Xstrata Half Yr Report 2010

8/8/2019 Xstrata Half Yr Report 2010

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Xstrata plc Half-Yearly Report

six months ended 30 June 2010

3 August 2010


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Xstrata plc Half-Yearly Report 2010 | 1

$mSix months to

30.06.10

Six months to

30.06.09

%

Change

Revenue 13,608 9,541 43Operating EBITDA* 4,494 2,685 67

Operating profit* 3,236 1,605 102

Attributable profit* 2,299 909 153

Attributable profit 2,288 690 232

Earnings per share (basic)* $0.79 $0.38 108

Earnings per share (basic) $0.79 $0.29 172

Net debt to net debt plus equity 19% 28% (32)Net assets 35,223 33,302 6

Net assets per share** $12.13 $11.49 6

Dividends declared and paid (2009 final) 8.0 - -

Dividends proposed 5.0 - -

*

**

Excludes exceptional items

Excluding own shares

Highlights

Strong financial performance more than doubled operating profit to $3.2 billion and attributableprofit rose by 153% to $2.3 billion

Further real cost savings of $243 million achieved during the period together with increasedvolumes of ferrochrome, PGMs, coking and semi-soft coal, refined nickel and mined zinc

Net debt reduced to $8.4 billion and gearing to 19% at the end of June

On track to deliver 50% increase in volumes and 20% cost reduction from Xstratas industry-leading organic growth pipeline by 2014:

Successfully commissioned major Nickel Rim South, Blakefield South coal and Goedgevonden

coal growth projects in the first half

Approval of major $4.2 billion Las Bambas copper project in southern Peru and $1.1 billionUlan West coal project in Australia a total of over $8 billion of new projects approved in2010

15 major growth projects now approved and in implementation, representing $14 billion ofcapital investment

Interim dividend of 5 per share, representing 25% increase over implied 2009 full year dividendreflecting the Boards confidence in Xstratas prospects.

Key Financial Results


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DisclaimerThis announcement does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer

to purchase or subscribe for any securities. The making of this announcement does not constitute a recommendation

regarding any securities.

Certain statements, beliefs and opinions contained in this announcement, particularly those regarding the possible or

assumed future financial or other performance of Xstrata, industry growth or other trend projections are or may be forward

looking statements. Forward-looking statements can be identified by the use of forward-looking terminology, including the

terms believes, estimates, anticipates, expects, intends, plans, goal, target, aim, may, will,

would, could or should or, in each case, their negative or other variations or comparable terminology. These forward-

looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks

and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and

may be beyond Xstratas ability to control or predict. Forward-looking statements are not guarantees of future performance.No representation is made that any of these statements or forecasts will come to pass or that any forecast result will be

achieved.

Neither Xstrata, nor any of its associates or directors, officers or advisers, provides any representation, assurance or guarantee

that the occurrence of the events expressed or implied in any forward-looking statements in this announcement will actually

occur. You are cautioned not to place undue reliance on these forward-looking statements.

Other than in accordance with its legal or regulatory obligations (including under the UK Listing Rules and the Disclosure and

Transparency Rules of the Financial Services Authority), Xstrata is not under any obligation and Xstrata expressly disclaims any

intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future

events or otherwise.

This announcement may contain 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 producers

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.

No statement in this announcement is intended as a profit forecast or a profit estimate and no statement in this

announcement should be interpreted to mean that earnings per Xstrata share for the current or future financial years would

necessarily match or exceed the historical published earnings per Xstrata share.


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Chief Executives Report

Xstratas first half performance was characterised by another robust cost performance, volume growth in mostkey commodities and positive momentum in developing our industry-leading pipeline of organic growth projects.Operating profit more than doubled to $3.2 billion and EBITDA rose by 67% to $4.5 billion, reflecting a robustoperational performance and markedly stronger commodity markets compared to the first half of 2009 asdemand from China grew rapidly and the US economy continued its recovery. Earnings per share more thandoubled to 79 cents on a pre-exceptional basis.

Xstrata continues to be differentiated by an ongoing focus on maximising the value of our existing operationsand achieving incremental operational improvements. In the first half, sustainable real cost savings of $243million were achieved as a result of the restructuring and expansions of our zinc and nickel assets undertaken in2009, the restart of alloys and coking coal operations to meet growing demand from the steel industry, thesuccessful commissioning of three major, low cost operations in nickel and thermal coal and productivity

improvements across the portfolio that offset cost pressures, in particular from lower grades at most copperoperations and increased energy, fuel and labour costs.

Following the successful expansions and restructurings of our nickel and zinc businesses in 2009, both businessunits are now operating well within the bottom half of their respective industry cost curves. Xstrata Nickelsrecent initiatives have seen the business emerge as a robust nickel producer with C1 cash costs currently around$2.50 per pound, with a portfolio of attractive greenfield and brownfield organic growth options. Xstrata Zincsexpansions and productivity improvements at the Mount Isa and McArthur River Mine operations in Australia in2009 contributed $121 million to earnings in the first half, including $66 million of real cost savings anddelivered a 6% increase in mined zinc production and a 10% increase in mined lead production. Recordproduction was achieved at the Mount Isa mining operations and concentrator despite lower head grades, whichare expected to improve in the second half. Integrated zinc mine and smelter C1 costs were significantlyreduced in the first half of 2010 compared with the same period of 2009, falling by 18% from 44 per pound to36 per pound. This marks an impressive reduction of around 30% in integrated zinc C1 cash costs since 2008.In total, over $500 million of costs have been stripped out of Xstratas zinc operations since 2004, primarily as aresult of low capital cost expansions and productivity improvements. Over half of these savings have come fromthe former MIM operations, demonstrating the significant value that has been created throughout thecommodity price cycle from the progressive improvement of formerly underperforming operations.

Safety performance improved further across the Group with a 19% reduction in the frequency of totalrecordable injuries sustained compared to the prior year to 7.1 per million hours worked.

Growth from the portfolio

Since 2002, our commodity business teams have established a solid track record of on time, on budget delivery

of growth projects, successfully developing 14 new operations. The pace of our delivery of growth gatheredmomentum in the first half, as we enter the most intensive phase of organic growth in Xstratas history.

Three major growth projects were successfully commissioned during the first six months of the year. Thepolymetallic, negative cash cost Nickel Rim South mine in Canada is already exerting a significant positiveinfluence on our nickel cash costs as it ramps up to full production next year. The efficient 8 million tonnes perannum Blakefield South underground longwall thermal coal operation to replace Beltana mine and extend thelife of our New South Wales operations by 12 years commenced production during the period, and the 7 milliontonnes per annum Goedgevonden open pit thermal coal mine in South Africa was commissioned to continueour strategy of transitioning our South African coal operations into three major, low cost and primarily open cutmining complexes.

In addition, over $8 billion of new projects were approved during the first half. Less than a month ago, Xstrata

Copper gained all approvals for the $1.47 billion Antapaccay expansion to the Tintaya operation in southernPeru and we have today announced the approval of the $4.2 billion major greenfield Las Bambas project in thesame region. The $1.3 billion extension of the world-class Antamina copper-zinc operation in central Peru wasalso approved in January. Xstrata Zincs Black Star Deeps expansion at Mount Isa and the Bracemac-McLeodexpansion project in Canada have recently commenced construction and today Xstrata Coal announced theapproval of Ulan West which will add another 6.7 million tonnes of annual thermal coal production from a


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highly efficient underground longwall operation to Xstrata Coals industry leading asset portfolio for a capitalcost of $1.1 billion.

This momentum will continue into the second half of the year, as additional projects reach the approval stage,including an expansion to the Cerrejn thermal coal operation in Colombia and the development ofRavensworth North coal mine in Australia.

In total, 15 major growth projects are now approved and in the construction phase, representing a total of $14billion of capital investment. These projects alone will deliver substantially all of our expected 50% increase inoverall volumes by 2014, delivering 40% volume growth over the same period. The balance of the projects toachieve 50% volume growth will reach approval in the coming months. All of our projects remain on track andwithin budget and I am very pleased with the progress our teams are making from a technical, social andenvironmental point of view.

Industry-leading copper growthOver the past five years, Xstrata Copper has grown its resource base more than five-fold through a combinationof acquisitions and intensive exploration programmes at existing operations and greenfield projects to provide anexceptional base for our growth plans to increase copper volumes by 50% by the end of 2014. This includes therecently announced 40% increase in mineral resources at the world class Collahuasi mine in Chile to over 7billion tonnes, comprising 58 million tonnes of contained copper and increased reserves of 2.45 billion tonnes,paving the way for the substantial future expansion of the operation to one million tonnes of annual production.Conceptual studies for this major expansion will be completed in the first quarter of 2011.

