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Antofagasta PLC13 March 2007 Antofagasta plc Preliminary Results Announcement for the year ended 31 December 2006 13 March 2007 HIGHLIGHTS • Record financial results with profit before tax up 86% to US$2,859 million (2005 - US$1,536 million). The Group benefited from record copper prices in 2006 with copper production above forecast at all three mines, molybdenum production 13% above the previous year and strong performances from the transport and water divisions. This helped offset the effects of lower molybdenum prices and expected higher operating costs due mainly to industry pressures. Total income tax expense in Chile (including corporation, mining and withholding taxes) on profits and dividends relating to the year amounted to US$665 million (2005 - US$308 million); these amounts have either been paid or are due for settlement in the first half of 2007. • Total dividend for the year up 119% to 48.2 cents per share. The final dividend proposed for 2006 is 43 cents, comprising an ordinary dividend of 5 cents and a special dividend of 38 cents. • Continued progress with key capital projects. The 140,000 tonnes per day plant expansion at Los Pelambres is substantially complete five months ahead of schedule and construction at the Mauro tailings dam is scheduled to be completed by the end of 2007. • Consolidation of existing operations. The Group now owns 100% of El Tesoro following the acquisition of Equatorial Mining Limited in August 2006. This has increased attributable copper production. • Feasibility studies initiated in 2006 to increase Group production. The Esperanza study should be completed in April 2007, with expected ore throughput of 90,000 tonnes per day and possible start-up during 2010. A study was also started for the increase of throughput at Los Pelambres to 175,000 tonnes per day. • Acquisition of new exploration interests outside Chile. During 2006, the Group established new ventures for exploration in Pakistan, Colombia and Ecuador. Marcelo Awad, Chief Executive Officer of Antofagasta Minerals S.A., commented: "We are delighted with the progress of the Group during 2006 with the recordresults, record dividend and substantial progress towards the Group's objectivesin production levels, new mines and exploration potential. The copper market hasdeclined somewhat since mid-December, although more recently appears to haverebalanced. We currently expect the copper and molybdenum markets to remain wellabove historical levels in 2007 with the potential, through the year, for copperprices to recover from recent weakness and molybdenum prices to continue ontheir upward trend of recent months. However, the exceptional average copperprice of 2006 might not be repeated and the recent volatility that hascharacterised the market is likely to continue." Antofagasta is a Chilean-based mining group listed in the United Kingdom. Inaddition to copper mining, its interests include rail and road transportoperations and water distribution. FULL YEAR TO 31 DECEMBER 2006 2005 % Change---------------------------- -------- ------ ------ --------Group turnover US$'m 3,870.0 2,445.3 58.3%Cash flow from operations US$'m 2,810.1 1,647.5 70.6%Profit before tax US$'m 2,859.0 1,536.3 86.1%Earnings per share 1 cents 137.4 73.6 86.7%Total dividends per share 1,2 cents 48.2 22.0 119.1%LME copper price (per pound) cents 305.3 167.1 82.7%Group copper production '000 tonnes 465.5 467.3 (0.4)%Group weighted average cash costs 3 (netof by-product credits) cents 40.2 13.9 189.2%Group weighted average cash costs 3excluding by-product credits cents 95.6 77.3 23.7%Market molybdenum price (per pound) US$ 24.8 32.0 (22.5)%Group molybdenum production '000 tonnes 9.8 8.7 12.6%---------------------------- -------- ------ ------ -------- 1 Earnings per share and dividends per share have been restated for the effectsof the 4-for-1 bonus issue on 19 June 2006. 2 Dividends are paid in either sterling or US dollars. The conversion rate fordividends to be paid in sterling will be set on 15 May 2007. 3 Cash cost is a method used by the mining industry to express the cost ofproduction in cents per pound of copper, and is further explained in Note 28(b)(iii). Enquiries - London : Antofagasta plc Issued by : Bankside Consultants Tel: +44 20 7808 0988 Tel: +44 20 7367 8873www.antofagasta.co.uk Keith Irons Email: keith@bankside.com Desmond O'Conor Email: doconor@antofagasta.co.uk Tel: +44 20 7367 8874 Oliver WintersHussein Barma Email: oliver.winters@bankside.com Email: hbarma@antofagasta.co.uk Enquiries - Santiago : Antofagasta Minerals S.A. Tel +562 377 5145Alejandro RiveraEmail: arivera@aminerals.cl DIRECTORS' COMMENTS FOR THE YEAR TO 31 DECEMBER 2006 Overview The Group has reported a set of record results, with net earnings up 86.6% toUS$1,354.3 million and cash flow from operations up 70.6% to US$2,810.1 millioncompared with 2005. These results were achieved against a background of strongmetal prices combined with a sound performance from all the Group's operations. Copper prices averaged 305.3 cents per pound in 2006, supported by strong marketfundamentals. While some weakening occurred in the fourth quarter with reducedconsumption in the United States and a prolonged de-stocking process in China,the market more recently appears to have rebalanced. The Group currently expectsthe copper market to remain well above historical levels in 2007 and 2008,though the exceptional prices of 2006 might not be repeated and the recentvolatility that has characterised the market may continue. The copperconcentrate market has moved into sharp deficit, and should result in lowersmelting and refining charges in 2007. Molybdenum prices, while lower than 2005,remained at very high levels throughout 2006 at an average of US$24.8 per pound,and strong demand should continue to support prices in 2007. All the Group's operations performed well in 2006. Group copper production was465,500 tonnes, 5.4% ahead of the original forecast for the year of 441,500tonnes, with all three mines ahead of target. Molybdenum production at LosPelambres reached a record 9,800 tonnes and both the transport and waterdivisions increased volumes as new contracts with mining customers have startedto come on stream. As expected in these tight markets, cost pressures havecontinued. Weighted average cash costs were 40.2 cents per pound compared with13.9 cents per pound in 2005. This was due to a combination of higher on-sitecosts as expected, increased tolling charges mainly due to price participationwith smelters, and reduced by-product credits from lower molybdenum prices. Los Pelambres has progressed with both its capital projects. The plant expansionto 140,000 tonnes of ore throughput per day was substantially completed fivemonths ahead of schedule by the end of 2006. Los Pelambres expects constructionof the Mauro tailings dam, where it believes all permits granted have beenproperly applied for and issued, to be completed by the end of 2007. During 2006, Los Pelambres also initiated a feasibility study to consider afurther expansion of the concentrator plant to 175,000 tonnes per day whichshould be completed later this year. An expansion of this size is within thescope of the existing environmental approval which was granted in 2004. Thefeasibility study for Esperanza is progressing well and should be completed asexpected by April this year. This currently envisages average annual productionof 175,000 tonnes of copper and 197,000 ounces of gold based on a ore throughputrate of 90,000 tonnes per day. 2006 was also an important year in meeting the Group's objectives for securingnew growth opportunities. The Group completed the acquisition of Tethyan CopperCompany Limited and established a joint venture with Barrick Gold Corporationover Tethyan's mineral interests in Pakistan. It also acquired Equatorial MiningLimited; this has increased the Group's interest in El Tesoro to 100% and hasconsolidated its land position in the Sierra Gorda district in Chile's SecondRegion. The agreements with AngloGold Ashanti and Ascendant Copper Corporationhave provided exploration interests in Colombia and Ecuador respectively. In September 2006, Mr. Philip Adeane retired having served as Managing Directorfrom 1982 to 2005 and as a Non-Executive Director thereafter. The Board wouldlike to thank him for his enormous contribution over a long period of time whichhas seen the transformation of the Group into a major copper producer. Hecontinues to act as a senior advisor to the Board following his retirement. Mr.William Hayes joined the Board as an independent Non-Executive Director inSeptember. Mr. Hayes was previously a senior executive with Placer Dome Inc.and a former president of the Consejo Minero in Chile. He has extensiveknowledge and experience of the mining industry both in Chile and globally whichwill benefit the Group in its future development. The Board has announced a final dividend for 2006 of 43 cents per ordinaryshare, comprising an ordinary dividend of 5 cents and a special dividend of 38cents. This gives a total dividend for the year of 48.2 cents, representing adistribution of 35% of 2006 net earnings and a 119% increase over 2005. TheBoard believes this combines its desire to return cash to shareholders in a yearof strong results with the ability to develop the Group's existing opportunitiesfor growth. The Board will also continue to seek new opportunities globally tosecure further world class mining assets. Review of Operations Los Pelambres Los Pelambres had a record year with operating profit up 64.7% to US$2,223.7million, compared with US$1,350.4 million in 2005. Realised copper prices were335.0 cents per pound (2005 - 189.2 cents per pound). This reflected strong LMEprices and pricing adjustments on settlement of provisional sales, although thebenefit of these adjustments were partly offset by lower copper prices in thelast quarter of the year. Realised molybdenum prices decreased to US$24.6 perpound (2005 - US$31.4 per pound), reflecting lower market prices. Furtherdetails of pricing adjustments are given in the Financial Commentary on page 12. Los Pelambres produced 324,200 tonnes of payable copper (2005 - 322,800 tonnes).This exceeded the original forecast for 2006 of 308,000 tonnes, with better thanexpected ore grades of 0.81% (compared with initial estimates for the year of0.77%) and completion of the concentrator plant expansion ahead of schedule,which enabled the ore throughput to average 127,400 tonnes per day (despitelower throughput in the first half when harder rock was processed) and to reachnearly 140,000 tonnes per day in the final quarter of the year. This comparedwith ore grades of 0.80% and throughput of 128,100 tonnes per day in 2005. Molybdenum production reached 9,800 tonnes (2005 - 8,700 tonnes), an increase of12.6% due to improved molybdenum grades in the area mined during the year by LosPelambres. The improved production mitigated the impact of lower molybdenumprices in the year. Cash costs, which are stated net of by-product credits, averaged 16.4 cents perpound in 2006 compared with negative 17.1 cents per pound in 2005. The increasewas due to a combination of lower by-product credits, higher tolling charges andincreased on-site and shipping costs. By-product credits decreased by 12.1 centsper pound mainly due to the lower realised molybdenum prices. Tolling chargeswere 12.1 cents per pound higher mainly as a result of price participation withsmelters as the average LME copper price increased significantly in 2006.On-site and shipping costs averaged 56.4 cents per pound in 2006, in line withexpectations but 9.3 cents per pound above 2005 mainly as a result of costpressures including oil, plant and machinery hire and freight costs. During 2006, Los Pelambres further reduced its borrowings with repaymentstotalling US$81.3 million. Total borrowings were US$314.8 million at 31 December2006. Continued progress was made with two major capital expenditure programmes, theMauro tailings dam project and the expansion of the concentrator plant, both ofwhich are being financed out of Los Pelambres' cash resources. The Mauro tailings dam will, together with the existing Quillayes tailings dam,provide Los Pelambres with sufficient storage capacity for its 2.1 billiontonnes of existing ore reserves, thereby supporting its mine plan to 2047. Workon the Mauro tailings dam began at the end of 2004 following approval of theEnvironmental Impact Study earlier that year and necessary sectoral permits weregranted during 2005. In November 2006, the Court of Appeals of Santiago upheld achallenge by claimants in the Pupio Valley against the Chilean Water Authority(Direccion General de Aguas) in relation to the award of one of these sectoralpermits. In December, however, the Court of Appeals rejected a second request bythe claimants that work on the dam should be suspended, and confirmed that LosPelambres was entitled to continue construction pending a final resolution bythe Chilean Supreme Court, to whom Los Pelambres have appealed as an affectedparty together with the Direccion General de Aguas. Los Pelambres continues tobelieve that all the technical and legal permits it has received have beenappropriately applied for and granted and is confident that this view will beupheld by the Chilean Supreme Court. Construction is continuing on schedule.There are other claims at first instance currently in the Chilean courts againstthird parties (either governmental authorities or former owners of land in theEl Mauro area). These claims are not against Los Pelambres, but in some casesthe company has intervened in case an eventual judgement affects the project.The Mauro tailings dam was 66% complete by the end of 2006 with US$323 millionspent to that date. It is expected to be completed during 2007 at a total costof approximately US$534 million. Expansion of the concentrator plant to 140,000 tpd was started in mid-2005,through re-powering the grinding lines and installing a fifth ball mill. Theprincipal elements of this project were completed by November 2006 with thestart-up of the fifth ball mill, and throughput in the last quarter of 2006reached an average of 139,100 tonnes per day. By the end of 2006 US$145 millionhad been spent on this project which remains within its original budget ofUS$182 million. In July 2006, Los Pelambres initiated a feasibility study for a furtherexpansion of the concentrator plant, through additional infrastructure includinga third SAG mill and a sixth ball mill. This study is expected to be completedby mid-2007. In January 2007, the Los Pelambres board approved initialexpenditure of US$113 million for the first steps in an expansion of up to175,000 tonnes per day. This expansion is within existing environmental permits.During 2006 Los Pelambres also started an exploration programme to identifyfurther reserves. Further details are given under "Projects, exploration and newopportunities" below. In 2007, the ore processing level is expected to average 134,200 tpd as thebenefits of the plant expansion are partly offset by harder rock in the currentphase of the mine plan. The ore grade is expected to average 0.74%. As a result,copper production in 2007 is expected to be around 321,000 tonnes, compared with324,200 produced in 2006. The production level should increase in 2008 whenhigher ore grades are expected. Molybdenum production in 2007 is forecast toincrease to around 11,000 tonnes (compared with 9,800 tonnes in 2006) throughthe combination of the higher processing levels and marginally better gradesaveraging 0.029% compared with 0.028% in 2006. Cash costs before by-product credits are expected to increase from 96.1 centsper pound in 2006 to approximately 100 cents per pound in 2007, as lower tollingcharges are offset by increased on-site and shipping costs, partly due toindustry pressures but also due to the effect of the lower ore grade in theyear. Nevertheless, molybdenum prices remain strong and Los Pelambres shouldcontinue to benefit from substantial by-product credits. El Tesoro Operating profit at El Tesoro rose by 137.1% from US$172.9 million in 2005 toUS$409.9 million this year. Realised copper prices were 316.4 cents per pound,compared with 175.7 cents per pound last year, reflecting the improved LMEprices, strong premiums due to the tight cathode market and