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.
As concentrate producers, Los Pelambres and Centinela require reagents and grinding media. As cathode producers using the SX-EW process, Centinela, Antucoya and Zaldívar 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 largest operation, Los Pelambres, is competitively positioned on the copper industry cost curve in the first quartile, but, like the Group’s other operations and the industry as a whole, it has a declining grade profile over time, which places upward pressure on unit costs.
The Group sources its energy from the main electricity grid in Chile, the National Electric System (SEN), formed following the merger early in 2018 of two previously independent systems, the northern grid (SING) and the central grid (SIC). The SEN has an installed capacity of 22.7 GW, supplying 99% of national demand, and its creation has increased customers’ access to a range of power generation sources.
The northern sector of SEN supplies the Centinela, Antucoya and Zaldívar mines, and the central sector supplies Los Pelambres.
The northern sector of SEN is supplied by coal-fired power stations and renewable sources such as wind and solar, and the central sector primarily from hydroelectric plants. Due to this reliance on hydroelectric power, the cost of energy fluctuates in the southern sector depending on precipitation levels, while the northern sector’s costs tend to be more stable.
Approximately 14% of the Group’s cost base is 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 are all under PPAs.
The Group’s mining operations located in the northern sector of SEN 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. In 2018 the Group signed a new PPA to give Zaldívar continuity of supply after 2020, with the new PPA guaranteeing that 100% of the power will come from renewable sources.
Water is a precious commodity in the regions where the Group’s mines operate, so its efficient use and recycling 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 supply of water at current production levels and Zaldívar submitted an Environmental Impact Assessment during the year to extend its water extraction permit from current sources beyond 2025, in line with its existing Life-of-Mine.
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 an optimal rate, 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 2018, sea water accounted for 48% of total Group water use, an increase from the previous year.
Securing the availability of labour is key to the Group’s success. Labour agreements with unions are in place at all of the Group’s mining operations and generally last for a period of three years.
The Group continues to foster good working relationships with its employees and unions and there has never been any industrial action. During 2018 Los Pelambres successfully concluded labour agreements with both mine and plant unions in the formal negotiation period.
Contractors account for approximately 70% of the Group’s workforce 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 Group’s Central Procurement Department negotiates corporatelevel 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 team 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 4,750 suppliers of 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 both parties and achieve a sustainable, longer-term, lower cost base.
Fuel and lubricants represent approximately 7% of total operating cost base and are used mainly by trucks hauling 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. The oil price tends to affect not only the fuel price but 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 27% during 2018, putting pressure on the Group’s operating cost base.
The sulphuric acid market was tight during 2018 and will tighten further during 2019, mainly due to supply disruptions across the world and scheduled smelter upgrades in Chile during 2018 and the first half of 2019. These upgrades have increased the regional deficit, raising demand for acid from outside the region and causing prices to rise in 2018 and into 2019. However, once the upgrades are completed, prices are expected to revert to previous levels.
The Group secures most of its sulphuric acid requirements under contracts for a year or longer, normally at prices agreed in the latter part of the previous year. The tight market in 2018 is reflected in higher annual acid prices for 2019.
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 some 50% 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, so a natural hedge exists for the Group. During 2018, the Chilean peso weakened by 1.3% from Ch$649/$1 in 2017 to Ch$641/$1.