Post on 30-May-2020
Continuous Transformation
Mick Davis - CEO Deutsche Bank BRICs Conference - November 2011
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This presentation contains references to “cost curves”. A cost curve is a graphic representation in which the total production volume of a given commodity across the relevant industry is arranged on the basis of average unit costs of production from lowest to highest to permit comparisons of the relative cost positions of particular production sites, individual producers or groups of producers across the world or within a given country or region. Generally, a producer’s position on a cost curve is described in terms of the particular percentile or quartile in which the production of a given plant or producer or group of producers appears. To construct cost curves, industry analysts compile information from a variety of sources, including reports made available by producers, site visits, personal contacts and trade publications. Although producers may participate to some extent in the process through which cost curves are constructed, they are typically unwilling to validate cost analyses directly because of commercial sensitivities. Inevitably, assumptions must be made by the analyst with respect to data that such analyst is unable to obtain and judgment must be brought to bear in the case of virtually all data, however obtained. Moreover, all cost curves embody a number of significant assumptions with respect to exchange rates and other variables. In summary, the manner in which cost curves are constructed means that they have a number of significant inherent limitations. Notwithstanding their shortcomings, independently produced cost curves are widely used in the industries in which Xstrata operate. 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Long-term demand drivers remain intact
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Slow but positive growth in most of the OECD; sustained growth in China
China, y-o-y change US, y-o-y change
Eurozone, y-o-y change Japan, y-o-y change
-20%
-15%
-10%
-5%
0%
5%
10%
15%
2005 2006 2007 2008 2009 2010 United States industrial production United States leading indicator
0%
5%
10%
15%
20%
25%
30%
2005 2006 2007 2008 2009 2010 China industrial production China leading indicator
-40% -30% -20% -10%
0% 10% 20% 30% 40%
2005 2006 2007 2008 2009 2010 Japan industrial production Japan leading indicator
-25% -20% -15% -10% -5% 0% 5%
10% 15%
2005 2006 2007 2008 2009 2010 Eurozone industrial production Eurozone leading indicator
5 5
A multi-decade secular change
Percentage of US per capita GDP at PPP
Source: Citi Investment Research and Analysis, Dragonmonics-GaveKal Research
Contribution to Global GDP
China has sustained rapid GDP growth for 30 years but is still a long way below
developed world income levels
Developing economies are expected to account for almost 80% of global GDP
by 2050
48%
30% Advanced Economies;
21%
27%
44% Developing Asia; 49%
25% 26% Other
Developing Economies;
30%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2030 2050
GDP in 2010 PPP $US
Developing Economies as % of total: 52% 70% 79%
6 6
Social housing key driver of Chinese construction
With social housing offsetting a potential softening of private construction
Source: Dragonomics- GaveKal Research
Chinese urban housing has significant further growth
China has a severe urban housing shortage with many rural migrants living
in inadequate housing
M households and M units
0
50
100
150
200
250
300
1998 2005 2009 2015e
Urban households Migrant households Units of housing
0
2
4
6
8
10
12
14
2006
2007
2008
2009
2010
2011
f
2012
f
2013
f
2014
f
2015
f
Commerical housing Off market housing Social housing
China can absorb 10m units/year new housing, up from 6m historically. This
will be filled by additional social housing
New Housing supply, M units
7 7
Chinese consumption intensity and capital stock still lagging developed economies
Investment also remains well below that of the US
Energy consumption is expected to grow rapidly
0
2000
4000
6000
8000
10000
12000
14000
0
2
4
6
8
10
12
2010 2015 2020 2030 Energy consumption (trillion kWh) LHS
Per capita energy consumption (kWh) RHS
China needs an additional 1bn tonnes of coal by 2020
Flags show 2010 kWh per capita consumption
Source: International Copper Association, Xstrata Estimates Note: Assuming today’s energy mix
$0
$20'000
$40'000
$60'000
$80'000
$100'000
$120'000
$140'000
China 2010
China 2010 at
PPP
US 1930 US 2009
Source: Dragonomics- GaveKal Research
Capital Stock per GDP
Capital stock per capita is just 7% of that in the US
8 8
Despite 10 years of investment, the supply-side is still struggling to keep pace
Disruptions continue to limit output