pricing adjustmentson the close-out of cathode sales. Production at El Tesoro was 94,000 tonnes (2005 - 98,100 tonnes). As expected,lower ore grades of 1.16% (2005 - 1.23%) offset the increase in ore throughputfollowing the plant expansion carried out in 2005. Production was neverthelessahead of the original forecast for 2006 of 91,600 tonnes. Cash costs rose in line with forecasts to 78.6 cents per pound compared with66.1 cents in 2005. The expected increase resulted from a combination of inputcost pressures (including exchange rates and inflation) and operational factors,including higher acid consumption due to an increased level of carbonates andthe effect of the lower ore grade on production. El Tesoro's results were alsoaffected by commodity hedging implemented in 2005, which reduced operatingprofit in 2006 by US$44.8 million (2005 - US$24.8 million). This hedgingprogramme ended in December 2006. As explained under "Projects, exploration and new opportunities" below, theacquisition of Equatorial Mining Limited in August of 2006 has increased theGroup's interest in El Tesoro from 61% to 100%. During the year, El Tesoro reduced its borrowings by US$28.0 million to US$28.1million at 31 December 2006. This included a voluntary prepayment of US$14.0million. In 2007, El Tesoro expects to produce approximately 90,000 tonnes of cathodesmainly reflecting lower recoveries compared with 2006, together with a marginaldecline in the ore grade to around 1.15%. Cash costs are expected to beapproximately 100 cents per pound, reflecting the impact of lower production,the higher waste-to-ore ratio and increased acid consumption, as well as othercost factors including exchange rates and local inflation. Michilla Operating profit in 2006 increased to US$145.5 million compared with a loss ofUS$31.1 million in 2005, as Michilla benefited from the strong commodity marketin 2006. Realised copper prices were 318.5 cents per pound (2005 - 177.1 centsper pound), reflecting strong cathode premiums and positive pricing adjustmentsin addition to strong LME prices. Cathode production in 2006 was 47,300 tonnes,a 1.9% increase over the 2005 production level of 46,400 tonnes. This resultedfrom increased throughput and higher recoveries, partly offset by the lower oregrade. Production was also ahead of the original forecast for 2006 of 41,900tonnes. Cash costs for 2006 were 126.4 cents per pound, marginally lower than forecastbut 7.6 cents per pound higher than 2005. The increase was mainly due to thehigher cost of processing third party ore and, to a lesser extent, higher inputcosts. Hedging losses at Michilla amounted to US$39.7 million (2005 - US$43.8million) as a result of the completion of the commodity hedging programmeentered into during 2005. Michilla completed a technical review of its resources in November 2006, and itsrevised mine plan envisages a three year remaining mine life to 2009, withaverage annual production of approximately 39,000 tonnes and average cash costsof approximately 130 cents per pound. For 2007, production is expected to beapproximately 45,000 tonnes with cash costs of 136 cents per pound. In December2006, Michilla, which is the Group's highest cost mine, hedged approximately 48%of its expected 2007 production through min/max and futures. Further details aregiven in the Financial Commentary on page 15 and in Note 4(b) to the preliminaryresults announcement. Railway and other transport services Rail and road transport volumes in 2006 were 4.5 million tons (2005 - 4.3million tons) and 1.5 million tons (2005 - 1.5 million tons) respectively. Railvolumes were 3.5% above 2005 due to increases across various mines and thestart-up of the Spence copper project. Operating profit (excluding income fromassociates) was US$32.6 million (2005 - US$27.4 million). The medium to longer term prospects of the FCAB, the Chilean railway network,remain very positive, with expected additional volumes in 2007 from contractswith the Spence and Escondida sulphide leach projects in Chile and the SanCristobal project in Bolivia. These three projects are expected to addapproximately one million tonnes to existing rail volumes in 2007 and a further500,000 tonnes from 2008. In addition, in December 2006 the FCAB signed acontract with Coldeco's Gaby project; this is expected to add approximately600,000 tonnes in 2008 increasing to one million tonnes by 2011. Aguas de Antofagasta Aguas de Antofagasta had a successful year of operations. Water sales increasedby 14.3% from 33.1 million cu. m. in 2005 to 37.8 million cu. m. this year, as aresult of higher domestic consumption and increased sales to industrialcustomers; this included 2.3 million cu. m. to Spence which started operationsduring the second half of 2006. Aguas de Antofagasta also benefited from thestrengthening of the Chilean peso (the currency in which the majority of itssales are denominated) against the US dollar in 2006. Accordingly, operatingprofit increased to US$31.5 million compared with US$25.1 million in 2005.During 2006, Aguas concluded four-year labour agreements with its two unionswith a real increase in wages of approximately 4% over the four years. It alsosuccessfully completed its 5-yearly regulatory review of domestic tariffs in theyear which resulted in an anticipated average reduction in tariffs compared withprevious levels of approximately 5% from July 2006. The prospects for Aguas de Antofagasta remain good, with total water volumesexpected to continue to increase as sales to Spence eventually reachapproximately 4.7 million cu. m. per year. Projects, exploration and new opportunities Esperanza The Group's principal new project is Esperanza, located approximately fivekilometres from the El Tesoro oxide deposit. Esperanza has drill-inferredresources of 786 million tonnes of sulphide ore with an average copper grade of0.53%, an average gold grade of 0.20 g/t, and an average molybdenum grade of0.012%, at a cut-off grade of 0.3% copper. It also contains a low grade oxidedeposit with a drill inferred resource of 73 million tonnes of ore with anaverage copper grade of 0.42%. Pre-feasibility work, which commenced in 2004,was completed in August 2006 at a cost of US$14.8 million, within the originalbudget of US$15.3 million. This included a 2.3 kilometre exploration decline fordetailed metallurgical testing of ore. In August 2006, Aker Kvaerner began a feasibility study. This was approximately80% complete by February 2007 with US$12.3 million spent out of a total budgetof US$16.9 million. This is expected to be completed on schedule in April 2007at the budgeted cost of US$16.9 million. The study currently contemplates aconcentrator plant with daily throughput of up to 90,000 tonnes per day of oreand with average annual production of approximately 175,000 tonnes of payablecopper and 197,000 ounces of gold over the first 13 years of operation, althoughproduction will be below this level in the earlier years when lower grades aremined. An Environmental Impact Assessment is expected to be submitted in thesecond quarter of this year and, subject to approval by the relevantauthorities, a decision to proceed with project development could be taken inthe second half of 2007 with an estimated 30-month pre-stripping programmebeginning by the end of the year, and possible start-up of operations in thethird quarter of 2010. Reko Diq (Tethyan Copper Company Limited) In April 2006, the Group acquired a 100% interest in Tethyan Copper CompanyLimited ("Tethyan"), a company then listed on the Australian Stock Exchange withcopper-gold interests in Pakistan, for a cash consideration of US$170.4 million.In September, it entered into a joint venture over Tethyan's mineral interestswith Barrick Gold Corporation ("Barrick Gold"), through the indirect disposal ofa 50% interest in Tethyan to Barrick Gold for a cash consideration of US$86.8million. In November, the Group and Barrick Gold each contributed US$30 millionto extinguish a "claw-back right" held by BHP Billiton over certain of Tethyan'smineral interests. Tethyan's principal assets are a 75% interest in the exploration licenceencompassing the Reko Diq prospect in the Chagai Hills region of South-WestPakistan (in which the Government of Balochistan holds the remaining 25%)including the Tanjeel Mineral Resource and the Western Porphyries, and a 100%interest in certain other licences in the region. Tethyan has reported totalindicated and inferred mineral resource estimates at these properties of 2.4billion tonnes with a copper grade of 0.51% and a gold grade of 0.27g/t. In June 2006, an 18-month programme was initiated with a current budget ofUS$30.5 million. This comprises exploration, including a drilling programme ofapproximately 94,000 metres focused mainly on the Western Porphyries and, in thelater stages, initial pre-feasibility work on the prospects identified. By theend of 2006, approximately 25,000 metres of drilling had been completed andcosts of US$7.9 million incurred. Preliminary results are encouraging and a newresource estimate is expected to be completed by the end of this year. During2007, Tethyan will analyse possible project scenarios and consider eventualinfrastructure requirements. Support from both the Federal Government of Pakistan and the Government ofBalochistan for the development of a project has been strong, and discussionsare in progress to establish a foreign investment protection agreement. TheGroup considers that the long-term potential of the investment in Tethyanremains promising. Acquisition of Equatorial Mining Limited and development of the Sierra Gordadistrict In August 2006, the Group acquired 100% of Equatorial Mining Limited, a companythen listed on the Australian Stock Exchange, at a cost of US$406.1 million (orUS$288.1 million net of cash balances acquired). Equatorial's principal asset isa 39% interest in Minera El Tesoro in which the Group held the remaining 61%,together with mining and water rights in the Sierra Gorda district in Chile'sSecond Region. An agreement to sell Equatorial's North American interests wasreached in December 2006 and the proceeds of US$4.9 million were received inJanuary 2007. The acquisition of Equatorial has consolidated the Group's position in theSierra Gorda district where it either wholly owns or has a 51% controllinginterest in a number of mining properties containing oxide and sulphideresources. As was announced in 2001, these properties were part of a portfolioacquired from the Luksic family who hold the remaining interest. During 2007,the Group will continue examining its prospects in this area. Colombia - joint venture with AngloGold Ashanti In July 2006, the Group signed a Head of Terms agreement with AngloGold AshantiLimited ("AngloGold"), one of the world's largest gold producers. This sets outthe terms of the proposed Southern Colombia joint venture agreement to explore,discover and develop copper and gold mining projects in an area of interest insouthern Colombia extending approximately 30,000 square kilometres. AngloGoldhas agreed to contribute its mineral interests in the area covered by the jointventure and Antofagasta has committed to funding US$1.3 million in explorationcosts over a period of twelve months. The agreement allows Antofagasta to fundan additional US$6.7 million in exploration costs within four years(representing a total contribution of US$8.0 million), in order to earn a 50%interest in the joint venture. The Group spent US$0.9 million under thisagreement during 2006. Ecuador - Agreement with Ascendant Copper In November 2006 the Group signed a Letter of Agreement with Ascendant CopperCorporation ("Ascendant"), a mining company listed on the Toronto StockExchange, to acquire an interest in Ascendant's Chaucha Project. The ChauchaProject is a copper-molybdenum prospect located in the Western Cordillera of theAndes in southern Ecuador, approximately 70 kilometres west of the town ofCuenca. The mineral concession covers an area of 2,544 hectares withapplications by Ascendant in progress for further mineral concessions from theappropriate government entities. The Group has committed to fund at least US$1million of expenditure; this includes reimbursement of prior expenditures ofapproximately US$0.5 million to be made when the additional concessions havebeen contributed. The Group will subsequently earn an equity interest of up to60% in successive stages by spending a total of US$40 million over a six-yearperiod in four distinct phases of qualifying expenditures. These expenditureswill cover exploration and advancement costs including, in the later phases,preparation of a feasibility study and a final payment on completion toAscendant. Los Pelambres As part of its review for possible expansion, Los Pelambres commenced a two-yearprogramme to identify additional deposits beyond the existing 2.9 billion tonneresource, both by drilling the areas surrounding the current mine plan as wellas drilling the existing open pit in greater depth. During 2006, a drillingprogramme of 14,500 metres was conducted at a cost of US$3.5 million. Theprogramme is expected to be completed in 2007. Antucoya - Buey Muerto In May 2006, the Group acquired the Antucoya property from Soquimich for US$8.0million plus a future net smelter return (i.e. royalty payment). Antucoya isestimated to contain 322 million tonnes of oxide ore with an average coppergrade of 0.4%, and is adjacent to Buey Muerto, a deposit which is estimated tocontain 138 million tonnes of oxide ore with a grade of 0.43%. The Group has a51% interest in Buey Muerto, which was acquired on the same terms as the SierraGorda properties referred to above. The Group is currently conducting initial engineering and technical studies aswell as further drilling to examine the viability of on-site leaching of thedeposits to provide enriched solution to utilise any excess capacity atMichilla's SX-EW plant. 19,000 metres of drilling had been completed by the endof 2006 and the studies are expected to be concluded in the second half of 2007. Peru - Cordillera de Las Minas S.A. On 2 March 2007, the Group agreed to sell its 50% interest in Cordillera de LasMinas S.A. ("CMSA") to Panoro Minerals Limited ("Panoro"), a company listed onthe TSX Venture Exchange. CMSA was the joint venture entity with Companhia ValeRio Doce ("CVRD") through which its interests in southern Peru were held. TheGroup's share of the consideration comprises US$6 million plus 6 million sharesin Panoro. The agreement is subject to a number of conditions includingfinancing by Panoro and regulatory approvals. Subject to these conditions beingmet, closing is expected to occur by June 2007. Peru remains an area of focus for the Group and it will continue to look forsuitable opportunities in that country. Dividends Dividends per share proposed in relation to the year are as follows: US dollars Percentage change 2006 2005 1 2004 1 06 v 05 05 v 04 cents cents cents change change -------- -------- -------Ordinary Interim 3.2 3.2 3.0Final 5.0 4.8 4.8 -------- -------- ------- 8.2 8.0 7.8 2.5% 2.6% -------- -------- -------Special Interim 2.0 - -Final 38.0 14.0 8.0 -------- -------- ------- 40.0 14.0 8.0 -------- -------- -------Total dividends to ordinaryshareholders 48.2 22.0 15.8 119.1% 39.2% ======== ======== ======= PercentageDividends as a percentage ofprofit attributable toequity shareholders 35% 30% 27% ======== ======== ======= 1 Dividends per share have been restated for the effects of the 4-for-1 bonusissue on 19 June 2006. 