Chairman's statement

The rapid progress Xstrata has made since its listing in London in 2002 continued apace in 2004. Our management teams achieved significant operational improvements and initiated major growth projects across the Group, to further optimise a portfolio already strengthened by the acquisitions during the two preceding years. Today, Xstrata has a market capitalisation of some $12 billion compared to around $600 million at the time of the IPO in 2002 and benefits from a balanced portfolio of commodities, diversified by product and geography, and with robust market positions.

Our progress over the last three years affirms the strategic direction set out at the time of the London listing in 2002; to create value for shareholders through growing Xstrata into a global, diversified mining group. Notwithstanding our success to date, further opportunities exist.

In 2004, the Group reported record attributable profit of $1.09 billion, pre-exceptionals, up over 560% from last year, as the diversification and breadth of our portfolio achieved through the acquisition of the coal assets in 2002 and MIM in 2003 showed its potential in strong commodity markets. Even more encouragingly, Xstrata was alone among the London-listed diversified mining companies in reducing operating costs in real terms in 2004, despite the inevitable cost pressures associated with the high commodity price environment.

The Group's achievements since the acquisition of MIM, including the seamless integration and subsequent improvements in the operational and safety performance of these operations, confirm our confidence in the strength of Xstrata's management structure, which devolves responsibility and authority, empowering the Group's businesses to operate effectively and efficiently.

This devolved management structure relies on strong governance and good communication across the Group and in 2004, Xstrata implemented a number of Group-wide policies and assurance programmes to reinforce existing frameworks.

Governance

The Board of Xstrata believes that effective governance structures and procedures are essential to the long-term sustainability of our business. Xstrata's Board comprises nine non-executive directors, six of whom are independent, and during 2004 the Board undertook a rigorous and formal assessment of its own performance and the performance of individual directors, led by David Rough, the senior independent non-executive director.

Following the implementation of the Group-wide comprehensive risk management system and internal audit processes in 2003, subsequently extended to all former MIM sites and offices, a Group-wide risk management policy was agreed by the Board. This policy articulates our belief that risk is an intrinsic part of our business and is inseparable from opportunity. The objective of our risk management system is to ensure an environment where we can confidently grow shareholder value through developing and protecting our people, our assets, our environment and our reputation.

A Group health, safety, environment and community policy was also introduced during 2004, which sets out our commitment to the highest standards of health, safety and environmental performance, community co-operation and to the principles of sustainable development. To support this commitment, 17 health, safety, environment and community management standards, supported by a comprehensive assurance programme, were developed and implemented during the year. Each site will be independently audited against these management standards by the end of 2005.

Health, safety, environment and community performance

Improvements in operational efficiency and productivity at our operations were accompanied by above-average improvements in health and safety performance. Overall, Xstrata achieved a 30% reduction in the Group total recordable injury frequency rate and a 33% reduction in the lost time injury frequency rate.

These substantial improvements were achieved across our businesses, but were particularly marked at the former MIM operations in north Queensland, where safety improvements formed an integral part of the transformation programme. Here, again, Xstrata's decentralised management structure played a central role, as safety officers were taken out of corporate offices and put back into the operations.

However, while we can feel pleased that these improvements were made, there is no room for complacency. Six people lost their lives working at our operations in South Africa during the year. This is a situation which neither I nor any of the directors or executive management find acceptable. It is difficult to imagine the impact these deaths will have had on families and friends, and I extend my deepest sympathies to all those affected by this tragic loss of life.

It is my firm belief that it is possible to run our operations without any loss of life or injury - indeed, our overall aim is to achieve zero harm to any of our employees, contractors, local communities or stakeholders. This is a major priority for Xstrata's Board, executive management and for all of our employees in 2005.

Our South African operations in particular face the challenge, in common with other South African mining and metals groups, of ensuring employees align their behaviour to a risk-averse workplace. To address this challenge, we implemented a major behavioural safety programme across our South African operations and made a number of senior appointments to transfer best practice knowledge and experience from our other high-performing operations, particularly in Australia.

In early 2005, the Board established a health, safety, environment and community (HSEC) committee, chaired by Ian Strachan, a non-executive independent director, and comprising Mick Davis, David Rough and Fred Roux as members. The formation of this committee underlines the Board's view of the importance of health, safety, environmental and community issues to the Group and its commitment to ensuring Xstrata attains the highest possible standards in these areas.

Community engagement remains a fundamental part of our business, and in 2004 we spent $10.5 million on corporate social involvement initiatives to benefit the communities that host our operations, our employees and their families.

A more detailed review of our social, environmental and health and safety performance is provided in our Sustainability Report, published separately and available on our website.

Conclusion

As I suggested in my report last year, the structure of the metals and mining industry has improved significantly over the past several years, with consequent improved returns for companies in the sector. Underlying growth in demand for power, metals and minerals remains strong, particularly in China and India, and while producers have begun to respond to the tightness in specific commodities, the major companies in the industry have not initiated unwarranted new projects or expansions based on prevailing commodity prices or unrealistic long-term assumptions. In many commodities, there has been an under-investment in exploration and a number continue to face infrastructural constraints on increased supply. The outlook suggests an extended period of sustained commodity price strength.

Xstrata remains exceptionally well positioned to secure further value for shareholders from this point in the cycle. The strong commodity prices of 2004 have risen further in the first three months of 2005, with the likelihood of higher received prices in the Group's key businesses this year. Importantly, the operational efficiency programmes across the Group will deliver further benefits in 2005 and the Group will reap the reward of volume increases as a number of internal projects, such as the Rolleston open-cut coal mine and the Black Star zinc lead open pit operation, come on stream this year.

The longer term future for the Group is similarly positive and rests on our proven capacity to grow Xstrata and to run our operations with ever greater efficiency. The significant improvements in operating performance, profitability and health and safety indicators since the acquisition of the coal assets in 2002 and of MIM Holdings in 2003, have demonstrated the strength of the Group's business model. We remain confident of our ability to leverage Xstrata's size and momentum to seize further opportunities that have potential to deliver value for shareholders in the future.

All those who work at Xstrata have played an important part in our success in 2004, and I thank them for their dedication and hard work. I also thank my fellow directors who continue to provide their expertise and time to guide Xstrata along its strategic path, and the executive team, who continue to show great leadership in driving Xstrata forwards. I have great confidence that the Group's energy and momentum will be sustained into 2005 and beyond, delivering further value to all shareholders.

Willy R Strothotte
Chairman