Notes to the Financial Statements
1. Accounting policies
Basis of preparation
These financial statements have been prepared in accordance with applicable UK accounting standards (refer to note 2 for changes in these standards). Xstrata plc (the Company) has adopted the following principal accounting policies:
Investments
Equity investments in subsidiaries are carried at cost less any provision for impairments.
Financial Assets, Loans and Receivables
Financial assets are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments or available-for-sale financial assets, as appropriate. The Company determines the classification of its financial assets at initial recognition. When financial assets are recognised initially, they are measured at fair value on the trade date, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, do not qualify as trading assets and have not been designated as either fair value through profit and loss or available for sale. Such assets are carried at amortised cost using the effective interest method. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount.
Gains and losses are recognised in the profit and loss account when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Loans and receivables are derecognised when the Company no longer has a right to receive cash flows from the asset.
If there is objective evidence that an impairment loss on loans and receivables have been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate (ie the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced and the amount of the loss is recognised in profit or loss account. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the profit and loss account, to the extent that the carrying value of the asset does not exceed its amortised cost (that would have been measured if there had been no impairment) at the reversal date.
Impairment
The carrying amounts of fixed assets are reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable. If there are indicators of impairment, an exercise is undertaken to determine whether the carrying values are in excess of their recoverable amounts. Such review is undertaken on income generating units.
If the carrying amount of a fixed asset exceeds the recoverable amount, a provision is recorded to reflect the asset at the lower amount. In assessing recoverable amount for fixed assets, the relevant future cash flows expected to arise from the continuing use of such assets and from their disposal have been discounted to their present value using a market-determined discount rate.
Provisions for liabilities
Provisions are recognised when the Company has a present obligation, as a result of past events, and it is probable that an outflow of resources that can be reliably estimated will be required to settle the obligation.
Deferred taxation
Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date that will result in an obligation to pay more, or a right to pay less, tax in the future. In particular:
- provision is made for tax on gains arising from the disposal of fixed assets, only to the extent that, at the balance sheet date, there is a binding agreement to dispose of the assets concerned. However, no provision is made where, on the basis of all available evidence at the balance sheet date, it is more likely than not that the taxable gain will be rolled over into replacement assets and charged to tax only where the replacement assets are sold;
- provision is made for deferred tax that would arise on remittance of the retained earnings of overseas entities only to the extent that, at the balance sheet date, dividends have been accrued as receivable; and
- deferred tax assets are recognised only to the extent that, it is considered that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.
Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date.
Deferred tax is recognised in the profit and loss account for the period except to the extent it is attributable to a gain or loss recognised directly in equity, in which case it is also recognised in equity.
Ordinary share capital
Ordinary shares issued by the Company are recorded at the net proceeds received, which is the fair value of the consideration received less costs that are incurred in connection with the share issue. The nominal par value of the shares issued is taken to the share capital account and any excess is recorded in the share premium account, including the costs that were incurred with the share issue.
Own shares
The cost of purchases of own shares held by the Employee Share Ownership Plan (ESOP) trust are deducted from equity. Where they are issued to employees or sold, no gain or loss is recognised in the profit and loss account. Any proceeds received on disposal of the shares or transfer to employees are also recognised in equity.
Share-based payments
The Company makes share-based awards, including free shares and options in the Company, to certain employees and Directors of the Group. The expense recognised in the financial statements relates only to those share-based awards that are granted by the Company, to its employees and Directors and to the employees of the Group who provide services to the Company.
Equity-settled awards
For equity-settled awards, the fair value is charged to the profit and loss account and credited to retained earnings, on a straight line basis over the vesting period, after adjusting for the estimated number of awards that are expected to vest (taking into account the achievement of non-market based performance conditions). The fair value of the equity-settled awards is determined at the date of the grant. In calculating fair value, no account is taken of any vesting conditions, other than conditions linked to the price of the shares of the Company (market conditions). The fair value is determined by external experts using the models outlined in note 11. At each balance sheet date prior to vesting, the cumulative expense representing the extent to which the vesting period has expired and management's best estimate of the awards that are ultimately expected to vest is computed (after adjusting for non-market performance conditions). The movement in cumulative expense is recognised in the profit and loss account with a corresponding entry within equity.
