Corporate Governance Report

Introduction

The Board is committed to the principle of best practice in corporate governance. This report addresses the status of the Company's compliance with the principles and provisions of the Combined Code on Corporate Governance issued on 23 July 2003 ("the Code"), details the key policies, processes and structures that apply within the Group to comply with the Code.

Statement by the Directors on corporate governance policies and compliance with the provisions of the Combined Code

The Code establishes 14 main Principles of Good Governance, 21 supporting principles and 48 provisions. The Listing Rules require every listed company to report on how it applies the principles in the Code, and to confirm that it complies with the Code's provisions or, where it does not, to provide an explanation. During the year ended 31 December 2004, the Company complied with the best practice governance provisions as set out in Section 1 of the Code, except, as explained below, with regard to membership of the Remuneration Committee (B.2.) as the Chairman of the Committee is not considered independent.

A. Directors

A.1 The Board

The first main principle requires the Company to have an effective Board which is collectively responsible for its success. Supporting principles describe the Board's role to provide entrepreneurial leadership within a framework of controls that allow risk to be assessed and managed. The Board should set strategic aims and the Company's values, ensuring that obligations to shareholders are met. Non-executive directors have a particular role in overseeing the development of strategy, scrutinising management performance and ensuring the integrity of financial information and systems of risk management. The Board is satisfied that it has met these requirements.

There were no changes to the membership of the Board during the year. The Board, chaired by Willy Strothotte, has twelve directors, comprising three executive directors and nine non-executive directors. The three executive directors are Mick Davis, the Chief Executive, Trevor Reid, Chief Financial officer, and Santiago Zaldumbide, Chief Executive of Xstrata Zinc. David Rough, an independent, non-executive director is the Deputy Chairman. The non-executive directors possess a range of experience and are of sufficiently high calibre to bring independent judgement to bear on issues of strategy, performance, and resources that are vital to the success of the Group.

The Board is responsible for the governance of the Group on behalf of shareholders within a framework of policies and controls which provide for effective risk assessment and management. The Board provides leadership and articulates the Company's objectives and strategy for achieving those objectives. The Board sets standards of conduct, as documented in an approved Statement of Business Principles, which provide an ethical framework for all Xstrata businesses. While the Board focuses on strategic issues, financial performance, risk management and critical business issues, it also has a formal schedule of matters specifically reserved to it for decision. These reserved matters which are comprised in a comprehensive regime of authorisation levels and prior approval requirements for key corporate decisions and actions are reviewed and updated annually by the Board. Such matters reserved to the Board include, but are not limited to, approval of budgets and business plans, major capital expenditure, major acquisitions and disposals, and other key commitments. Certain powers are delegated by the Board to an Executive Committee which is a Committee of the Board of Xstrata (Schweiz) AG, the main trading subsidiary of Xstrata plc. This Committee and a description of its powers are described on page 72.

Directors and officers of the Company are entitled to be indemnified out of the assets of the Company in respect of any liability incurred in relation to the affairs of the Company to the extent that the law allows. In addition, directors and officers of the Company and its subsidiaries are covered by Directors & Officers liability insurance. The Company has a policy based on the Model Code published in the Listing Rules, which covers dealings in securities and applies to directors and senior management.

Five full Board meetings were held during the year. Additional meetings can be held when required by circumstances. Attendance by directors at Board meetings and committee meetings is shown below. The Chairman held separate meetings with the non-executive directors several times a year following the full Board meetings without the executive directors being present. All Board meetings are held in Switzerland.

During the year, the Board had three formally constituted committees, each of which has formal terms of reference. Each of the Committees has written terms of reference that clearly set out their authorities and duties, and are in accordance with the Code. The terms of reference of each committee are reviewed annually and can be seen on the Company website.

A.2 Chairman and Chief Executive

Another main principle states that there should be a clear division of responsibilities between the running of the Board and executive responsibility for running the business, so that no one person should have unfettered powers of decision.