2 Further details relating to dividends are given in Note 8 to this PreliminaryResults Announcement. The Board recommends a final dividend of 43 cents per ordinary share payable on14 June 2007 to shareholders on the Register at the close of business on 11 May2007. The final dividend comprises an ordinary dividend of 5 cents and a specialdividend of 38 cents. Including the interim dividend, this represents adistribution of approximately 35% of net earnings (profit attributable to equityholders of the Company) after taking into account withholding taxes incurred bythe Group in funding the dividend. The Board's policy is to establish an ordinary dividend which can be maintainedor progressively increased at conservative long-term copper prices and throughthe economic cycle. The Board recommends special dividends when it considersthese appropriate after taking into account the level of profits earned in theperiod under review, the existing cash position of the Group and significantknown or expected funding commitments. As can be seen from the above table, theBoard has increased its recommended dividends in line with profits by means ofspecial dividends in these years of high copper prices. The cost of the final dividend, including related withholding taxes, isapproximately US$541 million. This compares with a net cash position (on anattributable basis) of US$1,363 million. The Board considers this to be anappropriate level of distribution of profits earned in the year. In determiningthis, it has taken into account its existing capital commitments, workingcapital requirements and the balance of taxes (including withholding taxes)accrued for profits earned in 2006 and to be paid in 2007. The Board has alsoconsidered the potential future capital requirements of the Group which couldamount to approximately US$3 billion over a number of years should it proceedwith its existing portfolio of projects and opportunities; it believes theseopportunities remain attractive for the long-term development of the Group evenin an environment of lower copper prices. The Board also considers that thisprovides the Group with sufficient flexibility to take advantage of newopportunities which may arise in the future. Current Trading Prospects Fundamentals for the copper market remained very strong in 2006, characterisedby low inventories and high financing costs for fabricators. LME copper priceswere over 300 cents per pound for most of the year, having started at just over200 cents per pound. The market weakened in the final quarter of the year withreduced consumption in the United States and a prolonged de-stocking process inChina, combined with increased mine production and availability of scrap inresponse to the high prices. With increasing inventory levels, LME copper pricesfell in February 2007 to around 240 cents, 40% below the peak reached in May2006. More recently, however, the market appears to have rebalanced, as thede-stocking phase in China has declined or possibly ended. In 2007, demand isexpected to continue to grow as increased Chinese consumption and possiblere-stocking should help offset the effects of a moderate slowdown in the UnitedStates. Supply is also expected to increase but remains vulnerable to declininggrades and other constraints including equipment availability, labour shortagesand power and water supplies. Most commentators expect the market in 2007 tofinish in a modest surplus, although forecasts range considerably. Total stocksremain low at approximately 2.5 weeks' consumption, and this should help supportprices well above historical levels. For 2007, consensus estimates are for anaverage copper price of above 260 cents, and around 230 cents in 2008. Theincreased role of investment funds in commodity markets has made base metalprices more sensitive to changes in sentiment, and accordingly copper prices areexpected to remain volatile. The concentrate market moved sharply in favour of producers through 2006, asexpansion of smelter capacity has not been matched by corresponding increases inmine capacity. With concentrate stocks at already low levels, a significantdeficit in the concentrates market is expected in both 2007 and 2008. This hasresulted in improved terms for producers with settlements for the annualnegotiations at the level of US$60 per dry metric tonne of concentrate forsmelting and 6.0 cents per pound of copper for refining with price participationof nil, compared with US$95 and 9.5 cents respectively and price participationat 10% above a copper price of 90 cents per pound. While this shouldsignificantly benefit producers, the impact will be partly mitigated by the"brick system" whereby the benchmark is often averaged over two years. Molybdenum prices remained comparatively stable throughout 2006, averaging justunder US$25 per pound. The market is expected to remain strong, with continueddemand from the steel and catalyst sectors combined with limited supplyincreases. Inventory levels for molybdenum remain low and this market alsoremains vulnerable to supply disruption. Group copper production for 2007 is expected to be approximately 456,000 tonnes,a moderate decline of 2% from 2006 mainly as a result of minor reductions ateach of the Group's operations. Attributable copper production shouldnevertheless be higher following the increase in the Group's interest in ElTesoro to 100% during 2006. Cash costs will increase at the Group's three minesas a result of both industry pressures and mine specific factors, although thesewill be partly offset by lower tolling charges and strong by-product credits. In2008, Group copper production is expected to increase as ore grades recover atLos Pelambres. 2006 has been a very successful year for the Group. The excellent resultsachieved have been supported by strong market conditions and sound operatingperformances by all divisions. The Group has progressed well with its capitalprojects, and its growth opportunities have been enhanced through itsacquisitions and the new ventures established. It intends to build on these in2007, a year in which it currently expects to be supported by favourable marketconditions. The Group believes it has a number of prospects that couldsubstantially enhance its current production profile in the medium to longerterm, and it intends to use its sound financial position to advance its existingassets and properties while continuing to seek opportunities globally to securefurther world-class mining assets. FINANCIAL COMMENTARY FOR THE YEAR TO 31 DECEMBER 2006 Results Turnover Group turnover increased by 58.3% to US$3,870.0 million, compared withUS$2,445.3 million in 2005. The increase was mainly due to very strong LMEcopper prices which increased to an average of 305.3 cents per pound, 82.7%above the 2005 financial year. The Group also benefited from improved molybdenumvolumes and higher sales at the transport and water divisions. These factorswere partly offset by increased tolling charges for copper concentrate and lowermolybdenum prices. Turnover from copper concentrate and copper cathodes Turnover from copper concentrate and copper cathode sales from the Group's threemines increased by 83.5% to US$3,144.7 million, compared with US$1,713.4 millionin 2005. The Group's average realised copper price was 329.5 cents per pound(2005 - 185.2 cents). Realised copper prices are determined by comparingturnover (gross of tolling charges for concentrate sales) with sales volumes inthe period. Realised copper prices in 2006 exceeded LME prices because, in line withindustry practice, concentrate and cathode sales generally provide forprovisional pricing at the time of shipment with final pricing based on theaverage market price for future periods (normally 30 days after delivery to thecustomer in the case of cathode sales and up to 180 days after delivery to thecustomer in the case of concentrate sales). The strong improvement in copperprices in the first nine months of the year resulted in significant positivepricing adjustments, although this was partly offset by weakening copper pricesin the final quarter. In the case of Los Pelambres, pricing adjustments added US$223.5 million in 2006to initially invoiced sales (before adjusting for tolling charges), comprisingUS$136.0 million in respect of sales invoiced in 2005 (net of the reversal ofmark-to-market adjustments made at the end of 2005) which were finally priced in2006 and US$87.5 million in respect of sales invoiced in 2006 (net of amark-to-market provision for open sales at the end of the year of US$110.1million when the copper price weakened). Pricing adjustments in 2006 at ElTesoro and Michilla (which relate almost entirely to sales invoiced in the year)added US$11.7 million and US$8.9 million respectively. El Tesoro and Michillaalso continued to benefit from strong cathode premiums reflecting tight marketconditions in the year. Further details are given in Note 4(a) to thepreliminary results announcement. Turnover also benefited from a 1.6% increase in copper sales volumes from460,500 tonnes in 2005 to 467,800 tonnes this year. The increase was mainly dueto timing differences in shipment and loading schedules which resulted in minorreductions in inventory levels, offsetting the marginal 0.4% decrease in 2006production to 465,500 tonnes (2005 - 467,300 tonnes). Tolling charges for copper concentrate at Los Pelambres increased from US$166.9million in 2005 to US$254.0 million in 2006, mainly as a result of the effect ofthe higher copper price on price participation with smelters. Tolling chargesare deducted from concentrate sales in reporting turnover and hence partlyoffset the effect of improved copper prices. Turnover from by-products Turnover from by-products at Los Pelambres decreased by 5.0% to US$556.3 millionin 2006 compared with US$585.7 million in 2005, mainly due to lower molybdenummarket prices. The realised molybdenum price averaged US$24.6 per pound (2005 -US$31.4 per pound). Molybdenum prices are also subject to provisional pricingbut as prices remained steady through the year, the realised price did notdiffer significantly from the average market price of US$24.8 per pound (2005 -US$32.0 per pound). Lower molybdenum prices were partly offset by better salesvolumes which increased by 16.5% to 9,900 tonnes as a result of higherproduction and, to a lesser extent, lower inventory levels due to shipmenttimings. Gold and silver by-product revenues increased significantly to US$42.5million (2005 - US$22.9 million) due to higher metal prices and increasedvolumes. Turnover from the transport and water divisions Turnover from the transport division (FCAB) increased by US$12.8 million or13.8% to US$105.3 million, reflecting increased rail volumes and higher tariffsin 2006. Tariffs are indexed to cost factors including inflation, the Chileanpeso-US dollar exchange rate and fuel costs. Turnover at Aguas de Antofagasta, which operates the Group's water business,increased by US$10.0 million or 18.6% to US$63.7 million in 2006, mainly due toincreased volumes as a result of both higher domestic and industrialconsumption. Operating profit from subsidiaries and joint ventures and EBITDA Operating profit from subsidiaries and joint ventures increased by 86.1% fromUS$1,506.4 million in 2005 to US$2,804.1 million in 2006. Operating profit at the mining division increased by 88.5% from US$1,453.9million to US$2,740.0 million, due to significantly improved turnover asexplained above (resulting mainly from higher copper prices and improvedmolybdenum volumes), partly offset by increased operating costs. Excludingby-product credits (which are reported as part of turnover) and tolling chargesfor concentrates (which are deducted from turnover), weighted average cash costsfor the Group (comprising on-site and shipping costs in the case of LosPelambres and cash costs in the case of the other two operations) increased from58.3 cents per pound in 2005 to 68.0 cents per pound. This reflected the impactof higher input costs at all three mines as well as lower grades and recoveriesat El Tesoro and lower grades at Michilla. Operating profits were also affectedby losses on commodity derivatives (including net mark-to-market adjustments) ofUS$84.5 million at Michilla and El Tesoro, compared with a loss of US$68.6million in 2005. These mainly resulted from commodity derivatives entered intoin 2005 which matured in 2006. Exploration and corporate costs did not changesignificantly in 2006 compared with 2005. Operating profit (excluding income from associate) at the transport divisionincreased by US$5.2 million to US$32.6 million, reflecting the improved railtariffs and higher rail volumes. Aguas de Antofagasta (whose revenues and costsare mainly denominated in Chilean pesos) contributed US$31.5 million compared toUS$25.1 million last year, benefiting from higher sales and the strongerexchange rate. EBITDA (earnings before interest, depreciation, tax and amortisation) in 2006was US$2,957.3 million, compared with US$1,674.1 million in 2005, up 76.7%. Thisis calculated by adding back to operating profit from subsidiaries and jointventures, depreciation and amortisation of US$145.0 million (2005 - US$128.0million), losses on disposals of property, plant and equipment of US$8.2 million(2005 - US$9.7 million) and in 2005 the impairment provision at Michilla ofUS$30.0 million. The Group's share of net profit from its 30% investment in Antofagasta TerminalInternacional S.A. ("ATI") was US$1.1 million (2005 - US$0.9 million). Net finance income Net finance income in 2006 was US$53.8 million, compared with US$29.0 million in2005. Interest receivable increased from US$39.7 million in 2005 to US$78.3 million in2006, due to the higher level of cash and deposit balances and higher marketinterest rates compared with 2005. Interest expense (excluding themark-to-market effect of interest rate derivatives) increased slightly fromUS$26.0 million in 2005 to US$26.4 million, reflecting the increase in marketinterest rates, which offset the effect of the decrease in the level ofborrowings through loan repayments during the year. Foreign exchange gains included in finance items were US$1.6 million in 2006,compared with US$13.3 million in the previous year. The 2005 results benefitedfrom retranslation of peso-denominated inter-company receivables and cashbalances due to stronger period end exchange rates. Mark-to-market gains oninterest rate and exchange derivatives were US$0.3 million in 2006 compared withUS$2.0 million in 2005. Profit before tax The resulting profit before tax for the period was US$2,859.0 million comparedto US$1,536.3 million in 2005, reflecting the improved operating results andincreased finance income. Income tax expense The rate of first category (i.e. corporation) tax in Chile was 17% for both 2006and 2005. New tax legislation on Chilean mining companies was passed into lawwith effect from 1 January 2006. This legislation established an additional taxof up to 5% of tax-adjusted operating profit, with the option for miningcompanies to elect for a lower rate of 4% by entering into a tax stabilityregime for a period of 12 years, after which the rate of 5% will apply. For 2006and 2007, 50% of the new mining tax can be offset against first category tax andthe remaining 50% is tax deductible (i.e. an allowable expense in determiningliability to first category tax). From 2008, when the ability to offset will nolonger be available, 100% of the new mining tax will be tax deductible. LosPelambres, El Tesoro and Michilla opted in 2005 to enter into this new taxstability agreement, and hence the effect of the legislation is to increase theeffective tax rate of these three operations (before taking into accountdeductibility against corporation tax) by approximately 2% in 2006 and 2007 and4% thereafter. In addition to first category tax and the new mining tax, theGroup incurs withholding taxes on the remittance of profits from Chile.Withholding tax is levied on remittances of profits from Chile at 35% less firstcategory tax already paid. Accordingly, the effective tax rate of withholdingtax for the purpose of paying dividends to Group shareholders is approximately18% of the amount remitted or expected to be remitted. Tax (including deferred tax) amounted to US$664.9 million (2005 - US$308.1million), mainly reflecting the increased profit for the year. Including bothcurrent and deferred taxes, this comprised corporate tax of US$476.6 million(2005 - US$267.9 million), the new Chilean mining tax of US$56.6 million (2005 -US$0.5 million relating to initial deferred tax charges) and withholding taxcharges of US$134.1 million (2005 - US$59.9 million). This was partly offset byexchange gains on corporate tax balances of US$2.4 million (2005 - US$20.2million). As a result of these factors, the effective tax rate for the Group in 2006 was23.3% (2005 - 20.1%), compared with the Chilean statutory tax rate of 17%. Minority interests Profit for the financial year attributable to minority shareholders was US$839.8million, compared with US$502.4 million in 2005. The increase mainly resultedfrom the improvement in Group profit after tax from US$1,228.2 million in 2005to US$2,194.1 million in 2006. As a percentage of Group profit after tax, minority interests represented 