Five brownfield copper expansion projects are currently in construction - Lomas Bayas and Collahuasi mines innorthern Chile; Ernest Henry underground mine in Queensland, Australia; and the Antamina and Tintaya-Antapaccay expansions in Peru approved during the first half of the year. The approval of the greenfield LasBambas copper project announced today builds on this solid growth platform to continue the transformation ofXstrata Copper into a low cost, 1.5 million tonnes per annum copper producer.

Since acquiring the option rights to Las Bambas in August 2004 for a total consideration of $121 million, Xstratahas transformed this early stage exploration prospect into a world class mining project, which will be one of thetwo largest greenfield copper projects to be commissioned globally over the next decade. The current MineralResource is 1.13 billion tonnes at a copper grade of 0.77% across three separate orebodies, of which almost80% is in the Measured and Indicated categories. There is substantial scope to add to this resource base asextensions to the existing orebodies and in the highly prospective Las Bambas mineral district. Similarly, theAntapaccay orebody and the Coroccohuayco deposit around 10 kilometres from Tintaya offer further brownfieldexpansion potential and exploration and resource definition programmes are currently being developed for thatpurpose.

Together, the Antapaccay expansion to Xstratas existing Tintaya operation and the Las Bambas greenfieldproject in the same mineral district of southern Peru, mark the emergence of a world-class copper producing

division for the Xstrata Group. Annual production is expected to exceed 500,000 tonnes of copper inconcentrate per annum by the end of 2014, more than five times higher than current Tintaya production levels.Antapaccay and Las Bambas are expected to enjoy competitive cash costs of around 90 cents and 60 cents perpound respectively in their early years. Together, Xstrata Coppers near-term growth projects are expected toreduce the overall cost profile of our copper business by some 20%.

The Antapaccay project will use some of Tintayas existing infrastructure and increase production by 60% to anaverage of 160,000 tonnes of copper per annum. The Antapaccay mine is scheduled to start production as theTintaya open pit closes in mid-2012 and will extend the life of the operations by at least 20 years. This projectpaves the way for the larger Las Bambas development.

Both projects will use Xstrata Coppers innovative standard concentrator design, developed through a three-yearpartnership with major engineering firm Bechtel to reduce engineering and capital costs, minimise lead times,

improve efficiency and provide important maintenance and training synergies. Concentrate from Las Bambaswill be transported through a 215 kilometre pipeline to a new filter and molybdenum plant at the Tintaya-Antapaccay site. Product from both operations will be transported on a common rail connection to theexpanded existing Matarani port facilities. The operations will also share the existing Tintaya road network,


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pipeline access road, established Arequipa logistics centre and will be supported by an integrated team to reduceoverheads.

Initial production will commence in early 2014, 2 years after the start-up of Antapaccay. This sequencing of theoperations will enable a trained and experienced workforce to move from the construction of Antapaccay to theLas Bambas project, ensuring that the project is properly resourced and minimising delays or costs associatedwith the availability of skills.

Tier one mine to transform Xstrata NickelThe Koniambo Nickel project is on schedule and within the original budget of $3.85 billion approved by theXstrata Board in October 2007. Koniambo will accelerate the next step in the transformation of Xstrata Nickelby doubling mined nickel production and adding annual production of 60,000 tonnes of nickel contained inferronickel with a first quartile cost position. The long-life, high grade operation has an extensive resource basethat provides for over 50 years of production at current reserves and resources, with substantial future growthpotential. First ore is expected to be processed in mid-2012, followed by a ramp-up to full capacity within two

years. Importantly, the technology used at Koniambo is low risk. The project will use conventional pyro-metallurgical smelting technology, meaning that it does not require high pressure acid leaching.

Around 80% of the budget has been committed, with $2.2 billion incurred to date. The project is almost 60%complete and a number of significant milestones were reached in the first half of 2010. Dredging to completethe port and the 150 metre wharf is now complete with the team maintaining its exemplary environmentalrecord throughout. The metallurgical plant site is now fully prepared for the arrival of the fabricated modulecomponents from China and the first modules are due to begin loading in the first week of August.

The innovative modular design used for the Koniambo project enables substantial components of theinfrastructure required on site to be pre-fabricated at dedicated engineering facilities and shipped to beassembled on site. This approach has significant capital cost benefits but also minimises the technical, safety andenvironmental risks involved in constructing large-scale infrastructure from scratch at a remote location.

The next key milestones for the project are the successful delivery of all the modules from China by November,followed by the completion of the on-site assembly of the metallurgical plant modules by year end. Earthworksto construct the conveyor route and the ore preparation plant are expected to be complete by the end of thisyear and the project is due to enter its peak on-site construction phase from the end of 2010.

Xstrata Nickel has also retained an attractive suite of potential additional brownfield and greenfield growthprojects including further expansions at the Raglan operation in northern Quebec, including from the Kikialikdeposit which is scheduled to begin in 2011 to maintain current production capacity, a 50% interest in theKabanga sulphide resource in Tanzania with a feasibility study due to be completed by the end of the year andthe early stage greenfield Araguaia deposit in Brazil. A feasibility study has recently been completed toreconfigure the energy source of the Falcondo operation in the Dominican Republic from oil to gas and restartproduction at an annual rate of 15 thousand tonnes of nickel in ferronickel.

High return growth in thermal coalXstrata Coal continues to benefit from an exceptional growth pipeline dominated by high return, brownfieldexpansions and lower cost replacement capacity to extend the life of our regional complexes. Near-term growthprojects will add over 30 million tonnes per annum of new thermal coal production and 2 million tonnes perannum of additional coking coal capacity by 2015 and reduce operating costs by approximately 10% over 2009levels. The extent of Xstrata Coals growth pipeline is apparent in the range of 25 projects that are beingprogressed at various stages of development in Australia, South Africa and Colombia.

The transition of our South African coal operations into three large, low cost, primarily open cut mine complexescontinued with the successful commissioning of the Goedgevonden open pit coal mine and the development ofthe ATCOM East operation which is around one-third complete and the coal preparation plant is on track tocommission in the first half of 2011. This strategy mirrors the successful transition of our New South Wales coal

operations into four main complexes to leverage shared infrastructure and create regional scale.In Australia, the Newlands Northern underground extension will commence production by the second half of2011 while the Mangoola project is now almost 30% complete and on track to commission the coal handlingand preparation plant in the first half of 2011, around three months earlier than originally anticipated.


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In addition to the Ulan West project approved today, approval is expected to be sought in the second half forthe major Ravensworth North mine to produce 14.5 ROM tonnes annually from a large, open cut operation. An

expansion to the world-class Cerrejn joint venture in Colombia will be tabled for approval in the second half toincrease production to 40 million tonnes per annum, with pre-feasibility work into further expansions due tocommence early next year. Reserves at the massive Wandoan deposit have increased to 1 billion tonnes andfeasibility studies continue to investigate the potential to develop a large-scale mine.

Leveraging Xstrata Zincs resource baseThe zinc team continues to pursue opportunities to leverage the extensive resource base at Mount Isa andMcArthur River. Production at the Black Star open pit mine is on track to increase to around 4.5 million tonnesin 2011 and a project to deepen and extend the life of the operation to 2016 was approved during the first half.A further project to increase production from the underground George Fisher mine from 3.5 million tonnes to4.5 million tonnes per annum is due for approval before the end of the year. Together, these projects will requireless than $300 million of capital expenditure. Recent expansions at the McArthur River Mine in the NorthernTerritory have realised a 28% increase in concentrate production in the first half and ongoing cost

improvements. McArthur River Mines bulk zinc-lead concentrates will be processed on a trial basis at anindustrial scale demonstration plant for Xstrata Zincs proprietary technology for the direct leaching of zincconcentrates, which was commissioned ahead of schedule and on budget at San Juan de Nieva in Spain.Construction has also recently started on an expansion of Xstrata Zincs Nordenham operation in Germany whichwill enable around 46,000 tonnes of bulk zinc-lead concentrates from McArthur River Mine to be processedannually.

In Canada, the Bracemac-McLeod project in Quebecwas approved in June with a capital cost of $151 million.Located around 5 kilometres from the Matagami concentrator, the project will provide ore to Matagami oncethe Perseverance mine reaches depletion at the end of 2012.

Exploration continues at the prospective Pallas Green deposit in Ireland where recent discoveries continue toshow encouraging signs of a potential world-class resource.

Ferrochrome efficiencies and growth in platinumXstrata Alloys continues to find innovative solutions to the cost pressures faced and during the first half theXstrata-Merafe Chrome Venture approved the construction of a new 600,000 tonnes per annum pelletizing andsintering plant at its Rustenburg operations. The plant will be operational by 2013 at a capital cost of $114million and will deliver significant cost savings, operational efficiencies and improved environmental performancefrom reduced dust and air emissions. The plant is expected to further improve energy efficiency - a vitalconsideration given recent significant increases in electricity prices in South Africa, which rose by around 68%compared to the first half of 2009.

