MINERA MICHILLA S.A.AUDITED FINANCIAL STATEMENTSFOR THE FULL YEAR ENDED 31 DECEMBER 2012AND 2011 - UNDER IFRS(TRANSLATION FROM SPANISH VERSION TO BEFILED WITH SUPERINTENDENCIA DE VALORES Y SEGUROSDE CHILE 22 TH MARCH 2013)
MINERA MICHILLAFinancial Statements for the year endedDecember 31, 2012 and 2011and independent auditor`s report
DeloitteAuditores y Consultores LimitadaRosario Norte 407Las Condes, SantiagoChileFono: (56‐2) 2729 7000Fax: (56‐2) 2374 email@example.comINDEPENDENT AUDITORS' REPORTTo the Shareholders’ and Directors’ ofMinera MichillaWe have audited the accompanying financial statements of Minera Michilla S.A., which comprise thestatements of financial position as of December 31, 2012 and 2011, and the related statements ofcomprehensive income, changes in equity, and cash flows for the years then ended, and the relatednotes to the financial statements.Management’s responsibility for the financial statementsManagement is responsible for the preparation and fair presentation of these financial statements inaccordance with International Financial Reporting Standards; this includes the design, implementation,and maintenance of internal control relevant to the preparation and fair presentation of financialstatements that are free from material misstatement, whether due to fraud or error.Auditors' responsibilityOur responsibility is to express an opinion on these financial statements based on our audits. Weconducted our audits in accordance with auditing standards generally accepted in Chile. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free from material misstatement.An audit involves performing procedures to obtain audit evidence about the amounts and disclosures inthe financial statements. The procedures selected depend on the auditor's judgment, including theassessment of the risks of material misstatement of the financial statements, whether due to fraud orerror. In making those risk assessments, the auditor considers internal control relevant to theCompany's preparation and fair presentation of the financial statements in order to design auditprocedures that are appropriate in the circumstances, but not for the purpose of expressing an opinionon the effectiveness of the Company's internal control. Accordingly, we express no such opinion. Anaudit also includes evaluating the appropriateness of accounting policies used and the reasonableness ofsignificant accounting estimates made by management, as well as evaluating the overall presentation ofthe financial statements.We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis forour audit opinion.Deloitte® se refiere a Deloitte Touche Tohmatsu Limited una compañía privada limitada por garantía, de Reino Unido, y a su red defirmas miembro, cada una de las cuales es una entidad legal separada e independiente. Por favor, vea en www.deloitte.cl/acerca dela descripción detallada de la estructura legal de Deloitte Touche Tohmatsu Limited y sus firmas miembro.Deloitte Touche Tohmatsu Limited es una compañía privada limitada por garantía constituida en Inglaterra & Gales bajo el número07271800, y su domicilio registrado: Hill House, 1 Little New Street, London, EC4A 3TR, Reino Unido.
OpinionIn our opinion, the financial statements referred to above present fairly, in all material respects, the financialposition of Minera Michilla S.A. as of December 31, 2012 and 2011, and the results of their operations andtheir cash flows for the years then ended in accordance with International Financial Reporting Standards.The accompanying financial statements have been translated into English for the convenience of readersoutside Chile.March 13, 2013
MINERA MICHILLA S.A.STATEMENT OF FINANCIAL POSITION AS OF DECEMBER 31, 2012 AND 2011(In thousands of US dollars - ThUS$)ASSETSNoteDecember 31,2012ThUS$December 31,2011ThUS$NON-CURRENT ASSETS:Property, plant and equipment 9 109,119 66,179Derivative financial instruments 15 7,990 47,635Available for sale investments 15 670 529Total non-current assets 117,779 114,343CURRENT ASSETS:Inventories 10 51,341 43,751Trade and other receivables 11 41,612 32,095Current tax assets 8,617Derivative financial instruments 15 24,962 10,897Cash and cash equivalents 12 9,615 88,725Current assets - Total 136,147 175,468TOTAL ASSETS 253,926 289,811NET EQUITY AND LIABILITIESCURRENT LIABILITIES:Derivative financial instruments 15 7,925Trade and other payables 14 41,496 48,758Current tax liabilities 11,878Total current liabilities 41,496 68,561NON-CURRENT LIABILITIES:Trade and other payables 14 90Long-term employee benefits 17 497 554Provisions 18 27,173 25,841Deferret tax liabilities 7 528 920Total non-current liabilities 28,288 27,315TOTAL LIABILITIES 69,784 95,876NET ASSETS 184,142 193,935EQUITY:Paid-in capital 19 42,568 42,568Hedging reserves 19 11,523 16,302Other reserves 219 219Retained earnings 129,832 134,846Equity attributable to equity holders of the Company 184,142 193,935TOTAL EQUITY 184,142 193,935TOTAL NET EQUITY AND LIABILITIES 253,926 289,811The accompanying notes are an integral part of these financial statements.
MINERA MICHILLA S.A.STATEMENT OF COMPREHENSIVE INCOMEFOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011(In thousands of US dollars - ThUS$)NoteDecember 31,2012ThUS$December 31,2011ThUS$Operating revenue 4 307,421 354,981Operating expenses (279,845) (215,543)Total profit from operations 27,576 139,438Investment income 6 850 1,314Financial expense 6 (2)Other finance items 6 (14,097) 48,974Net finance (expense ) / income (13,247) 50,286PROFIT BEFORE INCOME TAX 14,329 189,724INCOME TAX EXPENSE 7 (4,231) (42,398)PROFIT FOR THE YEAR 10,098 147,326The accompanying notes are an integral part of these financial statements.
MINERA MICHILLA S.A.STATEMENT OF OTHER COMPREHENSIVE INCOMEFOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011(In thousands of US dollars - ThUS$)December 31,2012ThUS$December 31,2011ThUS$Profit for the year 10,098 147,326Profit in fair value of cash flow hedges deferred in reserves 1,635 62,805Deferred tax effects arising on cash flow hedges deferred in reserves (150) (11,762)Other (112)Total profit recognised in equity 1,373 51,043(Profit) / Losses in fair value of cash flow hedges transferred to the income statement (6,899) 15,653Deferred tax effects arising on cash flow hedges transferred to the income statement 635 (2,932)Total transferred to the income statement (6,264) 12,721Total comprehensive income for the year 5,207 211,090The accompanying notes are an integral part of these financial statements.
MINERA MICHILLA S.A.STATEMENT OF CHANGES IN NET EQUITYFOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011(In thousands of US dollars - ThUS$)Paid-in Hedging Other Total other RetainedTotalcapital reserves reserves reserves earningsThUS$ ThUS$ ThUS$ ThUS$ ThUS$ ThUS$Balance as of January 1, 2011 42,568 (47,462) 219 (47,243) 7,520 2,845Total comprehensive income for the period 63,764 63,764 147,326 211,090Dividends (20,000) (20,000)Balance as of December 31, 2011 42,568 16,302 219 16,521 134,846 193,935Paid-in Hedging Other Total other Retained Totalcapital reserves reserves reserves earningsThUS$ ThUS$ ThUS$ ThUS$ ThUS$ ThUS$Balance as of January 1, 2012 42,568 16,302 219 16,521 134,846 193,935Total comprehensive income for the period (4,779) (4,779) 10,098 5,319Other (112) (112)Dividends (15,000) (15,000)Balance as of December 31, 2012 42,568 11,523 219 11,742 129,832 184,142The accompanying notes are an integral part of these financial statements.
MINERA MICHILLA S.A.STATEMENT OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011(In thousands of US dollars - ThUS$)NoteDecember 31,2012ThUS$December 31,2011ThUS$NET CASH FLOWS FROM OPERATING ACTIVITIES 20 (6,176) 119,459CASH FLOWS FROM INVESTING ACTIVITIESSale of property, plant and equipment 9 415 713Purchases of property, plant and equipment 9 (58,349) (52,683)Tota net cash flows used in investing activities (57,934) (51,970)CASH FLOW FROM FINANCING ACTIVITIESDividends 8 (15,000) (20,000)Cash flows used in financing activities (15,000) (20,000)NET INCREASE (DECRESASE) IN CASH AND CASH EQUIVALENTS (79,110) 47,489CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 12 88,725 41,236CASH AND CASH EQUIVALENTS AT END OF THE YEAR 12 9,615 88,725The accompanying notes are an integral part of these financial statements.
