chief executive's report

Xstrata's net profit for 2004 increased by 563% to $1,088.4 million (pre-exceptional items). While much of the result is due to significantly higher commodity prices achieved across all of our commodities, it also reflects the fact that the two successive company-transforming acquisitions completed in 2002 and 2003 created the proper base to benefit from the buoyant commodity markets. Indeed, Xstrata ends 2004 in a stronger competitive position than ever before, with increased diversification and scale across its portfolio and improved market positions within its business.

EBIT (earnings before interest and tax) grew by $1,070 million to $1,502 million, representing an increase of 248%. Higher prices contributed $1.6 billion and net real cost savings $44 million, while the weak US dollar and inflationary impacts on our cost base offset this result by some $580 million.

It is particularly pleasing that despite the increased pressure on costs experienced at times of strong commodity prices, efficiency programmes across the Group achieved savings of over $191 million, with real cost savings of $44 million in total, equating to some 1% of the operating cost base. Xstrata Coal and Xstrata Zinc in particular again made excellent progress in cost efficiencies and productivity improvements. These two businesses have together achieved real cost savings in excess of $200 million since Xstrata's listing in London in 2002.

Xstrata Zinc's San Juan de Nieva smelter in Spain retained its position as the world's lowest cost zinc smelter, increasing production for the sixth consecutive year and cutting costs in real terms by over $9 million. Production at Nordenham increased to over 10% above its nameplate capacity at the time of Xstrata's acquisition in December 2002 and the Australian zinc-lead operations benefited from initiatives implemented in the first half to improve mining sequence and optimise production, as part of the ongoing programme to transform Xstrata's North Queensland operations. Further operational efficiencies are expected from the development of the Black Star zinc-lead mine, where production is now underway - one of Xstrata's four major internal growth projects launched in 2004.

Xstrata Coal's excellent performance in cutting costs by $66.5 million overall was achieved despite the increased costs associated with switching a portion of New South Wales coal production to higher-cost semi-soft coal to improve overall margins. Efficiency and productivity improvements were achieved across a number of operations and several mines achieved new production records and substantial improvements in performance over the previous year. Some 45% of the efficiency gains were associated with Xstrata Coal's New South Wales operations, with South Africa and Queensland accounting for 30% and 25% respectively. I am delighted to note that Xstrata's Beltana and Newlands underground longwall mines are now the lowest cost mines of this type in Australia - an indication of Xstrata Coal's operating excellence. Demurrage costs incurred in the first half of the year were significantly reduced following the introduction of the capacity allocation scheme at the Newcastle Port in New South Wales, which Xstrata, together with other companies, was instrumental in establishing.

At the start of the year, Xstrata Copper was established as a single global commodity business, led by Charlie Sartain. Working with Santiago Zaldumbide on the zinc-lead business, Charlie and his team have made great progress in transforming the former MIM operations in North Queensland in 2004, improving profitability and securing the longer-term future of these assets.

The significant turn-around in the performance of the Queensland copper operations has been particularly impressive. In real terms a $52 million unit cost improvement was achieved mainly as a result of substantial improvements in operating throughput achieved in the copper smelter together with substantial cost savings relative to 2003. In addition, the increased volumes contributed over $7.5 million to the operating profit of the Queensland copper businesses, particularly at Mount Isa where the production of copper ore had reached an annualised rate of 6.2 million tonnes by year end.

Across both the copper and zinc lead businesses at Mount Isa, a comprehensive programme addressed overdue stope development and filling work, concentrator availabilities, smelter metallurgical performance, contractor management and safety performance, as well as the development of the Northern 3500 underground copper orebody and the Black Star zinc-lead open pit mine to improve utilisation of fixed plant capacities. The higher costs incurred as a result of some of these initiatives in the first half bore fruit later in the year, as improved operational efficiency and increased production allowed Xstrata to capitalise on the very strong copper prices prevailing in 2004 and in the first few months of 2005.

During the course of the year, the process of business transformation and organisational change in North Queensland concluded successfully with the transfer of complete management control of the Mount Isa zinc lead business to Xstrata Zinc. The revitalisation of the copper and zinc lead businesses at Mount Isa owes a great deal to the devolvement of management responsibility back into the operations themselves and the establishment of profit centres and clear lines of accountability across the former base metals assets of MIM in North Queensland.

The ongoing coke reduction programme initiated by Xstrata Alloys continues to make a significant contribution to mitigating the very strong price increases for reductants experienced in our ferrochrome business, and achieved savings of over $11 million in 2004. Xstrata Alloys' strategy of securing its supply of reductants and insulating the business from cost increases as far as possible will reap further cost benefits in 2005, following the acquisition of African Char Group, a South African char producer, in January 2005.

