6 | Business review: overview www.xstrata.com | 7 Chairman’s statement “Against a more encouraging macroeconomic backdrop, Xstrata delivered its second best financial performance since its IPO” Willy Strothotte Chairman The conviction that the financial crisis was a severe but temporary interruption of a positive secular trend underpinned Xstrata’s executive management’s decision, supported by the Board, to continue to invest in Xstrata’s major organic growth projects during 2009, thereby ensuring Xstrata was quickly able to position itself for growth in anticipation of the global economy recovering. I am pleased to report that the decision to do so has enabled the Group to maintain its ambitious growth trajectory, and Xstrata’s major growth projects remain set to deliver a substantial 50% increase in overall volumes on a copper-equivalent basis over 2009 levels by the end of 2014, providing robust returns at conservative commodity prices and, importantly, an average reduction in unit costs of 20%. The volatility in prices evident in 2010 will, in the Board’s view, persist over the medium term as a result of more prudent supply chain management by customers leading to lower inventories and greater spot market activity, an increase in shorter term, quarterly pricing agreements for many commodities, the impact of commodity markets becoming an investment class in their own right, and high levels of capacity utilisation on the supply side. The impact of financial flows on exchange traded metals is clearly visible in the almost immediate response of the commodities market to changes in market sentiment. Financial investment in commodities now represents a semi-permanent, but highly volatile, source of demand. Xstrata’s diversified portfolio is geared towards early and mid-stage LME-traded commodities such as copper, nickel and zinc, and bulk negotiated commodities of thermal coal, coking coal and ferrochrome. With end-user construction, infrastructure and electricity generation sectors accounting for some 50% of Xstrata’s revenues, the Group remains in a strong position to continue to benefit from demand from the industrialising economies of China, India, Brazil and others. over the next three years of its ambitious expansion, as well as retaining the agility to opportunistically take advantage of value accretive acquisitions. With a robust balance sheet that continues to provide the flexibility to withstand short-term price pressures and maintain our ambitious capital expenditure programme, and the Board’s confidence in the medium-term outlook, I am pleased that we have been able to return Xstrata’s final dividend to pre-financial crisis levels. This substantial increase, which underlines the Board’s commitment to a progressive dividend policy, will form the level from which the dividend policy will grow in the future. During the year, members of the Board’s Health, Safety, Environment and Community Committee were able to see the impressive progress of the Koniambo nickel project at first hand during a visit to the module yard in Qingdao in China, where components of Koniambo’s metallurgical plant were constructed, followed by a visit to the Koniambo site itself in New Caledonia. The project’s disciplined approach to safety, its integration into and close collaboration with the local community and its systematic approach to project management give the Board great confidence in the successful execution of this substantial project. Xstrata also made further progress on its medium-term goal to build a substantial iron ore business in 2010. The fundamentals for iron ore are attractive and provide additional diversification of Xstrata’s portfolio. Xstrata’s proven expertise in bulk commodities, together with its track record in infrastructure and project development, means the Group is well positioned to successfully develop its iron ore projects. Following the acquisition of controlling interests in junior mining companies with assets in Mauritania and Republic of Congo (Brazzaville), Xstrata now has a firm foothold in the market, with projects that offer both near and long-term development potential. mining companies and the equally legitimate requirement of shareholders to be compensated for the risks borne in developing and operating mines is complex and requires open consultation and a spirit of genuine partnership. Xstrata continues to support the communities associated with its operations and 2010 was no exception, with more than $84 million invested in projects in the areas of health, education, community development, art and culture, job creation and enterprise development. Several countries in which we operate faced severe weather-related catastrophes. In January, the Group donated $500,000 to the International Red Cross Haiti Appeal, established to provide emergency aid and relief to those affected by the devastating earthquake, as Xstrata Nickel’s Falcondo operation is situated in the Dominican Republic bordering Haiti. In March, Xstrata donated $1 million following a major earthquake in Chile, comprising $500,000 to the Chilean Red Cross and a further $500,000 to support relief efforts being undertaken by an