Our plans to grow our platinum business continue to make steady progress. The shaft for the Western DeclineSystem at Eland advanced by almost 700 metres during the first half and shaft development at the EasternDecline is currently at around 440 metres following capital approvals in March. Production from the

underground operations at Eland is projected to reach 250,000 tonnes per month by 2013, , with steady statecapacity of 500,000 tonnes per month equivalent to some 310,000 ounces of platinum being achieved during2015. Eland will have a mine life of approximately 40 years. Exploration programmes are also under way toinvestigate the potential to extend and increase capacity through the development of the deeper Madibeng andadjacent de Wildt reserves.

The next transformation

Xstratas strategy has consistently focused on achieving value for our shareholders by growing our businessthrough acquisitions and organically and by progressively improving the quality of our existing assets. Thatstrategy remains intact and we continue to review opportunities for acquisition-led growth. Indeed we recentlyannounced a minor proposed transaction to acquire the outstanding priority units of the Noranda Income Fundto gain full control of the CEZinc refinery in Quebec, Canada.

However, as we stand today, the next transformation of Xstrata will be delivered from the projects we arecurrently constructing and those due for near-term approval. Our near-term organic growth pipeline andexpected capital spending of $14 billion from 2010 to 2012 is industry-leading both as a percentage ofenterprise value and in terms of the transformation and value that these projects will engender. A further,


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second wave of projects is being concurrently progressed to replenish our range of growth options once theprojects in construction have been successfully delivered.

The compelling nature of the opportunity is clear. Our projects will deliver attractive returns and overall volumegrowth of 50%, weighted towards copper, thermal coal and nickel. Our operating cost profile will reduce byaround 20% as new lower cost production is brought on stream. Importantly, the development of theseprojects is largely within our control and involves lower execution risk than acquisition-led growth. There arefew transformational transactions that could be executed with the same degree of certainty in the value that willbe created for our shareholders over the next four years.

Within Xstrata, we have both the financial wherewithal and the project management expertise and experienceto continue delivering projects on time and on budget. We have established a robust financial position fromwhich to fund our growth, with gearing of 19% at the end of June, net debt of $8.4 billion and robustoperating cash flows. During the period, cash flows were further bolstered by Glencores exercise of its optionto repurchase the Prodeco operations in Colombia for an initial cash consideration of $2.25 billion plus the

balance of cash invested by Xstrata and profits accrued to the completion date.

Outlook

The short term outlook for macro-economic conditions remains mixed, with a three-speed global economylikely to persist for the foreseeable future. Uncertainty in Europe is likely to remain in the short term as highnational deficits drive spending cuts and the likelihood of higher unemployment that could further dampendomestic demand. At the same time, governments will seek to strike a balance between austerity and growthby retaining loose monetary policy and a certain level of stimulus, further increasing levels of sovereign debt.With the exception of Germany, the EU is likely to struggle for some time to reach historical growth rates.

In the US, steady signs of recovery continue with industrial production returning to growth, employmentbecoming progressively, albeit tentatively, positive and restocking of our products. Despite the occasionally

disappointing statistic, US growth appears to be moving to sustainable levels following the restocking phase,supporting exports from China and other Asian economies. The US is likely to continue to provide an importantbase of demand for exports from developing countries and directly for commodities as its economic recoverycontinues.

However the developing economies, led by China, Brazil and India, are set to continue to provide the main driverof demand growth for our products.

In China, the government has been proactive in taking steps to manage the economy into a sustainable growthrange of 8% to 10% in real terms to counter the high-end real-estate bubble and growing inflation, which nowappears to have peaked. Exports have grown robustly at 41% year-on-year in the second quarter and the 12thfive-year plan envisages over $1 trillion for urban infrastructure and significant spending on railway constructionand rural infrastructure. So, while the Chinese economy is clearly slowing, I remain confident that it is headed

for a soft landing and a GDP growth rate at or higher than last years levels.

Indias importance in demand growth for our products is becoming increasingly evident, in particular for thermaland metallurgical coal. Although some way behind Chinas level of investment, Indias construction spend isforecast to grow at almost 13% per annum over the next five years and India is set to become the worldssecond largest steel producer within five years at over 120 million tonnes of annual production. Ambitiousenergy generation plans to install over 20GW of capacity per annum are driving growing imports of thermalcoal.

We remain very confident in the buoyant outlook for Xstratas commodities in the medium term. It is worthnoting that China is undergoing a fundamental shift in the drivers of its economic growth as growing domesticdemand mitigates slowing infrastructure investment. Wages are rising as urbanisation continues, which ispositive for consumer expenditure. China is moving towards the manufacture of higher-value products as the

labour market experiences fewer new entrants. Demand for durable goods and other consumer products is setto increase accordingly. At the same time, the savings ratio is expected to fall as Chinas social security systemimproves, fundamental land reforms take effect and the population ages.

In particular, I am encouraged by the outlook for thermal coal and copper, our two core commodities. Incopper, existing operations are struggling to maintain levels of production, while many of the new projects


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expected to replace this declining production remain some years from reaching production. Growing imports byChina and India and infrastructure constraints mean the outlook for thermal coal is also expected to remain

positive.Our growth plans aim to take advantage of these robust market conditions, bringing forward a 50% increase inboth copper and coal volumes over the next five years with substantial reductions in operating costs. Ouroperating teams have delivered a robust operating performance and we move into the second half of the yearwith positive momentum on volumes and on costs.

The next transformation of Xstrata is well under way from our suite of approved and soon to be approvedorganic growth projects which will deliver industry-leading volume growth, substantial cost reduction and strongreturns.

We will continue to maximise the value of our existing operations and I expect further cost reductions in thesecond half as new, lower cost production ramps up and our operating teams find new ways to unlockproductivity improvements and mitigate cost pressures. Acquisitions remain another potential avenue for furthergrowth and we will continue to review opportunities, maintaining our focus on pursuing only thoseopportunities that will create clear and compelling value for our shareholders.

Our suite of commodities is well geared to continued infrastructure investment in China, India and elsewhere,but also to growing domestic demand and the emerging shift to the production of higher value products in ourkey markets.

The robust outlook for Xstratas prospects has enabled the Board to announce an interim dividend of 5 cents pershare to be paid to shareholders on the record at 17 September 2010, representing an increase of 25% over theimplied full year dividend for 2009. I remain very confident that Xstratas industry-leading growth prospects,attractive commodity mix and proven ability to realise value from the optimisation of our existing portfolioposition the Group to deliver superior returns to its shareholders.

ML Davis


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Financial Review

Basis of presentation of financial information

Financial information is presented in accordance with International Financial Reporting Standards (IFRS) asadopted for use in the European Union. The reporting currency of Xstrata plc is US dollars. Unless indicated tothe contrary, revenue, operating earnings before interest, taxation, depreciation and amortisation (EBITDA) andoperating profit are reported in the Chief Executives Report and the Operating and Financial Review beforeexceptional items. Exceptional items are significant items of income and expense which, due to their nature orexpected infrequency, are presented separately on the face of the income statement. All dollar and cent figuresprovided refer to US dollars and cents.

Consolidated operational results

CONSOLIDATED RESULTS$m

Six months to30.06.10


Year ended31.12.09

Alloys 920 530 1,305

Coal 3,579 3,242 6,749

Copper 5,879 3,687 9,223

Nickel 1,297 741 1,891

Zinc 1,868 1,295 3,450

Technology 65 46 114

Total Group Revenue 13,608 9,541 22,732

Attributable Total Group Revenue 13,089 9,114 21,790

Alloys 287 (16) 70

Coal 1,401 1,438 2,755

Copper 1,789 1,017 2,922

Nickel 436 25 427

Zinc 600 247 860

Technology 12 10 28

Corporate and unallocated (31) (36) (274)

Total Group Operating EBITDA 4,494 2,685 6,788

Attributable Total Group Operating EBITDA 4,284 2,486 6,350

Alloys 227 (52) (23)

Coal 1,030 1,137 2,038

Copper 1,377 648 2,126

Nickel 226 (179) (18)

Zinc 400 84 506

Technology 9 8 22

Corporate and unallocated (33) (41) (282)

Total Group Operating profit 3,236 1,605 4,369

Attributable Total Group Operating profit 3,069 1,440 3,999

The ongoing economic recovery in OECD countries and robust Chinese growth that led to a rebound incommodity prices in the second half of 2009 continued into 2010, resulting in increased spot and LME prices for

all of Xstratas commodities compared to the first half of 2009. Following a strong first quarter, concerns overthe sustainability of economic recovery and high national debt levels, particularly in Europe, and Chinesegovernment interventions to cool rapidly growing sectors of its economy weighed on global market confidenceand commodity prices from April. Nonetheless, Xstratas revenues increased by 43% and improved sales pricescontributed $2 billion to operating profit compared to the same period last year.