MINERA MICHILLA S.A.NOTES TO THE FINANCIAL STATEMENTSIndexPage1. General information 12. Summary of principal accounting policies 12.1. Accounting standards principles 12.2. Adoption of new accounting standards 83. Significant accounting judgments and key sources of estimation uncertainty 104. Operating Revenues 125. Employee benefit expense 126. Net finance income (expense) 147. Income tax and deferred tax 148. Dividends 179. Property, plant and equipment 1710. Inventories 1811. Trade and other receivables 1812. Cash, cash equivalents 1813. Borrowings 1914. Trade and other payables 1915. Financial instruments and financial risk management 20a) Types of financial instruments 20b) Fair value of financial instruments 20c) Financial risk management 21d) Embedded derivatives – provisionally priced sales 25e) Derivative financial instruments 26f) Outstanding derivative financial instruments 2716. Long-term incentive plan 2817. Employee benefits provision 2918. Provisions 3019. Capital and other reserves 3120. Notes to the cash flows statement 3221. Operating lease arrangements 3222. Exchange rates in US dollars 3323. Related party transactions 3324. Contingent assets and liabilities 3425. Subsequent events 35
MINERA MICHILLA S.A.NOTES TO THE FINANCIAL STATEMENTS(In thousands of US dollars - ThUS$)1. GENERAL INFORMATIONMinera Michilla S.A. (hereinafter the “Company”) was incorporated through public deeddated May 29, 1959. The corporate purpose of the Company is the exploration, extraction,exploitation, production, ore reduction, and the sale of ore, concentrates, precipitates, copperor non-ferrous metal cathodes and bars and their products and sub products, and theexploitation of mining properties, including all mining industry phases.The parent of Minera Michilla S.A. is Antofagasta plc.The business address of Minera Michilla S.A is located in the II Region, road to TocopillaKm.110, Municipality of Mejillones, Antofagasta.According to the requirements of Law No. 20,026 on the Specific Mining Tax published in theOfficial Gazette of June 16, 2005, and the relevant regulations issued by the Superintendenceof Securities and Insurance (“SVS”) through its Exempt Resolutions N°549 of September 23,2005 and Nº 39 of February 3, 2006, the Company shall deliver its Audited Quarterly andAnnual Financial Statements, and an Annual Report, to the SVS, in the manner and at the timestipulated in such resolutions.2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES2.1 Accounting standards principlesThese financial statements are stated in thousands of US dollars and were prepared based onthe accounting records kept by the Company and have been prepared in accordance withInternational Financial Reporting Standards, issued by the International Accounting StandardsBoard (hereinafter “IASB”).These financial statements fairly present the financial position of the Company as ofDecember 31, 2012 and 2011, and the results of its operations, changes in net equity and of itscash flows for the years ended as of December 31, 2012 and 2011.According to the procedures established by the Company, these financial statements wereapproved by the Board of Directors on March 13, 2013The significant accounting policies adopted in the preparation of these financial statements aredetailed below. As required by IFRS 1, these policies have been defined according to theIFRS in force as of December 31, 2012, applied consistently to all periods presented in thesefinancial statements.1
a) Basis of preparation – These financial statements have been prepared using the historicalcost basis, which has been changed by using fair values to measure certain financialinstruments, mainly sales with prices provisionally fixed, as explained in Note 2.1 (d), andfinancial derivative contracts, as explained in Note 2.1 (o).b) Foreign currency – The Company’s functional currency is defined as the currency of theprimary economic environment in which it operates. The transactions that are notdenominated in the Company’s functional currency are translated by using the exchange rateprevailing at the date of the transaction. Monetary assets and liabilities denominated incurrencies other than the functional currency will be translated at year-end exchange rates.Gains or losses on translation are included in net profit for the period in other financial items.The Company's presentation and functional currency is the US dollar.c) Offsetting balances and transactions - As a general standard, assets and liabilities, incomeand expenses, are not offset in the financial standards, except for those cases in whichoffsetting is required or is allowed by some standard and the presentation is a reflection of thesubstance of the transaction.d) Revenue recognition – Revenue represents the value of goods supplied to third partiesduring the period. Revenue is measured at the fair value of consideration received orreceivable, and excludes any applicable sales tax.A sale is recognized when the significant risks and rewards of ownership have been passed tothe customer. This is generally when title and any insurance risk have passed to the customer,and the goods have been delivered to a contractually agreed location.Revenue is recorded at the invoiced amounts with an adjustment for provisional pricing ateach reporting date. For exported copper cathodes, the invoiced amount is the market value ofthe metal payable by the customer.Copper cathode sale agreements generally provide for provisional pricing of sales at the timeof shipment, with final pricing based on the monthly average London Metal Exchange(“LME”) copper price. Such provisional sale contains an embedded derivative which isrequired to be separated from the host contract. The host contract is the sale of metalscontained in the cathode at the provisional invoice price, and the embedded derivative is theforward contract for which the provisional sale is subsequently adjusted. At each reportingdate, the provisionally priced metal sales are marked-to-market, with adjustments (both gainsand losses) being recorded in revenue in profit or loss and in trade debtors in the statement offinancial position. Forward prices at the period-end are used for copper cathode sales.Investment income is recorded on an accrual basis, by reference to the principal outstandingand the effective interest rate applicable, which is the rate that exactly discounts estimatedfuture cash receipts through the expected life of the financial asset to that asset’s net carryingamount.2
e) Exploration and evaluation expenditure - Exploration and evaluation expenditures arerecorded in the year in which they are incurred. When the Company determines that a miningproject is commercially viable (normally when the project has reached the feasibility stage),all additional directly attributable pre-production expenditures are capitalized. Capitalizationof pre-production expenditures ceases when commercial levels of production are achieved oras defined by Management.f) Property, plant and equipment – The costs of mining properties and leases include thecosts of acquiring and developing mining properties; and mineral rights, are capitalized asproperty, plant and equipment in the period in which they are incurred.The cost of property, plant and equipment comprises the purchase price and any costs directlyattributable to bringing the asset to the location and condition necessary for it to be capable ofoperating in the manner intended. Once a project has been established as commercially viable,any related development expenditures are capitalized. This includes costs incurred inpreparing the site for mining operations, including pre-stripping costs. Capitalization ceaseswhen the mine is capable of reaching the commercial production or the performanceestablished by Management is reached, with the exception of development costs which giverise to a future benefit. Interest on borrowings directly related to construction or developmentof projects is capitalized until such time as the assets are substantially ready for their intendeduse or sale. In the case of mining properties, is when they are capable of reaching thecommercial production.Repair, preservation and maintenance expenses have been charged to pre-operational costwhen the expenses were incurred.g) Depreciation of property, plant and equipment – Property, plant and equipment isdepreciated over its useful life, or over the remaining life of the operation if shorter, to itsresidual value. The major categories of property, plant and equipment are depreciated asfollows:(i) Land – The Company’s land is not depreciated.(ii) Mining properties – Mining properties, including capitalized financing costs, aredepreciated on a unit of production basis, in proportion to the volume of ore extracted in theperiod compared with total proven and probable reserves at the beginning of the year.(iii) Buildings and infrastructure – straight-line or over the remaining useful life of theoperation.(iv) Machinery, equipment and other assets – straight-line or over the remaining useful lifeof the operation.Each part of heavy equipment is depreciated separately: The components, chasis and tolvasare depreciated on a unit of production basis, in proportion to the number of hours used in theoperation, the equipments motors are depreciated in a straight-line or over the remaininguseful life of the operation.3
