Division Latitude 33.14º South; 70.26º East VI Region El Teniente Division Latitude 34.06º South; 70.36º East Divisions Codelco has five Divisions -four mining Divisions and one metalmechanic Division- located between the II and VI Region of Chile. Codelco Norte Division Located in the II Region, Codelco Norte Division was created on August 1st 2002, by the fusion of the former Chuquicamata and Radomiro Tomic Divisions. The exploitation of Chuquicamata, the largest open pit mine in the world, started in 1910. It is located 250 Km northeast of Antofagasta and 1,600 Km north of Santiago. During 2002, Chuquicamata produced 596,743 metric tons of fine copper, with a cash cost of 39.6 c/lb. As of December 31st, 2002, the mine employed 7,286 workers. Radomiro Tomic started operations in 1997. It is located at 3,000 meters above sea level and at 45 Km of Calama, in the II Region. During 2002, Radomiro Tomic produced 297,119 metric tons of fine copper, with a cash cost of 32.8 c/lb. As of December 31st, 2002, the mine employed 681 workers. Salvador Division Located in the III Region, Salvador Division started operations in 1959 with a smelter and electrolythic refinery. Since 1995, it incorporated an hydrometallurgical line with a production of 25 thousand metric tons of fine copper a year, from its open pit mine. Currently, the Division exploits sulfide and oxide ores, each at a different copper benefitiation plant. Its main products are electrorefined and electrowinning cathodes, anodic slimes and molybdenum concentrate. During 2002, Salvador produced 72,819 metric tons of fine copper, with a cash cost of 69.4 c/lb. As of December 31st, 2002, it employed 1,906 workers. Codelco’s mission is to fully develop its mining and related business skills in a responsible and flexible manner, in order to maximize its long-term economic value and its contribution to the country. Andina Division Andina is located right on the Andean Range, in the V Region, 80 Km northeast of Santiago. It started operating in 1970. Andina has two mines: Río Blanco, underground mine; and Sur Sur, an open pit mine. Currently, both exploit sulfide ores. Its main products are copper and molybdenum concentrates. During 2002, Andina produced 218,706 metric tons of fine copper, with a cash cost of 49.7 c/lb. As of December 31st, 2002, it employed 1,154 workers. El Teniente Division The world´s largest underground mine, with some 2,400 Km of underground tunnels, is located at 2,100 meters above sea level and 44 Km east of Rancagua, VI Region. This mine has been exploited since 1904. The exploitation method used is block caving, in which gravitational force aids the mining extraction. Its main products are blister (fire refined) copper, electrowinning cathodes and molybdenum concentrate. During 2002, El Teniente produced 334,306 metric tons of fine copper, with a cash cost of 40.3 c/lb. As of December 31st, 2002, it employed 5,085 workers. Talleres Division It is located in the southern part of the city of Rancagua, VI Region, 80 Km south of Santiago. This metal-mechanic Division was established in November 1992 with the main functions of mechanical workshop and foundry. Talleres Division manufactures and repairs mining and crushing equipment and spare parts; as well as casting steel and bronze. Its production supplies local and foreign clients of the mining and metallurgic area. Index 14 Letter from the Chairman of the Board 24 Joint Strategic Plan 16 Letter from de President & CEO 32 Strategic plan 18 Board of Directors 19 Senior Officers 48 Economic-financial results 20 Highlights 58 Subsidiaries and associations Produciendo Futuro 22 Corporate profile 23 History 76 Financial statements Letter from the Chairman of the Board Thirty two years ago I started my professional career at Codelco, at the same time that, with the agreement of all political actors, the large scale mining companies Codelco became the property of all Chileans. Hard times, in 14 which many did not trust the capacity of our technicians, professionals and workers to manage this vital wealth for the national development. At the beginning of 2002, His Excellency the President of Chile conferred me the honor of appointing me Minister of Mining and, as such, Chairman of the Board of Codelco. I found a fully consolidated company with a clear world leadership position within the copper industry. Notwithstanding this, and in view of the changes and challenges of the sector, I also found a company requiring great modifications and ambitious projects in order to maintain that position. In view of this, Codelco has embarked in its most ambitious project yet to increase its value and, as a consequence, to generate the largest profits of its history. This project is based on the optimization of the mining resources, facilities and equipment, maximization of the potential of its human team and investing in increased low cost production. In order to achieve this, the Joint Strategic Plan was agreed, in which the workers, the technical and professional staff adopted a commitment to carry out the changes necessary to reach the proposed goals. Thus, all of them as well as the Board are committed to carry forward this plan, which is critical for the future economy of the country. The year 2002 was a difficult one for the mining and copper industry, as well as for Codelco. In spite of this, the company increased its operating income and, more importantly, was able to continue consolidating its value increase project. We want this income to augment even further in the future and that is what we are working for. We also want the company to continue contributing to the social and economic development of the communities where it operates and that is why we are committed to the Good Neighbor policy. 15 Chile has put in our hands the responsibility of efficiently managing our main industry. The historical results Annual Report 2002 show that we are capable of insuring that we will meet the challenge for the benefit of all Chileans. I would like to thank the workers, technicians and professionals, as well as the members of the Board of Codelco for their great effort and commitment with the company. Alfonso Dulanto Rencoret Minister of Mining Letter from the President & Chief Executive Officer During 2002, we have faced major challenges. We revised our business model and have introduced deep transformations in our organization. At the same time, we were able to achieve demanding investment goals and to generate a higher operating income than the previous year. More importantly, we have set the foundations to maximize the business potential of the Corporation and to thus meet the commitment of doubling its economic value, for the benefit of all Chileans. Codelco 16 In order to double Codelco´s value we need to optimize the exploitation of our mining resources and our facilities and equipment; to make the most of the creativity, initiative, expertise, knowledge and professional capacity of our executive staff and workers, and to efficiently invest in increasing low cost production. Our challenge is to use the great advantage represented by the fact that all our mines and industrial plants, as well as the major reserves and mining resources available, are all concentrated in few development poles, all of them within Chile. Our choice has been “Codelco: only one company” and to encourage the “Codelco way to do things”, in order to give rise to a new organization that seeks: • To centralize strategic thinking and leadership, while decentralizing the operation; • to structure the business from the main components of the value chain, emphasizing the economic optimization of the development and exploitation of the mining resources; • to capture the potential of synergies, harmonizing policies and processes, concentrating activities where there are economies of scale, and encouraging the dissemination and adoption of better practices, and • to encourage the development, reconversion and mobility of its executive staff and workers. Initiatives such as the merger of the Chuquicamata and Radomiro Tomic Divisions into the new Codelco Norte Division, the shared administrative services, the executive staff development plan, the protocol of stability through competitiveness, the convergence towards a unique model of capacities, the career development and continuous training, are concrete expressions of the ongoing change. Simultaneously with promoting the change, we have accelerated the investment plan. During the year we invested in the order of US$ 850 million in mining projects, a figure that is among the highest of the last decade. To partly finance this investment and to take advantage of the low interest rates, we placed long-term bonds for US$ 165 million and US$ 435 million in the local and international capital markets, respectively. In both cases, the demand for these bonds greatly exceeded our expectations and we obtained exceptional conditions. In view of the complex scenario of the international market, we fostered a policy of inventory control and stabilization, aimed at preventing their growth. In late 2001 we announced that we would revise our mining plans and that, as a consequence, would decrease our programmed production for 2002 in 106,000 tons of fine copper, a commitment which we have respected.