Major internal growth projects

One of the successes of 2004 has been the expansion of the Group's pipeline of internal growth, with four large-scale new expansion projects, one in each of our commodity businesses, launched during the year. The estimated total capital cost for these projects is some $650 million, with expenditure of $250 million in 2004. Two of the four projects hold significant, low-cost and lower risk brownfield expansion potential, which will underpin growth in our South African ferrochrome and Queensland thermal coal businesses for many years to come.

Alloys

Construction has begun on the first stage of Project Lion, with initial production expected mid-2006 and full production of 360,000 tonnes per annum in the final quarter of 2007. The project will benefit from Xstrata Alloys' proprietary Premus technology, which will deliver significant cost savings compared to prevailing ferrochrome production technologies and ensure returns in excess of our cost of capital at every point in the commodity price cycle. Depending on the level of participation of our chrome venture partner, Merafe Resources, Xstrata will hold between 75% and 85% of the project, which will consolidate Xstrata Alloys' position as the world's largest and most efficient producer of ferrochrome.

Phases two and three of Project Lion, which have the potential to provide a further 650,000 tonnes of annual capacity, will be sequenced over the next eight to ten years as market conditions require.

Coal

The development of the new open-cut thermal coal mine at Rolleston in Queensland, Australia remains on schedule, with production of one million tonnes of coal expected in 2005, and full production of 6 million export tonnes and 2 million domestic tonnes expected in 2008. The project has estimated Identified Coal Resources of approximately 600 million tonnes including 173 million tonnes of recoverable coal reserves, providing Xstrata Coal with a long-life, low cost asset with a rapid development profile.

A distinctive feature of our Australian coal business remains the inherent brownfield expansion potential of the operations. In Queensland, the Rolleston coal operation holds brownfield potential for a further 50% expansion to 12 million tonnes a year, with low capital expenditure associated mainly with the purchase of another drag line. In New South Wales, the Group is superbly positioned to grow its production through a combination of small expansion projects and flexible working practices by over 5 million tonnes. Most of this production can be brought on with short timeframes and minimal capital expenditure.

Copper

Xstrata Copper's acquisition of an option to develop a mine at Las Bambas in Southern Peru in August 2004 for $91 million reflects our commitment to growing Xstrata's copper business and provides an excellent opportunity to assess this potentially world-class resource. In March 2005, Xstrata began the largest drilling programme in South America this year to define better this resource. In Argentina, the team at Alumbrera confirmed an additional 80 million tonnes of ore reserves at Alumbrera during 2004, which further extended metal production from this low-cost, highly efficient mine until 2015. Additional intensive resource-definition work will continue this year.

Xstrata Copper holds an option to acquire up to 62.5% of the Tampakan copper-gold deposit in the Philippines, exercisable until December 2007. A scoping study has been completed on the project by Xstrata's partner, Indophil Resources. We were recently encouraged by the Supreme Court's ruling in the Philippines that a law opening the mining industry to foreign investors was constitutional. Another positive development has been the publication with independent Competent Person sign-off of a Mineral Resource inventory totalling 900 million tonnes at 0.7 per cent copper and 0.3 grams per tonne gold at a 0.4 percent copper cut-off, which revealed the emerging scale of this deposit.

Zinc

The development of the new Black Star zinc-lead open pit mine was approved at the end of the first half, as one of a number of initiatives to improve returns and secure the long-term viability of the operations at Mount Isa. Planning and pre-stripping have remained on time and within budget and first ore production is now underway. Original expectations of annual production from the mine have been increased by over 50% to 2.3 million tonnes per annum over an eleven year life of mine, with further reserve extensions also expected. This low capital cost project will supplement production from the existing George Fisher zinc-lead mine, to utilise the full capacity of the zinc-lead concentrator at Mount Isa and achieve further operational efficiencies.

Xstrata Zinc continues to assess options in respect of an expansion of the McArthur River Mine (MRM) in the Northern Territory, Australia, with feasibility studies underway into a possible open-pit and associated Albion Plant. Given current zinc prices and the significant improvements that have been achieved in producing a more saleable concentrate, MRM is profitable. However, the business model of the operation faces the significant challenge posed by the on-going closure of ISF smelters, which are the only purchasers of the bulk concentrate produced by MRM.

Further growth remains available at the San Juan smelter in Spain, with potential for the use of direct leaching to increase annual capacity by around 45,000 tonnes to 537,000 tonnes.