A clear separation is maintained between the responsibilities of the Chairman and the Chief Executive. The former is responsible for leadership of the Board and creating the conditions for overall Board and individual director effectiveness while the latter is responsible for overall performance of the Group including the responsibility for arranging the effective day to day management controls over the running of the Group. The separation of roles is documented in a statement approved by the Board.

A.3 Board balance and independence

The Company complies with the requirement of the Code that there should be a balance of executive and non-executive directors such that no individual or small group can dominate the Board's decision taking.

Of the nine non-executive directors, six are considered by the Board to be independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement and three, Willy Strothotte, Ivan Glasenberg and David Issroff are directors of Glencore International AG ("Glencore"). Willy Strothotte is Chairman, Ivan Glasenberg is Chief Executive Officer and David Issroff is Head of the Ferroalloys Division, of Glencore. The Board has considered these associations and considers the industry expertise and experience of these directors beneficial to the Group.

David Rough, the Deputy Chairman is also the Senior Independent Director. His role and responsibilities as the Senior Independent Director are detailed in and formalised by Board resolution and, in summary, are that he should be available to shareholders to discuss their concerns where the normal channels would not be appropriate for this purpose, to have contact with analysts and major shareholders to obtain a balanced understanding of their issues and concerns, to chair the Nomination Committee and to lead the Board and director appraisal process.

The non-executive directors have a particular responsibility to ensure that the strategies proposed by the executive directors are fully considered. To enable the Board to discharge its duties, all directors receive appropriate and timely information and briefing papers are distributed to all directors.

The Board reviews annually the composition and chairmanship of its standing committees, namely the Audit, Remuneration and Nomination Committees. Details of the Health, Safety & Environment Committee established on 24 February 2005 are given below.

A. 4 Appointments to the Board

The Code requires there to be a formal, rigorous and transparent procedure for the appointment of new directors, which should be made on merit and against objective criteria. The Nomination Committee fulfils these requirements and its report is set out on page 72.

A. 5 Information and professional development

Another main principle requires that information of appropriate quality is supplied to the Board in a timely manner and that, in addition to induction programmes on joining the Company, directors should regularly update their skills and knowledge.

All directors are made aware that they may take independent professional advice at the expense of the Company in the furtherance of their duties. All directors had access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that all governance matters are complied with and assists with professional development as required.

Arrangements have been approved by the Board to ensure that new directors should receive a full, formal and tailored induction on joining the Board. In addition ongoing support and resources are provided to directors in order to enable them to extend and refresh their skills, knowledge and familiarity with the Company. Professional development and training is provided in three complementary ways: regular updating with information on changes and proposed changes in laws and regulations affecting the Group or its businesses; arrangements, including site visits, to ensure directors are familiar with the Group's operations; and, opportunities for professional and skills training.

A. 6 Performance evaluation

In accordance with the Code requirement, the Board undertook a formal and rigorous evaluation of its own performance and that of its Committees and of its individual directors including the Chairman. The process was led by the Senior Independent Director and resulted in a number of proposals to enhance the effectiveness of the Board. The evaluation of individual director performance was also employed to identify individual director training requirements.

A. 7 Re-election of directors

Under the Code, directors should offer themselves for re-election at regular intervals and there should be a planned and progressive refreshing of the Board.

One third of all directors are required to retire by rotation at each annual general meeting and any director who, at the start of an annual general meeting, has been in office for more than three years since his election must retire. Retiring directors may offer themselves for re-election. A succession plan was approved by the Board during the year to ensure there was a balance of skills and experience on the Board and to plan for an orderly refreshing of Board membership. It is proposed that Messrs Strothotte, Hazen, Strachan and Reid will retire and will offer themselves for re-election at the Annual General Meeting on 9 May 2005. Following an appraisal of the non-executive directors, the Board was satisfied that each director's performance continues to be effective and that each director continues to demonstrate commitment to the role, and recommended the re-election of the four directors.

B. Remuneration

Remuneration is covered in the Remuneration Report on pages 73 to 87 and, with regard to the Remuneration Committee, on page 73.