Antofagasta-based industry body. Xstrata Copper provided a variety of in-kind support, including food parcels for impacted employees, supporting a rescue and reconstruction team and facilitating helicopters for the rescue effort. Xstrata Copper also provided support for the rescue of the Chilean miners who were recovered safely on 13 October after 69 days trapped underground at a mine operated by San Esteban. During late 2010, the Australian state of Queensland suffered some of the worst flooding in decades, leaving many homeless and infrastructure paralysed. As a significant Queensland employer and a major contributor to the affected region’s economic growth via its coal, copper and zinc operations, it was fitting that Xstrata supported and assisted these communities through a AUD2 million contribution to the Queensland Premier’s Disaster Relief Appeal to help the state’s recovery. The safety and wellbeing of our workforce remains paramount. Whilst in 2010 the businesses saw an overall strong improvement in the reduction of total recordable injuries, I am very saddened to report that three people lost their lives while working at Xstrata’s managed operations or projects. Improvement in safety performance and the prevention of fatalities remains the utmost priority for Xstrata’s Board and management, and we continue to work to ensure we implement the learnings from every actual and potential critical incident, as well as from best practices within our own and other industries. Sustainability information is integrated within this report, including a range of non-financial key performance indicators in the Strategy section. A comprehensive Sustainability Report is also published separately from the Annual Report each year laying out key sustainability risks, strategy and performance against set targets, which is available from Xstrata’s website. Overview Strategy Performance Governance Financials Strategy 2010 offered Xstrata’s businesses a markedly improved operating environment compared to the previous year, despite the impact on confidence of sovereign debt concerns in the early part of the year and uncertainty about the potential impact of inflation on emerging economies’ growth in the latter part of the year. Against this more encouraging macroeconomic backdrop, and aided by the numerous restructuring and cost saving initiatives implemented during the previous year, Xstrata delivered its second best financial performance since its IPO nine years ago. In 2010, the Board focused its attention on the substantial capital investment programme underway across our business, examining the management processes in place to identify and manage the risks inherent in such an extensive expansion programme, and scrutinising the 10 projects brought to the Board for approval to commence construction. The Board continues to assess each project brought for approval against stringent criteria in terms of the anticipated return on investment at conservative long-run prices, reduction in operating costs compared to current production, and in the light of anticipated market conditions, in addition to evaluating the business’s ability to manage the associated risks. The accelerating pace of delivery of organic growth created a strong sense of momentum in 2010 and into early 2011. It is encouraging to see Xstrata already delivering volume growth and cost savings from the three major projects completed during the year, and demonstrable progress on projects at every stage of development. The combination of low gearing, over $8 billion in undrawn bank facilities, high-quality access to the debt markets and strong cash flow generation means Xstrata is well-placed to fund the $18 billion of expansionary capital expenditure that has been committed for currently approved and soon-to-be approved projects Sustainability Xstrata’s Sustainable Development Policy, Business Principles’, supporting suite of standards and assurance process, ensure a rigorous approach is taken at every site and project. As Xstrata moves further into an intensive phase of developing large-scale mining projects and exploring the potential of longer-term projects that lie in new and more complex geographies, it is imperative that we continue to work in this way and apply our best-in-class environmental management and community relations if we are to successfully deliver our organic growth strategy. Mining involves a capital-intensive, long-term investment commitment. We have a recognised obligation to ensure our activities have a positive impact in terms of jobs, training, education and social and financial benefits that endure over the long term. To do so, we must work in partnership with host governments and communities within a stable regulatory environment that facilitates the substantial investment required to develop and sustain mining operations and that recognises the full contribution of mining activities to the socio-economic well-being of a region or nation. Striking the right balance between the legitimate desire of government to extract financial benefit for their countries from Commodity markets Throughout the financial crisis and ensuing global downturn, Xstrata’s