38.3%in 2006 compared with 40.9% in 2005. The decrease was mainly due to theelimination of the minority interest in El Tesoro through the acquisition ofEquatorial Mining Limited in August 2006. Earnings per share As a result of the factors set out above, profit for the 2006 financial yearattributable to equity shareholders of the Company was US$1,354.3 millioncompared with US$725.8 million in 2005. Accordingly, basic earnings per share were 137.4 cents in 2006 compared with73.6 cents for 2005, an increase of 86.7%. Earnings per share have been restatedto reflect the impact of the 4-for-1 bonus issue on 19 June 2006. Derivative financial instruments The Group occasionally uses derivative financial instruments to reduce exposureto commodity price, interest rate and foreign exchange movements. The Group doesnot use such derivative instruments for speculative trading purposes and it didnot apply the hedge accounting provisions of IAS 39 "Financial Instruments:Recognition and Measurement" in either 2005 or 2006. Accordingly, derivativeshave been measured at fair value through the income statement in both financialyears, in either other operating income or expense (in the case of commodityderivatives) or finance income or finance cost (in the case of interest andforeign exchange derivatives). The hedge accounting provisions of IAS 39 will be applied from 1 January 2007and changes in the fair value of derivative financial instruments that aredesignated and effective as hedges of future cash flows will be recogniseddirectly in equity, with such amounts subsequently recognised in the incomestatement in the period when the hedged item affects profit or loss. At 31 December 2006 Michilla, which is the Group's highest cost operation, hadmin/max instruments for 12,000 tonnes of copper production, with a weightedaverage floor of 281.2 cents per pound and a weighted average cap of 337.9 centsper pound. These instruments had an average duration of 6.5 months and a maximumduration of one year. Michilla also had futures for 9,600 tonnes of copperproduction with an average price of 306.9 cents, a weighted average duration of6.5 months and a maximum duration of twelve months. These investments represent50% of Michilla's forecast production for 2007. From a cash flow perspective theGroup's exposure to the copper price during 2007 will be reduced by the extentof these instruments. Details of the mark-to-market position of these instruments, together withdetails of interest and commodity derivatives held by the Group, are given inNote 4(b) to this preliminary results announcement. Commodity price sensitivities Based on 2006 amounts and without taking into account the effects of provisionalpricing and any hedging activity, a one-cent change in the average copper pricewould affect turnover and profit before tax by US$10.3 million and earnings pershare by 0.5 cents. Similarly, a one-dollar change in the average molybdenumprice would affect turnover and profit before tax by US$21.6 million andearnings per share by 1.1 cents. Acquisitions and disposals The Group acquired a 100% interest in Tethyan Copper Company Limited ("Tethyan")on 20 April 2006 for cash consideration (including transaction costs) ofUS$170.4 million, following a recommended cash offer first made on 14 February2006. On 14 February, the Group also separately entered into an agreement withBHP Billiton whereby BHP Billiton's right to claw-back a material interest incertain of Tethyan's mineral interests ("Claw-Back Right") would be extinguishedfor a consideration of US$60 million. On 22 September 2006, the Group enteredinto a joint venture agreement with Barrick Gold Corporation ("Barrick Gold") toestablish a 50:50 joint venture over Tethyan's mineral interests in Pakistan.This was achieved through the indirect sale of a 50% interest in Tethyan for acash consideration of US$86.8 million. The Group and Barrick Gold eachcontributed US$30 million to Tethyan to enable it to extinguish BHP Billiton'sClaw-Back Right on 22 November 2006. The Group also acquired a 100% interest in Equatorial Mining Limited("Equatorial") for a cash consideration (including transaction costs) ofUS$406.1 million. Equatorial's principal asset was a 39% interest in El Tesoro,the remaining 61% of which was already owned by the Group. There is currently aclaim going through the Australian Courts against Equatorial in relation tocertain of Equatorial's assets. The claim is being defended and its effect isunlikely to be material to the Group. On 11 December 2006, the Group enteredinto an agreement to sell Equatorial's North American interests through the saleof Equatorial North America Inc. to Idaho General Mines Inc. for a cashconsideration for US$4.9 million (which was received in January 2007) andfurther contingent consideration of US$6.0 million will be receivable shouldcertain conditions be met (see Note 22(b) to this preliminary resultsannouncement). Cash flows, cash and debt Cash flows from operations were US$2,810.1 million in 2006 compared withUS$1,647.5 million last year, reflecting the improved operating results adjustedfor depreciation, amortisation and working capital movements. A dividend ofUS$0.4 million was received from the Group's investment in ATI. Cash tax payments in the year were US$498.2 million (2005 - US$343.8 million),comprising corporation tax of US$426.5 million, mining tax of US$9.9 million andwithholding tax of US$61.8 million. These amounts differ from the current taxcharge in the consolidated income statement of US$592.2 million (2005 - US$285.0million) because cash tax payments partly comprise monthly payments on accountin respect of current year profits and partly comprise the settlement of theoutstanding balance for the previous year. The increased payments reflect higherprofits in each successive year from 2004 (thereby increasing both monthlypayments on account for the current year as well as settlement of theoutstanding balance for the previous year), higher withholding tax payments and,to a lesser extent, monthly payments on account in 2006 for the new mining tax. Net cash outflow from acquisitions amounted to US$487.5 million; this amount isstated net of cash balances acquired of US$119.0 million. The net cash outflowcomprised US$199.4 million in respect of Tethyan (net of cash balances acquiredof US$1.0 million) and US$288.1 million in respect of Equatorial (net of cashbalances acquired of US$118.0 million). Net cash inflow from disposals amounted to US$84.3 million; this is stated netof cash balances disposed of US$2.5 million. The net cash inflow comprisedUS$85.7 million (net of cash balances disposed of US$1.1 million) on thedisposal of 50% of Tethyan to Barrick Gold less an outflow of cash balances ofUS$1.4 million when Equatorial Mining North America Inc. was sold; the proceedsof US$4.9 million for this latter disposal were received in January 2007. Capital expenditure in 2006 was US$506.6 million compared with US$223.0 millionin 2005. This included expenditure of US$256.9 million (on a cash basis)relating to the Mauro tailings dam project (2005 - US$90.0 million) and US$134.0million relating to the plant expansion at Los Pelambres (2005 - US$10.7million). Dividends (including special dividends) paid to ordinary shareholders of theCompany this year were US$236.6 million (2005 - US$155.4 million), which relatedto the final dividend declared in respect of the previous year and the interimdividend in respect of the current year, and reflected the increased dividendper share paid in 2006 compared with 2005. Dividends paid by subsidiaries tominority shareholders were US$630.6 million (2005 - US$385.6 million),principally due to increased distributions by Los Pelambres and El Tesoro. Repayments of borrowings and finance leasing obligations in 2006, mainly at LosPelambres and El Tesoro, were US$111.4 million, which included voluntaryprepayments of US$14.0 million at El Tesoro. In 2005, the repayment ofborrowings amounted to US$139.6 million, which included voluntary prepayments ofUS$36.2 million at El Tesoro. New borrowings in the period amounted to US$3.8million (2005 - US$0.2 million). Details of other cash inflows and outflows in the period are contained in theConsolidated Cash Flow Statement. At 31 December 2006, the Group had cash and cash equivalents of US$1,805.5million (2005 - US$1,316.8 million). Excluding the minority share in eachpartly-owned operation, the Group's attributable share of total cash and cashequivalents was US$1,592.7 million (2005 - US$1,085.8 million). Total Group borrowings at 31 December 2006 were US$358.7 million (2005 -US$465.3 million). Of this, US$230.0 million (2005 - US$283.6 million) isproportionally attributable to the Group after excluding the minorityshareholdings in partly-owned operations. The decrease in debt is mainly due tofurther principal repayments at Los Pelambres and El Tesoro as explained above. Balance Sheet Net equity (i.e. equity attributable to ordinary shareholders of the Company)increased from US$2,041.7 million at 1 January 2006 to US$3,155.1 million at 31December 2006, relating mainly to profit after tax and minority interests forthe period less ordinary dividends declared and paid in the year. Minority interests increased from US$721.3 million at 1 January 2006 to US$793.0million at 31 December 2006, principally reflecting the minority's share ofprofit after tax, less the minority's share of the dividends paid bysubsidiaries in the year and the elimination of the minority interest in ElTesoro through the acquisition of Equatorial Mining Limited. Consolidated Income Statement Year ended Year ended 31.12.06 31.12.05 Notes US$'m US$'m Group turnover 2,3 3,870.0 2,445.3 Total operating costs (1,065.9) (938.9) -------- ---------Operating profit from subsidiaries andjoint ventures 2,3 2,804.1 1,506.4 Share of income from associate 12 1.1 0.9 -------- ---------Total profit from operations and 2 2,805.2 1,507.3associates -------- ---------Investment income 78.3 39.7Interest expense (26.4) (26.0)Other finance items 1.9 15.3 -------- --------- Net finance income 5 53.8 29.0 -------- ---------Profit before tax 2,859.0 1,536.3 Income tax expense 6 (664.9) (308.1) -------- ---------Profit for the financial year 2,194.1 1,228.2 ======== ========= Attributable to: -------- ---------Minority interests 839.8 502.4 Equity holders of the Company (net 1,354.3 725.8earnings) -------- --------- US cents US cents Restated (*)Basic earnings per share 7 137.4 73.6 ======== ========= Dividends to ordinary shareholders ofthe Company Per share US cents US cents RestatedDividends per share proposed in (*)relation to the year 8 - ordinary dividend (interim) 3.2 3.2- ordinary dividend (final) 5.0 4.8- special dividend (interim) 2.0 -- special dividend (final) 38.0 14.0 -------- --------- 48.2 22.0 ======== =========Dividends per share paid in the yearand deducted from net equity- ordinary dividend (interim) 3.2 3.2- ordinary dividend (final) 4.8 4.8- special dividend (interim) 2.0 -- special dividend (final) 14.0 8.0 -------- --------- 24.0 16.0 ======== ========= In aggregate US$'m US$'m Dividends proposed in relation to the 8 475.2 216.9year ======== ========= Dividends paid in the year and deductedfrom net equity 236.6 157.7 ======== ========= Turnover and operating profit are derived from continuing operations. (*) Earnings per share and dividends per share have been restated for the effectof the 4-for-1 bonus issue on 19 June 2006. There was no potential dilution ofearnings per share in any period set out above. Consolidated Balance Sheet At At 31.12.06 31.12.05 Notes US$'m US$'mNon-current assets Intangible assets 9 205.3 97.7Property, plant and equipment 10 2,373.7 1,820.0Investment property 11 3.2 3.4Investment in associate 12 3.5 2.8Available for sale investments 13 6.2 0.1Deferred tax assets 18 3.1 6.6 -------- -------- 2,595.0 1,930.6 -------- --------Current assets Inventories 14 120.3 98.8Trade and other receivables 549.4 428.1Current tax assets 7.5 5.3Derivative financial instruments 4 7.3 -Cash and cash equivalents 21 1,805.5 1,316.8 -------- -------- 2,490.0 1,849.0 -------- -------- Total assets 5,085.0 3,779.6 ======== ======== Current liabilities Short-term borrowings 15 (97.6) (97.2)Derivative financial instruments 4 - (40.3)Trade and other payables (211.5) (142.9)Current tax liabilities (204.8) (108.7) -------- -------- (513.9) (389.1) -------- --------Non-current liabilities Medium and long term borrowings 15 (261.1) (368.1)Trade and other payables (4.8) (3.5)Post-employment benefit 16 (24.1) (20.6)obligationsLong-term provisions 17 (9.8) (9.8)Deferred tax liabilities 18 (323.2) (225.5) -------- -------- (623.0) (627.5) -------- -------- Total liabilities (1,136.9) (1,016.6) ======== ======== Net assets 3,948.1 2,763.0 ======== ======== Equity Share capital 89.8 16.6Share premium 199.2 272.4Translation reserves 12.3 16.6Retained earnings 2,853.8 1,736.1 -------- --------Net equity attributable to equityholders of the Company 3,155.1 2,041.7 Minority interests 793.0 721.3 -------- --------Total equity 3,948.1 2,763.0 ======== ======== The preliminary information was approved by the Board of Directors on 12 March2007. Consolidated Cash Flow Statement Year ended Year ended 31.12.06 31.12.05 Notes US$'m US$'m Cash flows from operations 20 2,810.1 1,647.5Interest paid (24.6) (23.3)Dividends from associate 12 0.4 1.0Income tax paid (498.2) (343.8) -------- --------Net cash from operating activities 2,287.7 1,281.4 -------- -------- Investing activitiesAcquisition of subsidiary 22 (487.5) -Disposal and part-disposal of subsidiaries 23 84.3 -Recovery of Chilean VAT paid onpurchase of water concession 8.7 7.7Purchases of property, plant and equipment (506.6) (223.0)Proceeds from sale of property,plant and equipment - 4.1Interest received 77.6 37.9 -------- --------Net cash used in investing activities (823.5) (173.3) -------- -------- Financing activitiesDividends paid to equity holders of the Company (236.6) (155.4)Dividends paid to preferenceshareholders of the Company (0.2) (0.2)Dividends paid to minority interests (630.6) (385.6)Net proceeds from issue of new borrowings 3.8 0.2Repayments of borrowings (109.6) (126.2)Repayments of obligations under finance leases (1.8) (13.4) -------- --------Net cash used in financing activities (975.0) (680.6) -------- -------- Net increase in cash and cash equivalents 489.2 427.5 ======== ======== Cash and cash equivalents atbeginning of the year 1,316.8 881.4Net increase in cash and cash equivalents 489.2 427.5Effect of foreign exchange rate changes (0.5) 7.9 -------- --------Cash and cash equivalents at end of the year 21 1,805.5 1,316.8 ======== ======== Consolidated Statement of Changes in Equity For the years ended 31 December 2005 and 2006 Share Share Translation Retained Net Minority Total capital premium reserves earnings equity interests US$'m US$'m US$'m US$'m US$'m US$'m US$'m Balance at 1 January 2005 16.6 272.4 8.5 1,168.0 1,465.5 604.5 2,070.0 Profit for the financial year - - - 725.8 725.8 502.4 1,228.2Currency translation adjustment - - 8.1 - 8.1 - 8.1Dividends paid - - - (157.7) (157.7) (385.6) (543.3) ------ ------ ------- ------- ------ ------- -------Balance at 31 December 2005 and 1 January 2006 16.6 272.4 16.6 1,736.1 2,041.7 721.3 2,763.0 Profit for the financial year - - - 1,354.3 1,354.3 839.8 2,194.1Currency translation adjustment - - (4.3) - (4.3) - (4.3)Capitalisation of sharepremium on bonus issue of ordinary shares (see Note 19) 73.2 (73.2) - - - - -Acquisition of minorityinterest (see Note 22(b)) - - - - - (137.5) (137.5)Dividends paid - - - (236.6) (236.6) (630.6) (867.2) ------ ------ ------- ------- ------ ------- -------Balance at 31 December 2006 89.8 199.2 12.3 2,853.8 3,155.1 793.0 3,948.1 ====== ====== ======= ======= ====== ======= ======= There were no items of recognised income and expense in either year other thanthe profit for the financial year and the currency translation adjustment. Notes 1. General information and accounting policies a) General information This preliminary results announcement is for the year ended 31 December 2006.While the financial information contained in this preliminary resultsannouncement has been computed in accordance with International FinancialReporting Standards ("IFRS"), this announcement does not itself containsufficient information to comply with IFRS. For these