(v) Assets under construction – no depreciation until asset is available for use as establishedby Management.(vi) Assets held under finance leases – are depreciated over the shorter of the lease term andthe remaining useful life of the operation, or as established by Management.Residual values and useful lives are reviewed and adjusted, if appropriate, at least annually,and changes to residual values and useful lives are accounted for prospectively.According to the business plan for the period 2012-2015 approved by the Board of Directorsof the Company in April 2011, supported by mining stocks with high certainty, the Companyin June 2011 changed the residual useful life of fixed assets, in order to allocate itsdepreciation over the same period.h) Impairment of property, plant and equipment – Property, plant and equipment and finitelife intangible assets are reviewed for impairment if there is any indication that the carryingamount may not be recoverable. If any such indication exists, the recoverable amount of theasset is estimated in order to determine the extent of the impairment (if any). Where the assetdoes not generate cash flows that are independent from other assets, the Company estimatesthe recoverable amount of the cash-generating unit to which the asset belongs. Any intangibleasset with an indefinite useful life is tested for impairment annually and whenever there is anindication that the asset may be impaired.Recoverable amount is the higher of fair value less costs to sell and value in use. In assessingvalue in use, the estimated future cash flows are discounted to their present value, using a pretaxdiscount rate that reflects current market assessments, of the time value of money, and thespecific risks to the asset for which estimates of future cash flows have not been adjusted.For mining properties, estimates of future cash flows are based on assumptions of expectedproduction levels, commodity prices, cash costs of production and capital expenditures. IAS36 “Impairment of Assets” includes a number of restrictions on the future cash flows that canbe recognized regarding future restructurings and improvement related expenditures. Whencalculating value in use, it also requires that calculations should be based on exchange ratescurrent at the time of assessment.If the recoverable amount of an asset or cash-generating unit is estimated to be less than itscarrying amount, the carrying amount is reduced to the recoverable amount. An impairmentcharge is recognized in profit or loss immediately. Where an impairment is subsequentlyreversed, the asset’s carrying amount is increased to its revised estimated of recoverableamount to the extent that the increased carrying amount does not exceed the carrying amountthat would have been determined if no impairment had previously been recognized. Animpairment reversal is recognized immediately in profit or loss.i) Inventory – Inventory consists of raw materials and consumables, work-in-progress andfinished goods. Work-in-progress represents material that is in the process of being convertedinto finished goods. The conversion process for mining operations depends on the nature of4
the copper ore. For oxide ores, processing includes leaching of stockpiles, solution extractionand electro-winning and results in the production of copper cathodes. Finished goods consistof copper cathode at Minera Michilla.Inventory is valued at the lower of cost, on a weighted average basis, and net realisable value.Net realisable value represents estimated selling price less all estimated costs of completionand costs to be incurred in marketing, selling and distribution. Cost of finished goods andwork-in-progress is production cost and for raw materials and consumables it is purchaseprice. Production cost includes: Labour costs, raw material costs and other costs directly attributable to the extraction andprocessing of ore; Depreciation of plant, equipment and mining properties directly involved in the productionprocess; An appropriate portion of production overheads.Stockpiles represent ore that is extracted and is available for further processing. Costs directlyattributable to the extraction of ore are generally allocated as part of production cost inproportion to the tonnes of material extracted. Operational stripping costs are generallyabsorbed into inventory, and therefore expensed as that inventory is processed and sold. If orewill not be processed within twelve months of the statement of financial position date it isincluded within non-current assets. If there is significant uncertainty as to when any stockpiledore will be processed it is expensed as incurred.j) Taxation - Tax expense comprises the charges or credits for the period relating to bothcurrent and deferred tax.Current tax is based on taxable profit for the year. Taxable profit may differ from net profit asreported in the income statement because it excludes items of income and expense that aretaxable and deductible in different years and also excludes items that are not taxable ordeductible. The liability for current tax is calculated using tax rates which have been enactedor substantively enacted at the statement of financial position date.Deferred tax is the tax expected to be payable or recoverable on temporary differences (i.e.differences between the carrying amount of assets and liabilities in the financial statementsand the corresponding tax basis used in the computation of taxable profit). Deferred tax isaccounted for using the balance sheet liability method and is provided on all temporarydifferences.Deferred tax assets are recognized only to the extent that it is probable that they will berecovered through sufficient future taxable profit. The carrying amount of deferred tax assetsis reviewed at each statement of financial position date.Deferred tax is calculated at the tax rates that are expected to be applied in the period when theliability is settled or the asset is realized. Deferred tax is charged or credited in the incomestatement, except when it relates to items charged or credited directly to equity, in which casethe deferred tax is also taken directly to equity.5
k) Provisions for decommissioning and restoration costs – An obligation to incurdecommissioning and restoration costs occur when environmental disturbance is caused by thedevelopment or ongoing production of a mining property. Costs are estimated on the basis ofa formal closure plan and are subject to regular formal reviews.Such costs arising from the installation of plant and other site preparation work, discounted totheir net present value, are determined and capitalized at the start of each project, as soon asthe obligation to incur such costs arises. These decommissioning costs are charged to profit orloss over the life of the mine, through depreciation of the asset and unwinding of theprovision. Depreciation is included in operating costs while the unwinding of the discountedprovision is included as financing costs. Changes in the measurement of a liability relating tothe decommissioning of plant or other site preparation work are added to, or deducted from,the cost of the related asset in the current period.The costs for restoration of site damage, which are created on an ongoing basis duringproduction, are provided for at their net present values and charged against operating profit asextraction progresses. Changes in the measurement of a liability relating to site damagecreated during production is charged against profit or loss.l) Long-term employee benefits - The contractual conditions determine the paymentindemnity for years of service when a contract of employment ends. This is typically at therate of one month for each year of service (subject in most cases to a cap as to the number ofqualifying years of service). The severance indemnity obligation is treated as an unfundeddefined benefit plan, and the calculation is based on valuations performed by an independentactuary using the projected unit credit method, which are regularly updated. The obligationrecognized in the statement of financial position represents the present value of the severanceindemnity obligation. Actuarial gains and losses are immediately recognized in profit or losswithin operating cost.m) Cash and cash equivalents - Cash and cash equivalents comprise cash on hand, timedeposits and highly liquid investments that are readily convertible into known amounts of cashand which are subject to insignificant risk of changes in value. Cash and cash equivalentsnormally have a maturity period of 90 days or less. In the statement of financial position thebank overdraft is classified as current liabilities.n) Leases - Rental costs under operating leases are charged to profit or loss in equal annualamounts over the term of the lease.Finance lease is when the lessor substantially transfers all the inherent risks and rewards of theownership of the asset to the lessee. The ownership of the asset, as the case may be, may ormay not be transferred. Assets under finance leases are recognized as assets of the Company atinception of the lease at the lower of their fair value or the present value of the minimum leasepayments derived by discounting at the interest rate implicit in the lease. The interest elementis charged within financing costs so as to produce a constant periodic rate of interest on theremaining balance of the liability.6