Board and management continued to hold the view that the secular trends underpinning the positive prospects for commodities remained intact and would, in time, reassert themselves. Demand growth fuelled by urbanisation and industrialisation in highly populated developing markets and the structural issues that restrict new supply of many major commodities continued to provide support for commodity prices, notwithstanding events that weighed on global confidence during the year and had a short-term impact on commodity markets. Governance and risk management As announced in early March, I will step down as Chairman of Xstrata plc at the Annual General Meeting (AGM) on 4 May 2011. Sir John Bond has been invited to join the Board and will stand for election as Chairman and independent non-executive director. At this 26 | Business review: strategy www.xstrata.com | 27 Strategy Strategy to deliver superior shareholder value Our mission: We will grow and manage a diversified portfolio of metals and mining businesses with the single aim of delivering industry-leading returns for our shareholders. We can achieve this only through genuine partnerships with employees, customers, shareholders, local communities and other stakeholders, which are based on integrity, co-operation, transparency and mutual value-creation. p24 For more information on our business model Strategic priorities Develop our portfolio of significant organic growth projects to deliver new production on time and on budget Progress in 2010 ■ Key performance indicators ■ Overview Three major new mines successfully commissioned in 2010 10 projects approved and entered implementation with capital spend of $10 billion, 20 projects currently in construction $7.5 billion of project approvals due in 2011 Record real cost savings of $541 million from efficiency initiatives and new, lower cost production Increased copper mineral resources at Antapaccay, Collahuasi, El Pachón, Frieda River and Las Bambas Three fatalities at managed operations in 2010 20% reduction in total recordable injury frequency rate (including contractors) Corporate social involvement of $81.3 million (cash) and $2.5 million (in-kind) 7.1% voluntary turnover in 2010, 11% higher than 2009 Accelerated leadership development programme continued across Group Career development processes in place across the Group including annual performance reviews Extension of bank facilities through $4 billion syndicated loan with no financial covenants Increased headroom of $8.7 billion Cash generation from operations of $9.95 billion Net debt reduced to $7.6 billion Acquisition of Sphere Resources (iron ore projects in Mauritania); majority ownership secured, integration underway Completion of divestment of El Morro to New Gold Targeted 50% volume growth over 2009 levels by end 2014 20% reduction in operating costs by end 2014 ■ ■ How we achieve our strategy ■ Strategy Organic growth Achieve further improvements to the net present value of our business Delivering the next phase of transformation of Xstrata’s portfolio through our industryleading pipeline of organic growth projects. ■ ■ ■ Real cost savings (see page 37) Increase in average mine life: 50+ years in 2010 Increase in total mineral resources: up 60% on 2006 levels in 2010 Zero fatalities Governance Performance ■ ■ p28 Improve our health and safety, environmental and social performance and, in particular, to operate a fatality-free business ■ ■ ■ ■ Total recordable injury frequency rate (see page 38) Environmental incidents (see page 39) Corporate social involvement (see page 41) ■ ■ ■ Operational excellence Financials Continuously improving the quality of our assets through year-on-year operating cost reductions, mine life extensions and productivity improvements. Operating in line with leading practice social and environmental standards. Retain key personnel and offer our people a rewarding and non-discriminatory workplace with development opportunities ■ ■ ■ Voluntary turnover (see page 41) Training spend and hours per employee (see page 41) ■ ■ Mergers and acquisitions Growing our business through the opportunistic identification and execution of value-adding bolt-on or transformational acquisitions. Maintain a robust and appropriate capital structure ■ ■ ■ Gearing (net debt / net debt + equity) Cash generation from operations (see page 3) Net debt position ■ ■ ■ ■ Evolution of Xstrata’s strategy Initially, Xstrata’s strategy was focused on the execution of transformational and bolt-on acquisitions to rapidly add diversity and scale to the Group. A second stage focused on improving the operational, safety and environmental performance of acquired assets. While we continue to pursue value creation through M&A and operational excellence, our strategy is now focused on delivering the next stage of Xstrata’s growth from the range of organic growth projects within our portfolio. Each of these strategic thrusts relies on our ability to operate responsibly and to secure broad-based support for our operations from the communities in which we operate. Identify and execute opportunities to create value through acquisitions, divestments, mergers or strategic