The Group’s mining operations depend on many inputs, ranging from energy and water to labour and fuel, the most important of which are reviewed below.
Concentrate producers such as Los Pelambres and Centinela require other particular inputs such as reagents and grinding media. Cathode producers such as Centinela, Antucoya and Zaldívar, which use the SX-EW process, require sulphuric acid. The availability, cost and reliability of these inputs are central to 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 already competitively positioned on the copper industry cost curve. The Group’s operations and the industry as a whole have a declining grade profile over time, which places upward pressure on unit costs. During the year the initiatives below have been implemented by the Group’s Procurement Department to reduce the unit cost of each operation and allow each to remain profitable as ore grades decline.
The Group sources its energy from the two electricity grids in Chile: the northern grid (SING), which supplies the Centinela, Antucoya and Zaldívar mines, and the central grid (SIC) which supplies Los Pelambres. The SING has an installed capacity of 5.3GW, supplied by coal-fired power stations and renewable sources such as wind and solar. The SIC’s installed capacity is 17.4GW, primarily from hydroelectric plants. Due to this reliance on hydroelectric power, the cost of energy on the SIC fluctuates depending on precipitation levels, whereas on the SING costs tend to be more stable.
In 2014, the Chilean government began a process to connect the SING and SIC power grids to increase the reliability of the national power system. This should be completed in 2018. The new integrated grid will supply 99% of national demand, increasing customer access to a range of power generation sources and bringing stability to power prices throughout the year.
Approximately 19% of the Group’s cash costs are energy related. To manage price fluctuations, the Group has medium and long-term electricity contracts, called Power Purchase Agreements (PPAs) at each operation. Pricing, in most cases, is linked to the cost of electricity on the Chilean grids or the generation costs of a supplier, the latter being subject to adjustments for inflation and fuel input prices. The Group operations’ power requirements, which previously had some exposure to spot prices, are now all under PPAs.
All of the Group operations located on the SING benefit from long-term contracts, mostly indexed to the price of coal. The first of these to expire will be the PPA supplying 100% of Zaldívar’s power until 2020. The Group has invited several suppliers to bid for the long-term power contracts for Zaldívar, and hopes to conclude the process in 2018.The Group’s other PPAs continue until 2026–28.
Water is a precious commodity in the regions where the Group’s mines operate, so the efficient use and recycling of water is extremely important.
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 reducing demand, using untreated sea water and encouraging recycling across its operations. Water reuse rates depend on a range of factors and the Group seeks to achieve a rate of 76–93% depending on circumstances at each operation.
The Group pioneered the use of untreated sea water in the 1990s and currently uses it at Centinela and Antucoya. In 2017, sea water accounted for 45% of total Group water use, a decrease from the previous year.
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 lasting for a period of three years. In 2017, the Group successfully entered into new labour agreements with the unions at Centinela and Zaldívar.
The Group continues to foster good working relationships with its employees and unions and to date there has been no industrial action. At Centinela, the Group was able to conclude labour agreements several months in advance of the formal negotiation period, streamlining benefits across the three main unions at the mine.
Contractors account for approximately 70% of the workforce across the Group’s operations, and are responsible for labour negotiations with their own employees. The Group maintains strong relations with all contractors to ensure operating continuity and requires all contractors to adhere to the same standards expected of its own employees, particularly in the areas of safety and health.
The sulphuric acid market was tight during 2017 due to supply disruptions in many regions of the world. This increased the regional deficit and caused prices to rise during the year.
The Group secures most of its sulphuric acid requirements under contracts for a year or longer, at prices normally agreed in the latter part of the previous year. The tight market in 2017 is reflected in lower acid prices in 2018.
The Group’s Central Procurement Department negotiates corporate-level agreements for key purchases such as mining equipment, tyres and reagents. It also achieves synergies and economies of scale in other high-spend areas, while co-ordinating activities at each of the mining operations. A core of experts defines product and service categories, and procurement policies and procedures are standardised across the Group.
The Group continually reviews its procurement processes and existing agreements, identifying additional cost-saving opportunities during the coming years as part of its Cost and Competitiveness Programme. In total, the Group has over 3,000 suppliers for goods and services. Key contracts, such as tyres, grinding media, mining and mobile equipment, chemicals, explosives, camp administration and maintenance, are under long-term agreements. Price adjustment formulae reflect the market variations of key cost elements, such as steel, petrol and the Consumer Price Index (CPI). Contracts are normally negotiated between the operation and the supplier, but tenders and negotiations are generally co-ordinated, and sometimes led, by the Central Procurement Department in order to maximise leverage and benefits.
The Group’s corporate procurement team uses a variety of strategies, such as full-price competition, price auctions, sourcing from China and working with strategic suppliers to reduce the costs to each party and achieve a sustainable, longer-term, lower-cost base.
Fuel represents approximately 7% of total cash costs and is used in trucks transporting ore and waste at the mine sites. Improving fuel efficiency is a priority, with the amount of fuel consumed per tonne of material extracted being a key measure. Fuel is supplied by Chile’s two largest suppliers to avoid sole supplier risk.
The oil price tends to affect the spot price of energy, shipping rates for supplies and products, and the cost of items such as tyres and conveyor belts, which contain oil-based products. The oil price rose by approximately 15% during 2017, putting pressure on the Group’s operating cost base.
Costs are affected by the Chilean peso to US dollar exchange rate, as approximately 35-40% of the mining division’s operating costs are in Chilean pesos. However, as over half of Chile’s foreign exchange earnings are generated from copper sales, an increase in the copper price tends to weaken the Chilean peso and vice versa and so a natural hedge exists for the Group. During 2017, the Chilean peso strengthened by 4.1% from Ch$677/$1 in 2016 to Ch$649/$1. During the first two months of 2018 it strengthened further, averaging Ch$601/$1.