The non-executive directors are given the opportunity to notify the Company what proportion (if any) of the post-tax amount of their fees for each year they wish to apply to acquire shares in the Company. The price at which they may acquire these shares is the higher of the nominal value of the share and the exercise price which is set in respect of the next grant of options under the Xstrata LTIP following the notification. No notifications were received in respect of 2004.

C. Accountability and Audit

C. 1 Financial Reporting

The Board is required to present a balanced and understandable assessment of the Company's position and prospects. This responsibility extends to interim and other price-sensitive reports and reports to regulators as well as to information required to be presented by statutory requirements.

The Board is mindful of its responsibility to present a balanced and clear assessment of the Company's financial position and prospects. The Board is satisfied that it has met this obligation. This assessment is primarily provided in the Chairman's Statement, the Chief Executive's Report, and the Financial and Operating Reviews contained in this Report. The Statement of Directors' Responsibilities in respect of the Financial Statements is set out on page 88 and contains a 'going concern' statement as required by the Code.

C. 2 Internal Control

The Code requires the Company to maintain a sound system of internal control to safeguard shareholders' investment and the Company's assets. The Board must review, at least annually, the effectiveness of the internal control system and report to shareholders that they have done so. The review should cover all material controls, including financial, operational and compliance controls and risk management systems.

Internal Control

The Board of Directors is responsible for the Group's system of internal control. It annually reviews the effectiveness of the Group's system of internal control and relies on reviews undertaken by the Audit Committee (supported by the Business Unit Audit Committees) with respect to the Group's compliance with the Turnbull Guidance with specific reference to risk management and internal control systems, and has complied with the Turnbull Guidance throughout the year.

The Audit Committee reviews the process by which risks are identified and assessed and the effectiveness of the system of internal control by considering the regular reports from management on key risks, mitigating actions and internal controls, management representations and assertions and the reports on risk management and internal control from Internal Audit, the External Auditors and other assurance providers such as Health Safety and Environmental Management.

The principal aim of the system of internal control is the management of business risks that are significant to the fulfilment of the Group's business objectives with a view to enhancing over time the value of the shareholders' investment and safeguarding the assets. The internal control systems have been designed to manage rather than eliminate the risk of failure to achieve business objectives and provide reasonable but not absolute assurance against material misstatement or loss. The directors confirm that they have reviewed the effectiveness of the system of internal control and are not aware of any significant weakness or deficiency for the year under review and up to the date of the Annual Report.

Control environment

The key elements and procedures that have been established to provide an effective system of internal control are as follows:

(i) Organisational Structure

There is a well-defined organisational structure with clear operating procedures, lines of responsibility and delegated authority.

The way the Group conducts its business, expectations of management and key accountabilities are embodied in the Group's policies, its Statement of Business Principles and Board Level Authority Limits.

(ii) Risk Identification and Evaluation

The Board considers effective risk management as essential to the achievement of the Group's objectives and has implemented a structured and comprehensive system across the Group. The Group Risk Management Policy is published on the Xstrata website at www.xstrata.com as part of the Governance and Sustainability section.

(iii) Information and Financial Reporting Systems

Financial reporting to the Executive Committee and the Board is continuously modified and enhanced to cater for changing circumstances. The Group's comprehensive planning and financial reporting procedures include detailed operational budgets for the year ahead and a three-year rolling plan. The Board reviews and approves the budget and plan. Plans and budgets are prepared on the basis of consistent economic assumptions determined by the Group Finance Function. Performance is monitored and relevant action taken throughout the year through the monthly reporting of key performance indicators, updated forecasts for the year together with information on the key risk areas.

Comprehensive monthly management reports on a divisional and consolidated basis, including updated forecasts for the year, are prepared and presented to the Executive Committee by the Group Controller. Detailed consolidated management accounts, together with an executive summary from the Chief Executive, are circulated to all Directors on a monthly basis.

(iv) Investment Appraisal

A budgetary process and authorisation levels regulate capital expenditure. For expenditure beyond specified levels, detailed written proposals are submitted to the Executive Committee in accordance with Board delegated authority limits. A standardised format is used that includes a detailed calculation of return on equity. Economic assumptions are consistent with those included in management reports and budgets and are agreed with Group Finance. Reviews are carried out after the project is complete, and for some projects, during the construction period, to monitor progress against plan; major overruns are investigated. Commercial, legal and financial due diligence work, using outside consultants, is undertaken in respect of acquisitions as appropriate.