o) Other financial instruments - Financial assets and financial liabilities are recognized onthe Company’s statement of financial position when the Company becomes a party to thecontractual provisions of the instrument.(i) Trade and other receivables - Trade and other receivables do not generally carry anyinterest and are normally stated at their nominal value less any impairment. Impairment losseson trade receivables are recognized within an allowance account unless the Companyconsiders that no recovery of the amount is possible, in which case the carrying value of theasset is reduced directly. This item also includes accounts receivable from related companies.(ii) Trade and other payables - Trade and other payables generally do not bear interest andare normally stated at their nominal value. This item also includes accounts payable to relatedcompanies.(iii) Borrowings – Interest-bearing loans and bank overdrafts are initially recorded at theproceeds received, net of direct issuance costs. They are subsequently measured at amortizedcost using the effective interest method, with interest expense recognized on an effective yieldbasis. The effective interest method is a method of calculating the amortized cost of afinancial liability and of allocating interest expense over the relevant period. The effectiveinterest rate is the rate that exactly discounts estimated future cash payments through theexpected life of the financial liability, or, where appropriate, a shorter period.Finance charges, including premiums payable on settlement or redemption, and direct issuecosts, are accounted for on an accrual basis using the effective interest method. Amounts areeither recorded as financing costs in the income statement or capitalized in accordance withthe accounting policy set out in Note 2.1 (f). Finance charges are added to the carryingamount of the instrument to the extent that they are not settled in the period in which they ariseand are recorded in trade and other payables.(iv) Derivative financial instruments – The Company uses derivative financial instrumentsto reduce its exposure to the fluctuation of foreign currency and commodity prices. TheCompany does not use such derivative instruments for trading purposes.The Company applies hedge accounting to its derivative transactions. Changes in the fairvalue of derivative financial instruments that are designated and are effective as cash flowhedges are recognized directly in equity. Such changes in value are subsequently recognized inthe income statement in the period when the hedged item affects profit or loss. Anyineffective portion is immediately recognized in profit or loss. Profit and loss realized fromcommodity derivatives are recognized in the income statement and recorded in revenue.The time value element of the changes in the fair value of derivative options is excluded fromthe designated hedge relationship and, therefore, it is recognized directly in the statement ofincome under other financial items.7
Derivatives embedded in other financial instruments or other host contracts are treated asseparate derivatives when their risks and characteristics are not closely related to those of thehost contracts and the host contracts are not carried at fair value. Changes in fair value arereported in profit or loss for the period. The treatment of embedded derivatives arising fromprovisionally-priced commodity sales contracts is set out in further detail in Note 2.1 (d)relating to revenue.(v) Impairment of financial assets – Financial assets, other than those at fair value throughprofit or loss, are assessed for indicators of impairment at each statement of financial positiondate. Financial assets are impaired where there is objective evidence that as a result of one ormore events that occurred after the initial recognition of the financial asset the estimated futurecash flows of the investment have been impacted. For loans and receivables the amount of theimpairment is the difference between the asset’s carrying value and the present value ofestimated future cash flows, discounted at the original effective interest rate. Any impairmentloss is recognized in profit or loss immediately.The carrying amount of the financial asset is reduced by the impairment loss directly for allfinancial assets with the exception of trade receivables.With the exception of available-for-sale equity instruments, if, in a subsequent period theamount of the impairment loss decreases and the decrease can be related objectively to anevent occurring after the impairment was recognized; the previously recognized impairmentloss is reversed immediately in the income statement. Such reversal is recorded to the extentthat the carrying amount of the investment at the date the impairment is reversed does notexceed what the amortized cost would have been had the impairment not been recognized.With regard to available-for-sale equity instruments, any increase in fair value subsequent toan impairment loss is recognized directly in equity.2.2) Adoption of new accounting standardsIn the current period, the Company has adopted the following standards that have affected thepresentation and disclosure of these financial statements:a) The following new IFRS standards and interpretations have been adopted in these financialstatements:Amendments to StandardsIAS 12, Income Taxes – Deferred tax: Recovery ofunderlying assetsIFRS 1 (Revised), First Time Adoption of IFRS –(i)Replacement of ‘fixed dates’ for first-time adopters –(ii) Severe HyperinflationIFRS 7, Financial Instruments: Disclosures –Disclosures - Transfers of financial assetsEffective dateAnnual periods beginning on or after January1, 2012.Annual periods beginning on or after July 1,2011.Annual periods beginning on or after July 1,2011.8
The application of these standards has had no significant impact in the amounts reported inthese financial statements; however, it could affect the accounting of future transactions oragreements.b) The following new IFRS standards and interpretations have been issued by the IASB, buttheir application date is not yet effective:New Standards, Interpretations and AmendmentsIFRS 9, Financial InstrumentsIFRS 10, Consolidated Financial StatementsIFRS 11, Joint ArrangementsIFRS 12, Disclosure of Involvement in Other EntitiesIAS 27 (2011), Separate Financial StatementsIAS 28 (2011), Investments in Associates and JointVenturesIFRS 13, Fair Value MeasurementsAmendments to StandardsIAS 1, Presentation of Financial Statements – Presentationof Items of Other Comprehensive IncomeIAS 19, Employee benefits (2011)IAS 32, Financial instruments: presentation – Clarifiedrequirements for offsetting of financial assets and financialliabilitiesIFRS 7, Financial Instruments: Disclosures –Amendments to disclosures about offsetting of financialassets and financial liabilitiesIFRS 10, Consolidated Financial Statements, IFRS 11Joint Arrangements and IFRS 12 Disclosure ofInvolvement in Other Entities – Transition GuidanceInvestment Entities (Amendments to IFRS 10, IFRS 12and IAS 27)Effective dateAnnual periods beginning on or afterJanuary 1, 2015.Annual periods beginning on or afterJanuary 1, 2013Annual periods beginning on or afterJanuary 1, 2013Annual periods beginning on or afterJanuary 1, 2013Annual periods beginning on or afterJanuary 1, 2013Annual periods beginning on or afterJanuary 1, 2013Annual periods beginning on or afterJanuary 1, 2013Effective date:Annual periods beginning on or afterJuly 1, 2012Annual periods beginning on or afterJanuary 1, 2013Annual periods beginning on or afterJanuary 1, 2014Annual periods beginning on or afterJuly 1, 2011.Annual periods beginning on or afterJanuary 1, 2013Annual periods beginning on or afterJanuary 1, 20149
New InterpretationsIFRIC 20, Stripping costs in the production phase of asurface mineEffective dateAnnual periods beginning on or afterJanuary 1, 2013The Company’s management estimates that the adoption of the standards, amendments andinterpretations described above will have no significant impact on the financial statements.3. SIGNIFICANT ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATIONUNCERTAINTYDetermining many of the amounts included in the financial statements involves the use ofjudgment and/or estimation. These judgments and estimates are based on management’s bestknowledge of the relevant facts and circumstances with regard to prior experience. Actualresults may differ from the amounts included in the financial statements. Information aboutsuch judgments and estimates is included in the principal accounting policies in Note 2.1 andthe key areas are set out below.a) Useful lives of property, plant and equipment and ore reserves estimatesAs explained in Note 2.1(g), mining properties, including capitalized financing costs, aredepreciated in proportion to the volume of ore extracted during the year compared to totalproven and probable reserves at the beginning of the year.There are numerous uncertainties inherent in estimating ore reserves, and assumptions thatwere valid at the time of estimation may change when new information becomes available.These include assumptions as to grade estimates and cut-off grades, recovery rates,commodity prices, exchange rates, production costs, capital costs, processing and reclamationcosts and discount rates. The actual volume of ore extracted and any changes in theseassumptions could affect prospective depreciation rates and carrying values.The majority of other items of property, plant and equipment are depreciated on a straight-linebasis over their useful lives with exception of mine equipment (trucks), which are depreciatedon the base of the numbers used in the operation. Management reviews the appropriateness offixed asset useful lives at least annually. Any changes could affect prospective depreciationrates and asset carrying values.10
) Impairment of assetsAs explained in Note 2.1(h), the Company reviews the carrying value of its intangible assetsand property, plant and equipment to determine whether there is any indication that thoseassets are impaired. In making assessments for impairment, assets that do not generateindependent cash flows are allocated to an appropriate cash-generating unit (“CGU”). Therecoverable amount of those assets, or CGU, is measured at the higher of their fair value lesscosts to sell and value in use.Management necessarily applies its judgment in allocating assets to CGU’s, estimating theprobability, timing and value of underlying cash flows and in selecting appropriate discountrates to be applied within the value in use calculation. Subsequent changes to CGU allocationor estimates and assumptions in the value in use calculation could impact the carrying value ofthe respective assets.c) Provisions for decommissioning and site restoration costsAs explained in Note 2.1(k), the Company establishes a provision based on net present valuesfor decommissioning and site rehabilitation costs as soon as the obligation arises following thedevelopment or ongoing production of a mining property. The provision is based on a closureplan prepared with the assistance of external consultants.Management uses its judgment and experience to provide for and (in the case of capitalizeddecommissioning costs) amortize these estimated costs over the life of the mine. The ultimatecost of decommissioning and site rehabilitation cost is uncertain and cost estimates can vary inresponse to many factors including changes to relevant legal requirements, the emergence ofnew restoration techniques or experience at other mine sites.The expected timing and extent of expenditures can also change, for example in response tochanges in ore reserves or processing levels. As a result, there could be significant adjustmentsto the provisions established which would affect future financial results.d) Long- term employee benefitsAs explained in Note 2.1(l), the expected costs of severance indemnities relating to employeeservice during the period are charged to profit or loss. Any actuarial gains or losses, whichcan arise from differences between expected and actual outcomes or changes in actuarialassumptions, are recognized immediately in profit or loss.Assumptions regarding the expected costs are established in consultation with an independentactuary. These include the selection of the discount rate used, service lives and expectedsalary increase rates. While Management believes the assumptions used are appropriate, achange in the assumptions used would impact the Company`s earnings.11