purposes, IFRS comprisethe Standards issued by the International Accounting Standards Board ("IASB")and Interpretations issued by the International Financial ReportingInterpretations Committee ("IFRIC") that have been endorsed by the EuropeanUnion. This preliminary results announcement does not constitute the Group's statutoryaccounts as defined in section 240 of the Companies Act 1985. The statutoryaccounts for the year ended 31 December 2006 will be approved by the Board inApril 2007 and, with the exception of the information contained in Notes 28 to30, will be reported on by the auditors and subsequently filed with theRegistrar of Companies. Accordingly, the financial information included in thispreliminary results announcement for 2006 is unaudited. The information contained in this announcement for the year ended 31 December2005 also does not constitute statutory accounts. A copy of the statutoryaccounts for that year has been delivered to the Registrar of Companies. Theauditors' report on those accounts was unqualified and did not containstatements under section 237(2) of the Companies Act 1985 (regarding adequacy ofaccounting records and returns) or under section 237(3) (regarding provision ofnecessary information and explanations). The comparative information containedin Notes 28 to 30 of this preliminary results announcement is not derived fromthe statutory accounts for the year ended 31 December 2005 and is accordinglynot covered by the auditors' report. b) Accounting policies The preliminary results announcement has been prepared on the basis ofaccounting policies consistent with those applied in the financial statementsfor the year ended 31 December 2005 except in relation to jointly controlledentities. The Group's previously stated policy was to account for jointlycontrolled entities under the equity method. Under the Group's revised policy,jointly controlled entities are accounted for under the proportionateconsolidation method, which is the preferred benchmark under IAS 31 "Interestsin Joint Ventures". This change does not have any effect on the financialstatements for prior periods and therefore no restatement of prior periodinformation is required. c) Changes in estimates Previously mining properties, including capitalised financing costs, weredepreciated in proportion to the volume of ore extracted in the year comparedwith total proven, probable and possible reserves at the beginning of the year.From 1 January 2006, such depreciation is based on comparison with proven andprobable reserves only at the beginning of the year. The effect of this changeis to increase the depreciation charge in the year ended 31 December 2006 byUS$1.6 million. As a change in estimates, prior year comparatives have not beenrestated, but the effect would have been to increase the depreciation charge byUS$2.4 million in 2005. d) Restatement of comparative amounts for bonus issue Comparatives for earnings per share and dividend per share have been restatedfor the effect of the 4-for-1 bonus issue of ordinary shares on 19 June 2006(see Note 19). 2. Total profit from operations and associates Year Year ended ended 31.12.06 31.12.05 US$'m US$'m Turnover 3,870.0 2,445.3Cost of sales (805.1) (685.6) -------- --------Gross profit 3,064.9 1,759.7Administrative expenses (152.6) (132.0)Closure provision (0.6) 3.4Severance charges (7.7) (3.9)Exploration costs (21.5) (22.4)Other operating income 10.3 5.4Other operating expenses (88.7) (103.8) -------- --------Operating profit from subsidiaries and joint ventures 2,804.1 1,506.4Share of income from associate 1.1 0.9 -------- --------Total profit from operations and associates 2,805.2 1,507.3 ======== ======== 3. Segmental analysis Based on risks and returns, the Directors consider the primary reporting formatis by business segment and the secondary reporting format is by geographicalsegment. The Group considers its business segments to be Los Pelambres, ElTesoro, Michilla, Exploration, Railway and other transport services and theWater concession. Corporate and other items principally relate to the costsincurred by the Company and Antofagasta Minerals S.A. (the Group's miningcorporate centre), which are not allocated to any individual business segment.The classification reflects the Group's management structure. The amountspresented for each business segment exclude any amounts relating to theinvestment in Antofagasta Terminal Internacional S.A., an associate which isheld through the Railway and other transport services segment. a) Turnover, EBITDA and operating profit /(loss) from subsidiaries andjoint ventures analysed by business segment Operating profit /(loss) ------------------------ from subsidiaries ------------------- Turnover EBITDA and joint ventures ---------- -------- -------------------- Year Year Year Year Year Year ended ended ended ended ended ended 31.12.06 31.12.05 31.12.06 31.12.05 31.12.06 31.12.05 US$'m US$'m US$'m US$'m US$'m US$'m Los Pelambres 2,701.3 1,749.8 2,297.0 1,420.5 2,223.7 1,350.4El Tesoro 664.8 372.2 456.0 203.2 409.9 172.9Michilla 334.9 177.1 158.4 16.3 145.5 (31.1)Exploration - - (21.5) (22.4) (21.5) (22.4)Corporate and other items - - (16.9) (15.6) (17.6) (15.9) -------- -------- -------- -------- -------- --------Mining 3,701.0 2,299.1 2,873.0 1,602.0 2,740.0 1,453.9Railway and other transport services 105.3 92.5 42.9 38.2 32.6 27.4Water concession 63.7 53.7 41.4 33.9 31.5 25.1 ======== ======== ======== ======== ======== ========Group turnover(segment revenue),EBITDA and operating profit from subsidiaries and joint ventures(segment result) 3,870.0 2,445.3 2,957.3 1,674.1 2,804.1 1,506.4 ======== ======== ======== ======== ======== ======== Notes to turnover by business segment (segment revenue) (i) Turnover by business segment equates to segment revenue as defined by IAS 14. Turnover from Railway and other transport services is stated after eliminating inter-segmental sales to the mining division of US$9.6 million(2005 - US$8.8 million). (ii) Turnover includes the effect of both final pricing andmark-to-market adjustments to provisionally priced sales of copper andmolybdenum concentrates and copper cathodes. Further details of such adjustmentsare given in Note 4(a). (iii) Turnover does not include the effect of gains and losses oncommodity derivatives, which are included as part of operating profit in otheroperating income or expense. Further details of such gains or losses are givenin Note 4(b). (iv) Los Pelambres produces and sells copper and molybdenumconcentrates. It is also credited for the gold and silver content in the copperconcentrate it sells. Turnover by type of metal is analysed below to showseparately the amounts prior to deduction of tolling charges, the tollingcharges involved and the net amounts included in turnover. El Tesoro andMichilla do not generate by-products from their copper cathode operations. (v) On a Group basis, total copper revenues amounted toUS$3,144.7 million (2005 - US$1,713.4 million) comprising copper concentratesales at Los Pelambres of US$2,145.0 million (2005 - US$1,164.1 million) andcopper cathode sales at El Tesoro and Michilla of US$999.7 million (2005 -US$549.3 million). Notes to EBITDA and operating profit/(loss) from subsidiaries and joint venturesby business segment (segment result) (vi) Operating profit for the separate businesses equates tosegment result as defined by IAS 14. This excludes the share of income fromassociate of US$1.1 million (2005 - US$0.9 million). (vii) EBITDA is calculated by adding back depreciation,amortisation and disposals of plant, property and equipment and impairmentcharges (see Note 3(b)) to operating profit from subsidiaries. (viii) EBITDA and operating profit are stated after deducting losseson commodity derivatives (including both losses realised in each period andperiod-end mark-to-market adjustments) at El Tesoro of US$44.8 million (2005 -US$24.8 million) and Michilla of US$39.7 million (2005 - US$43.8 million).Further details are given in Note 4(b). (ix) Operating profit in 2005 is also stated after deducting animpairment charge against the carrying value of property, plant and equipment atMichilla of US$30.0 million. There was no comparable impairment charge (see Note3(b)) in the year ended 31 December 2006. Turnover at Los Pelambres by mineral Before deducting tolling charges Tolling charges Net of tolling charges ------------------------ ----------------- ------------------------ Year ended Year ended Year Year Year ended Year ended 31.12.06 31.12.05 ended ended 31.12.06 31.12.05 31.12.06 31.12.05 US$'m US$'m US$'m US$'m US$'m US$'m Copper 2,399.0 1,331.0 (254.0) (166.9) 2,145.0 1,164.1Molybdenum 536.4 588.4 (22.6) (25.6) 513.8 562.8Gold and silver 43.1 23.4 (0.6) (0.5) 42.5 22.9 ------- ------- ------- ------- ------- -------Los Pelambres 2,978.5 1,942.8 (277.2) (193.0) 2,701.3 1,749.8 ======= ======= ======= ======= ======= ======= b) Depreciation and amortisation, loss on disposal of property, plant and equipment and impairment charges by operation Depreciation and amortisation Loss on disposals Impairment charge ------------------------ --------------------- --------------------- Year ended Year ended Year ended Year ended Year ended Year ended 31.12.06 31.12.05 31.12.06 31.12.05 31.12.06 31.12.05 US$'m US$'m US$'m US$'m US$'m US$'m Los Pelambres 72.8 66.6 0.5 3.5 - -El Tesoro 43.4 29.1 2.7 1.2 - -Michilla 10.4 13.8 2.5 3.6 - 30.0Corporate and other items 0.3 0.3 0.4 - - - ------- ------- ------- ------- ------- -------Mining 126.9 109.8 6.1 8.3 - 30.0Railway and othertransport services 8.4 9.5 1.9 1.3 - -Water concession 9.7 8.7 0.2 0.1 - - ------- ------- ------- ------- ------- ------- 145.0 128.0 8.2 9.7 - 30.0 ======= ======= ======= ======= ======= ======= Other non-cash expenses relate to severance and closure costs and are disclosedfor the Group in Note 2. c) Capital expenditure by business segment Year Year ended ended 31.12.06 31.12.05 US$'m US$'m Los Pelambres 463.5 101.4El Tesoro 16.3 39.6Michilla 7.7 18.7Corporate and other items 20.5 1.6 -------- --------Mining 508.0 161.3Railway and other transport services 25.2 23.2Water concession 5.8 1.8 -------- -------- 539.0 186.3 ======== ======== Capital expenditure represents purchases of property, plant and equipment statedon an accruals basis (see Note 10) and may therefore differ from the amountincluded in the cash flow statement. d) Assets and liabilities by business segment Segment assets Segment liabilities Segment net assets ---------------- -------------------- -------------------- Year Year Year Year Year Year ended ended ended ended ended ended 31.12.06 31.12.05 31.12.06 31.12.05 31.12.06 31.12.05 US$'m US$'m US$'m US$'m US$'m US$'mLos Pelambres 2,103.4 1,648.2 (125.5) (72.5) 1,977.9 1,575.7El Tesoro 591.8 392.6 (53.3) (56.5) 537.8 336.1Michilla 67.2 61.6 (24.8) (47.5) 42.4 14.1Corporate and other items 145.8 8.5 (12.3) (11.4) 133.5 (2.9) ------- ------- ------- ------- ------- ------Mining 2,908.2 2,110.9 (215.9) (187.9) 2,691.6 1,923.0Railway and other transport services 158.8 133.8 (25.2) (21.7) 133.6 112.1Water concession 181.7 199.9 (9.1) (7.5) 172.6 192.4 ------- ------- ------- ------- ------- ------ 3,248.7 2,444.6 (250.2) (217.1) 2,997.8 2,227.5 ======= ======= ======= ======= ======= ====== Assets and liabilities of Tethyan Copper Company Limited (see Note 22) have beenincluded within Corporate and other items. Segment assets and liabilities are reconciled to entity assets and liabilitiesthrough unallocated items as follows: Segment assets Segment liabilities Segment net assets ---------------- -------------------- -------------------- Year Year Year Year Year Year ended ended ended ended ended ended 31.12.06 31.12.05 31.12.06 31.12.05 31.12.06 31.12.05 US$'m US$'m US$'m US$'m US$'m US$'mSegmentassets/(liabilities) 3,248.7 2,444.6 (250.2) (217.1) 2,997.8 2,227.5Investment property 3.2 3.4 - - 3.2 3.4Investment in associate 3.5 2.8 - - 3.5 2.8Available for sale investment 6.2 0.1 - - 6.2 0.1Derivative financialinstruments 7.3 - - - 7.3 -Deferred taxassets/(liabilities) 3.1 6.6 (323.2) (225.5) (319.4) (218.9)Current taxassets/(liabilities) 7.5 5.3 (204.8) (108.7) (197.3) (103.4)Cash and cashequivalents/(borrowings) 1,805.5 1,316.8 (358.7) (465.3) 1,446.8 851.5 ------- ------- ------- ------- ------- ------Entity assets/(liabilities) 5,085.0 3,779.6 (1,136.9) (1,016.6) 3,948.1 2,763.0 ======= ======= ======= ======= ======= ====== e) Geographical analysis of turnover by location of customer (geographical segment) Sales ------- Year Year ended ended 31.12.06 31.12.05 US$'m US$'mEurope- United Kingdom 8.1 34.2- Switzerland 396.5 148.4- Rest of Europe 877.1 527.2 Latin America- Chile 407.5 326.6- Rest of Latin America 165.2 87.8 North America 472.7 471.3 Asia- Japan 1,008.2 425.9- Rest of Asia 534.7 423.9 ------- ------- 3,870.0 2,445.3 ======= ======= 4. Derivatives and embedded derivatives a) Embedded derivatives - provisionally priced sales Copper and molybdenum concentrate sale agreements and copper cathode saleagreements generally provide for provisional pricing of sales at the time ofshipment, with final pricing being based on the monthly average London MetalExchange copper price or monthly average molybdenum price for specified futureperiods. This normally ranges from 30 to 180 days after delivery to thecustomer. Under IFRS, both gains and losses from the marking-to-market of open sales arerecognised through adjustments to turnover in the income statement and to tradedebtors in the balance sheet. The Group determines mark-to-market prices usingforward prices at each period end for copper concentrate and cathode sales, andperiod-end month average prices for molybdenum concentrate sales due to theabsence of a futures market for that commodity. The mark-to-market adjustments at the end of each period and the effect onturnover in the income statement for each period are as follows: Balance sheet --------------- net mark to market effect ---------------------- on debtors ------------ At At 31.12.06 31.12.05 US$'m US$'m Los Pelambres - copper concentrate (110.1) 33.2Los Pelambres - tolling charges for copper concentrates 7.6 -Los Pelambres - molybdenum concentrate (3.9) (12.6)El Tesoro - copper cathodes 1.3 0.2Michilla - copper cathodes (0.6) (0.1) ------- ------- (105.7) 20.7 ======= ======= (i) Copper sales Year Year Year Year Year Year ended ended ended ended ended ended 31.12.06 31.12.06 31.12.06 31.12.05 31.12.05 31.12.05 US$'m US$'m US$'m US$'m US$'m US$'m Los El Los El Pelambres Tesoro Michilla Pelambres Tesoro Michilla Copper Copper Copper Copper Copper Copper concentrate cathodes cathodes concentrate cathodes cathodesProvisionallyinvoiced gross sales 2,175.5 653.1 326.0 1,176.5 362.7 173.5 Effects of pricing adjustments to previous year invoices ------ ------ ------ ------ ------ ------Reversal of mark-to-marketadjustments at the end of the previous year (33.2) (0.2) 0.1 (18.6) (0.8) (0.4)Settlement of copper salesinvoiced in the previous year 169.2 2.0 0.6 41.4 0.2 (0.1) ------ ------ ------ ------ ------ ------Total effect of adjustmentsto previous year invoicesin the current period 136.0 1.8 0.7 22.8 (0.6) (0.5) Effects of pricing adjustments to current year invoices ------ ------ ------ ------ ------ ------Settlement of copper salesinvoiced in the current year 197.6 8.6 8.8 98.5 9.9 4.2Mark-to-market adjustments atthe end of the current year (110.1) 1.3 (0.6) 33.2 0.2 (0.1) ------ ------ ------ ------ ------ ------Total effect of adjustmentsto current year invoices 87.5 9.9 8.2 131.7 10.1 4.1 ------ ------ ------ ------ ------ ------Turnover beforededucting tolling charges 2,399.0 664.8 334.9 1,331.0 372.2 177.1Tolling charges (254.0) - - (166.9) - - ------ ------ ------ ------ ------ ------Turnover net of tolling charges 2,145.0 664.8 334.9 1,164.1 372.2 177.1 ====== ====== ====== ====== ====== ====== Copper concentrate Copper concentrate sales at Los Pelambres have an average settlement period ofapproximately four months from shipment date. At 31 December 2006, salestotalling 127,100 tonnes remained open as to price, with an averagemark-to-market price of 287.0 cents per pound compared with an averageprovisional invoice price of 326.3 cents per pound. At 31 December 2005, copperconcentrate sales totalling 114,500 tonnes remained open as to price, with anaverage mark-to-market price of 201.4 cents per pound compared with