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Sales volumes increased in response to stronger market conditions and added $384 million to operating profitcompared to the first half of 2009. Increased coal volumes contributed $178 million to the result, boosted by

improved demand for semi-soft coal, increased coal chain capacity in New South Wales and a 58% increase incoking coal sales, reflecting the return to growth of the global steel sector, which enabled the recommencementof longwall operations at Oaky No. 1 in the second half of 2009. Ferrochrome production similarly benefittedfrom improved stainless steel market conditions and rose by 149% compared to the first half of 2009 as idledproduction capacity was bought back on stream. The full integration of Xstrata Nickels mining and processingassets enabled maximum capacity utilisation of the Canadian smelting and Norwegian refining facilities. TheNikkelverk refinery achieved record production at its increased annual capacity of 92,000 tonnes of nickel perannum, increasing volumes of refined nickel by 8% compared to the first half of 2009. Copper sales volumesrecovered from weather-related impacts and reduced refined production in response to the collapse in demandfor sulphuric acid in 2009, with volumes rising by 2%. Volume growth was achieved despite lower grades at allmining operations except Kidd Creek, Alumbrera and Collahuasi. Xstrata Zincs successful restructuring andexpansion of its Australian operations in 2009 and full production from the zinc smelters increased production ofzinc and lead by 6% and 10% respectively.

The benefits of the substantial restructurings and cost savings initiatives implemented in response to the globaleconomic downturn from late 2008, together with the ramp-up of new, lower cost production from successfullycompleted growth projects continued into the first half of 2010. A total of $243 million of real cost savings wasachieved during the period. C1 cash costs at Xstrata Nickel were reduced by 31% to an average of $2.84 perpound in the first half of 2010 from $4.09 per pound in the same period in the previous year as a result of theSudbury restructurings and the commissioning of the new Nickel Rim South mine. At the end of the first half,Xstrata Nickel was operating with C1 cash costs of approximately $2.50 per pound at prevailing by-productprices, well within the bottom half of the industry cost curve. Xstrata Zincs expansion and restructuring of theMount Isa and McArthur River operations, together with ongoing productivity improvements at the smeltingoperations, reduced C1 cash costs on a fully integrated basis by 18% from 44 cents per pound in the first half of2009 to 36 cents per pound in the first half of 2010, despite the impact of a weaker US dollar against theAustralian and Canadian dollars.

The restart of Oaky No 1 and the ferrochrome furnaces, lower maintenance costs following the closure of KiddCreek and productivity improvements at the Collahuasi and Cerrejn joint ventures further contributed toXstratas unbroken record of real cost savings at successive reporting periods since the Groups inception in2002. This was achieved despite cost increases in the copper business due to lower average grades, whichresulted in increased costs of $62 million.

The provisional pricing of copper and zinc sales reduced earnings from the copper and zinc businesses by $20million and $48 million respectively. The terms on which Xstrata normally sells copper and zinc include aprovisional pricing mechanism whereby the sales price is calculated on the average price for the metal during thequotational period. This period ranges from 30 days after the date of the sale in respect of cathode sales to180 days for some concentrate sales. Any outstanding provisionally priced sales at year end are marked to

market using the prevailing forward curve. Subsequent movements in commodity prices will impact on earningsin the following period. Consequently in times of rising prices, Xstrata will tend to outperform the average LMEprices whilst the opposite applies in times of falling prices.

OPERATING PROFIT VARIANCES $mOperating profit 30.06.09 1,605

Sales price* 2,033

Volumes 384

Unit cost real 243

Unit cost CPI inflation (122)

Unit cost mining industry inflation 32

Unit cost foreign exchange (767)

Other income and expenses (83)

Depreciation and amortisation (excluding foreign exchange) (89)

Operating profit 30.06.10 3,236

* net of commodity price linked costs, treatment and refining charges


12/85


The US dollar weakened substantially against the majority of Xstratas operating currencies in the first half of2010 compared to the same period of 2009 and had a significant negative impact on earnings. The Australian

dollar strengthened by 25%, the South African rand was 18% stronger on average and the Canadian dollargained 15% on the US dollar compared to the first half of 2009. In total, adverse foreign exchange movementsreduced earnings by $767 million compared to the first half of 2009.

CURRENCY TABLE TO $ AverageH110

AverageH109

%change

At30.06.10

At30.06.09

At31.12.09

USD:ARS 3.87 3.64 6 3.93 3.80 3.80

AUD:USD 0.89 0.71 25 0.84 0.81 0.90

USD:CAD 1.03 1.21 15 1.06 1.16 1.05

USD:CHF 1.08 1.13 4 1.08 1.09 1.04

USD:CLP 525 586 10 546 533 507

USD:COP 1,947 2,321 16 1,917 2,144 2,043

USD:PEN 2.85 3.10 8 2.83 3.01 2.89

EUR:USD 1.33 1.33 - 1.22 1.40 1.43GBP:USD 1.53 1.50 2 1.49 1.65 1.62

USD:ZAR 7.53 9.19 18 7.67 7.71 7.39

Mining sector inflation reversed as the lagging impact of lower commodity prices in 2009 flowed through in thefirst half of 2010, in particular in the coal business. Increased investment by the mining industry in response tothe global economic recovery and continuing demand for commodities from China, and increased costs ofconsumables and labour are already increasing cost pressures.

Depreciation and amortisation increased mainly due to higher mine production in the zinc business, whereproduction at Black Star open cut rose 61% to 2.1 million tonnes, capitalisation of copper projects at Mount Isain 2009 and an adjustment to the reserve base in Collahuasi in 2009. Other income and expenses included

higher demurrage charges in the coal business and the reversal of a positive 2009 impact of nickel inventorywrite down at the end of 2008, partially offset by lower standing charges in the alloys business.

AVERAGE COMMODITY PRICESUnit



%Change

Ferrochrome (Metal Bulletin) /lb 118.5 74.0 60

Ferrovanadium (Metal Bulletin) $/kg 30.7 22.5 36

Platinum (LPPM cash price) $/oz 1,597 1,098 45

Australian FOB export coking* $/t 193.7 142.6 36

Australian FOB export semi-soft coking* $/t 123.1 169.8 (28)

Australian FOB export thermal coal* $/t 80.3 89.2 (10)

Americas FOB export thermal coal* $/t 68.5 77.2 (11)

South African export thermal coal* $/t 69.9 69.8 -

Copper (average LME cash price) $/t 7,130 4,046 76Nickel (average LME cash price) $/t 21,212 11,690 81

Zinc (average LME cash price) $/t 2,155 1,322 63

Lead (average LME cash price) $/t 2,084 1,332 56

* average received price

Recovering demand and ongoing constraints to supply, coupled with the return of investment activity in LMEmetals, led to significant increases in the average price of copper, nickel, zinc and ferrochrome compared to thecorresponding period in 2009.

Realised coking coal prices rose steeply to over $193 per tonne as a result of recovery in global steel demand,

while realised semi-soft and thermal coal prices during the first half were lower, due to the impact of lowerpriced 2009 contracts for the Japanese full year to 31 March 2010. Average prices in the comparable periodwere also positively influenced by higher priced carryover tonnage in the first quarter of 2009 from 2008Japanese contracts. Realised thermal and semi-soft coal prices in the second half are expected to rise, reflectingthe benefit of thermal coal contracts settled at up to $98 per tonne for the Japanese fiscal year from 1 April


13/85


2010. More recently, Xstrata has agreed contract prices at $103 per tonne for annual contracts commencing 1July 2010.

Earnings

The pre-exceptional effective tax rate for the period was 25%, in line with the six months ended 30 June 2009.Non-controlling interests increased mainly due to higher earnings at Alumbrera in the period.