partnerships ■ ■ Successful integration of acquired assets, realisation of anticipated synergies (if applicable) ■ p36 For more information on key performance indicators 38 | Business review: strategy www.xstrata.com | 39 Key performance indicators continued Non-financial key performance indicators In addition to monitoring the Group’s financial performance, as a measure of the Company’s performance against its objectives, Xstrata’s Board also regularly monitors a range of nonfinancial KPIs to assess performance against sustainable development targets and strategic objectives. Xstrata’s Board sets and overviews the Group’s industry-leading Sustainable Development (SD) Framework. The SD Framework has been mapped to international standards and comprises Xstrata’s Statement of Business Principles, SD Policy, SD Standards and Assurance Programme. Xstrata operates a highly devolved management model. Each commodity business is responsible for the implementation of the Group’s SD Framework throughout its business. Performance against the SD Framework is reviewed and evaluated on a quarterly basis by the commodity businesses and progress reported to the Board’s Health, Safety, Environment and Community Committee. The Committee benchmarks Xstrata’s performance against other mining and extractive sector companies. The KPIs that relate to the SD Framework include safety, environmental incidents, water and energy usage, employee turnover, training, and support for community initiatives, and are regularly reported to Xstrata’s Board, Executive Committee and senior management. The Group’s internal audit programme also examines health, safety, environment, ethical and community risks. Safety (Injury frequency rate) We are committed to providing a safe workplace and believe that every work-related incident, illness and injury is preventable. In 2010, three people (two contractors and one employee) lost their lives at Xstrata’s managed operations in South Africa (2009: nine people). We value the safety of contractors in exactly the same way as our employees. We monitor the performance of all contractors and insist on full compliance with our safety standards and procedures. All of our sites implement regular and appropriate behaviour-based training, with emphasis on the identification and management of major hazards. Our managers work with their supervisors and operators in the field to identify appropriate topics to be covered in daily team talks and safety training. We track total recordable injuries, which include lost time injuries, medical treatment injuries and restricted work injuries, as this provides a more complete measure than lost time injuries alone. The total recordable injury frequency rate and lost time injury frequency rates are reported per million hours worked and include contractors. For the tenth consecutive year, a significant reduction was achieved in the frequency of total recordable and lost time injuries. Total recordable injuries fell by 20% and lost time injuries were 10% lower than in 2009 per million hours worked. Environmental incidents Xstrata’s operations record environmental incidents according to severity, with category 1 representing very minor incidents with negligible impact and category 4 or 5 representing major or disastrous incidents with medium-to longer-term impacts respectively. Category 3 incidents cause moderate, reversible environmental impact and require moderate remediation. Our target is to achieve zero category 3, 4 or 5 incidents, which was achieved for the first time in 2010. Greenhouse gases (CO2 equivalents (CO2-e) million tonnes) Greenhouse gas (GHG) emissions are measured as CO2 equivalent tonnes (CO2-e). Xstrata’s main sources of GHGs are from electricity used, from methane released during our coal mining in some regions and from post mining fugitive methane emissions from our closed coal operations. We seek to reduce GHG emissions through improved energy efficiency and by capturing coal-seam methane to generate power wherever possible. In 2010, Xstrata’s direct (Scope 1) and indirect (Scope 2) GHG emissions from its operations rose by 7% and 20% respectively, mainly as a result of increased energy use due to higher production volumes in response to an improved demand for Xstrata’s commodities. Xstrata Coal’s Australian operations continue to invest in using methane from its operations for energy generation where possible. In 2010, generating capacity from our methane-fired power stations was 31MW, a similar level to that achieved in 2009. The electricity generated is either used for power by the mine or sold to the local grid. Overview Strategy Performance Governance Total recordable injury frequency rate (per million hours worked) Lost time injury frequency rate (per million hours worked) Environmental incidents (Category 3) Greenhouse gas emissions (CO2-e mt) Direct emissions Indirect emissions CO2-e by CBU (% of Group total) 1 Coal 2 Alloys 3 Copper 4 Zinc 5 Nickel 40% 36% 11% 9% 4% Financials 20% decrease 15 decrease 3 10% 2.7 100% decrease 9 8 12% increase 30 23.4 20 8.6 14.8 22.0 8.5 13.5 14.4 24.7 10.3 4 3 5 1 10 10.2 5 8.8 7.0 2 2.1 1 1.9 6 2 3 3 10 0 08 09 10 0 08 09 