an averageprovisional invoice price of 189.5 cents per pound. Tolling charges include a mark-to-market gain for copper concentrate sales openas to price at 31 December 2006 of US$7.6 million (31 December 2005 -mark-to-market loss of US$1.7 million). Copper cathodes Copper cathode sales at El Tesoro and Michilla have an average settlement periodof approximately one month from shipment date. At 31 December 2006, salestotalling 11,600 tonnes remained open as to price, with an averagemark-to-market price of 286.6 cents per pound compared with an averageprovisional invoice price of 294.0 cents per pound. At 31 December 2005, salestotalling 10,300 tonnes remained open as to price with an average mark-to-marketprice of 205.8 cents per pound compared with an average provisional invoiceprice of 205.4 cents per pound. (ii) Molybdenum sales Year Year ended ended 31.12.06 31.12.05 US$'m US$'m Los Los Pelambres Pelambres Molybdenum Molybdenum concentrate concentrate Provisionally invoiced gross sales 547.8 611.1 Effects of pricing adjustments toprevious year invoices ------- -------Reversal of mark-to-market adjustments at the end of the previous year 12.6 (32.9)Settlement of molybdenumsales invoiced in the previous year (27.5) 32.9 ------- -------Total effect of adjustmentsto previous year invoices inthe current period (14.9) - Effects of pricing adjustments tocurrent year invoices ------- -------Settlement of molybdenumsales invoiced in the current year 5.9 (10.1)Mark-to-market adjustmentsat the end of the current year (2.4) (12.6) ------- -------Total effect of adjustmentsto current year invoices 3.5 (22.7) ------- -------Turnover before deducting tolling charges 536.4 588.4Tolling charges (22.6) (25.6) ------- -------Turnover net of tolling charges 513.8 562.8 ======= ======= Molybdenum sales at Los Pelambres have an average settlement period ofapproximately three months after shipment date. At 31 December 2006, salestotalling 2,100 tonnes remained open as to price, with an average mark-to-marketprice of US$25.0 per pound compared with an average provisional invoice price ofUS$25.5 per pound. At 31 December 2005 sales totalling 1,400 tonnes remainedopen as to price, with an average mark-to-market price of US$27.4 per poundcompared with an average provisional invoice price of US$31.2 per pound. b) Derivative financial instruments The Group uses derivative financial instruments to reduce exposure to foreignexchange, interest rate and commodity price movements. The Group does not usesuch derivative instruments for speculative trading purposes. The Group did notadopt the hedge accounting provisions of IAS 39 "Financial Instruments:Recognition and Measurement" in the year ended 31 December 2006. Accordingly,derivatives are measured at each balance sheet date at fair value. Gains andlosses arising from changes in fair value are included in the income statementfor the year, within operating profit from subsidiaries and joint ventures forcommodity derivatives and within net finance costs for exchange and interestderivatives. The mark-to-market adjustments at the end of each year and the effect onoperating profit and net finance costs in the income statement for each year areas follows: Balance sheet --------------- net mark to market effect on ------------------------ debtors/(creditors) --------------------- At 31.12.06 At 31.12.05 US$'m US$'m Current assets - derivativefinancial instruments 7.3 -Current liabilities -derivative financial instruments - (40.3) -------- -------- 7.3 (40.3) ======== ======== Income statement ------------------ total effect (including ------------------------ Balance sheet mark to market and --------------- -------------------- net mark to market effect on realised amounts on ---------------------------- --------------------- debtors/(creditors) operating profit/finance cost --------------------- ------------------------ At 31.12.06 At 31.12.05 Year ended Year ended 31.12.06 31.12.05 US$'m US$'m US$'m US$'m Commodity 7.3 (40.0) (84.5) (68.6)Interest - (0.3) (0.3) (0.3)Exchange - - - (0.3) -------- --------- -------- -------- 7.3 (40.3) (84.8) (69.2) ======== ========= ======== ======== Commodity derivatives The Group periodically uses commodity derivatives to reduce its exposure to themarket price of copper. During 2006, the amount charged to operating profit oncommodity derivatives was US$84.5 million, comprising US$44.8 million at ElTesoro and US$39.7 million at Michilla (2005 - US$68.6 million, comprisingUS$24.8 million at El Tesoro and US$43.8 million at Michilla). This comprisedlosses on derivatives which matured in 2006 of US$136.3 million (2005 - US$24.1million) offset by mark-to-market gains outstanding at 31 December 2006 ofUS$7.3 million (2005 - US$44.5 million) and reversal of opening mark-to-marketlosses of US$44.5 million (2005 - nil). Net of margin calls of US$4.5 million,this resulted in a net balance sheet position at 31 December 2005 of US$40.0million. There were no margin calls at 31 December 2006. At 31 December 2006, the Group had min/max instruments at Michilla for 12,000tonnes of copper production (2005 - 42,000 tonnes), with a weighted averagefloor of 281.2 cents per pound and a weighted average cap of 337.9 cents perpound (2005 - weighted average floor 115.7 cents per pound; weighted average cap146.7 cents per pound). These instruments had a weighted average duration of 6.5months and a maximum duration of one year (2005 - weighted average 5 months anda maximum duration of one year). At 31 December 2006, the Group also had futures at Michilla for 9,600 tonnes ofcopper production with an average price of 306.9 cents, a weighted averageduration of 6.5 months and a maximum duration of twelve months. It also hadfutures to both buy and sell copper production at El Tesoro, with the effect ofswapping COMEX prices for LME prices without eliminating underlying market priceexposure. These have a weighted average price of 286.6 cents, a weighted averageduration of 6.5 months and a maximum duration of one year. Interest derivatives The Group did not have any interest derivatives outstanding at 31 December 2006. At 31 December 2005, the Group had interest rate collars with a notionalprincipal amount of US$108.7 million, with a weighted average floor of 5.02% anda weighted average cap of 6.00%. These instruments had a weighted averageduration of seven months. The mark to market loss at 31 December 2005 was US$0.3million, and the effect on the income statement is included within other financeitems. Exchange derivatives The Group did not enter into any exchange derivative instruments during 2006 andaccordingly the effect on the income statement was nil. During 2005, the Group entered into exchange derivative instruments to buy orsell Chilean pesos using US dollars with a net notional value of US$33.0million. The average duration of these derivatives was one month and the netloss was US$0.3 million. There were no outstanding instruments at 31 December2005 and the effect on the income statement is included within other financeitems. 5. Net finance income Year Year ended ended 31.12.06 31.12.05 US$'m US$'m Investment incomeInterest receivable 78.3 39.7 -------- -------- Interest expenseInterest payable (24.6) (23.8)Amortisation of deferred finance costs (0.4) (0.4)Discount charge relating to provisions (1.2) (1.6)Preference dividends (0.2) (0.2) -------- -------- (26.4) (26.0) -------- -------- Other finance itemsMark-to-market effect of derivatives 0.3 2.0Foreign exchange 1.6 13.3 -------- -------- 1.9 15.3 -------- -------- -------- --------Net finance income 53.8 29.0 ======== ======== 6. Taxation The tax charge for the year comprised the following: Year Year ended ended 31.12.06 31.12.05 US$'m US$'m Current tax chargeCorporate tax (principally firstcategory tax in Chile) (474.2) (296.6)Mining tax (Royalty) (58.5) -Withholding tax provision (61.9) (8.6)Foreign exchange gains on corporate tax balances 2.4 20.2 ------- ------- (592.2) (285.0) ------- ------- Deferred tax chargeCorporate tax (principally firstcategory tax in Chile) (2.4) 28.7Mining tax (Royalty) 1.9 (0.5)Withholding tax provision (72.2) (51.3) ------- ------- (72.7) (23.1) ------- -------Total tax charge (Income tax expense) (664.9) (308.1) ======= ======= Current tax is based on taxable profit for the year. Deferred tax is the taxexpected to be payable or recoverable on temporary differences (i.e. differencesbetween the carrying amount of assets and liabilities in the financialstatements and the corresponding tax basis used in the computation of taxableprofit). Deferred tax is accounted for using the balance sheet liability methodand is provided on all temporary differences with certain limited exceptions.The Group incurs withholding taxes on the remittance of profits from Chile andthe other countries in which it operates and deferred tax is provided onundistributed earnings to the extent that remittance is probable in theforeseeable future. The rate of first category (i.e. corporation) tax in Chile was 17% for both 2006and 2005. During 2005, new tax legislation on Chilean mining companies waspassed into law with effect from 1 January 2006. This legislation sets anadditional tax of up to 5% of tax-adjusted operating profit, with the option formining companies to elect for a lower rate of 4% by entering into a taxstability regime for a period of 12 years, after which the rate of 5% willapply. For 2006 and 2007, 50% of the new mining tax can be offset against firstcategory tax and the remaining 50% is tax deductible (i.e. an allowable expensein determining liability to first category tax). From 2008, when the ability tooffset will no longer be available, 100% of the new mining tax will be taxdeductible. Los Pelambres, El Tesoro and Michilla opted to enter into this newtax stability agreement during 2005, and hence the effect of the legislation isto increase the effective tax rate of these three operations (before taking intoaccount deductibility against corporation tax) by approximately 2% in 2006 and2007 and 4% thereafter. The effective tax rate for 2006 was 23.3%, compared with the Chilean statutorytax rate of 17.0%. This was principally due to the provision of withholding taxof US$134.1 million, and the effect of the new mining tax, which resulted in acharge of US$56.6 million. In 2005, the effective tax rate was 20.1%,principally due to the provision of withholding tax of US$59.9 million, partlyoffset by exchange gains of US$20.2 million on Chilean peso-denominated taxreceivable balances during the year. 7. Basic earnings per share Basic earnings per share is calculated on profit after tax and minority interestgiving net earnings of US$1,354.3 million (2005 - US$725.8 million) and based on985,856,695 ordinary shares, being the number of ordinary shares following the4-for-1 bonus issue on 19 June 2006 (see Note 19). Comparative amounts for basicearnings per share have been restated for the effects of the bonus issue. There were no other changes in ordinary shares in issue, nor was there anypotential dilution of ordinary shares in any period. 8. Dividends The Board will recommend a final dividend of 43.0 cents per ordinary share,which comprises an ordinary dividend of 5.0 cents per share and a specialdividend of 38.0 cents per share. The interim dividend of 5.2 cents per share,which comprised an ordinary dividend of 3.2 cents per share and a specialdividend of 2.0 cents per share, was paid on 12 October 2006. Together, thisgives total dividends proposed in relation to 2006 of 48.2 cents per share. The final dividend proposed in relation to 2005 was 18.8 cents, which comprisedan ordinary dividend of 4.8 cents per share and a special dividend of 14 centsper share. Together with the interim dividend that year of 3.2 cents per share,this gave total dividends proposed in relation to 2005 of 22 cents per share. Dividends per share actually paid in the year and recognised as a deduction fromnet equity under IFRS were 24 cents (2005 - 16 cents) being the interim dividendfor the year and the final dividend proposed in respect of the previous year. Comparative amounts for dividends per share have been restated for the effectsof the 4-for-1 bonus issue on 19 June 2006 (see Note 19). The final dividend will be paid on 14 June 2007 to shareholders on the registerat the close of business on 11 May 2007. Dividends are declared and paid gross.The conversion rate for the final dividend of 43.0 cents to be paid in sterlingwill be set on 15 May 2007. Dividends are declared in US dollars but may be paid in either dollars orsterling. Shareholders on the register of members with an address in the UnitedKingdom receive dividend payments in sterling, unless they elect to be paid indollars. All other shareholders are paid by cheque in dollars, unless they havepreviously instructed the Company's registrar to pay dividends by bank transferto a sterling bank account, or they elect for payment by cheque in sterling. TheCompany's registrar must receive any such election before the record date of 11May 2007. 9. Intangible assets Year Year Concession Exploration ended ended right licences 31.12.06 31.12.05 US$'m US$'m US$'m US$'m Balance at thebeginning of the period 97.7 - 97.7 93.2Acquisition (see Note 22) - 230.0 230.0 -Disposal (see Note 23) - (115.0) (115.0) -Amortisation (4.0) - (4.0) (3.4)Foreign currencyexchange difference (3.4) - (3.4) 7.9 -------- -------- -------- -------Balance at the end ofthe period 90.3 115.0 205.3 97.7 ======== ======== ======== ======= The concession right relates to the 30-year concession to operate the waterrights and facilities in the Antofagasta Region of Chile which the Group'swholly-owned subsidiary, Aguas de Antofagasta S.A., acquired in December 2003.The intangible asset is being amortised on a straight-line basis over the lifeof the concession. The exploration licences relate to the value attributed to the rights acquiredon the purchase of Tethyan Copper Company Limited (see Note 22). 10. Property, plant and equipment Mining Railway Water Year Year and other concession ended ended transport 31.12.06 31.12.05 US$'m US$'m US$'m US$'m US$'m Balance at the beginning of the year 1,638.3 110.4 71.3 1,820.0 1,796.1Additions 508.0 25.2 5.8 539.0 186.3Acquisition (see Note 22) 171.6 - - 171.6 -Transfers and reclassifications - - - - (0.8)Depreciation (126.9) (8.4) (5.7) (141.0) (124.6)Asset disposals (6.1) (1.9) (0.2) (8.2) -Disposals (see Note 23) (4.7) - - (4.7) (13.8)Impairment charge - - - - (30.0)Foreign currency exchangedifference - (0.4) (2.6) (3.0) 6.8 -------- -------- -------- -------- --------Balance at the end of the year 2,180.2 124.9 68.6 2,373.7 1,820.0 ======== ======== ======== ======== ======== 11. Investment property Year Year ended ended 31.12.06 31.12.05 US$'m US$'m Balance at the beginning of the year 3.4 3.2Foreign currency exchange difference (0.2) 0.2 -------- --------Balance at the end of the year 3.2 3.4 ======== ======== Investment property represents the Group's forestry properties, which are heldfor long-term potential and accordingly classified as investment property heldat cost. 12. Investment in associate Year Year ended ended 31.12.06 31.12.05 US$'m US$'m Balance at the beginning of the year 2.8 2.9Share of profit before tax 1.3 1.1Share of tax (0.2) (0.2)Dividends received (0.4) (1.0) -------- --------Balance at the end of the year 3.5 2.8 ======== ======== The investment in associate refers to the Group's 30% interest in AntofagastaTerminal Internacional S.A. ("ATI"), which operates a concession to manageinstallations in the port of Antofagasta. 13. Available for sale investments Year Year ended ended 31.12.06 31.12.05 US$'m US$'m Balance at the beginning of the year 0.1 0.1Acquisition (see Note 22) 5.6 -Movements in fair value 0.5 - -------- --------Balance at the end of the year 6.2 0.1 ======== ======== Available for sale investments represent those investments which are notsubsidiaries, associates or joint ventures and are not held for tradingpurposes. 