Copper

Markets

Strong Chinese demand, low exchange stocks and supply constraints created an exceptional year for the copper market. The LME cash copper price averaged 130US¢ per pound for the year, an increase of 38% on 2003 and the highest annual average since 1995. Global copper demand recorded the highest ever increase in tonnage terms and the fastest annual growth rate since 1979.

The surge in refined copper demand helped to eliminate most of the remaining exchange stocks of copper. Stocks at the LME, Comex and Shanghai exchanges saw a substantial decrease from 820,000 tonnes at the beginning of 2004 to just 129,000 tonnes by year end. The shortfall between world refined copper supply and global demand widened to more than 800,000 tonnes in 2004, compared to a deficit of around 300,000 tonnes over the corresponding period in 2003.

For copper raw materials, the second half of the year saw a reversal of the conditions experienced in the first half. The mine disruptions and curtailments that helped to generate extreme copper concentrate shortages in the first half of 2004 were more than offset in the second six months of the year. Mine restarts, together with a surge in new supply (principally in the second half of the year), increased production by more than one million tonnes versus the previous year. This increase in copper concentrate supply was further compounded by smelter problems and cutbacks.

Correspondingly, smelter treatment and refining charges (TC/RCs) jumped from record lows at the end of the first quarter to seven year highs above $130 per dry metric tonne and 13US¢ per pound by year end. The sharp growth in mine supply outpaced available smelting capacity and generated a considerable global surplus of copper concentrates. The copper scrap market also eased in line with rising economic activity and increased availability of concentrates.

Copper concentrate sales from Xstrata's Australian operations in North Queensland were 155,900 dry metric tonnes in 2004 compared to 226,100 dry metric tonnes the previous year. The reduction reflects improved performance at the Mount Isa smelting operations. A decision to replace Mount Isa copper concentrate exports with Ernest Henry copper concentrate delivered significant logistics and transportation benefits along with a reduction in working capital.

Increased smelter utilisation and the absence of a re-brick led to a 17% lift in 2004 refined own copper sales to 241,790 tonnes. Domestic copper cathode sales from Xstrata's North Queensland operations were also significantly higher at 101,800 tonnes, compared to 48,600 tonnes in 2003.

Xstrata's share of concentrate sales from Alumbrera (50%) eased to 347,000 dry metric tonnes in 2004 from 360,400 dry metric tonnes in 2003 as a result of lower head grades. Xstrata's share of contained copper in concentrate reduced to 88,220 tonnes compared to 99,270 tonnes the previous year.

Sales of gold contained in North Queensland copper products (copper concentrates and tankhouse slimes) totalled 148,700 ounces for the year, compared with 131,600 ounces in 2003. This increase reflects higher production at Ernest Henry.

The global copper concentrate market is expected to remain in surplus in 2005 due to concentrate supply continuing to exceed smelting capacity. In addition, numerous planned smelter maintenance shutdowns in the first half of this year should help maintain TC/RCs near historically high levels. In the face of expected strong refined copper demand, this production bottleneck will keep the refined copper market tight and cathode premiums buoyant.

Macroeconomic indicators are pointing to slowing conditions towards the second half of 2005. However copper prices are likely to remain well supported until copper warehouse stocks rise from their critically low levels. Continued US dollar weakness will also maintain speculative interest in the copper market. In line with the recent growth in mine supply and forecasts for slowing economic growth, the global refined copper deficit is forecast to narrow sharply in 2005.

Operations

South America

The strong financial performance of the Alumbrera business was achieved as a result of high copper prices and productivity improvements. EBIT doubled from $192 million to $369 million in 2004 and EBITDA increased from $332 million to $488 million. Higher realised copper prices helped to drive turnover up by 30% to $724 million compared to last year. Performance was characterised by lower production volumes as head grades declined toward life of mine averages as scheduled, with the impact mitigated by a combination of increased ore throughputs, further cost efficiency initiatives and improved prices.

Mill throughput was 3% higher than the corresponding period last year due mainly to the successful commissioning of a third flotation circuit in the concentrator towards the end of the first half, which has increased throughput rates and improved overall metallurgical performance. Material mined was marginally higher, and ore mined was 5% higher than last year.

Copper-in-concentrate and total gold production for 2004 was 176,400 tonnes and 583,600 ounces respectively, which was lower than the corresponding period in 2003 primarily due to lower head grades.

Low operating unit costs continued to be a highlight of the Alumbrera business in 2004, with C1 cash operating costs averaging 6US¢ per pound of copper produced (net of gold credits). The increase in C1 cash costs from 3.1US¢ per pound in 2003 is the result of the lower ore grades, higher smelting and refining charges, higher sea freight rates as well as higher contracted power and consumables costs.

Australia

The financial performance of the North Queensland copper division reflected strong copper prices and the results of the successful transformation of the business to improve productivity, safety and operational efficiency, following the formation of the single global copper business in January 2004. EBIT was up approximately 235% to $276 million from $82 million in 2003 as a result of the business transformation programme, which yielded increased production in the second half, and stronger copper prices. EBITDA increased by approximately 150% to $369 million from $150 million in the corresponding period.