e) Deferred taxesAs explained in Note 2.1(j) no deferred taxes have been determined for the future paymentover non-distributed income taxes, where the Company has no control of the remittance ofincome and it is probable that there will be no remittances of past in come in a predictablefuture. Management uses its judgement for the estimation of the probability of suchremittances. These criteria are based on the forecast of the Company and include assumptionsover the future income and future cash flows (which depend on several factors, including theprice of commodities, operating cost, production levels, capital investments, cost for interests,payment of debts and tax rates) and the cash requirements (which could also depend onseveral factors, including future dividend levels). A change in the assumptions used or in theestimate as to the probability that past profits will be remitted would impact the deferred taxcharge and the balance provision.4. OPERATING REVENUEThe following is an analysis of the Company's total revenue:December 31,2012ThUS$December 312011ThUS$Sales of cathodes 307,421 354,981Revenue 307,421 354,981Other operating income (a) 1,706 2,442Investment income 850 1,314Total revenue 309,977 358,737(a) The item other operating income is presented in the statement of comprehensive incomeoffset in operating cost.5. EMPLOYEE BENEFIT EXPENSEa) Average number of employeesDecember 31,2012December 31,2011Average number of employees 709 589The average number of employees for the period does not include contractors who are notdirectly employed by the Company.12
) Aggregate remunerationThe aggregate remuneration of the employees included in the table above is as follows:December 31,2012ThUS$December 31,2011ThUS$Wages and salaries 37,598 30,499Social security costs 1,192 394Current period severance indemnity expense 100 1,748Long-term incentive plan - charge of the year 130Total 39,020 32,641c) Key management personnelIn accordance with IAS 24 Related Party Disclosures, key management personnel are thosepersons having the authority and responsibility for planning, directing and controlling theCompany´s activities directly or indirectly, including any Directors of the Company.Compensation for key management personnel (including Directors) is as follows:December 31,2012ThUS$December 31,2011ThUS$Salaries and short-term employee benefits 2,204 1,670Current period severance indemnity expense 95 (277)Long-term incentive plan - charge of the year 130Total 2,429 1,39313
6. NET FINANCE INCOME (EXPENSE)Net finance income (expense) was as follows:December2012December2011ThUS$ThUS$Investment incomeInterest receivable 850 1,314Interest expensesInterest payable (2)Total 850 1,312Other finance itemsTime value effect of derivatives (12,388) 49,094Closure mine provisión (Note 18) (964) (779)Long-term provisions (Note 17) (26) (41)Foreingn exchange (719) 700Total (14,097) 48,974Net finance income / (expense) (13,247) 50,2867. INCOME TAX AND DEFERRED TAX.a) Current taxDecember 31,2012December 31,2011ThUS$ThUS$Current tax chargeCorporate Tax (3,378) (26,793)Mining tax (873) (5,764)Total (4,251) (32,557)Deferred tax (charge)/creditCorporate Tax 50 (9,048)Mining tax (30) (793)Total 20 (9,841)Total income tax expense (4,231) (42,398)14
Current tax expense is based on taxable profit for the period. Deferred taxes are the taxesexpected to be payable or recoverable on temporary differences (i.e. differences between thecarrying amount of assets and liabilities in the financial statements and the corresponding taxbasis used in the computation of taxable profit). Deferred taxes are accounted for using thebalance sheet liability method and are provided on all temporary differences.The income tax rate is 20% as of December 31, 2012 (20% at December 31, 2011). TheCompany is subject to a specific mining tax which is an additional tax of 4% as of December31, 2012 and 2011 on income adjusted for tax purposes. The mining tax is deductible for taxpurposes (that is, it is an allowable expense in determining the income tax liability)Law No.20,455 for the National Reconstruction was approved on July 31, 2010. Such Lawestablished an increase in the income tax rate for fiscal years 2011 and 2012 (20% and 18.5%,respectively). In 2013 the income tax rate falls back to 17%.Law No.20,469 was published on October 21, 2010. This law introduced amendments in thetaxation on mining activity, which the Company availed. This Law states different rates to beapplied ranging from 4 to 9% for years 2010, 2011 and 2012, fixed rate of 4% for years 2013to 2017 (the above is subject to tax invariability in accordance with Article 11 Ter of DecreeLaw 600/74) and rate from 5% to 14% onward.On September 27, 2012, Law No. 20,630 was published, such law perfects the tax legislationand finances the educational reform. This law introduces modifications to the tax regulationsand establishes a permanent increase in the corporate tax rate from 18.5% (current rateaccording to Law No. 20,455) to 20% in force from fiscal year 2012 onwards.The effect of the application of these laws has been included in the calculation of deferredtaxes and income tax for the current years:December 31, December 31,20122011ThUS$ % ThUS$ %Profit before tax 14,329 189,724Income tax - rate of 20% (2,866) 20.0% (37,945) 20.0%Effect of items not subject to or deductible from first category tax (792) 5.5% 2,104 (1%)Specific Mining tax (573) 4% (6,557) 3.5%Tax expense and effective tax rate for the period (4,231) 29.5% (42,398) 22.315
) Deferred taxesFollowing are the main liabilities and deferred tax assets recognized by the Company and theirmovements as of December 31, 2012 and 2011 are presented:OtherProperty,short-termplant and Temporary Miningequipment Accruals Differences Tax TotalThUS$ ThUS$ ThUS$ ThUS$ ThUS$As of January 1, 2012 1,483 (3,317) 427 487 (920)(Charge)/credit to income (3,511) 3,340 221 (30) 20Credit deferred in equity 372 372As of December 31, 2012 (2,028) 395 648 457 (528)As of January 1, 2011 2,341 19,197 797 1,280 23,615Charge to income (858) (7,820) (370) (793) (9,841)Deferred charge in equity (14,694) (14,694)As of December 31, 2011 1,483 (3,317) 427 487 (920)Certain deferred tax assets and liabilities have been offset. The following is an analysis ofdeferred tax balances (after offsetting):December 31,2012ThUS$December 31,2011ThUS$Deferred tax Assets 5,777 6,665Deferred tax Liabilities (6,305) (7,585)Net deferred tax balances (528) (920)16
8. DIVIDENDSIn the General Meeting of Shareholders held on April 26, 2012 it was agreed, by unanimousvote of the shareholders present:(a) approving and ratifying the decision of the Board, which agreed to distribute an interimdividend over the earnings of the year 2011 for US$20,000,000 (twenty million US dollars),US$0.76279385 per share; , which was paid to shareholders on May 3, 2011.(b) approving the distribution of a dividend over the earnings of the year 2011 forUS$15,000,000 (fifteen million US dollars), US$0.572095384 per share, which was paid toshareholders on May 14, 2012.The dividends distributed are subject to approval by the Company’s Board.9. PROPERTY, PLANT AND EQUIPMENTLand Machinery, Assetsand mining Buildings and equipment under Mineproperties infrastructure and others construction development TotalThUS$ ThUS$ ThUS$ ThUS$ ThUS$ ThUS$CostAt January 1, 2011 13,066 74,457 99,784 8,467 93,713 289,487Additions 95 52,588 52,683Disposals (5,588) (5,588)Reclasifications 1,401 6,614 (15,707) 7,692At December 31, 2011 13,066 75,858 100,905 45,348 101,405 336,582Accumulated depreciationAt January 1, 2011 (13,066) (72,113) (88,284) (90,309) (263,772)Depreciation and amortization of the period (1,062) (5,331) (6,539) (12,932)Disposals 6,301 6,301At December 31, 2011 (13,066) (73,175) (87,314) (96,848) (270,403)CostAt January 1, 2012 13,066 75,858 100,905 45,348 101,405 336,582Additions 83 58,267 58,350Disarmament capitalized cost 2,748 2,748Disposals (1,275) (198) (1,473)Reclasifications 823 57,183 (64,274) 6,268At December 31, 2012 13,066 76,681 159,644 39,143 107,673 396,207Accumulated depreciationAt January 1, 2012 (13,066) (73,175) (87,314) (96,848) (270,403)Depreciation and amortization of the period (1,405) (11,013) (5,357) (17,775)Disposals 1,090 1,090At December 31, 2012 (13,066) (74,580) (97,237) (102,205) (287,088)Net book valueAt December 31, 2011 2,683 13,591 45,348 4,557 66,179At December 31, 2012 2,101 62,407 39,143 5,468 109,11917