EARNINGS SUMMARY$m



Year ended31.12.09

Operating profit (before exceptional items) 3,236 1,605 4,369

Share of results from associates (2) (40) (56)

Net finance costs (8) (232) (347)

Income tax expense (800) (339) (993)

Effective tax rate 25% 25% 25%

Non-controlling interests (127) (85) (200)

Attributable profit (before exceptional items) from continuing operations 2,299 909 2,773

Earnings per share (before exceptional items) from continuing operations 0.79 0.38 1.05

Loan issue costs written-off (9) (41) (41)

Restructuring and closure costs - (40) (156)

Liability fair value adjustments - 79 350

Impairment of assets - (36) (2,553)

Share of loss from associates (4) (248) -

Profit on loss of control of interest in El Morro - - 194

Write down of investments in associates - - (277)

Foreign exchange gain on rights issue proceeds - 47 47

Income tax on exceptional items 2 20 324

(11) (219) (2,112)Attributable profit 2,288 690 661

Earnings per share 0.79 0.29 0.25


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OPERATING PROFIT SENSITIVITIES$m

Impact onH2 2010*

Indicativefull year**

1/lb movement in ferrochrome price 5 12$1/kg movement in ferrovanadium price 2 4

$1/t movement in Australian thermal export FOB coal price 4 36

$1/t movement in Australian coking export FOB coal price 1 7

$1/t movement in South African export thermal FOB coal price 2 10

$1/t movement in South American export thermal FOB coal price 3 9

1/lb movement in copper price 16 25

$10/oz movement in gold price 4 6

$1/lb movement in nickel price 70 141

1/lb movement in zinc price 15 26

$100/t movement in zinc treatment charge price 8 18

1/lb movement in lead price 4 7

$100/oz movement in platinum price 5 10$100/oz movement in palladium price 3 5

10% movement AUD 133 504

10% movement CAD 140 218

10% movement EUR 27 42

10% movement ZAR 102 223

*

**

After impact of currency and commodity hedging, and contracted, priced sales as at 30 June 2010

Assuming current annualised production and sales profiles, no currency or commodity hedging and no contracted, priced sales and

purchases at 30 June 2010

Cash Flow, Net Debt and Financing Summary

Xstratas operations generated strong cash flows of $4.8 billion in the first half of 2010, an increase of $3.2billion on the corresponding period in 2009. The Group benefitted from a substantially improved debt positiondue to these robust operational cash flows and the cash inflow of $2.25 billion from Glencore following theexercise of its option to repurchase Prodeco on 4 March. The transaction completed on 13 April and a further$238 million will be included as a receivable for the balance of undistributed profits and net cash invested. Thisreceivable is currently subject to final independent review.

Net debt in the period decreased by almost one third to $8.4 billion, despite a 73% increase in expansionarycapital expenditure of $1.4 billion. Gearing (net debt to net debt plus equity) decreased from 26% at the end of2009 to 19% at the end of June 2010. Gearing and lower interest rates reduced the amount of net interest paidto $189 million, 45% lower than the same period last year. Cash tax payments more than doubled to $919million due to higher earnings.


15/85


MOVEMENT IN NET DEBT$m



Cash generated from operations 4,778 1,611Net interest paid (189) (342)

Dividends received 2 -

Tax paid (919) (403)

Cash flow before capital expenditure 3,672 866

Sustaining capital expenditure (650) (502)

Disposals of fixed assets 22 7

Free cash flow 3,044 371

Expansionary capital expenditure (1,447) (836)

Cash flow before acquisitions 1,597 (465)

Purchase of Prodeco - (2,000)

Exercise of Prodeco option 2,250 -

Subscription to Lonmin rights issue (58) -Other investing activities 73 (166)

Net cash flow before financing 3,862 (2,631)

Net purchase of own shares (3) (5)

Issue of share capital - 5,667

Proceeds from sale of joint ventures and subsidiaries 466 -

Equity dividends paid (232) -

Dividends paid to non-controlling interests (121) (72)

Other non-cash movements (59) (27)

Movement in net debt 3,913 2,932

Net debt at the start of the year* (12,290) (16,026)

Net debt at the end of the period* (8,377) (13,094)

* Includes derivative financial instruments that have been used to provide an economic hedge

RECONCILIATION OF EBITDA TO CASH GENERATED FROM OPERATIONS$m



Operating EBITDA 4,494 2,685

Share based compensation plans 15 122

Decrease/(increase) in inventories 232 (288)

Decrease/(increase) in trade and other receivables 609 (687)

Increase in other assets (101) (363)

Decrease in trade and other payables (409) (7)

Movement in provisions and other non-cash items (62) 149

Cash generated from operations 4,778 1,611


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NET DEBT SUMMARY

$m As at 30.06.10 As at 31.12.09Cash 1,369 1,177

External borrowings (9,527) (13,286)

Finance leases (219) (181)

Net debt* (8,377) (12,290)

Net debt to net debt plus equity 19% 28%

* Includes derivative financial instruments that have been used to provide an economic hedge

Working Capital

WORKING CAPITAL$m As at 30.06.10 As at 31.12.09

Inventories 4,227 4,570

Trade and other receivables 2,691 3,306

Prepayments 114 232

Trade and other payables (3,259) (3,697)

Net working capital 3,773 4,411

Working capital balances were lower at the end of June 2010 due partly to lower commodity prices compared tothe end of 2009, resulting in downward mark-to-market adjustments on receivables.

Treasury Management and Financial Instruments

The Group is generally exposed to US dollars through its revenue stream and seeks to source debt capital in USdollars directly or by borrowing in other currencies and swapping them into US dollars.

Currency cash flow hedging may be used to reduce the Groups short-term exposure to fluctuations in the USdollar against local currencies. The unrealised mark-to-market loss on currency hedges at 30 June 2010 was $51million. Currency hedging gains reflected in the income statement for the first half amounted to $106 million.These related to coal sales for which prices were contractually fixed.

The Group did not enter into any strategic, long-term base metals hedging contracts in the period.


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Consolidated Capital Expenditure

CAPITAL EXPENDITURE SUMMARY

(excludes deferred stripping expenditure)$m



Year ended31.12.09

Alloys 47 38 114

Coal 214 151 424

Copper 230 204 498

Nickel 89 42 93

Zinc 88 54 133

Technology 1 1 2

Unallocated - 1 1

Total Sustaining 669 491 1,265

Attributable Sustaining 659 484 1,243

Alloys 59 17 49

Coal 542 315 687Copper 325 173 436

Iron Ore 26 - 23

Nickel 611 432 1,049

Zinc 49 26 114

Technology - - 1

Total Expansionary 1,612 963 2,359

Attributable Expansionary 1,332 832 1,993

Alloys 106 55 163

Coal 756 466 1,111

Copper 555 377 934

Iron Ore 26 - 23

Nickel 700 474 1,142Zinc 137 80 247

Technology 1 1 3

Unallocated - 1 1

Total 2,281 1,454 3,624

Attributable total 1,991 1,316 3,236

Expansionary capital expenditure increased to over $1.6 billion during the first six months of the year as Xstratacontinued to ramp up investment to deliver growth from its project pipeline. Expenditure in the period marked asubstantial 67% increase, reflecting the advanced stage of construction and commissioning of a number ofXstratas major projects, set against lower spending in 2009 as cash was conserved in light of prevailingeconomic conditions.

During the period, three major growth projects were successfully commissioned:

Nickel Rim South mine in Sudbury reached full mine operations on time and below budget in April. Themine is ramping up to full capacity of 18,000 tonnes of nickel per annum in 2011.

Xstrata Coal commissioned two major thermal coal operations, namely the Goedgevonden greenfield opencut operation in South Africa and the underground Blakefield South mine in Australia. Goedgevonden mineproduction is ramping up to its capacity of 7 million tonnes per annum, split between the domestic andexport market, with full production expected to be achieved in 2011. The Blakefield South project willreplace the Beltana underground mine and is ramping up to reach full capacity in the third quarter of 2010.

Expansionary capital expenditure is expected to increase in the second half to approximately $4.6 billion for the

full year to progress the further 15 major projects that are currently approved or in the construction phase. Themost significant in terms of capital budget is the Koniambo nickel project in New Caledonia which is now almost60% complete and on track to commence production in the first half of 2012.

The Mangoola thermal coal project is on track to commence initial production during the second half, rampingup to an annual production capacity of 8 million tonnes of domestic and export thermal coal by 2011.


18/85


Construction of the ATCOM East project in South Africa is nearly one third complete and on track to commenceannual production of 5.7 million tonnes in the first half of 2011, ramping up to full production in 2014 at an

annual rate of 7.5 million tonnes. Provided regulatory approvals are received in the second half of 2010,construction will begin on the 14.5 million tonnes run of mine per annum Ravensworth North project. Followingapproval in August, full production at the Ulan West longwall operation is scheduled to commence in 2014 at anannual rate of 6.7 million tonnes run of mine.

Xstrata Copper is progressing three brownfield expansion projects at Ernest Henry mine in Australia, LomasBayas in Chile and Antamina in Peru. Board approval for the $1.5 billion Antapaccay project in July, abrownfield expansion to the Tintaya operation in southern Peru, will see construction commence in the thirdquarter, with commissioning expected in the second half of 2012. Once commissioned, Antapaccay will producean average of 160,000 tonnes of copper for the first six years and transform the mine into a long life businesswith at least 20 years of operations. Xstratas Board has approved the $4.2 billion investment to develop the LasBambas project, including the exercise of the option contract with the Peruvian government to transfer the landtitles to Xstrata Copper. Construction is scheduled to commence in the third quarter of 2011, subject to

Peruvian government environmental approvals. Las Bambas will be a large, long life, low cash cost operationcomprising three mines feeding a 140,000 tonne per day concentrator that will initially produce 400,000 tonnesof copper in concentrate a year from the end of 2014.