In the Mount Isa copper operations, lower head grades were offset by a 6% increase in the ore tonnage milled. The average copper head grade was 3.37% compared with 3.49% in 2003, with 5.5 million tonnes of ore milled in 2004 compared with 5.2 million tonnes in the previous year. Increased mine development and stope filling programmes initiated during the first half of 2004 allowed the achievement of higher production levels in the second half of the year, with further gains expected in 2005.

At the Ernest Henry operation, copper head grade improved to 1.14% compared with 1.05% in the prior year and total mill throughput achieved was 5% higher than 2003.

Copper anode production of over 236,200 tonnes was a record for the copper smelter. The 2004 production exceeded the performance in the corresponding period by 11%, or 24,000 tonnes, due to the increase in availability and substantial improvements in operating throughput rates, together with the absence of a re-brick during the year.

North Queensland unit costs on a C1 basis increased to 59.4US¢ per pound during 2004 from 49US¢ per pound in 2003, largely as a result of the stronger Australian dollar but also reflecting higher costs associated with increased treatment and refining charges on surplus concentrates, and increased development and filling activities that were required to facilitate the rising production of metal during the latter part of the year. These cost increases were partially offset by improved production and operating cost efficiencies, higher metallurgical recoveries and increased refined metal production.

Developments

South America

Concentrator flotation capacity was expanded during the first half of 2004. As a result, mill throughputs increased in the second half of 2004 with the plant consistently achieving above 3 million tonnes per month. Four additional haul trucks were delivered during September 2004 to enable the mine to continue to maintain total material movements as the pit deepens.

The ongoing ore delineation drilling programme, undertaken both within the existing ore envelope and for extensions at depth, confirmed in excess of 80 million tonnes of additional ore reserves, as announced in June 2004. The mine plan was re-optimised based on a new geological model with additional mineralisation, and together with improved metal prices and improved cost profiles this resulted in an increase in contained metal reserves of more than 20%. This is expected to lead to an additional 350,000 tonnes of contained copper and 1.2 million ounces of gold over the life of the mine being extracted, which will extend the Alumbrera mine life by 2.5 years and will ensure metal production into 2015. A new Ore Reserve Statement for Alumbrera was completed in December 2004 which identified a further 30 million tonnes in additional mineral resources. The JV team at Alumbrera will continue an intensive in-pit resource definition programme during 2005, with the objective of adding further to the Ore Reserve base.

Independently of the Alumbrera Joint Venture exploration work, Xstrata Copper has also scaled up its Alumbrera district exploration programme. The past year's exploration activities have identified a number of promising geological targets with further potential in the Catamarca Province. These targets will be followed up with a drilling programme in 2005.

Xstrata Copper's successful bid for the Las Bambas Project in Peru announced on 31 August 2004 forms an important part of Xstrata Copper's global growth strategy. Planning, permitting, local community consultation and mobilisation are being progressed to enable exploration and resource drilling to commence in the first half of 2005.

Australia

Capital expenditure of AUD36 million ($24.8 million) was approved in June to commence development of the Northern 3500 underground copper orebody at Mount Isa's Enterprise copper mine. The project will provide an additional high-grade mining zone in Enterprise, enabling the mine to maintain its rated capacity of 3.5 million tonnes per annum and improve the utilisation of the existing hoisting and concentrator capacity. Current plans indicate that the mining block will contribute a supplementary 5.3 million tonnes of copper ore at a grade of 4.5%, or 240,000 tonnes of contained copper metal, over the next 11 years. Capital work commenced on the project late in the second half of 2004 with initial production scheduled to commence in late 2006.

Also in June, Xstrata Copper announced the approval of an AUD7.2 million ($5 million) leaching plant to recover around 2,500 tonnes per annum of additional copper from the electrostatic precipitator dust in the Mount Isa copper smelter.

In November, capital expenditure of AUD41 million ($29.3 million) was approved to expand the Mount Isa copper smelter. The project comprises the installation of a second rotary holding furnace, a copper slag cleaning furnace, a converter slag treatment plant and associated plant and equipment. These are all designed to increase the smelter's capacity from 240,000 tonnes per annum to 280,000 tonnes per annum by mid 2006. The project will also improve the copper smelter matte process recoveries between the copper ISASMELT furnace and the copper converters by 2%; reduce the operating costs and improve the overall operating control of the smelter.

During the second half, a gas agreement was concluded with Enertrade for the supply of coal seam methane gas to the Townsville copper refinery. This will result in the conversion to gas at a lower unit cost than the current naptha fuel utilised within the refinery.

Exploration activity is continuing to focus on leveraging value from Xstrata Copper's strong regional asset and infrastructure base in North Queensland, targeting mineralisation in the Mount Isa/Cloncurry district.