10. INVENTORIESDecember 31,2012ThUS$December 31,2011ThUS$Raw materials and consumables 9,514 9,129Work in progress 30,559 26,745Finished goods 11,268 7,877Total 51,341 43,751Cost of inventories recognized in profit or loss as of December 31, 2012 is ThUS$198,690(ThUS$149,263 as of December 31, 2011).11. TRADE AND OTHER RECEIVABLESDecember 31,2012ThUS$December 31,2011ThUS$Trade debtors 31,195 20,620Other debtors 9,558 10,736Account receivable from related companies (Note 23a) 859 739Total 41,612 32,095There is no significant concentration of credit risk involving trade receivables, since theexposure is spread out over a large number of clients. The average period of credit for cathodesales and provision of services is 37 days (25 days at December 31, 2011). Trade receivablesdo not accrue interest and include mark-to market adjustments of cathode sales withprovisional prices whose final prices are still open.There are no indicators for trade receivables to be impaired, reason for which the Companyhas not recorded a doubtful accounts provision. The carrying value of the trade receivablesrecorded in the financial statements represents the maximum exposure to credit risk. TheCompany does not hold any collateral as security.12. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIESThe fair value of cash, cash equivalents and marketable securities is not materially differentfrom the carrying values presented. The credit risk on cash and cash equivalents is limitedbecause the counterparties are banks with high credit ratings assigned by international creditratingagencies.18
Cash, cash equivalents and marketable securities, are as follows:December 31,2012ThUS$December 31,2011ThUS$Cash and cash equivalents 3,879 79Time deposits 2,100 85,473Marketable - Securities 3,636 3,173Total 9,615 88,725The currency exposure of cash, cash equivalents and marketable securities is as follows:December 31,2012ThUS$December 31,2011ThUS$US Dollars 5,914 61,237Chilean Pesos 3,691 27,480Others 10 8Total 9,615 88,72513. BORROWINGSAt December 31, 2012, the Company has lines of credit and guarantees with banks for itshedging transactions for MUS$304,500.14. TRADE AND OTHER PAYABLESDecember 31, 2012 December 31, 2011Current Non-current Current Non-currentThUS$ ThUS$ ThUS$ ThUS$Trade creditors 29,714 21,831Other creditors and provisions 10,106 90 24,824Accounts payable to related parties (Note 23a) 1,676 2,103Total 41,496 90 48,758The balances included in trade payables, other creditors and provisions means a debt of notmore than one year; accordingly, the average credit period taken for trade purchases is 37 daysat December 31, 2012 and 30 days at December 31, 2011.Trade payables and provisions principally comprise of amounts outstanding for tradepurchases and ongoing costs.19
15. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT(a) Types of financial instrumentsThe Company's financial instruments, grouped according to the categories defined in IAS 39“Financial Instruments: Recognition and Measurement”, were the following:December 31,2012December 31,2011ThUS$ThUS$Financial assetsDerivatives in designated hedge accounting relationships 32,952 58,532Available for sale investments 670 529Receivables (including cash and cash equivalents) 51,227 120,820Financial liabilitiesDerivatives in designated hedge accounting relationships (7,925)Financial liabilities measured at amortized cost (41,496) (48,758)Total 43,353 123,198(b) Fair value of financial instrumentsThe fair values of financial assets and liabilities are determined as follows:The fair values of financial assets and liabilities with standard terms and conditions andtraded on active liquid markets are determined with reference to quoted market prices;The fair values of other financial assets and liabilities (excluding derivative instruments)are determined in accordance with generally accepted pricing models based on discountedcash flow analysis using prices from observable current market transactions; andThe fair values of derivative instruments are calculated using quoted prices. Where suchprices are not available, the Company uses discounted cash flow analysis based on theapplicable yield curve for the duration of the instruments for non-option derivatives, andoption pricing models for option derivatives.The fair value of each category of financial assets and liabilities is not materially different tobook values presented at December 31, 2012 and 2011.The following table presents an analysis of the financial instruments that are measuredsubsequent to initial recognition at fair value, grouped into levels 1 through 3 based on thedegree to which the respective fair value is observable:Level 1 fair value measurements are those derived from quoted prices (unadjusted) inactive markets for identical assets or liabilities;Level 2 fair value measurements are those derived from inputs other than quoted pricesincluded within level 1 that are observable for the asset or liability, either directly (i.e. asprices) or indirectly (i.e. derived from prices); and20
Level 3 fair value measurements are those derived from valuation techniques that includeinputs for the asset or liability that are not based on observable market data (unobservableinputs).At December 31, 2012 Level 1 Level 2 TotalThUS$ ThUS$ ThUS$Financial assetsAvailable for sale investments 670 670Derivatives in designated hedge accounting relationships 32,952 32,952Receivables at fair value (136) (136)Total 670 32,816 33,486At December 31, 2011 Level 1 Level 2 TotalThUS$ ThUS$ ThUS$Financial assetsDerivatives in designated hedge accounting relationships 58,532 58,532Available for sale investments 529 529Receivables at fair value (171) (171)Financial liabilitiesDerivatives in designated hedge accounting relationships (7,925) (7,925)Total 529 50,436 50,965There were no transfers between levels 1 and 2 during the period.(c) Financial risk managementThe Company’s activities expose it to a variety of financial risks: market risk (includingcommodity price risk, currency risk, interest rate risk and other price risk), credit risk andliquidity risk. The Company uses derivative financial instruments to reduce exposure tocommodity price, foreign exchange and interest rate fluctuations. The Company does not usesuch derivative instruments for speculative trading purposes.The Board of Directors is responsible for overseeing the Company’s risk managementframework. Internal Audit undertakes both regular and ad hoc reviews of risk managementcontrols and procedures, the results of which are reported to the Board of Directors.(i) Commodity price riskThe Company sells its ore output at prevailing market prices, subject to final pricingadjustments, and is therefore exposed to changes in market prices for copper, both regardingfuture sales and previous sales which remain open as to final pricing.As of December 31, 2012, sales of ore represent most of the Company’s revenues and,therefore, revenues and earnings depend significantly on London Metal Exchange and realizedcopper prices.21
The Company uses futures and min-max instruments to manage its exposure to the prices ofcopper. These instruments could lead to accounting volatility due to fluctuations in the fairvalue before maturity.Details of sales of copper cathodes are presented in letters d) and f), respectively. Details ofcommodity rates derivatives entered into by the Company are presented in letters d) and f).Commodity price sensitivityThe sensitivity analysis presented shows the impact of a movement in the copper price on thefinancial instruments held as of the reporting date. A movement in the copper forward priceas of the reporting date will affect the final pricing adjustment to sales which remain open atthat date, impacting the trade receivables balance and consequently the income statement. Amovement in the copper forward price as of the reporting date will affect the final pricingadjustment to sales which remain open at that date, impacting trade receivables balance andconsequently the income statement. The calculation assumes that all other variables, such ascurrency rates, remain constant.If the future price of copper at the reporting date had increased by 10 cents, the net profitwould have decreased by US$13.0 million and the hedging reserves in equity would havedecreased by US$6.0 million.If the future price of copper at the reporting date had decreased by 10 cents, the net profitwould have decreased by US$0.4 million and the hedging reserves in equity would haveincreased by US$24.7 million.In addition, a movement in the average copper price during the year would impact revenue andearnings. A 10 cents change in the average copper price during the year would affect netearnings by US$6.3 million net earnings, based on production volumes in 2012, without takinginto account the effects of provisional pricing and hedging activity.(ii) Currency riskThe Company is exposed to a variety of currencies. The US dollar is however the currency inwhich the majority of the Company’s sales are denominated. Operating costs are influencedby those currencies in which the cost of imported equipment and services are determined.After the US dollar, the Chilean peso is the most important currency influencing costs and to alesser extent sales.Given the significance of the US dollar to the Company’s operations, it is the presentationalcurrency of the Company for internal and external reporting. The US dollar is also thecurrency for borrowing and holding surplus cash, although a portion of this may be held inother currencies, mostly Chilean peso, to meet short term operational and capital commitmentsand dividend payments.22