10 0 08 09 Nil 10 0 08 09 10 44 | Business review: strategy www.xstrata.com | 45 Principal risks and uncertainties continued Emissions and climate change regulation Risk Xstrata operates in a number of jurisdictions in which regulations or laws have been introduced or are being considered to limit or reduce emissions. The likely effect of climate change related regulation will be to increase costs for fossil fuels, electricity and transportation, restrict industrial emissions, impose added costs for emissions in excess of permitted levels, and increase costs for monitoring, reporting and accounting. Our customers and suppliers are becoming increasingly aware of their own carbon and water footprints and are selecting business partners who actively reduce their impact on climate change through changes to operational processes and transportation infrastructures. Impact Climate change legislation in the countries in which Xstrata operates, such as the carbon pricing proposals in Australia, Canada and South Africa, may lead to direct financial and production costs, higher energy costs or restricted energy supply, which may have a material adverse impact on our ability to maintain production and/ or contain operating costs. Failing to meet and exceed best practice for monitoring and reporting emissions to land and air will have a reputational impact on Xstrata’s operating capabilities. Xstrata is the world’s largest producer of export thermal coal. Any material decline in the use of coal as a power source as a result of carbon taxes, emissions trading or similar legislation may have a material adverse impact on Xstrata’s financial position. Climate change may also result in weather-related events or other physical threats such as disruption to transport infrastructure that may hamper production or damage assets. Mitigation Climate change issues are given a high priority by management and initiatives are undertaken to continually improve understanding of the Group’s carbon footprint and to reduce the carbon intensity of operations and activities. We undertake studies to better understand the potential physical and weather-related risks of climate change on our operations and logistics networks and incorporate the results into our longer-term planning. We are improving the accuracy of our greenhouse gas (GHG) emissions reporting year-on-year and use the latest research to inform our methods. Our commodity businesses actively develop and implement climate change strategies that are pertinent to their business and commodities. Every plan includes clear performance targets and a timeframe in which they should be achieved. We incorporate the cost of carbon into our existing business and investment decisions. We participate in industry and regulatory initiatives to address climate change and associated issues. Xstrata’s executive management team is actively involved in the International Council on Mining and Metals Executive Working Group on climate change. Xstrata Coal, together with other coal producers, governments, scientific and academic organisations is actively investing in and advocating government support for research and development projects to reduce GHG emissions from the use of coal in power generation. Demand for coal is expected to be supported by forecast significant increases in global demand for energy, particularly in developing countries, and by coal’s relative cost position, availability and security of supply. We are committed to measuring, controlling and reducing harmful emissions to air, water and land. We monitor all emissions including dust, heavy metals, CFCs, VOCs and others. Xstrata’s most significant air emission is sulphur dioxide (SO2). Operations that emit SO2 set annual targets to reduce their emissions and increase the proportion of emitted gas that they capture, and we publicly report progress against these targets in the Group’s sustainability reports. We actively engage with governments through industry associations and on our own behalf to discuss the potential implications of proposed legislation and to understand and manage the potential impacts on our business. Project development continued Mitigation Cost control remains a key consideration of any project development and Xstrata’s commodity businesses have an excellent track record of delivering major capital growth projects on time and on budget. Xstrata also benefits from a broad range of project development experience within its commodity business management teams. Rigorous planning and risk management processes are in place both leading up to a project’s approval and during its development. Each of Xstrata’s businesses has a comprehensive project approval process which governs project management at each stage of a project’s development to commissioning and includes future scenario planning. Stage gate and other approval processes fully ensure that material risks are comprehensively assessed and, where possible, mitigated before the project can proceed to the next phase. Under Xstrata’s Sustainable Development Framework, projects are regularly audited against the specific performance standards to ensure social, environmental and ethical