14. Inventories Year Year ended ended 31.12.06 31.12.05 US$'m US$'m Raw materials and consumables 36.6 32.8Work in progress 68.6 45.1Finished goods 15.1 20.9 ------- ------- 120.3 98.8 ======= ======= Work in progress includes US$25.3 million related to high carbonate oreinventories at El Tesoro which are expected to be processed more than twelvemonths after the balance sheet date. 15. Borrowings At At 31.12.06 31.12.05 US$'m US$'m Los PelambresCorporate loans (305.3) (381.5)Other loans (9.5) (14.3)El TesoroCorporate loans (27.9) (55.8)Finance leases (0.2) (0.3)MichillaFinance leases (0.9) (2.6)Railway and othertransport servicesLoans (10.8) (7.2)OtherPreference shares (4.1) (3.6) -------- --------Total (see Note 21) (358.7) (465.3) ======== ======== Loans at 31 December 2006 are shown net of deferred financing costs of US$1.5million (2005 - US$2.0 million). The amount in relation to Los Pelambres wasUS$1.4 million (2005 - US$1.7 million). The amount in relation to El Tesoro wasUS$0.1 million (2005 - US$0.3 million). Maturity of borrowings At At 31.12.06 31.12.05 US$'m US$'mShort-term borrowings (97.6) (97.2)Medium and long-term (261.1) (368.1)borrowings -------- --------Total (see Note 21) (358.7) (465.3) ======== ======== Loans are predominantly floating rate. However the Group periodically entersinto interest rate derivative contracts to manage its exposure to interestrates. Details of any derivative instruments held by the Group are given in Note4 (b). 16. Post-employment benefit obligation Year Year ended ended 31.12.06 31.12.05 US$'m US$'m Balance at the beginning of the year (20.6) (16.2)Charge to operating profit in the year (7.7) (3.9)Release of discount to net interest in year (0.8) (1.0)Utilised in period 4.2 1.8Foreign currency exchange difference 0.8 (1.3) -------- --------Balance at the end of the year (24.1) (20.6) ======== ======== The post employment benefit obligation relates to the provision for severanceindemnities which are payable when an employment contract comes to an end, inaccordance with normal employment practice in Chile and other countries in whichthe Group operates. The severance indemnity obligation is treated as an unfundeddefined benefit plan, and the calculation is based on valuations performed by anindependent actuary. 17. Long-term provisions Year Year ended ended 31.12.06 31.12.05 US$'m US$'m Balance at the beginning ofthe year (9.8) (13.2)(Charge)/credit tooperating profit in the year (0.6) 3.4Release of discount to netinterest in the year (0.4) (0.6)Amount capitalised - 0.8Acquisition (see Note 22) (0.8) -Disposals (see Note 23) 0.8 -Utilised in period 0.8 -Foreign currency exchangedifference 0.2 (0.2) -------- --------Balance at the end of the year (9.8) (9.8) ======== ======== Analysed as follows:Decommissioning and restoration (9.4) (9.5)Termination of water concession (0.4) (0.3) -------- --------Balance at the end of the year (9.8) (9.8) ======== ======== Decommissioning and restoration costs relate to the Group's mining operations.Costs are estimated on the basis of a formal closure plan and are subject toregular formal review. The provision for the termination of the water concession relates to theprovision for items of plant, property and equipment and working capital itemsunder Aguas de Antofagasta's ownership to be transferred to the previousstate-owned operator ESSAN at the end of the concession period, and is based onthe net present value of the estimated value of those assets and liabilities inexistence at the end of the concession. 18. Deferred tax assets and liabilities Year Year ended ended 31.12.06 31.12.05 US$'m US$'m Net position at thebeginning of the year (218.9) (194.5)Charge to tax on profit in year (72.7) (23.1)Acquisition (see Note 22) (29.0) -Foreign currencyexchange difference 0.5 (1.3) -------- --------Net position at the endof the year (320.1) (218.9) ======== ======== Analysed between:Deferred tax assets 3.1 6.6Deferred tax liabilities (323.2) (225.5) -------- --------Net position (320.1) (218.9) ======== ======== 19. Share capital and share premium At the Company's Annual General Meeting and the separate class meetings of theordinary and preference shareholders of the Company held on 14 June 2006,resolutions were passed to: • increase the authorised share capital from £12,727,000 to £67,000,000 by the creation of 1,085,460,000 ordinary shares of 5p each; • issue, by way of bonus issue, four new ordinary shares of 5p each (credited as fully paid) for every one ordinary share held by the shareholders of the Company at the close of business on 19 June 2006, by applying £39.4 million from the Company's share premium account in paying up and allotting the new ordinary shares; • increase the voting rights of each preference share from 20 votes to 100 votes, to prevent dilution of the voting rights of each preference share as a proportion of the total votes to be exercised at a general meeting. The ordinary shares were issued at the opening of business on 19 June 2006, andthe effect of the bonus issue of ordinary shares is disclosed in theConsolidated Statement of Changes in Equity. The increase in ordinary sharecapital of US$73.2 million and corresponding reduction in the share premiumaccount has been recorded at the closing exchange rate on 16 June 2006. 20. Reconciliation of profit before tax to net cash inflow from operatingactivities Year Year ended ended 31.12.06 31.12.05 US$'m US$'m Profit before tax 2,859.0 1,536.3Depreciation and amortisation 145.0 128.0Loss on disposal of property,plant and equipment (includingimpairment charge in 2005) 8.2 39.7Net finance income (53.8) (29.0)Share of profit of associate (1.1) (0.9)Increase in inventories (21.5) (28.9)Increase in debtors (135.5) (36.3)Increase in creditors andprovisions 9.8 38.6 -------- --------Cash flows from operations 2,810.1 1,647.5 ======== ======== 21. Analysis of changes in net cash At 1.1.06 Cash Other Exchange At flows 31.12.06 US$'m US$'m US$'m US$'m US$'m Cash and cash equivalents 1,316.8 489.2 - (0.5) 1,805.5 -------- -------- -------- -------- --------Bank borrowings duewithin one year (95.8) 95.4 (96.2) (0.1) (96.7)Bank borrowings dueafter one year (363.0) 10.4 95.8 - (256.8)Finance leases duewithin one year (1.4) 1.7 (1.2) - (0.9)Finance leases dueafter one year (1.5) 0.1 1.2 - (0.2)Preference shares (3.6) - - (0.5) (4.1) -------- -------- -------- -------- --------Total borrowings (465.3) 107.6 (0.4) (0.6) (358.7) -------- -------- -------- -------- -------- Net cash 851.5 596.8 (0.4) (1.1) 1,446.8 ======== ======== ======== ======== ======== Net cash Net cash at the end of each year was as follows: At At 31.12.06 31.12.05 US$'m US$'mCash and cash equivalents 1,805.5 1,316.8Total borrowings (358.7) (465.3) -------- -------- 1,446.8 851.5 ======== ======== 22. Acquisition of subsidiaries Subsidiaries acquired Principal Date of Proportion Cost of activity acquisition of shares acquisition acquired ----------------------- -------- -------- -------- -------- % US$'mTethyan Copper Company MiningLimited exploration 20 Apr 2006 100 170.4 Equatorial MiningMining Limited investment 24 Aug 2006 100 406.1 a) Tethyan Copper Limited On 20 April 2006 the Group acquired 100% of the issued share capital of TethyanCopper Company Limited ("Tethyan") for cash consideration (including transactioncosts) of US$170.4 million, following a recommended cash offer first made on 14February 2006. Book Accounting Fair value Fair value policy adjustments value alignment US$'m US$'m US$'m US$'m Intangible assets - exploration licences - 60.0 170.0 230.0Property, plant and equipment 0.4 - - 0.4Exploration, evaluation and development 18.0 (18.0) - -Trade and other receivables 0.8 - - 0.8Cash and cash equivalents 1.0 - - 1.0Trade and other payables (1.7) - - (1.7)Short-term provisions - (60.0) - (60.0)Long-term provisions (0.1) - - (0.1) -------- -------- -------- --------Net assets 18.4 (18.0) 170.0 170.4 ======== ======== ======== ======== Net cash outflow arising on acquisitionCash consideration (including directlyattributable costs) 170.4Cash payment for share ofcost of extinguishing claw-back right 30.0Cash and cash equivalents acquired (1.0) -------- 199.4 ======== (i) The intangible assets represent the full unencumberedvalue attributed to the interests in the exploration licences held by Tethyan.These include a 75% interest in the Reko Diq prospect in the Chagai Hills regionof South-West Pakistan, which includes the Tanjeel Mineral resource and theWestern Porphyries, and a 100% interest in certain other licences in the region. (ii) Exploration costs capitalised by Tethyan have beenwritten off on acquisition in the consolidated financial statements inaccordance with the Group's accounting policies. (iii) Total consideration includes directly attributablecosts of US$6.1 million. (iv) On 14 February 2006, the Group separately entered intoan agreement with BHP Billiton whereby BHP Billiton's rights to claw-back amaterial interest in certain of Tethyan's mineral interests ('Claw-Back Right')would be extinguished for a consideration of US$60 million. Trade and otherpayables were adjusted on acquisition to reflect this amount which results fromthe fair valuing of the encumbrance over the acquired exploration licencesrelating to the Claw-Back Right. Following the disposal of 50% of Tethyan toBarrick Gold Corporation ("Barrick Gold") (see Notes 22(a)(v) and 23(a) below),the Group contributed US$30 million to Tethyan for its share of the cost ofextinguishing the Claw-Back Right on 23 November 2006. This amount has beenincluded in the net cash outflow on acquisition. (v) On 22 September 2006 the Group entered into a jointventure agreement with Barrick Gold Corporation ("Barrick Gold"), to establish a50:50 joint venture in relation to Tethyan's mineral interests in Pakistan.Further details of the part-disposal of Tethyan to Barrick Corporation to giveeffect to the joint venture are set out in Note 23 below. (vi) Tethyan is wholly engaged in mineral explorationactivities and did not generate any revenue in the period before or afteracquisition by the Group. The operating loss generated by Tethyan for the periodsince acquisition was US$5.3 million, which relates mainly to exploration costsexpensed in accordance with the Group's accounting policy. This includes US$3.3million during the period for which Tethyan was wholly-owned by the Group andUS$2.0 million under the proportionate consolidation method during the periodafter which the joint venture with Barrick Gold was established. If theacquisition of Tethyan had been completed on the first day of the financialyear, its operating loss for the year would have been nil. b) Equatorial Mining Limited On 24 August 2006 the Group acquired 100% of the issued share capital ofEquatorial Mining Limited ("Equatorial") for a cash consideration (includingtransaction costs) of US$406.1 million, following a recommended cash offer firstmade on 15 August 2006. Book Accounting Fair value Fair value policy adjustments value alignment US$'m US$'m US$'m US$'m Property, plant and equipment 0.2 - 171.0 171.2Exploration, evaluation and development 10.1 (10.1) - -Investment in associate(Minera El Tesoro) 137.5 (137.5) - -Available for sale investments 5.6 - - 5.6Trade and other receivables 6.4 - - 6.4Cash and cash equivalents 118.0 - - 118.0Current trade and other payables (1.4) - - (1.4)Non-current trade and other payables (1.4) - - (1.4)Long-term provisions (0.8) - - (0.8)Deferred tax - - (29.0) (29.0) -------- -------- -------- --------Net assets 274.2 (147.6) 138.9 268.6 ======== ======== ========Elimination of minority interest 137.5 --------Total consideration 406.1 ======== Net cash outflow arising on acquisitionCash consideration (including directly attributable costs) 406.1Cash and cash equivalents acquired (118.0) -------- 288.1 ======== (i) Equatorial's principal asset was a 39% interest in MineraEl Tesoro, in which the Group held the remaining 61% and which it had accountedfor as a subsidiary. The acquisition has resulted in the elimination of minorityinterest of US$137.5 million recognised in the Group's balance sheet immediatelyprior to acquisition. (ii) Exploration costs capitalised by Equatorial have beenwritten off on acquisition in the consolidated financial statements inaccordance with the Group's accounting policies. (iii) Total consideration includes directly attributable costs ofUS$3.1million (iv) In July 2006, Equatorial received notice of a claim byErrigal Limited in the New South Wales Supreme Court. Errigal is a formerminority shareholder in one of Equatorial's subsidiaries whose interest wasacquired in 1993, and the claim is for amounts payable under the1993 acquisition agreement. Equatorial does not agree with the interpretationof the 1993 agreement advanced by Errigal and the action will be defendedvigorously. The effect of the claim is unlikely to be material to the Group. (v) The acquisition has also resulted in a fair value adjustmentto mining properties (including those mining properties held by Minera El Tesoro) of US$171.0 million, and a corresponding deferred tax provision of US$29.0million. (vi) The Group entered into an agreement to sell EquatorialMining North America Inc. (EMNA), a wholly-owned subsidiary of Equatorial.Further details of the disposal are given in Note 23(b). (vii) Equatorial did not generate revenue in the period before orafter acquisition by the Group, and its acquisition did not have any effect onthe Group as its interest in El Tesoro was already consolidated as a subsidiaryin the Group's financial statements. The operating profit generated byEquatorial (excluding its interest in El Tesoro which was already consolidatedby the Group as a subsidiary) for the period since acquisition was US$4.4million. If the acquisition of Equatorial had been completed on the first day ofthe financial year, its operating profit (similarly excluding its interest in ElTesoro) for the year would have been US$4.4 million. 23. Disposal and part-disposal of subsidiaries a) Atacama Copper Pty Limited and joint venture with Barrick Gold Corporation On 22 September 2006, the Group entered into a 50:50 joint venture agreementwith Barrick Gold Corporation ("Barrick Gold") in relation to Tethyan's mineralinterests in Pakistan. The Group disposed of 50% of the issued share capital ofAtacama Copper Pty Limited ("Atacama"), the immediate parent company of Tethyan,to Barrick Gold for US$86.8 million. Book value of net assets US$'msold Intangible assets - exploration 115.0licencesProperty, plant and 0.6equipmentTrade and other 0.4receivablesCash and cash equivalents 1.1Trade and other payables (0.6)Short-term provisions (30.8)Long-term provisions (0.1) --------Net assets 85.6 ======== Profit on disposalConsideration received 86.8Net assets on disposal of (85.6)50% interest -------- 1.2 ======== Net cash inflow arising on disposalConsideration received in cash and 86.8cash equivalentsLess: cash and cash (1.1)equivalents disposed -------- 85.7 ======== (i) The book value of net assets sold represents 50% of theconsolidated carrying value of Atacama and its subsidiaries including Tethyan atthe date of disposal. Following the disposal, the Group has treated itsremaining 50% interest in Atacama as a jointly controlled entity under theproportionate consolidation method. (ii) The profit on disposal principally represents the recoveryof 50% of the exploration costs incurred and expensed by Tethyan between 20April, the date of its acquisition by the Group, and 22 September, the date ofthe part-disposal to Barrick Gold. This amount has been recorded in otheroperating income. b) Equatorial Mining North America Inc. On 11 December 2006, the Group entered into an agreement to dispose ofEquatorial Mining North America Inc. (EMNA), a wholly-owned subsidiary ofEquatorial Mining Limited, to Idaho General Mines Inc ("IGM"). EMNA and itssubsidiaries formerly owned and operated the Tonopah copper mine in Nevada, overwhich they retained royalties. The consideration of US$4.9 million was receivedin January 2007. Book value of net assets US$'msold Property, plant and 4.3equipmentCash and cash equivalents 1.4Long-term provisions (0.8) --------Net assets 4.9 ======== Profit on disposalConsideration receivable (received 4.9in January 2007)Net assets on disposal (4.9) -------- - ======== Net cash outflow arising on disposalConsideration received in cash and -cash equivalentsLess: cash and cash (1.4)equivalents disposed -------- (1.4) ======== (i) The book value of net assets sold equates to the fair values assigned at thetime of the acquisition of Equatorial Mining Limited. (ii) The consideration was received in January 2007 and will be accounted for inthe cash flow statement for that year. (iii) No amount has been recognised in respect of the further contingentconsideration of US$6 million which is payable should production at the Tonopahmine commence. 