No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.
Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified over the original vesting period. In addition, an expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification, over the remainder of the new vesting period.
Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. Any compensation paid up to the fair value of the awards at the cancellation or settlement date is deducted from equity, with any excess over fair value being treated as an expense in the profit and loss account. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the new award is treated as if it is a modification of the original award, as described in the previous paragraph.
Cash-settled awards
For cash-settled awards, the fair value is recalculated at each balance date until the awards are settled based on the estimated number of awards that are expected to vest adjusting for market and non-market based performance conditions. During the vesting period, a liability is recognised representing the portion of the vesting period which has expired at the balance sheet date times the fair value of the awards at that date. After vesting the full fair value of the unsettled awards at each balance date is recognised as a liability. Movements in the liability are recognised in the profit and loss account. The fair value is recalculated using an option pricing model (refer to note 11).
The Group has taken advantage of the transitional provisions of FRS 20 in relation to unvested equity-settled awards and has applied this accounting standard only to awards granted after 7 November 2002 that had not vested prior to 1 January 2005.
Loans from subsidiaries
Loans from subsidiaries are recognised at inception at the fair value of the proceeds received net of issue costs. Subsequently they are measured at amortised cost using the effective interest method. Finance costs are recognised in the profit and loss account using the effective interest rate method.
Foreign currency transactions
Foreign currency transactions are booked in the functional currency (US$) at the exchange rate ruling on the date of the transaction. Foreign currency monetary assets and liabilities are translated into the functional currency at rates of exchange ruling at the balance sheet date. Exchange differences are recorded in the profit and loss account. Foreign currency non-monetary assets and liabilities are not restated at balance sheet date.
Revenue
Interest income is recognised as earned on an accruals basis using the effective interest method.
Dividend income is recognised as earned when the Company's right to receive payment is established.
Income for other services is recognised when the service has been rendered, when the amount of revenue (and associated costs) can be reliably measured and it is probable that economic benefits will flow to the Company.
Comparatives
Where applicable, comparatives have been adjusted to disclose them on the same basis as current period figures.
Use of estimates
The preparation of these financial statements is in conformity with generally accepted accounting practice and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual outcomes could differ from these estimates.
2. Change of accounting policies
As outlined in note 1 these financial statement have been prepared in accordance with applicable UK accounting standards. In preparing the financial statements for the current year, the Company has adopted the following Financial Reporting Standards (FRS) for the first time:
- FRS 20 Share-based payments;
- FRS 21 Events after the Balance Sheet Date;
- FRS 22 Earnings per share;
- FRS 23 The effects of changes in foreign exchange rates;
- FRS 25 Financial instruments: Disclosure and presentation;
- FRS 26 Financial instruments: Measurement; and
- FRS 28 Corresponding Amounts.
All standards have been retrospectively applied except for FRS 25 and FRS 26 which have only been applied from 1 January 2005. The adoption of FRS 20 has resulted in changes in accounting for share-based payment transactions and the adoption of FRS 21 has resulted in changes in the accounting for dividends. The impact on the profit and loss account from the adoption of FRS 20 is to decrease profit by US$9.1 million in the current year and decrease profit by US$4 million in the prior year. There was no material impact on the profit and loss account from the adoption of the other standards.
