The Group’s mining operations are dependent on a range of key inputs, such as energy, water, labour and fuel. For cathode producers such as Centinela, Antucoya and Zaldívar, which use the SX-EW process, sulphuric acid is a key input. The availability and cost of such inputs lie at the heart of the Group’s cost management strategy, which focuses on cost control and security of supply.

The Group’s two largest operations, Los Pelambres and Centinela, are competitively positioned on the copper industry cost curve. This reflects low operating costs and significant by-product credits. The Group cash cost guidance for 2016, before by‑product credits, is $1.65/lb, some 9% lower than achieved in 2015. The initiatives below, implemented by the Group’s procurement department contribute to the reductions required to lower unit costs, even while mine grades are declining.

The Group introduced the Cost and Competitive Programme in 2014, with the aim of reducing the cost base and improving the Group’s competitiveness within the industry.

During 2015, the Group continued to focus on reducing its operating costs through its integrated Cost and Competitiveness Programme. The Group achieved cost savings of approximately $150 million. The target for 2016 is set at an incremental $160 million.

The Group endeavours to procure electricity through medium and long-term contracts at each mine. The cost, in most cases, is linked to either the current cost of electricity on the Chilean grids or the generation costs of a particular supplier, with the latter subject to adjustments for inflation and each generator’s fuel input prices.

To improve security of supply, Los Pelambres has invested in the largest wind-power plant in Chile, El Arrayán. This started providing some 20% of Los Pelambres’ energy requirements from the middle of 2014. Later in the year Los Pelambres signed long-term Power Purchase Agreements ("PPAs") with two solar power providers for a total of 50MW of power commencing in 2015 and 2016. These PPAs, together with those signed in 2013 as part of the Group’s investment in Alto Maipo, come on-stream in 2015 and 2018 and will provide the remaining energy requirements for Los Pelambres at competitive and stable prices.

Currently, all of the Group’s operations located on the Sistema Interconectado del Norte Grande ("SING") benefit from long-term contracts indexed to the price of coal. The Group has also secured a competitive long-term PPA that will secure the energy provision for the Antucoya project.

Water is a precious commodity in the regions where the Group’s mines operate, so the recycling of water is of great importance.

Water for each operation is sourced either from the sea or from surface and underground sources. Each operation has the necessary permits for the long-term supply of water at current production levels. 

The Group optimises water efficiency by using desalinated sea water, reducing demand and encouraging recycling across the operations. Water reuse rates depend on a range of factors and the Group seeks to achieve between 70–85% depending on the characteristics of each operation.

The Group has pioneered the use of untreated sea water at its Chilean operations, with both Centinela and Antucoya using this process. In 2015, sea water accounted for 45.5% of total Group water use.

Secure labour supply is key to the Group’s success. Labour agreements with unions are in place at all of the Group’s mining operations, generally covering periods of four years. In 2014, new labour agreements were negotiated at all operations, except Zaldívar, securing terms of employment for all employees until 2018 and at Zaldívar until 2017. The Group continues to foster good working relationships with its employees and labour unions and to date there has been no industrial action.

Contractors make up approximately 72% of the total workforce across all Group operations. Labour negotiations for the contractors’ workforce are the responsibility
of contractors. The Group maintains strong relations with all contractors to ensure operational continuity.

The sulphuric acid market weakened during 2015, mainly due to lower consumption in the fertiliser industry. In Chile, acid consumption at mine operations decreased as lower copper prices affected production,
lowering the regional deficit and causing prices to drop by the end of the year.

The Group secures most of its sulphuric acid requirements for a year or longer at specified rates, normally agreed in the latter part of the previous year. Therefore, the decline in demand is likely to benefit the acid procurement programme in 2016.

The Central Procurement Department is repositioning the Group as a single entity rather than several separate operations.  Procurement policies and procedures have been standardised. A central group of subject matter experts now defines categories of products and services.  There are new corporate level agreements  with price reductions and discounts in  high spend categories such as tyres, fuel,  lubricants, pick-up trucks, explosives and  blasting, grinding media, mining equipment  and spare parts as well as solvents and  reagents. This will save over $150 million over the coming five years. 

In 2015, the procurement team analysed the top 20 contractors across each operation in order to standardise procurement practices, re-scope major service contracts and seek price reductions with suppliers in exchange for centralised agreements.  The Group continually reviews its procurement processes and existing agreements and has identified additional cost-saving opportunities to be taken in  the coming years as part of the Cost and  Competitiveness Programme.

In total, the Group has over 1,000 contracts for goods and services. All key contracts, such as for tyres, grinding media, mining and mobile equipment, chemicals, explosives, camp administration and  maintenance, are under long-term  agreements. Price adjustment formulas reflect current market downturns of key cost elements, such as steel, petrol, coal,  etc. Contracts are normally between the operation and the supplier, but tender and negotiation processes are mostly coordinated or even led centrally by  the Central Procurement Department  to maximise leverage and benefits.

The Groups corporate procurement team uses a variety of strategies, from full price competition, price auctions or sourcing in  China, to working with strategic suppliers  to reduce the costs to each party and  achieve a sustainable, longer-term lower  cost base for future growth. To foster this  co-operative approach, the Group has  engaged productivity experts to map the  operations and understand value streams  and opportunities for the Group to increase  efficiency and reduce costs. 

The Central Procurement Department continually seeks to increase productivity, optimise service contracts, reduce relevant supply costs and better manage inventory  levels, as well as consolidating minor  suppliers for non-critical goods and services.  Over the last two years, the Groups material stocks have been reduced by a third, equivalent to $75 million, without  compromising service levels.  The Group has recently upgraded its financial and management systems implementing  SAP, an enterprise resource planning system  that centrally manages all stock codes,  inventories and supply contracts.  The procurement of supplies for the Zaldivar operation has been fully integrated into the Group´s centralised procurement system and will benefit from existing Group supply contracts. 

Oil represents a small proportion of the Group’s total costs, primarily as an input for transporting ore and waste at the mine sites. Improving fuel efficiency is a priority for the Group, with the litres of fuel consumed per tonne of material extracted being an efficiency measure. Fuel is supplied by Chile’s two largest suppliers to avoid sole supplier risk. The oil price also affects the spot price of energy, the shipping rates of supplies and products and the cost of items such as tyres and conveyor belts that contain oil-based products. The oil price fell by approximately 50% during 2014 and this weakness continued through 2015. This will have an impact on the Group’s costs, but given the small proportion of costs that are affected by the oil price, this impact will not be significant. 

Costs are affected by the Chilean peso to US dollar exchange rate because approximately 35% of the mining division’s operating costs are in Chilean pesos. However, the exchange rate often acts as a natural hedge: over half of Chile’s foreign exchange is generated from copper sales and movements in the copper price tend to affect the Chilean peso.