Quarterly mined copper production
Source: Company production reports, Brook Hunt, Xstrata estimates
60
70
80
90
100
110
120
130
140
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11
Anglo American BHP Billiton Rio Tinto Xstrata
-1600 -1400 -1200 -1000 -800 -600 -400 -200
0
2005 2006 2007 2008 2009 2010 2011e
Indexed from 1Q10
Kt Cu Difference between planned vs actual production
Annual change in global mine production
592
378
-207
150
848
182 212
588
112 179 187 40
-400 -200
0 200 400 600 800
1000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
e
Kt Cu
Running Hard to Stand Still
The importance of investment
10 10
More than ever, existing miners must “Run hard to stand still”
The Curse of Wasting Assets
Historical Future
The Strategic
Gap
Time
Val
ue
$m
Today
Shareholder Demands
Source: Company data
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
Export Tonnage
Inland Tonnage
0
20
40
60
80
Opex US$/t material moved (real 2008)
2008 2011
Labour
Other Energy
Consumables
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1980 1985 1990 1995 2000 2005 2010e 2015e
Primary copper head grade, %
Dep
letin
g re
serv
es
Incr
easi
ng c
osts
D
eclin
ing
grad
es
11 11
Sovereign and community issues remain key challenges for the industry
Government and community challenges
Examples and Potential Impact
Resource nationalism •Windfall taxes, royalties, carried interest, ‘empowerment’ of indigenous people, allocation of licences, mining licence reviews, etc. – increased complexity and cost
Social licence to operate
•Rising community expectations, NGO activity - delayed mining expansion, cost of compliance, focus on community involvement
Growing legislation/regulation
•Increased legislation across the board – UK Bribery Act, transparency initiatives, anti-trust, etc., growing organisation complexity and cost of compliance
Environmental/Climate Change regulation impacts
•Growing complexity, legislation by country, increased costs, impact on competitiveness
Water shortage •Competition with communities for water in arid areas, cost of providing alternatives (e.g. desalination)
Large diversifieds best positioned to mitigate these risks
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A symbiotic relationship between miners, communities and governments
Mining Companies
Communities
Governments
Governments Benefit from: § Investment in country § Taxes § Employment § Infrastructure § Products vital to
society
In return provide: § Security of tenure and
a stable investment regime
§ Transparency § Infrastructure § A skill base
Mining Companies Benefit from:
§ The Social Licence to Operate § New resources and business
opportunities § Access to diverse sources of
capital § Key skills
In return:
§ Provide vital products § Take on risk of investment
§ Provide skills and capabilities § Employ sustainable practices
§ Provide world-class technologies § Contribute to national and local
coffers
Communities Benefit from: § New infrastructure and advanced technology § Jobs, training and development § Corporate Social investment § Development of and procurement from local
suppliers and enterprises
In return provide: § The Social Licence to Operate § Employees § Suppliers
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Case Study: Las Bambas - investing since 2004
§ Initiated projects jointly with community early on to address key issues, including § Water and sanitation, agriculture and
livestock breeding, health, education, power supply and transportation
§ Building of Nueva Fuerabamba town including 450 homes, schools, medical clinic, police station and recreation facilities
§ 36 projects completed, another 29 under implementation
§ Xstrata has been investing in and engaging with the Las Bambas community since 2004; 10 years prior to the project’s commissioning date
• Provided training and employment: • 3,600 direct jobs during
construction and 1,350 permanent jobs when operating (37% locals)
§ Supplier/enterprise development (use of 40 local contractors)
Transforming Xstrata
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Xstrata’s path to value
Xstrata’s Strategic Framework Xstrata growth: 2002 to 2010
Coal Zinc Alloys Australia Africa Europe
2002
20
10
Coal Zinc Alloys Copper Nickel
Australia Africa Europe South America North America
EBITDA: $0.4bn Revenue: $1.8bn
EBITDA: $10.4bn Revenue: $30.5bn
2003: MIM
2002: IPO and Duiker / Enex
2006: Falconbridge
9 consecutive years of real cost savings
Mergers and Acquisitions
Operational Excellence
Organic Growth
$11bn growth capex including 17 major projects
delivered since 2002
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Sustained cost reduction and resource and mine life expansion have been a focus for Xstrata’s management