A reconciliation of the Balance Sheet and Equity at 31 December 2004 upon adoption of the change in accounting policies is provided below:
| US$m | Previous 2004 |
Change of accounting policy |
Notes | Restated 2004 |
|---|---|---|---|---|
| Fixed assets | ||||
| Investments | 3,761.0 | – | 3,761.0 | |
| 3,761.0 | – | 3,761.0 | ||
| Current assets | ||||
| Debtors: amounts falling due within one year | 52.8 | – | 52.8 | |
| 52.8 | 52.8 | |||
| Creditors: amounts falling due within one year | -131.4 | 99.8 | (i) | -31.6 |
| Net current assets | -78.6 | 99.8 | 21.2 | |
| Total assets less current liabilities | 3,682.4 | 99.8 | 3,782.2 | |
| Provisions for liabilities and charges | – | -8.8 | (ii) | -8.8 |
| Attributable net assets | 3,682.4 | 91.0 | 3,773.4 | |
| Capital and reserves | ||||
| Called up share capital | 315.8 | – | 315.8 | |
| Share premium account | 2,481.5 | – | 2,481.5 | |
| Other reserves | 949.2 | – | 949.2 | |
| Own shares | -32.9 | – | -32.9 | |
| Profit and loss account | -31.2 | 91.0 | (i, ii) | 59.8 |
| Equity shareholders' funds | 3,682.4 | 91.0 | 3,773.4 |
i) Dividends
The dividend accrual of US$99.8 million at 31 December 2004 has been reversed against the profit and loss account. The Company now accrues for a dividend if the dividend has been appropriately approved and is no longer at the discretion of the entity whereas previously it recorded an accrual for dividends payable when the dividend was proposed to shareholders.
ii) Share-based Payments
As outlined in note 1, the Company recognises an expense where the Company awards shares or rights over shares (equity-settled transactions), or other assets equivalent in value to a given number of shares or rights over shares (cash-settled transactions) to the Directors' and employees of the Company or employees of the Group who render services to the Company.
The impact of this on the Company for the year ended and as at 31 December 2004 was to recognise an additional expense of US$4 million and recognise a non-current provision of US$8.8 million for cash-settled awards at 31 December 2004.
Previously the Company recognised an expense of US$4.6 million for the year ended 31 December 2004 for the intrinsic value or cost of the potential awards for long term incentive plans as an expense. The cost of these awards were accrued over the performance period of each plan based on the intrinsic value of equity settled awards or estimated cost of cash-settled awards, and an adjustment was made to the latter to reflect the actual costs incurred.
3. Investments
| US$m | Investment in subsidiaries |
Loans to subsidiaries |
Total |
|---|---|---|---|
| Cost: | |||
| At 1 January 2005 | 3,439.8 | 321.2 | 3,761.0 |
| Additions | 734.5 | 110.7 | 845.2 |
| At 31 December 2005 | 4,174.3 | 431.9 | 4,606.2 |
The subsidiary undertakings of the Company as at 31 December and the percentage holding of ordinary share capital (which aligns with the voting rights) are set out below:
| Name | Country of incorporation |
Principal activities |
% of ordinary shares held & voting rights |
|
|---|---|---|---|---|
| Principal Subsidiaries | ||||
| Xstrata (Schweiz) AG | Switzerland | Holding company | 100% | |
| Xstrata Capital Corporation AVV | Aruba | Finance company | 40% |
The principal country of operation is the country of incorporation, and all subsidiaries are unlisted. Refer to note 38 of the consolidated financial statements for a list of significant subsidiaries, associates and joint ventures.
4. Debtors: amounts falling due within one year
| US$m | 2005 | 2004 |
|---|---|---|
| Loans to subsidiaries | – | 52.4 |
| Other debtors | 5.7 | 0.4 |
| 5.7 | 52.8 |
5. Creditors: amounts falling due within one year
| US$m | 2005 | 2004 |
|---|---|---|
| Loans from subsidiaries | 545.5 | 29.7 |
| Other creditors | 1.4 | 1.9 |
| 546.9 | 31.6 |
6. Provisions
| US$m | Share-based compensation plans |
2005 |
|---|---|---|
| At 1 January 2005 | 8.8 | 8.8 |
| Arising during the year | 11.3 | 11.3 |
| Utilised | -7.5 | -7.5 |
| At 31 December 2005 | 12.6 | 12.6 |
The Company has various share-based compensation plans under which options to subscribe for the Company's shares have been granted to Directors and employees of the Company and employees of the Group who provide services to the Company. The intrinsic value of the options that had vested at 31 December 2005 was US$0.5 million (2004 US$4.4 million).