Xstrata Zinc has announced the commencement of construction on the Bracemac-McLeod deposit in Quebec,Canada, which will replace the production from the Perseverance mine from 2012.

Capital for the shaft development of Xstrata Alloys Eland platinum mines Eastern Decline was approved duringMarch 2010 and the shaft development is currently at 442 metres. The previously approved Western Declinedevelopment has reached a depth of almost 700 metres. Production from underground operations is projectedto double current production levels to reach some 250,000 tonnes per month by 2013, with steady statecapacity of 500,000 tonnes per month, equivalent to around 310,000 ounces of platinum in concentrate, beingachieved during 2015.

Acquisitions and disposals

The Group received formal notification on 4 March 2010 by Glencore of their exercise of its option to re-acquirethe Prodeco coal operations which Xstrata had acquired in 2009 for a net consideration of $2 billion. Under theoption agreement, Glencore paid Xstrata a cash sum of $2.25 billion and Xstrata is also entitled to earnings fromProdeco up to 13 April 2010 and the net amount of cash paid into Prodeco by the Group.

In October 2009, the Group entered into an irrevocable sale agreement to dispose of the Groups 70% interestin El Morro SCM, the holder of the El Morro copper-gold project in Chile, and associated rights and assets, toNew Gold Incorporated for a total cash consideration of US$463 million. As the Group recovered the carryingvalue of this asset through a sale transaction, the asset was classified as held for sale at 31 December 2009. Thesale proceeds of $463 million were received from New Gold Incorporated on 17 February 2010.

On 30 July, Xstrata Zinc and the Noranda Income Fund announced that they had entered into an exclusivityagreement regarding a non-binding proposal by Xstrata Zinc to acquire all of the outstanding units of theNoranda Income Fund not held by Xstrata for C$3.40 per priority unit. Noranda Income Fund, a publicly tradedunit trust in which Xstrata Zinc owns a 25% interest, owns the CEZinc refinery in Quebec, Canada. Xstrata Zinccurrently manages the CEZinc refinery and processing facility in Quebec and supplies CEZinc with its annualrequirement of zinc concentrate through a contract which will expire in May 2017.


19/85


Dividends

The Directors have proposed a 2010 interim dividend of 5 per share amounting to $145 million which will bepaid on 8 October 2010. The final 2009 dividend of 8 per share amounting to $232 million was paid on 14May 2010.

DIVIDEND DATES 2010Ex-dividend date 15 September

Record date 17 September

Deadline for return of currency election form 23 SeptemberApplicable exchange rate date 1 OctoberPayment date 8 October

As Xstrata plc is a Swiss tax resident company, the dividend payment will be taxed at source in Switzerland at therate of 35%. A full or partial refund of this tax may be available in certain circumstances.

The interim dividend is declared and will be paid in US dollars. Shareholders may elect to receive this dividend inSterling, Euros or Swiss francs. The Sterling, Euro or Swiss franc amount payable will be determined by referenceto the exchange rates applicable to the US dollar seven days prior to the dividend payment date. Dividends canbe paid directly into a UK bank or building society account to shareholders who elect for their dividend to bepaid in Sterling. Further details regarding tax refunds on dividend payments, together with currency election anddividend mandate forms, are available from Xstratas website (www.xstrata.com) or from the CompanysRegistrars.

Share Data

Under IFRS, own shares (treasury stock) are deducted from the total issued share capital when calculating

earnings per share. During the period, 5,103,008 shares were disposed and 521,098 purchased.

SHARE PRICEXTA LSE

(GBP)XTA SWX

(SFR)

Closing price 31.12.09 11.21 18.45

Closing price 30.06.10 8.87 14.35

Period high 13.21 21.50

Period low 8.87 14.35

Period average 10.96 18.10

SHARES IN ISSUE FOR EPS CALCULATIONS Number ofshares(000s)

Weighted average for 6 months ended 30.06.10 used for eps calculation 2,902,329



Total issued share capital as at 30.06.10 2,939,018


20/85


PUBLICLY DISCLOSED MAJOR SHAREHOLDERS

Name of shareholder

Number ofOrdinary shares

of US$0.50 each

at 30.06.10

% ofOrdinary

issued share

capitalGlencore International AG* 1,010,403,999 34.38

BlackRock, Inc 175,809,581 5.98

Capital Research and Management 145,466,653 4.94

AXA S.A. 88,770,657 3.02

* The voting rights comprised in this interest are directly controlled by Finges Investment B.V., a wholly-owned subsidiary of Glencore

International AG

Principal risks and uncertainties

The Xstrata Group is exposed to a number of risks and uncertainties which exist in our business and which mayhave an impact on our ability to execute our strategy effectively in the future. The principal risks and

uncertainties facing the Group, as outlined in the Annual Report 2009 in the Business review section on pages36 to 41, remain appropriate for 2010.


21/85


Markets | Alloys

Ferrochrome and vanadium

Restocking of stainless steel commenced in the first half of the year, leading to a recovery in demand forferrochrome as stainless steel melt production increased. Global production of stainless steel melt during the firstsix months of the year of 15.5 million tonnes was 38% higher than in the comparable period in 2009 and 11%higher than the second half of 2009. China continued to be the dominant producer, producing 5.3 milliontonnes, followed by 3.9 million tonnes from European producers.

In response to increasing demand, South African ferrochrome producers returned to around 85% capacityutilisation at the beginning of 2010. Chinese and Indian domestic production was also restarted in the firstquarter of the year as furnaces returned to profitability.

In line with the recovery in the ferrochrome market, the average European ferrochrome benchmark price for the

first half of the year was 119 per pound, up from 96 per pound in the second half of 2009. The third quarterEuropean ferrochrome benchmark price was settled at 130 per pound.

Vanadium demand improved during the first half of the year responding to the recovery in global crude steelproduction. The average ferrovanadium price during the first half of 2010 was $31 per kilogram vanadium, 36%higher than the comparable period in 2009. Vanadium pentoxide traded at an average of $7 per pound duringthe first six months of the year, compared to $5 per pound during the same period in 2009.

Outlook

In the short-term, demand for ferrochrome will be impacted by the seasonally weak stainless steel demand inEurope and the US and exacerbated by the measures being taken by the Chinese government to slow its

overheating economy. Despite the slowdown in the demand, the ferrochrome market is expected to be inbalance, as South African capacity is reduced due to maintenance programmes being undertaken to coincidewith higher winter electricity tariffs.

Continued global economic growth will support a recovery in demand in the final quarter of 2010.

Platinum Group Metals (PGM)

Platinum group metals experienced a strong recovery in the first half of 2010 with platinum, palladium andrhodium prices increasing some 45%, 116% and 104% respectively over the same period last year.

Demand for platinum group metals came from a combination of exceptionally strong investment activitytriggered by the launch of the US ETF in January 2010 and the recovery of the global car market, driven by

restocking in the US and increased production from China and other BRIC countries.The combination of concerns over Europes slow economic recovery and the impact on vehicle sales in the Westof scrappage schemes, which came to an end in the second quarter of 2010, resulted in a heavy liquidation ofspeculative positions in both platinum and palladium in May 2010 followed by a retreat in prices. As metal pricesdipped, there was increased platinum buying on the Shanghai Gold Exchange, the barometer for Chinesejewellery demand, accentuating jewellerys role as a demand shock absorber.

Outlook

Austerity measures in Europe will reduce demand from the automobile sector, the impact of which on platinumdemand will be partially offset by a recovery in the commercial and heavy duty vehicle market as well as newdemand from off-highway vehicles, such as tractors and earth-moving equipment. Palladium will be favourablyexposed to increasing auto-catalyst demand due to an increase in gasoline vehicles and tightening emissionstandards in China.

Demand will continue from jewellery sales in China and from increased investment activity following the recentapproval to list additional shares on the US-listed ETF securities.


22/85


In the medium term, the PGM market is expected to remain tight as a result of continued constraints to supplygrowth following the deferral of capital projects during 2008 and 2009.