When considered appropriate, the Company uses forward exchange contracts and currencyswaps to limit the effects of fluctuations in exchange rates in foreign currency denominatedassets and liabilities. The Company may also use these instruments to reduce currencyexposure on future transactions and cash flows.The currency exposure of the Company’s cash, cash equivalents and marketable securities ispresented in Note 12. The effect of gains and losses from exchange differences included inthe income statement is presented in Note 6.Currency sensitivityThe sensitivity analysis below shows the impact of a movement in the US dollar / ChileanPeso exchange rate on the financial instruments held as of the reporting date.The impact on profit or loss is a result of the retranslation of monetary instruments (includingcash, trade receivables, trade payables, current tax balances and borrowings). The impact onequity is a result of changes in the fair value of derivative instruments which are effective andare designated as cash flow hedges, and changes in the fair value of available-for-sale equityinvestments. The calculation assumes that all other variables, such as interest rates, remainconstant.If the US dollar had strengthened by 10% against the Chilean peso as of the reporting date, netearnings would have increased less than ThUS$1.2; there would have been a net decreased onequity of US$5.0 million, as a consequence of the contract of derivate instruments of theCompany. If the US dollar weakened by 10% against the Chilean peso as of the reportingdate, net earnings would have decreased by less than ThUS$1.5; and there would have been anet increase on equity of US$6.1 million, as a consequence of the contracts of derivateinstruments of the Company.(iii) Interest rate riskThe Company’s policy is generally to borrow and invest cash at floating rates. Fluctuations ininterest rates may impact the Company’s net finance income or cost, and, to a lesser extent thevalue of financial assets and liabilities. The Company occasionally uses interest rate swapsand collars to manage interest rate exposures.Interest rate sensitivityThe sensitivity analysis below shows the impact of a movement in interest rates in relation tothe financial instruments held as of the reporting date and net income of the Company. Theimpact on profit or loss is a result of the effect of interest expense on floating rate borrowings,and interest income on cash and cash equivalents. The impact on equity is a result of changesin the fair value of derivative instruments which are effective and are designated as cash flowhedges. The calculation assumes that all other variables, such as currency rates, remainconstant.23
If the interest rate had increased by 1%, based on the financial instruments held at the date ofthe report, net earnings would have increased by ThUS$77; there would have been noadditional effect on equity.(iv) Cash flow riskThe Company’s future cash flows depend on a number of factors, including commodity prices,production and sales levels, operating costs, capital expenditure levels and financial incomeand costs. Its cash flows are therefore subject to foreign currency; interest rate and commodityprice risks described above as well as operational factors and input costs.To reduce the risk of potential short-term disruptions to the supply of key inputs such aselectricity and sulphuric acid, the Company through its parent Company enters into mediumandlong-term supply contracts to help ensure continuity of supply. Long-term electricitysupply contracts are negotiated directly by the Company. These contracts are for a period ofbetween one to two years, in most cases linking the cost of electricity under the contract to thecurrent cost of electricity on the Chilean grids. The Company seeks to lock in supply ofsulphuric acid for future periods of a year or longer, with contract prices agreed in the latterpart of the year, to be applied to purchases of acid in the following year.(v) Credit riskCredit risk arises from trade and other receivables, cash and cash equivalents, marketablesecurities and derivative financial instruments. The Company’s credit risk is primarilyregarding trade receivables. The credit risk on cash and cash equivalents, marketable securitiesand derivative financial instruments is limited as the counterparties are banks with high creditratings assigned by international credit agencies.All customers are subject to credit review procedures, including the use of external creditratings where available. Credit is provided only within set limits, which are regularlyreviewed. Outstanding receivable balances are monitored on an ongoing basis.The carrying value of financial assets recorded in the financial statements represents themaximum exposure to credit risk. The amounts presented in the statement of financialposition are net of allowances for any doubtful accounts.(vi) Liquidity riskThe Company manages liquidity risk by maintaining adequate cash reserves and financingfacilities through the review of forecasted and actual cash flows.The Company normally holds surplus cash in demand or term deposits or highly liquidinvestments.The detail of cash and cash equivalent is disclosed in Note 12 at December 31, 2012 and 2011.24
The following table analyses the maturity of the Company’s contractual commitments such asits financial liabilities and derivative financial instruments. The below table is presented basedon the undiscounted cash flows on the earliest date on which the Company can be required topay. The table includes both interest and principal cash flows.Less than Between 6 Between After6 months and 1 year 1-2 years 2 years TotalAt December 31, 2012 ThUS$ ThUS$ ThUS$ ThUS$ ThUS$Trade creditors and other payables 41,496 90 41,58641,496 90 41,586Less than Between 6 Between After6 months and 1 year 1-2 years 2 years TotalAt December 31, 2011 ThUS$ ThUS$ ThUS$ ThUS$ ThUS$Trade creditors and other payables 48,758 48,758Derivative financial instruments 7,925 7,92548,758 7,925 56,683(vii) Capital risk managementThe Company’s objective when managing its capital is safeguarding the capacity to continueas a going concern, while maximizing profitability for the shareholders by means ofmaintaining an optimum capital structure.The Company’s capital structure comprises debt, which includes loans disclosed in Note 14,cash and cash equivalents disclosed in Note 12 and the Company’s equity, which includespaid-in capital, reserves and retained earnings disclosed in Note 19.The Company reviews its capital structure on a periodic basis. On this basis, the Companywill compensate its general structure of capital through payments of dividends, release ofadditional debt or the redemption of current debt. The general strategy of the Company is hasnot changed from prior year.d) Embedded derivatives – provisionally priced salesThe sales agreement copper cathode, generally provide for provisional pricing of sales at thetime or month of shipment, with final pricing being based on the monthly average LondonMetals Exchange copper price.Under IFRS, both gains and losses from the marking-to-market of open sales are recognizedthrough adjustments to revenue in the income statement and to trade receivable in thestatement of financial position. The Company determines mark-to-market prices usingforward prices at each period end for copper cathode.25
The effects on the balance of sales with provisionally priced sales are as follows:Balance sheetNet mark to marketeffect on debtorsDecember 31, December 31,20122011ThUS$ThUS$Copper cathodes (136) (171)e) Derivative financial instrumentsThe Company periodically uses derivative financial instruments to reduce its exposure tocommodity price, foreign exchange and interest rate fluctuations. The Company does not usesuch derivative instruments for speculative trading purposes.The Company has applied the hedge accounting provisions of IAS 39 “Financial Instruments:Recognition and Measurements”, as described in Note 2.1 (o, iv).Impact onreservesTotal impacton balanceDecember 31, 2012ThUS$ThUS$Commodity derivativesCopper cathodes (20,055) 26,003Exchange derivativesCurrency forward 14,789 6,949Impact onreservesTotal impacton balanceDecember 31, 2011ThUS$ThUS$Commodity derivativesCopper cathodes 86,298 58,532Exchange derivativesCurrency forward (7,840) (7,925)Losses recognized in reserves are disclosed before tax.26
The net financial asset / (liability) resulting from the statement of financial position mark-tomarketadjustments are analyzed as follows:December 31, 2012 December 31, 2011Analyzed between: Current Non-current Current Non-currentThUS$ ThUS$ ThUS$ ThUS$Assets 24,962 7,990 10,897 47,635Liabilities (7,925)Total 24,962 7,990 2,972 47,635f) Outstanding derivative financial instrumentsi) Min – Max instrumentsAt December 31, 2012, the Company held min-max options for MT 57,000, with monthlymaturities from January 2013 to December 2014. These options have an average floor of US$3.53and an average cap of US$4.71 per pound of fine copper.The mark-to-market of these min-max contracts implied a US$26 million gain at December 31,2012.At December 31, 2011, the Company held min-max options for MT 84,300, with monthlymaturities from January 2012 to December 2014. These options have an average floor of US$3.45and an average cap of US$4.48 per pound of fine copper.At December 31, 2011, the mark-to-market of these min-max contracts implied a gain for US$58.5million.ii) Exchange derivativesAt December 31, 2012, the Company held foreign currency derivatives to reduce its exposure tofluctuations in the fair value of assets and liabilities not denominated in US dollars with monthlymaturities from January 2013 to September 2013.The mark-to-market of these derivative contracts in foreign currency implied a gain for US$6.9million at December 31, 2012.At December 31, 2011, the Company held foreign currency derivatives to reduce its exposure tofluctuations in the fair value of assets and liabilities not denominated in US dollars with monthlymaturities from January 2012 to September 2013.The mark-to-market of these derivative contracts in foreign currency implied a loss for US$7.8million at December 31, 2011.27