(v) Treasury Committee

A Treasury Committee has been established as a sub-committee of the Executive Committee. Its membership consists of the Chief Executive, the Chief Financial Officer, the Group Treasurer and Group Controller. All meetings are held outside the UK. The Committee recommends group policy, which is agreed by the Board, relating to all aspects of funding, management of interest rate and foreign exchange exposures and it co-ordinates relationships with banks, rating agencies and other financial institutions. The Committee monitors all significant treasury activities undertaken by group companies and ensures compliance with group policy. A monthly report details the Group cash/debt position, review of bank covenants, exposures and hedging and is circulated to the Executive Committee.

(vi) Internal Audit

The Group-wide internal audit function is supplemented by services provided as required by KPMG as an outsourced service provider.

Internal Audit is an important element of the overall process by which the Executive Committee and the Board obtains the assurance it requires that risks are being properly identified, managed and controlled. Risk-based internal audit plans, prepared on an annual basis, are approved by the Audit Committee.

(vii) Fraud Management

There is a formal Group policy relating to fraud management, including reporting and investigation arrangements and, in line with best practice, this includes whistleblowing procedures. There are independently operated confidential hotlines in each country in which the Group operates, through which employees or contractors can report any breach of Xstrata's Business Principles, including fraud. The contact details are published in the Statement of Business Principles which can be found on the Xstrata website.

C. 3 Audit Committee and Auditors

A principle of the Code is that the Board should establish formal and transparent arrangements for considering how it should apply the financial reporting and internal control principles and for maintaining an appropriate relationship with the external auditors, Ernst & Young LLP. These responsibilities are delegated to and are discharged by the Audit Committee whose work is described on page 70 and 71.

D. Relations with shareholders

D.1 Dialogue with shareholders

The Company is required to have a dialogue with shareholders, based on the mutual understanding of objectives, and it is the responsibility of the Board as a whole to ensure that a satisfactory dialogue does take place. While the Code recognises that most shareholder contact is with the Chief Executive and the Chief Financial Officer, the Chairman and the senior independent director, and other directors as appropriate, should maintain contact with major shareholders in order to understand their issues and concerns.

The Board places considerable importance on effective communication with shareholders. The Chief Executive and Chief Financial Officer, assisted by the General Manager Corporate Affairs, maintain regular dialogue with and give briefings throughout the year to analysts and institutional investors and are involved in a structured programme of investor, analyst and media site visits. Presentations are given by the Chief Executive and Chief Financial officer after the Company's preliminary announcements of the year-end results and at the half year. Care is taken to ensure that any price-sensitive information is released to all shareholders, institutional and private, at the same time in accordance with London and Swiss Stock Exchange requirements.

The Senior Independent Director is available to shareholders for any concern which contact with the Group Chairman, Chief Executive or Chief Financial Officer has failed to resolve or for which such contact is inappropriate.

All shareholders can obtain access to the annual report and accounts and other current information about the Company through the Company's website at www.xstrata.com. The Financial and Operating Reviews on pages 15 to 55 include a detailed report on the business and future developments.

D. 2 Constructive use of the Annual General Meeting (AGM)

All directors normally attend the Company's AGM and shareholders are invited to ask questions during the meeting and to meet directors after the formal proceedings have ended. Shareholders at the meeting are advised as to the level of proxy votes received including percentages for and against and the abstentions in respect of each resolution following each vote on a show of hands.

At the time of the listing in March 2002, shareholders in the old Xstrata AG were informed that the Company would offer shareholders the opportunity to attend general meetings in Switzerland where the head office resides, even though the Company was incorporated and has its registered office in England. Given this history and the number of shares still held in or through Switzerland, the Board continues to consider it is appropriate for the Annual General Meeting, to be held in Zug, Switzerland and for a satellite meeting to be held concurrently in London.