23/85


FINANCIAL AND OPERATING DATA$m


Six months to

30.06.09Year ended

31.12.09

Ferrochrome and vanadiumRevenue 783 448 1,105

Operating EBITDA 229 (36) 15

Depreciation and amortisation (43) (22) (62)

Operating profit/(loss) 186 (58) (47)

Share of Group Operating profit 5.7% (3.6)% (1.1)%

Capital employed 1,278 1,135 1,176

Return on capital employed* 28.6% (12.2)% (4.5)%

Capital expenditure 63 35 103

Sustaining 44 35 102

Expansionary 19 - 1

Platinum Group Metals

Revenue 137 82 200Operating EBITDA 58 20 55


Operating profit 41 6 24

Share of Group operating profit 1.3% 0.4% 0.6%


Return on capital employed* 4.7% 0.9% 1.6%

Capital expenditure 43 20 60

Sustaining 3 3 12

Expansionary 40 17 48

* ROCE % based on average exchange rates for the period

OPERATING PROFIT/(LOSS) VARIANCES

$m

Operating loss 30.06.09 (52)

Sales price* 267

Volumes 22

Unit cost real 54


Unit cost mining inflation (33)


Other income and expenses 66


Operating profit 30.06.10 227

*Net of commodity price linked costs, treatment and refining charges

Xstrata Alloys


24/85


Operations

Xstrata Alloys recorded an operating profit of $227 million in the first half of 2010, compared to an operatingloss of $52 million for the same period in 2009. The recovery of the global economy and restocking in thestainless steel sector created a significantly stronger pricing environment for all of Xstrata Alloys commodities.During the first half of 2010, the ferrochrome price and the average platinum group metals (PGM) basket bothincreased by 60% compared to the same period in 2009.

Ongoing inflation in the South African mining sector together with CPI reduced earnings by $55 million,exacerbated by the negative impact of a weaker US dollar against the South African rand, which contributed aloss of $60 million. Despite a difficult operating cost environment, which included a 68% increase in averageelectricity prices, Xstrata Alloys achieved real cost savings of $54 million as a result of savings from a number ofinitiatives, including the increased use of lower cost UG2 in the ore mix and the optimisation of the reductantmix to limit the impact of high metallurgical coke prices.


In response to a strong market, attributable saleable production of ferrochrome rebounded strongly to 608,000tonnes in the first half of 2010, an increase of 149% over the same period in 2009. Xstrata Alloys increasedferrochrome capacity utilisation from 20% in the first half of 2009 to approximately 85% during 2010.

The European ferrochrome benchmark price increased some 35% from $1.01 per pound in the first quarter to$1.36 per pound in the second quarter. Earnings from improved prices were offset against the strong rand andelectricity price increases in South Africa. The third quarter benchmark price has been settled at $1.30 perpound, down 4% on the second quarter price.

Platinum Group Metals (PGM)

PGM volumes increased by 2% compared to the same period in 2009, mainly as a result of the production build-up at Mototolo. Mototolo increased throughput by 91,000 tonnes, an 8% increase over the comparable periodin 2009, after reaching nameplate ROM capacity of around 200,000 tonnes per month in the third quarter of2009.

At Eland, total volumes mined were 3% lower than the previous year, mainly due to a prolonged wet seasonand delays in obtaining the regulatory permit for the De Wildt mining extension. Volumes milled during the firsthalf increased by 26,000 tonnes compared to the first half of 2009, with additional volumes being drawn fromstockpiles. Despite increased volumes being milled, PGM ounces were 4% lower than the first six months of2009, as a result of declining average mine grades. Grades are expected to stabilise and gradually improve overthe next two years as the underground operations ramp up in line with the scheduled depletion of the remaining

opencast reserves.


25/85


SUMMARY PRODUCTION DATASix months to

30.06.10Six months to

30.06.09Year ended

31.12.09

Ferrochrome (kt)* 608 244 786

Vanadium**

Ferrovanadium (k kg) 2,186 1,313 2,284

V2O5 (k lbs) 10,707 7,039 11,492

Platinum Group Metals (oz)**

Platinum 63,937 63,508 132,969

Paladium 32,882 31,723 67,435

Rhodium 10,759 9,801 21,182

Indicative average published prices (Metal Bulletin)

Ferrochrome (/lb) 118.5 74.0 85.0

V2O5 ($/lb) 7.0 5.2 6.0

Ferrovanadium ($/kg) 30.7 22.5 25.0

Average prices ($/oz)

Platinum (London Platinum and Palladium Market) 1,597 1,098 1,205

Palladium (London Platinum and Palladium Market) 468 217 264

Rhodium (Johnson Matthey) 2,635 1,290 1,559

*

**

Including Xstratas 79.5% share of the Xstrata-Merafe Chrome Venture

100% consolidated

Developments


During the first half of the year Xstrata Alloys concluded an offtake agreement with Lonmin plc, which expandedthe offtake of UG2 chrome tailings from Lonmins Eastern Platinum operations to Lonmins Western Platinumoperations. The tailings will be treated through a chromite recovery plant that will be built, owned and operatedby the Xstrata-Merafe chrome venture. This agreement will supply 1.5 million tonnes per annum of UG2chrome.

The chrome venture has approved the construction of a new 600,000 tonne per annum pelletizing and sinteringplant at its Rustenburg operations. The capital cost of the project is $114 million and it is expected to be fullyoperational by 2013. In addition to the agglomeration of UG2 and LG6 fines, the project will deliver significantoperational efficiencies, cost improvements and environmental benefits, including reduced dust and airemissions.

The $46 million mine development continued at the Horizon complex to increase ROM capacity from 180,000tonnes to 480,000 tonnes per annum in 2013.

Platinum Group Metals

Sinking of the Western Decline System at the Eland mine has substantially progressed and the shaft developmenthas advanced a total of 700 metres to date.

Capital for the shaft development at the Eastern Decline was approved during March 2010 and the shaftdevelopment is currently at 440 metres. Production from underground operations at Eland will eventuallyreplace opencast tonnage, maintaining milling throughput and gradually increasing production as the Easternand Western Decline Systems ramp up to nameplate capacity. Production from underground operations isprojected to double current production levels to reach some 250,000 tonnes per month by 2013, with steadystate capacity of 500,000 tonnes per month, equivalent to around 310,000 ounces of platinum in concentrate,being achieved during 2015.

Eland will have an estimated mine life of approximately 40 years. Potential to extend and increase capacity existsthrough the development of the deeper Madiberg reserves.


26/85


Eland is revising its opencast mine plan to incorporate additional information arising from the extensive infilldrilling programme currently under way, and incorporating mineable reserves from the adjacent De Wildt

exploration area. Reserves in the De Wildt area are of a lower grade but will extend the life of the opencast pitduring the development of the underground operations. A mining right application pertaining to the De Wildtproperty is currently awaiting approval from the Department of Mineral Resources (DMR).

A bankable feasibility study pertaining to the northern portion of the Nkwe Platinum project area (Garatau),located on the Eastern Limb of the Bushveld Igneous Complex has progressed to the peer review phase. Thestudy will be completed in the second half of 2010 and Xstrata has an option to acquire a 50% participation inthe project.

The exploration programmes at the Madibeng, De Wildt and Mulunamisi properties, started in August 2008 hasyielded 126 UG2 reef intersections, with further exploration currently under way. Ten boreholes have beencompleted to date at the Beestkraal properties, with the majority of the boreholes having intersected both theMerensky and UG2 reef horizons. Exploration at the Beestkraal properties was temporarily suspended during the

economic downturn and will be revisited in October.


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Thermal Coal Markets

Strong demand growth for seaborne thermal coal continued into 2010, driven primarily by growing demand for

imported coal by Chinese generators and the ongoing rollout of new generation capacity in India whereindustrialisation is gaining momentum.

Demand for coal in the Pacific market outweighed the impact on demand of muted economic recovery andlower gas prices in Europe and the US resulting in a steady improvement of coal prices during the first half of2010.

The initial disparity in pricing between the stronger Pacific market and still weak Atlantic market narrowedsignificantly towards the middle of the year as increased volumes of Atlantic supply moved into the Pacific,primarily from South Africa to India.

Imports into China continued at very high levels during the first half, running at an annualised rate of 117 milliontonnes per annum compared to total imports for 2009 of 92 million tonnes. Strong domestic demand has driven

domestic coal prices up from 640 RMB per tonne during the first quarter to levels of around 725 RMB per tonnemore recently, basis 5500 NAR, despite increased levels of Chinese production. Demand has moderatedsomewhat as the severe drought in China came to an end, resulting in increased hydro-electric powergeneration. Demand for electricity, while still growing, has been impacted by the measures taken by the Chinesegovernment to prevent the economy from overheating. However, imported coal remains competitively pricedagainst domestic supply, encouraging continued use by electricity generators in the coastal and southern regionsof China.

Demand for thermal coal imports in other Asian markets also grew in the first half of 2010, increasing 18% inKorea, 21% in Japan and 5% in India compared to the first half of 2009. In Europe, the US and other Atlanticmarkets, high stock levels, a slower economic recovery and lower gas prices reduced import demand byapproximately 19% during the first half of 2010.