100
120
140
160
180
200
220
2006 2007 2008 2009 2010 2011
Industry Peers Xstrata Copper
Xstrata Copper mine costs vs peers Xstrata Zinc mine costs vs peers
40 50 60 70 80 90
100 110 120
2006 2007 2008 2009 2010 2011
Industry Peers Xstrata Zinc
Source: Xstrata, Company reports, Brook Hunt
Xstrata Zinc Reserve Growth
81 (64)
+162 179
0
50
100
150
200
2004 Ore mined Increase in reserves
2010
C1 Normal Cash Costs post by product credits indexed from 2006
C1 Normal Cash Costs post by product credits indexed from 2006
Xstrata Copper Resource Growth
0
20
40
60
80
100
2005 2007 2010
Greenfield Projects Canada North Chile Southern Peru Minera Alumbrera North Queensland
Mt contained copper +472% increase
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Xstrata’s sustainability record is a source of competitive advantage
Group Safety Performance
0
5
10
15
20
25
30
35
2002 2003 2004 2005 2006 2007 2008 2009 2010
TRIFR LTIFR
79% improvement since 2002
84% improvement since 2002
Sustainability Rewards
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Operational excellence is at the core of the transformation of Xstrata’s portfolio
0 0.5 0 0
Percentile cost position
Coking coal 2011
Zinc 2011 Nickel
2011
Chrome 2011
Thermal Coal 2011
Zinc 2008
Nickel 2008
Copper 2008
Chrome 2008
Generic cost
curve
50th
Cas
h Cos
t
10th 90th
Copper 2011
Note: As the largest exporter of thermal coal from Australia, Xstrata’s thermal coal cost position disproportionally impacted by the 21% appreciation of the AUD since 2008, compared to most seaborne thermal coal suppliers
Coking coal 2008
Thermal Coal 2008
Improvement in Relative Competitive Position
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Industry-leading organic growth underway § On track to deliver 50% copper-equivalent volume growth by end 2014 (2009 base) § Track record of successful major project delivery
§ 6 have commissioned and $6.6bn of capex has been spent in past 18 months § Further 5 projects commissioning in H2 2011
§ All projects remain on schedule § Organic growth will result in significantly reduced operating costs and robust returns at long-
run prices
22 major approved projects
9 major projects with near-term approvals
$15bn approved
capex
$7bn potential
capex
$1bn to advance studies
Feasibility and scoping Existing business Approved Near term approval
0 20 40 60 80
100 120 140 160 180
2009
2010
2011
2012
2013
2014
2015
Xstrata volume growth(1)
50% growth to end 2014
Project pipeline; go-forward capex
(1) Copper equivalent volume growth from 2009 base
20 20
Creating a Tier 1 asset portfolio
Current operations and approved Tier 1 projects only
Project Operation
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Strong organic growth allows for a selective approach to M&A
2011 bolt on acquisitions
Location Business Unit
Cost Remarks
Lady Loretta Mount Isa, Australia Zinc AUD30M Outstanding 25%
Pallas Green Republic of Ireland Zinc USD19.4M Minco’s 23.6% interest
At pre-feasibility study stage
Two Exco Resources copper projects Australia Copper AUD175M
Increases Ernest Henry’s production profile from the second half of 2012
Hackett River and Wishbone exploration properties
Canada Zinc CAD50M Early stage opportunities
First Coal Canada Coal USD153M Coking coal optionality
Lossan deposit Canada Coal CAD40M Next to First Coal deposits
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Supported by a strong balance sheet and conservative financial strategy
0
1'000
2'000
3'000
4'000
5'000
6'000
7'000
8'000
9'000
2006
2007
2008
2009
2010
2011
H1
FCF (pre capex) Total capex
Free cash flow and capex ($m) § Xstrata has a strong balance sheet designed to ensure the organic growth strategy will be delivered
§ Gearing 18%
§ Significant undrawn headroom in banking facilities
§ No covenants on bank debt
§ A very benign bond repayment schedule over the next 5 years
§ Robust operational cash flows with net cashflow of US$8.2bn in 2010 and US$3.9bn in H1 2011
Free cash flow is pre capex
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Continuous Transformation § Portfolio of long life, low cost, cash generative businesses with diverse
pricing cycles § Diversification by geography, currency, commodity and customer § Mix of bulk and listed commodities § Continuously improving portfolio with next generation of Tier 1 assets
§ Industry leading growth in diverse mix of attractive commodities § Well placed to benefit from a recovery in OECD markets and continued strong
demand from Asia and other developing markets § Prolific growth and further cost reduction being delivered
§ Balance sheet to support organic growth and opportunistic M&A
§ Devolved organisation model encourages value creation and entrepreneurship