The Board uses the Annual General Meeting to communicate with institutional and private investors and welcomes their participation. The Chairman will aim to ensure that the Chairmen of the Audit, Remuneration and Nomination Committees are present at Annual General Meetings to answer questions. Details of the resolutions to be proposed at the Annual General Meeting on 9 May 2005 can be found in the notice of the meeting.

Board Committees

The terms of reference of the Audit, Remuneration, Nominations and HSEC Committees are available on the Company website.

Audit Committee

The Audit Committee comprises four independent non-executive directors. Sir Steve Robson is the Chairman of this Committee and the other members are David Rough, who was appointed on 2 August 2004, Fred Roux and Ian Strachan. The Board reviewed membership of the Committee during the year and declared its satisfaction that the members of the Audit Committee collectively have sufficient recent and relevant financial experience to discharge its role and responsibilities. The Committee met four times in the year. Four meetings are scheduled for 2005.

The Chief Executive, the Chief Financial Officer, the Group Controller, a representative of the Company's external auditors and the Head of Internal Audit normally attend the meetings. Other directors of the Company and senior management may also, on invitation by the Committee, attend and speak, but not vote at any meeting of the Committee.

The Audit Committee discharged its responsibilities in accordance with its terms of reference and in particular:

• reviewed the 2004 interim and 2004 annual financial statements before their submission to the Board and reviewed the external auditor's detailed reports thereon
• reviewed the appropriateness of the Group's accounting policies
• at each meeting reviewed the potential impact on the Group's financial statements which will result from the implementation of the International Financial Reporting Standards
• regularly reviewed the potential impact on the Group's financial statements of certain matters such as the impairment of fixed asset values
• reviewed the external auditor's plan and scope for the audit of the Group accounts, and approved their remuneration both for audit and non-audit work, and their terms of engagement
• recommended to the Board the re-appointment of the external auditors following an evaluation of their effectiveness and confirmation of auditor independence,
• reviewed the effectiveness of the Company's risk management system including its risk management process and profile, internal control systems and operations, and received updates on key areas of financial control
• reviewed and approved the Internal Audit scope and plan for 2004, the effectiveness of the Internal Auditors and, at each meeting, reviewed the reports on findings and on progress against recommendations
• monitored the controls which are in force to ensure the integrity of the information reported to the shareholders
• evaluated the performance of the Committee
• reviewed the whistleblowing arrangements.

Following each Committee meeting, separate meetings were held by the Committee with the external auditors in the absence of executive management, and with executive management in the absence of the external auditors. The Committee kept under review the independence and objectivity of the external and internal auditors, through:

• seeking confirmation that the external auditors are, in their professional judgement, independent of the Group;
• obtaining from the external auditors an account of all relationships between the auditors and the Group; and
• considering whether, taken as a whole, the various relationships between the Group and the external auditors impaired the auditors' judgement or independence

The Group has a specific policy governing the conduct of non-audit work by the external auditors which ensures that the Company is in compliance with the requirements of the Combined Code and the Ethical Standards for Auditors published by the Auditing Practices Board. Under that policy the auditors are prohibited from performing services which:

• result in the auditing of their own work;
• result in the auditors participating in activities normally undertaken by management;
• puts the auditor in the role of advocate for the Group; or
• create a mutuality of interest between the auditors and the Group

The auditors are permitted to provide non-audit services that are not in conflict with auditor independence. Six monthly reports are made to the Audit Committee detailing non-audit fees paid to both the external and internal auditors. However, prior approval of the Committee is required for each specific service provided by the external auditors. A range of non-audit services have been pre-approved in principle by the Audit Committee, however, where the fee is likely to be in excess of $100,000 for such services, specific re-approval is required, while prior approval of the Chief Financial Officer is required for those pre-approved services where the fee is likely to be less than $100,000.

The Audit Committee is supported and assisted in its work by separate Audit Committees for each Commodity Business Unit in line with the decentralised commodity business unit model. The Business Unit Audit Committees are independent of the executive management of the Business Unit and are chaired by suitably qualified individuals independent of Xstrata. The terms of reference of these Committees follow those of the Company's Audit Committee from which they obtain their delegated authority. Meeting dates precede those of the Company's Audit Committee and reports on their deliberations and findings are presented to the Chairman of the Company's Audit Committee.