The thermal coal market was broadly in balance in the first half of 2010. Indonesian coal, comprisingpredominantly low energy, sub-bituminous coal, accounted for the majority (83%) of global supply growth.Australian thermal coal exports were hampered by adverse weather and the switching of production into thebuoyant metallurgical coal markets and remained in-line with 2009 levels. The increased demand from thePacific markets was satisfied by coal traditionally destined for the Atlantic markets. In the first half of 2010,Colombian and South African thermal coal supplied to the Pacific market increased by more than 10 milliontonnes compared with 2009.

Spot thermal coal prices in the Pacific market remained in a range of $94-$100 per tonne for the period. Pricesin the Atlantic, as reported by the API2 and API4 indices, improved in the second quarter of 2010 due to thesteady reduction of EU stocks and demand from Asia. The API4 price increased from lows of around $81 pertonne to recently trade in between $90-$93 per tonne. The API2 price has risen from lows around $71 duringthe later part of the first quarter to recently trade in a range of $90-$95 per tonne.

At the end of March, Xstrata Coal secured contract price settlements with Japanese Power Utilities for the fiscalyear commencing 1 April 2010 at around $98 per tonne FOB basis 6322 GAR. More recently Xstrata has agreedcontract prices at around $103 per tonne for annual contracts commencing 1 July 2010. The Japanese FiscalYear contract price settlement is referenced to contracts with some other customers in the Pacific market, whereterm and annual contracts represented 76% of Xstrata Coals thermal coal sales in the first half of 2010.Xstratas thermal coal sales are underpinned by its position in the key thermal markets of Japan, Korea andTaiwan, which together accounted for 75% of Xstratas Pacific market thermal coal sales over the same period.

Approximately 55% of export sales from South Africa in the first half of 2010 were priced on a spot or indexbasis, with the balance of sales settled under fixed price term or annual contracts.

OutlookStrong demand for imported coal in China and India and an improving, albeit muted, recovery in Atlanticmarkets will support thermal markets during the second half of 2010. In Europe, a reduction in coal stocks builtup over the last year and increased gas prices during the second quarter of 2010, point to an improvement in

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coals competitiveness as a fuel for electricity generation and some recovery in demand is expected for the restof the year.

Over the medium term, thermal coal markets are expected to remain robust as coal demand continues tooutpace projected supply growth, driven by economic growth in Asia and other developing economies, as Chinacontinues on its path to industrialisation and India invests in new coal-fired generation to address their growingelectricity shortages,.

Coking coal markets

A key development in coking coal markets in 2010 was the shift from annual contract pricing to quarterlycontract pricing periods. The pricing system has been partially accepted by both suppliers and consumers,although some contract arrangements covering a full 12 month period of pricing remain.

During the first half of 2010, pig iron production in traditional coking coal importing countries has increased

steadily and on an annualised basis reflected an increase of over 25% above 2009 levels. Demand was furthersupported by the emergence of China, which was traditionally self sufficient, as a major coking coal importer. Inthe first half of 2010, China imported coking coal at an annualised rate of 33 million tonnes per annum, 3million tonnes more than in 2009. Increased demand for imports from China has been underpinned by therestructuring of mine ownership in the Shanxi province, which resulted in coking production remaining flatduring the first quarter while Chinese annualised pig iron production increased 13% compared with 2009.

Unusually high rainfall and the consequent damage to infrastructure impacted coking coal supply from Australiaby an estimated 8 million tonnes per annum during the first quarter of 2010. Australian coking coal exports haverecovered strongly since April and for the first half of 2010 are at 18 million tonnes per annum higher than 2009on an annualised basis. In the first half of 2010 US seaborne coking coal exports have increased by over 60% tomore than 52 million tonnes per annum, 21 million tonnes per annum higher than in 2009. The increased supplyfrom both Australia and the US combined with a 5 million tonne per annum increase from Canada has resulted

in a balanced market in the first half of 2010.

Stronger demand for coking coal during the first half of 2010, combined with the first quarter supply disruptionsin Australia, maintained a rising trend in spot coking coal prices which had commenced in April 2009. As supplyrecovered during the second quarter and pig iron production in coal importing countries stabilised, spot pricesmoderated slightly. During the first half of 2010, Xstrata secured prime hard coking coal prices through a rangeof spot, quarterly benchmark and annual contracts with prices ranging from $200 to $270 per tonne with anaverage in the upper end of the range. Quarterly benchmark contract prices for the second quarter of 2010were settled in March at $200 per tonne and, in May, increased to $225 per tonne for the third quarter.

Outlook

Europes slow economic recovery and the measures taken by the Chinese government to slow overheatingsectors are expected to impact steel and pig iron production during the second half of 2010. In the longer term,demand will be driven by the development of steel manufacturing capacity in China, India, Brazil and otherdeveloping economies seeking to build infrastructure, while supply growth will be constrained by scarcity ofcoking coal resources and potential infrastructure limitations. Consequently, coking coal markets are expected toremain tight over a sustained period.


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FINANCIAL AND OPERATING DATA$m



Year ended31.12.09

Revenue: operations 3,440 3,073 6,424Coking Australia 803 391 965

Thermal Australia 1,881 1,906 3,749

Thermal South Africa 412 387 968

Thermal Americas 344 389 742

Revenue: other 139 169 325

Coking Australia - - 22

Thermal Australia 139 166 294

Thermal South Africa - 3 9

Total revenue 3,579 3,242 6,749

Coking Australia 803 391 987

Thermal Australia 2,020 2,072 4,043



Operating EBITDA 1,401 1,438 2,755


Thermal Australia 673 1,010 1,712




Coking Australia (53) (33) (87)

Thermal Australia (194) (156) (397)

Thermal South Africa (81) (69) (148)

Thermal Americas (43) (43) (85)

Operating profit 1,030 1,137 2,038


Thermal Australia 479 854 1,315



Share of Group Operating profit 31.8% 70.8% 46.6%

Australia 27.3% 60.9% 37.9%

South Africa 0.8% 1.1% 2.5%

Americas 3.7% 8.8% 6.2%


Australia 6,887 6,126 6,843

South Africa 2,300 1,792 2,239

Americas 1,882 1,285 1,744

Return on capital employed* 17.8% 27.7% 20.9%Australia 24.2% 36.1% 27.4%

South Africa 2.1% 2.3% 5.6%

Americas 12.8% 22.1% 15.6%

Capital expenditure 756 466 1,111

Australia 590 267 662

South Africa 150 169 373

Americas 16 30 76

Sustaining 214 151 424

Expansionary 542 315 687

*

ROCE % based on average exchange rates for the period

Includes purchased coal for blending with mine production

Xstrata Coal


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OPERATING PROFIT VARIANCES$m


Sales price* 60

Volumes 178

Unit cost real 109


Unit cost mining industry inflation 93


Other income and expenses (88)



* net of commodity price linked costs, treatment and refining charges

Operations

Xstrata Coals operating profit decreased by 9% to just over $1 billion in the first half of the year as higheraverage prices, increased sales volumes and cost savings were more than offset by adverse foreign currencymovements.

Semi-soft sales volumes rose by 50% or 1.3 million tonnes and thermal coal sales remained consistent with theprior period, as thermal coal production was switched into semi-soft in response to higher market prices.Cerrejn sales volumes were at a similar level to the prior period.

Sales volumes from Prodeco operations were 3.3 million tonnes to 13 April 2010, 1 million tonnes lower than inthe first half of 2009, which included the full six months. Under the terms of the Option Agreement withGlencore, Xstrata is entitled to earnings from Prodeco up to the completion of the transaction, which is recordedas financial income and not included in Xstrata Coals reported earnings.

The recovery in global demand for steel from the second half of 2009 and the recommencement of longwalloperations at Oaky No. 1 mine contributed to a 58% increase in coking coal sales during the first half comparedto the same period last year.

Real unit cost savings of $109 million were mainly as a result of the recommencement of longwall operations atOaky No.1 as well as cost reduction initiatives and productivity improvements.

Substantially higher coking coal prices due to the recovery of the global steel market offset lower realised semi-soft and thermal prices and contributing $60 million to operating profit. This compared to the first half of 2009,when realised prices for coking coal were impacted by a number of deferrals of sales by customers in light ofmarket conditions. The average semi-soft price was lower than in the first six months of 2009 when the pricebenefitted in the first quarter from the higher priced carryover from 2008 Japanese financial year contract yearsales.

Foreign exchange reduced Xstrata Coals operating profit by $398 million

Xstrata Half Yr Report 2010

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Transcript of Xstrata Half Yr Report 2010