risks are properly identified and managed. Detailed progress reports are provided on a regular basis for all major projects to the Group Executive Committee and early warning systems are in place to keep projects on track. Xstrata regularly communicates and works in partnership with government bodies, communities and other stakeholders during the development of its growth projects. The project pipeline is rigorously evaluated and, if appropriate, projects are earmarked for disposal, partner introduction or postponement, depending on risk profile and an assessment of potential value. (See also Social and community risk below.) Overview Strategy Performance Social and community Governance Risk Xstrata’s operations and the development of its project pipeline can have an impact on communities local to its sites. In some instances, our developments may involve the resettlement of communities and relocation of infrastructure. In some regions, communities may oppose mining activities for various reasons. Impact Without gaining broad support for our activities from local communities; our projects could face delays in development, impacting future operating profit, development costs and our corporate reputation. Lack of support for our operations can impact production and affect our profitability and/or reputation. Mitigation We work with the communities affected by our operations to identify and evaluate their needs and concerns at every stage of a project’s life cycle, as well as the impacts our operations have or could have on them. We carry out social and human rights baseline studies and risk assessments, and engage with all communities in a transparent, culturally appropriate manner within an operation’s sphere of influence. We recognise community members’ rights and respect local laws, customs and cultural heritage. Decisions made during earlier phases of a project’s life cycle are reviewed during each subsequent phase. We aim to avoid the need to resettle communities, but where necessary we adhere to the World Bank/International Finance Corporation Standards on Involuntary Resettlement. Financials Health, safety and environment Risk Xstrata’s operations are subject to extensive health, safety and environmental (HSE) regulations and legislation, and community expectations. Xstrata must comply with existing regulations and address any new or upcoming laws, in addition to complying with Xstrata’s best practice Sustainable Development Framework. Impact New or amended environmental, health and safety legislation or regulations may result in increased operating costs or, in the event of non-compliance, the possibility of fines, penalties or other actions that may adversely affect Xstrata’s financial position. Rehabilitation costs, which are generally estimated and provided for over the life of operations and based on the best information available, may subsequently increase, impacting Group earnings. Any breach of regulations or non-compliance with Xstrata’s own best practice standards on health, safety and environmental performance and community relations may damage our reputation and, as a result, our licence to operate. Increasing and competing demands for water in water-scarce regions presents a growing risk for some of Xstrata’s operations. Performance standards at acquired operations may not meet Xstrata’s expected performance standards. Mitigation We comply in full with the laws and regulations in each country in which we operate. In addition, we operate in accordance with Xstrata’s Sustainable Development Framework, aspiring to achieve the highest international standards regardless of location and without exception. Xstrata’s businesses monitor legislative requirements and engage with government and regulators regularly to ensure full compliance. Our commitment to the principles of sustainable development, which incorporates environmental, economic and social performance, is an integral part of our operating philosophy. Every managed Project development Risk Xstrata benefits from a significant pipeline of organic growth projects in a number of countries. The development of our projects can be affected by a number of factors, some of which are outside our control. These include technical uncertainties, availability of suitable financing, infrastructure constraints, cost overruns, overstretched management and insufficient skills or resources. External organisations can cause unexpected delays due to problems obtaining, renewing or extending relevant operating, social or environmental permits or other legislative requirements. Anti-mining sentiment by local communities and/or NGOs can slow or halt project development and influence government processes. Impact Xstrata’s ability to develop its project pipeline and replace older operations with new, lower cost supply will impact future revenues, costs and management’s reputation for successful project development. Severe shortage of the inputs required to execute projects, including labour, equipment and raw materials, can lead to an unpredictable inflationary environment impacting Xstrata’s ability to control project costs. www.blacksunplc.com © Black Sun Plc 2011 27