16. LONG - TERM INCENTIVE PLANThe Company established a long-term incentive plan (the “Plan”) at the end of 2011 as part ofthe remuneration of senior executives in the Company. Directors are not eligible to participatein the Plan. The Plan includes Restricted Share Awards (“RSAs”) and Performance ShareAwards (“PSAs”).Under the Plan, participants are granted potential awards based on a specified number ofAntofagasta plc shares. Upon vesting the participant receives a cash payment based on thenumber of shares awarded and the market price of Antofagasta plc shares on the date ofvesting. There is no exercise price payable by participants in respect of the awards.RSA participants are required to remain in the employment of the Company for three yearsfrom the date the awards are granted in order for them to vest in full, with one third vestingafter one year, one third vesting after two years and one third vesting after three years. Thereare no performance criteria attached to the awards. The fair value of RSAs under the Plan isrecorded as compensation expense over the vesting periods, with a corresponding liabilityrecognised for the fair value of the liability at the end of each period until settled. Fair value atthe end of each period is determined using a Black Scholes valuation model.PSA awards vest only if certain performance criteria are met. The performance criteria arebased on total shareholder return and a range of operational and financial performancemeasures. The fair value of PSAs under the Plan is recorded as compensation expense over thevesting period, with a corresponding liability at the end of each period until settled. Fair valueat the end of each period is determined using a Black Scholes valuation model.The Company has recorded a liability for ThUS$130 at December 31, 2012 (of whichThUS$90 is due after more than one year) and total expenses of ThUS$130 for the year. In2011, the amount of the fair value of the awards which accrued between the grant date ofDecember 29, 2011 and year end was estimated to be less than ThUS$100, and thereforedisclosure of the related valuation assumptions is not significant to the financial statements.28
17. LONG-TERM EMPLOYEE BENEFITS PROVISIONEmployment terms at the Company provide for payment of a severance indemnity when anemployment contract comes to an end, in accordance with Note 2.1 (l).The most recent actuarial valuation related to the Company’s post-employment benefitobligation was performed in December 2012 by an external actuary that is not related to theCompany. The main assumptions used to determine the actuarial present value of benefitobligations were as follows:December 31,2012December 31,2011Average nominal discount rate 5.47% 4.99%Average rate of increase in salaries 5.00% 5.15%Average staff turnover 2.88% 4.28%The amounts included in the income statements related to provisions for severance indemnitiesfor years of service and other provisions were as follows:December 312012ThUS$December 312011ThUS$Current service cost (charge / (credit) to operating costs) 1,934 126Actuarial (gain)/ losses ((credit)/charge to operating costs) (1,834) 1,622Interest cost 732 820Foreign exchange charge/(credit) to other finance items 1,135 (1,280)Total charge to income statement 1,967 1,28829
The following presents the movement in the present value of the Company´s severanceprovision:ThUS$Balance at January 1, 2012 554Current service cost 69Actuarial losses 314Payments (512)Interest cost 26Foreign currency exchange difference 46Balance at December 31, 2012 497ThUS$Balance at January 1, 2011 927Current service cost 21Actuarial gain (339)Interest cost 41Foreign currency exchange difference (96)Balance at December 31, 2011 55418. PROVISIONSThUS$Balance at January 1, 2012 25,841Credit to operating profit in the year (250)Decommisioning capitalized cost 2,748Interest cost 964Actuarial gain (2,148)Paid in the period (1,071)Foreign currency exchange difference 1,089Balance at December 31, 2012 27,173ThUS$Balance at January 1, 2011 25,831Credit to operating profit in the year (1,078)Interest cost 820Actuarial loss 1,920Paid in the period (468)Foreign currency exchange difference (1,184)Balance at December 31, 2011 25,84130
Decommissioning and restorationDecommissioning and restoration costs are related to operation. Costs are estimated based on aformal closure plan and are periodically subject to independent formal reviews. The provisionwill be used during 3 years, based on current mine plans.19. CAPITAL AND OTHER RESERVESa) CapitalThe paid-in capital of the Company is as follows:ShareholderTotalPaid-in CapitalCapital suscritoy pagado ParticipeCity Shares ThUS$ %Antofagasta Minerals S.A. Santiago 19,450,031 31,578 74.182Minera Cerro Centinela S.A. Santiago 2,090,541 3,394 7.973Inversiones Costa Verde Ltda. y Cía. En Comandita por Acciones Santiago 4,019,486 6,526 15.330Inmobiliaria e Inversiones Pie de Monte Ltda. Santiago 633,946 1,029 2.418Sucesión Blair Kirkwood James David Viña del Mar 18,000 29 0.069Manuel Gonzalez López Antofagasta 2,000 3 0.008Patricia Faúndez Cifuentes Santiago 1,800 3 0.007Amelia Georgina Guthrie Véliz Coquimbo 1,080 2 0.004Sucesión Roasio Grace Grace Santiago 900 1 0.003Sucesión Santiago Donoso Bolaños Arica 720 1 0.003Vivian de los Angeles Escobar L. Santiago 450 1 0.002Cyntia Teresa Escobar L. Santiago 450 1 0.002Total paid-in capital 26,219,404 42,568 100%b) Other reservesDetails of the Company´s other reserves accounts are made up the following:December, 31 December, 312012 2011ThUS$ThUS$Commodity derivatives reserves 7,455 27,510Exchange derivatives reserves 6,949 (7,840)Deferred tax (2,881) (3,368)Total 11,523 16,30231
20. NOTES TO THE CASH FLOWS STATEMENTReconciliation of profit before tax to net cash from operating activities is as follows:December 31, December 31,2012 2011ThUS$ThUS$Profit before tax 14,329 189,724Depreciation and amortization 17,775 12,932Net financial expense / (income) 13,247 (50,286)(Increase) in inventories (7,590) (14,602)(Increase)/ decrease in debtors (9,517) 3,206(Decrease) in creditors and provisions (34,420) (21,515)Cash flows from operations (6,176) 119,45921. OPERATING LEASE ARRANGEMENTSAs of the reporting period, the Company had outstanding commitments for future minimumlease payments under non-cancellable operating leases, which fall due as follows:December 31,2012ThUS$December 31,2011ThUS$Within one year 494 963In the second to fifth years inclusive 55 253Total 549 1,216Operating lease payments are principally related to the leasing of: Fleet of light vehicles. Computer equipment rental, installation and maintenance.The payments for operating leases recognized in profit:December 31,2012MUS$December 31,2011MUS$Fleet of light vehicles 1,610 1,275Computer equipment rental, installation and maintenance 151 121,761 1,28732
22. EXCHANGE RATES IN US DOLLARSThe following is the main exchange rates in dollars of the United States of America and usedin the preparation of financial statements at December 31, 2012 and 2011:December 31,2012December 31,2011Year-end rates US$1 = Ch$479.96 US$1 = Ch$519.20Average rates US$1 = Ch$486.75 US$1 = Ch$483.3623. RELATED PARTY TRANSACTIONSTransactions between the Company and its related parties are disclosed below:a) Accounts receivable and payableDecember 31, 2012December 31, 2011Asset Liability Asset LiabilityRelated company Relationship ThUS$ ThUS$ ThUS$ ThUS$Antofagasta Minerals S.A. Shareholder 131 1,366 33 900Antofagasta Railway Company plc Indirect 138 1 122(Agency in Chile)Minera Los Pelambres Indirect 100Minera El Tesoro Indirect 437 10 686 918Minera Esperanza Indirect 100 19Madeco Mills S.A. Indirect 11 57Aguas Antofagasta S.A. Indirect 75Servicios Transportes Integrados Ltda. Indirect 162 106Minera Antucoya Indirect 5859 1,676 739 2,10333
) Transactions with related companiesDecember 2012 December 2012Effect onEffect onAmount of income Amount of incomeCompany Relationship Transaction transactioncharge(credit) transactioncharge(credit)ThUS$ ThUS$ ThUS$ ThUS$Antofagasta Minerals S.A. Shareholder Administrative Services 1,428 1,200 1,763 1,481Rent expenses 96 81 106 89Recovery of expenses 20Management expenses 197 166Explorations services 2,848 2,393 5,203 4,372Final dividend 11,127 14,836Antofagasta Railway & Co. Indirect Transport service 1,574 1,323 1,676 1,408(Agency in Chile) Recovery of expenses 11 11Minera Los Pelambres Indirect Management expenses 100 (84)Madeco Mills S.A. Indirect Purchase of materials 50 42 2 1Sale of copper 3,939 (2,620) 1,537 (249)Minera El Tesoro Indirect Sale of supplies 3,226 (2,711) 5,104 (4,289)Purchase of supplies 3,248 2,730 6,114 5,137Rent facilities 527 (443) 719 605Administrative Services 100 (84)Minera Esperanza Indirect Administrative Services 100 (84) 167 (140)Sale of water 211 (177)Minera Antucoya Explorations services 2,742 (2,304)Metallurgical Services 13 (11)Sudamericana de Vapores Sea freight 994 994 1,385 1,385Shell Chile S.A.C.I. Purchase of supplies 49 42Servicios de Transportes Integrados Ltda. Indirect Transport service 1,666 1,400 1,447 1,216Banco de Chile Indirect Time deposits 63,995 (165) 148,390 (211)All transactions were carried out at market value and are included in operation revenues and expenses.24. CONTINGENT ASSETS AND LIABILITIESa) LitigationsThe Company’s Management is aware of legal actions brought against it either directly oralternatively, or brought by Minera Michilla S.A., which to the best of its understanding wouldnot significantly affect these financial statements.b) EncumbrancesThe Company’s assets do not recognized mortgages, encumbrances or bans.c) Guarantees GrantedThe Company recognizes that there are no guarantees provided.d) Guarantees ReceivedTo date, the Company has received guarantee bonds, issued by local banks, provided bycontractors and suppliers for an approximate amount of ThUS$12,526 which are to guaranteethe faithful fulfillment of the contracts.34
e) Commitments for the sale of oreThe Company has sales commitments for approximately 33,880 FMT (fine metric tons) ofcopper cathodes.f) Forward exchange contractsThe Company has associated to their forward exchange contracts, commitments byThUS$63,000 by operations with maturity to September, 2013.25. SUBSEQUENT EVENTSBetween January 1, 2013 and the date of issuance of these financial statements (March 13,2013), there have been no subsequent events that could materially affect them.* * * * * *35