A rigorous assessment of any project's long-term return on capital remains the key hurdle for approval of any of the growth projects within the business, and Xstrata remains committed to maintaining this discipline in assessing the future of any potential or existing project, irrespective of prevailing commodity prices.

Growth through acquisition*

During 2004 Xstrata examined a number of possible acquisition targets to assess their potential to complement the growth inherent in the Group's commodity businesses. In the final quarter of 2004, our focus turned to the potential acquisition of WMC Resources Limited, a large diversified Australian mining group.

Following our initial approach to the Board of WMC in October 2004, and the Board's rejection of this approach, on 22 November we made a cash, debt-financed offer for the entire issued share capital of WMC directly to shareholders of AUD6.35 per share. We subsequently raised this offer to AUD7.20 per share cum dividend and declared it unconditional on 2 March 2005. Shortly after our offer was declared unconditional, a counter offer was made by BHP Billiton of AUD7.85 per share, which has been recommended by the WMC Board. Xstrata announced that it would not be raising its offer, due to close on 24 March 2005.

Xstrata's approach to the potential acquisition of WMC has underscored our unremitting commitment to creating value for shareholders, over and above any desire for growth for its own sake. Value creation remains the guiding principle in the pursuit of the strategy to continue to leverage our size and momentum to grow Xstrata, taking advantage of opportunities as they arise and withdrawing if further pursuit will destroy value.

The strategy we have successfully pursued since the formation of Xstrata plc three years ago remains the roadmap for Xstrata's future growth - to enhance further Xstrata's position as a value-adding business for its shareholders through a combination of internal growth from our portfolio, smaller incremental transactions and company-transforming acquisitions.

There are a number of alternative opportunities available to Xstrata to achieve further value creation for shareholders and we will continue to examine these carefully. The strength and balance of our current portfolio, together with the growth being achieved from these assets and new projects, mean that we are ideally positioned to take advantage of these opportunities at the right moment.

*This section of the CEO's report has been updated from the text issued at the announcement of preliminary results to reflect further developments in respect of Xstrata's offer for WMC.

Balance sheet, dividend and capital management

Xstrata's balance sheet was further strengthened in 2004 by the very strong cashflow generated from our operations. By the end of 2004, Xstrata's gearing stood at 16.8%, down from 31.3% (net debt to equity) as at 31 December 2003, with free cashflow before expansionary capital expenditure and acquisitions of $1.4 billion. The syndicated loan facility of $1.4 billion was refinanced during the first half, reducing borrowing costs.

As a result of the Group's strong financial performance in 2004, the Board has declared a full year dividend of 16USÊ per share, bringing the total dividend for 2004 to 24USÊ per share, an increase of 20% from the previous year. This increase continues our policy of progressively increasing the dividend and reflects our confidence in the outlook for Xstrata's businesses in the medium term.

In the second half of 2004, we initiated the Equity Capital Management Programme which enables the purchase of up to 10% of Xstrata's issued shares in the market. Through the programme, around 0.5% of Xstrata's issued share capital was purchased, returning $51 million to shareholders. The programme has been suspended while Xstrata's offer to shareholders of WMC Resources remains open. The programme remains an excellent option to improve balance sheet efficiency and enhance earnings in a tax efficient manner without cancelling any shares.

Outlook

2005 opened with a continuation of the positive market of 2004. As many have remarked, the robust economic activity in China and, to a lesser extent, India underpins these market conditions, and it is expected that this will continue for some time. Clearly within the overall commodities market, different commodities will be subject to varying market forces and within the cycle exhibit relatively stronger or in some cases weaker behaviour. Given our range of commodity businesses, we expect that overall 2005 will be another year of strong performance. In addition, we expect our efficiency programmes to continue to deliver ongoing real cost reductions across our various businesses. Further, two of our projects will be commissioned this year (Rolleston and Black Star) and the Group will benefit from the resultant growth in volumes and the lowering of unit cost of production.

The company is thus well positioned to continue to deliver superior returns to its shareholders.

I pay tribute to the Board of Xstrata, which has provided immeasurable advice and support to management throughout the year and into 2005. This has resulted in a coherent and achievable strategy of value and growth maximisation. The momentum of our management team, guided by a prudent and robust Board, augurs well for Xstrata to further enhance its position along the growth and value axis.

However, it is the people at the operations who have delivered in 2004. They have ensured that our product has reached the markets at a lower cost than previous years while at the same time enhancing our potential to extract even more value from our assets going forward. I congratulate them in the certain knowledge that they will continue to aim high as we continue on our odyssey.

ML Davis