Remuneration Committee

The Remuneration Committee is chaired by Willy Strothotte. As Chairman of the Company and Chairman of Glencore, he is not considered to be an independent director. The Board regards Willy Strothotte's membership as critical to the work of the Committee due to his extensive knowledge and experience of the global mining resources sector. David Rough and Paul Hazen, the other members of the Committee, are both non-executive directors and independent. The Committee met three times during the year. The Chief Executive attends meetings by invitation but does not participate at a meeting of the Committee (or during the relevant part) at which any part of his remuneration is being discussed or participate in any recommendation or decision concerning his remuneration.

The principal roles of the Committee are (i) to consider and determine all elements of the remuneration of the Chief Executive, and Chief Financial Officer and of the Heads of the major operating subsidiaries or business units of the Company (the "Executive Group") as defined by the Chief Executive and (ii) to determine targets for any performance-related pay schemes operated by the Company. At its meetings, the Committee made recommendations to the Board in regard to all elements of the remuneration for the executive directors and the members of the Executive Committee. The Committee received independent advice on benchmarking and best practice. The terms of reference of the Remuneration Committee conform precisely to the Code. The setting of non-executive directors' remuneration was decided by the Board as a whole.

Details of the Company's remuneration for executive directors, benefits, share options, pensions entitlements, service contracts and compensation payments are given in the Remuneration Report on pages 73 to 87. A resolution to approve the Remuneration Report will be proposed at the AGM.

Nominations Committee

The Nominations Committee is chaired by David Rough and comprises three non-executive directors. Of these, Ivan Glasenberg is not considered independent. The terms of reference provide for a formal and transparent procedure. The Committee has responsibility to identify, evaluate and recommend candidates for Board vacancies and to make recommendations on Board composition and balance. Two meetings were held in 2004.

During the year, the Committee approved a plan for the orderly succession of appointments to the Board and for the re-election of directors which takes in account matters such as the size of the Company, product diversity and geographical spread, as well as maintaining a balance to the Board in relation to independent/non-independent members, their skills and experience. The Committee initiated a non-executive director search assignment in collaboration with an external search consultancy, formulated policies for director induction and professional training, and recommended the Board/director performance evaluation process.

Health, Safety, Environment & Community Committee

The Health, Safety, Environment & Community Committee was established by the Board on 24 February 2005, for the purpose of reviewing and making recommendations to the Board on the appropriateness and effectiveness of HSEC strategy, systems and methodology to ensure the Group achieves its desired HSEC outcomes. It will also review the results of any investigation into significant HSEC incidents and will keep the Board informed of new developments, trends and/or forthcoming significant legislation on HSEC matters which may be relevant to the Group's operations, its assets or employees.

The Committee comprises Ian Strachan, who chairs the Committee, Mick Davis (Chief Executive), David Rough (Senior Independent Director and Deputy Chairman) and Fred Roux (independent non-executive director).

Executive Committee

The Executive Committee is a Committee of the Board of Xstrata (Schweiz) AG, the main trading subsidiary of Xstrata plc. The Executive Committee obtains its responsibility and authority from the Xstrata (Schweiz) AG Board and is directly accountable to the plc Board. It is chaired by Mick Davis and comprises executive directors, Trevor Reid (Chief Financial Officer) and Santiago Zaldumbide (Chief Executive of Xstrata Zinc) together with the Chief Executives of the other Business Units, Peter Coates (Xstrata Coal), Peet Nienaber (Xstrata Alloys), Charlie Sartain (Xstrata Copper) and Marc Gonsalves (General Manager, Corporate Affairs). Other members of senior management are invited to attend Executive Committee meetings as required. The Executive Committee is responsible for implementing strategy, approval of matters consistent with its delegated levels of authority and overseeing the various businesses which comprise the Group. It meets regularly during the year and no meetings are held in the United Kingdom.