24. Other transactions a) Agreement with Ascendant Copper Corporation On 14 November 2006 the Group signed a Letter of Agreement ("Agreement") withAscendant Copper Corporation ("Ascendant"), a mining company listed on theToronto Stock Exchange, to acquire an interest in Ascendant's Chaucha Project.The Chaucha Project is a copper-molybdenum prospect located in the WesternCordillera of the Andes in southern Ecuador, approximately 70 kilometres west ofthe town of Cuenca. The mineral concession covers an area of 2,544 hectares withapplications by Ascendant in progress for further mineral concessions from theappropriate government entities. Under the terms of the Agreement, the Group has the right to earn up to anundivided 60% interest in the Chaucha Project. The interest will be acquired byearning an equity interest in Compania Minera DosRios S.A. ("DosRios"), awholly-owned subsidiary of Ascendant which holds (or will hold) all of themineral concessions associated with the Chaucha Project. The Group has committedto fund at least US$1 million of expenditure (after which it has the right toterminate the Agreement at any time) and will subsequently earn its equityinterest in successive stages by spending a total of US$40 million over asix-year period in four distinct phases of qualifying expenditures. Theseexpenditures will cover exploration and advancement costs including, in thelater phases, preparation of a feasibility study and a final payment oncompletion to Ascendant. No expenditure was incurred on this project during 2006. b) Agreement with AngloGold Ashanti Limited On 14 July 2006 the Group reached agreement with AngloGold Ashanti Limited toform a joint venture to explore and develop copper and gold mining projects insouthern Colombia. Under the agreement, AngloGold will contribute its mineralinterests in the area covered by the joint venture agreement, and the Group hascommitted to funding US$1.3 million in exploration over a one year period. TheGroup may elect to fund an additional US$6.7 million in exploration within fouryears, in order to earn a 50% interest in the joint venture. During 2006 the Group spent US$0.9 million on this project which has beenincluded in exploration costs. 25. Post balance sheet event On 2 March 2007, the Group agreed to sell its 50% interest in Cordillera de LasMinas S.A. ("CMSA") to Panoro Minerals Limited ("Panoro"), a company listed onthe TSX Venture Exchange. CMSA was the joint venture entity with Companhia ValeRio Doce through which its interests in southern Peru were held. The Group'sshare of the consideration comprises US$6.0 million plus six million commonshares in Panoro. The agreement is subject to a number of conditions includingfinancing by Panoro and regulatory approvals. Subject to these conditions beingmet, closing is expected to occur by June 2007. 26. Currency translation Assets and liabilities denominated in foreign currencies are translated intodollars and sterling at the period end rates of exchange. Results denominated inforeign currencies have been translated into dollars at the average rate foreach period. Period end rates Average rates 31.12.06 US$1.9569 = £1; US$1 = Ch$532 US$1.8386 = £1; US$1 = Ch$530 31.12.05 US$1.7179 = £1; US$1 = Ch$513 US$1.8185 = £1; US$1 = Ch$560 27. Distribution The Annual Report and Financial Statements for the year ended 31 December 2006,together with the Notice of the 2007 Annual General Meeting, will be posted toall shareholders in April 2007. The Annual General Meeting will be held atCanning House, 2 Belgrave Square, London SW1 at 10.30 a.m. on Wednesday, 13 June2007. 28. Production and Sales Statistics (not subject to audit or review) (See notes following Note 28(b).) a) Production and sales volumes for copper and molybdenum Production Sales ------------ ------- Year Year Year Year ended ended ended ended 31.12.06 31.12.05 31.12.06 31.12.05 000 000 000 000 tonnes tonnes tonnes tonnes CopperLos Pelambres 324.2 322.8 324.8 319.1El Tesoro 94.0 98.1 95.3 96.1Michilla 47.3 46.4 47.7 45.3 -------- -------- -------- --------Group total 465.5 467.3 467.8 460.5 ======== ======== ======== ======== MolybdenumLos Pelambres 9.8 8.7 9.9 8.5 ======== ======== ======== ======== b) Cash costs per pound of copper produced and realised prices per pound of copper and molybdenum sold Cash cost Realised prices ----------- ----------------- Year ended Year ended Year ended Year ended 31.12.06 31.12.05 31.12.06 31.12.05 US cents US cents US cents US cents CopperLos Pelambres 16.4 (17.1) 335.0 189.2El Tesoro 78.6 66.1 316.4 175.7Michilla 126.4 118.8 318.5 177.1 -------- -------- -------- ---------Group weightedaverage (net of by-products) 40.2 13.9 329.5 185.2 ======== ======== ======== ========= Group weightedaverage (before deducting by-products) 95.6 77.3 ======== ======== Cash costs at Los PelambresOn-site shipping cost 56.4 47.1Tolling charges for concentrates 39.7 27.6 -------- --------Cash costs before deductingby-product credits 96.1 74.7By-product credits(principally molybdenum) (79.7) (91.8) -------- --------Cash costs (net ofby-product credits) 16.4 (17.1) ======== ======== LME average 305.3 167.1 ======== ========= US$ US$MolybdenumLos Pelambres 24.6 31.4 ======== ========= Market average price 24.8 32.0 ======== ========= Notes to the production and sales statistics (i) The production and sales figures represent the actualamounts produced and sold, not the Group's share of each mine. The Group owns60% of Los Pelambres, 100% of El Tesoro (61% prior to 24 August 2006) and 74.2%of Michilla. (ii) Los Pelambres produces copper and molybdenum concentrates,and the figures for Los Pelambres are expressed in terms of payable metalcontained in concentrate. Los Pelambres is also credited for the gold and silvercontained in the copper concentrate sold. El Tesoro and Michilla producecathodes with no by-products. (iii) Cash costs are a measure of the cost of operationalproduction expressed in terms of cents per pound of payable copper produced.Cash costs are stated net of by-product credits and include tolling charges forconcentrates at Los Pelambres. Cash costs exclude depreciation, financial incomeand expenses, hedging gains and losses, exchange gains and losses andcorporation tax for all three operations. By-product calculations do not takeinto account mark-to-market gains for molybdenum at the beginning or end of eachperiod. (iv) Excluding by-product credits (which are reported as part ofturnover) and tolling charges for concentrates (which are deducted fromturnover), weighted average cash costs for the Group (comprising on-site andshipping costs in the case of Los Pelambres and cash costs in the case of theother two operations) increased from 58.3 cents per pound in 2005 to 68.0 centsper pound in 2006. (v) Realised copper prices are determined by comparing turnoverfrom copper sales (grossing up for tolling charges for concentrates) with salesvolumes for each mine in the period. Realised molybdenum prices at Los Pelambresare calculated on a similar basis. Realised prices do not take into accountgains and losses (including those arising from fair value adjustments) oncommodity derivatives which are included in other operating income or expense asthe Group did not adopt the hedge accounting provisions of IAS 39 "FinancialInstruments: Recognition and Measurement" during 2005 or 2006. (vi) The totals in the tables above may include some smallapparent differences as the specific individual figures have not been rounded. (vii) The production information in Note 28(a) and the cash costinformation in Note 28(b) is derived from the Group's production report for thefourth quarter of 2006, published on 31 January 2007. 29. Summary of mining companies' Chilean GAAP financial statements (not subjectto audit or review) The Group's three mining companies, Los Pelambres, El Tesoro and Michilla, willfile financial statements under Chilean GAAP for the year ended 31 December 2006with the Chilean securities regulator, the Superintendencia de Valores y Segurosde Chile ("SVS") on 30 March 2007. These filings are in accordance with miningtax legislation introduced in Chile last year which requires companies that haveelected to enter a new tax stability regime to publish from the 2006 financialyear on a quarterly basis. The balance sheets, income statements and cash flow statements prepared underChilean GAAP and to be filed with the SVS are summarised below. (a) Balance sheets Los El Tesoro Michilla Pelambres At At At 31.12.2006 31.12.2006 31.12.2006 US$'m US$'m US$'m Cash and cash equivalents 485.3 219.0 69.5Trade and other receivables 365.1 53.0 17.0Inventories 46.6 53.8 18.1Current and deferred tax assets 29.9 2.5 2.6 ---------- ---------- ----------Current assets 926.9 328.3 107.2 Fixed assets 1,504.8 258.1 54.6 Other non-current assets 152.2 51.4 0.7 ---------- ---------- ---------- TOTAL ASSETS 2,583.9 637.8 162.5 ========== ========== ========== Short term borrowings (82.5) (14.2) -Trade and other payables (154.6) (43.4) (20.5)Current and deferred taxliabilities (110.7) (36.0) (15.5) ---------- ---------- ---------- Current liabilities (347.8) (93.6) (36.0) ---------- ---------- ---------- Medium and long termborrowings (234.8) (14.0) -Trade and other payables (12.2) (6.5) (7.5)Deferred tax liabilities (138.8) (31.6) - ---------- ---------- ---------- Non-current liabilities (385.8) (52.1) (7.5) ---------- ---------- ---------- Total liabilities (733.6) (145.7) (43.5) ---------- ---------- ---------- Share capital (373.8) (91.0) (78.4)Reserves (1,476.5) (401.1) (40.6) ---------- ---------- ---------- Total shareholders' equity (1,850.3) (492.1) (119.0) ---------- ---------- ---------- TOTAL LIABILITIES ANDSHAREHOLDERS' EQUITY (2,583.9) (637.8) (162.5) ========== ========== ========== (b) Income statements Los El Tesoro Michilla Pelambres Year ended Year ended Year ended 31.12.06 31.12.06 31.12.06 US$'m US$'m US$'m Turnover 2,726.9 603.2 260.5 Operating costs (403.7) (178.6) (142.3) ---------- ---------- ---------- Operating margin 2,323.2 424.6 118.2 Administrative and distribution expenses (77.1) (27.2) (13.2) ---------- ---------- ---------- Operating profit 2,246.1 397.4 105.0 ---------- ---------- ---------- Other income 0.8 0.3 0.8Financial income 36.1 4.8 1.9Financial expenses (21.9) (3.0) (0.3)Other expenses (2.0) (2.1) (0.6)Exchange difference 4.7 1.5 0.7 ---------- ---------- ----------Net non-operating income 17.7 1.5 2.5 ---------- ---------- ----------Profit before tax 2,263.8 398.9 107.5Income tax expense (419.1) (75.2) (21.5) ---------- ---------- ----------Profit for the financial period 1,844.7 323.7 86.0 ========== ========== ========== (c) Cash flow statements Los El Tesoro Michilla Pelambres Year ended Year ended Year ended 31.12.06 31.12.06 31.12.06 US$'m US$'m US$'m Net cash flow from operating activities 1,896.8 352.2 112.0 ---------- ---------- ---------- Investing activitiesAdditions to fixed assets (442.2) (13.7) (7.8)Disposals of fixed assets 1.4 - 0.1 ---------- ---------- ----------Net cash usedin investing activities (440.8) (13.7) (7.7) ---------- ---------- ---------- Financing activitiesDividends paid (1,450.0) (95.0) (50.0)Loans repaid (81.4) (28.0) - ---------- ---------- ---------- Net cash used in financingactivities (1,531.4) (123.0) (50.0) ---------- ---------- ---------- Net (decrease)/increase in cashand cash equivalents (75.4) 215.5 54.3 Cash and cash equivalents atthe beginning of the period 560.7 3.5 15.2 ---------- ---------- ---------- Cash and cash equivalents atthe end of the period 485.3 219.0 69.5 ========== ========== ========== Notes to Chilean GAAP financial statements (i) The above balance sheets, income statements and cash flowstatements have been derived from the financial statements of Los Pelambres, ElTesoro and Michilla for the year ended 31 December 2006 to be filed with the SVSin Chile on 30 March 2007. Certain detailed lines in the individual statementshave been combined. (ii) The balance sheets, income statements and cash flowstatements above have been prepared under Chilean GAAP and therefore do notnecessarily equate to the amounts that would be included in the Group'sconsolidated financial statements for a corresponding period either as tomeasurement or classification. (iii) The amounts disclosed above represent the full amount foreach company and not the Group's attributable share. The Group owns 60% of LosPelambres, 100% of El Tesoro (61% prior to 24 August 2006) and 74.2% ofMichilla. (iv) A translation into English of the full quarterly financialstatements for each company shown in summary form above will be available on theGroup's website www.antofagasta.co.uk. 30. Reconciliation of Chilean GAAP results to Turnover and EBITDA under IFRSfor individual business segments (a) Turnover Los El Tesoro Michilla Pelambres Year ended Year ended Year ended 31.12.06 31.12.06 31.12.06 Notes US$'m US$'m US$'m Chilean GAAP - Turnover 2,726.9 603.2 260.5 Mark-to-market ofprovisionally priced sales (i) (25.6) (0.2) -Reclassification of realisedlosses on commodityderivatives to other operating expense (ii) - 61.8 74.4 ---------- ---------- ----------IFRS - Turnover 2,701.3 664.8 334.9 ========== ========== ========== (b) EBITDA Los El Tesoro Michilla Pelambres Year ended Year ended Year ended 31.12.06 31.12.06 31.12.06 Notes US$'m US$'m US$'m Chilean GAAP - Operating profit 2,246.1 397.4 105.0 Depreciation & amortisation 72.2 35.3 15.2 ---------- ---------- ---------- Chilean GAAP - EBITDA 2,318.3 432.7 120.2 Mark-to-marketof provisionallypriced sales (i) (25.6) (0.2) - Mark-to-marketof financial derivatives (ii) 0.3 17.0 34.8 Other IFRS andconsolidation adjustments (iii) 4.0 6.5 3.4 ---------- ---------- ----------IFRS - EBITDA 2,297.0 456.0 158.4 ========== ========== ========== Notes to reconciliation of turnover and EBITDA (i) Copper and molybdenum concentrate sale agreements and copper cathode saleagreements generally provide for provisional pricing of sales at the time ofshipment, with final pricing being based on the monthly average London MetalExchange copper price or monthly average market molybdenum price for specifiedfuture periods. This normally ranges from 30 to 180 days after delivery to thecustomer. Under Chilean GAAP, the Group's accounting treatment is to value sales, whichremain open as to final pricing at the period end, in aggregate at the lower ofprovisional invoice prices and mark-to-market prices at the balance sheet date.The Group determines mark-to-market prices using forward prices at each periodend for copper concentrate and cathode sales, and period-end month averageprices for molybdenum concentrate sales due to the absence of a futures marketfor that commodity. Under IFRS, both gains and losses from the marking-to-market of open sales arerecognised through adjustments to turnover in the income statement and to tradedebtors in the balance sheet. Under IFRS, the Group determines mark-to-marketprices in the same way as under Chilean GAAP. (ii) The Group uses derivative financial instruments to reduce exposure tocommodity price movements. The Group does not use such derivative instrumentsfor trading purposes. Under Chilean GAAP, such derivatives are held off the balance sheet. Gains orlosses on derivative instruments are matched in the income statement against theitem intended to be hedged. Such gains or losses are reflected by way ofadjustment to turnover. The Group did not adopt the hedge accounting provisions of IAS 39 "FinancialInstruments: Recognition and Measurement" in the year ended 31 December 2006.Accordingly, under IFRS, derivatives have initially measured at cost includingtransaction costs (which may be nil), and measured at subsequent reporting datesat fair value. Gains and losses arising from changes in fair value, or fromderivatives which mature or are liquidated in the period, are included in theincome statement for the period as part of other operating income or expense.Any amounts included in turnover under Chilean GAAP are reclassifiedaccordingly. (iii) Other IFRS and consolidation adjustments are not material eitherindividually or in aggregate. This information is provided by RNS The company news service from the London Stock Exchange
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