7. Dividends Paid and Proposed
| US$m | 2005 | 2004 |
|---|---|---|
| Declared and paid during the year: | ||
| Final dividend for 2004 – 16.0 cents per ordinary share (2003 – 13.3 cents per ordinary share) | 100.0 | 83.6 |
| Interim dividend for 2005 – 9.0 cents per ordinary share (2004 – 8.0 cents per ordinary share) | 54.2 | 50.2 |
| 154.2 | 133.8 | |
| Proposed for approval at the Annual General Meeting (not recognised as a liability as at 31 December): | ||
| Final dividend for 2005 – 25.0 cents per ordinary share (2004 – 16.0 cents per ordinary share) | 149.9 | 100.0 |
Dividends declared in respect of the year ended 31 December 2005 will be paid on 19 May 2006. The trustees of the ESOP have waived the right to receive dividends on their own shares.
8. Capital
| US$m | 2005 | 2004 |
|---|---|---|
| Authorised share capital: | ||
| 875,000,000 (2004: 875,000,000) ordinary shares of US$0.50 each | 437.5 | 437.5 |
| 50,000 deferred shares of £1 each | 0.1 | 0.1 |
| 1 special voting share of US$0.50 | – | – |
| 437.6 | 437.6 | |
| Allotted, called up and fully paid: | ||
| 632,502,416 (2004: 631,502,416) ordinary shares of US$0.50 each | 316.3 | 315.8 |
| 50,000 deferred shares of £1 each paid to £0.25 | – | – |
| 1 special voting share of US$0.50 | – | – |
| 316.3 | 315.8 |
Issue of ordinary shares
During March 2005, 1,000,000 shares were issued to the ESOP at a market price of GBP10.20 per share.
Deferred shares
The holders of deferred shares do not have the right to receive notice of any general meeting of the Company nor the right to attend, speak or vote at any such general meeting. The deferred shares have no rights to dividends and, on a winding-up or other return of capital and entitle the holder only to the repayment of the amounts paid upon such shares after repayment of the nominal amount paid up on the Ordinary Shares, the nominal amount paid up on the special voting share plus the payment of GBP100,000 per ordinary share. The Company may, at its option, redeem all of the deferred shares in issue at any time (but subject to the minimum capital requirement of the Companies Act 1985) at a price not exceeding GBP1.00 for each share redeemed to be paid to the relevant registered holders of the shares.
Special voting share
Certain rights, that are inalienable under Swiss law, have been preserved in the Xstrata plc Articles of Association by creating a special voting share that carries weighted voting rights sufficient to defeat any resolution which could amend or remove these entrenched rights. The holder of the special voting share is the Law Debenture Trust Corporation plc which has entered into a voting agreement with the Company, specifying the conditions upon which it is entitled to exercise its right to vote. The special voting share does not carry a right to receive dividends and is entitled to no more than the amount of capital paid up in the event of liquidation.
9. Capital and reserves
| US$m | Share capital |
Share premium account |
Other reserves |
Own shares |
Profit and loss account |
2005 |
|---|---|---|---|---|---|---|
| Capital and Reserves | ||||||
| At 1 January 2005 | 315.8 | 2,481.5 | 949.2 | -32.9 | 59.8 | 3,773.4 |
| Attributable profit for the year | – | – | – | – | 406.5 | 406.5 |
| Issue of share capital | 0.5 | 18.6 | – | -19.1 | – | – |
| Own shares purchased | – | – | – | -0.1 | – | -0.1 |
| Own shares sold | – | – | – | 16.5 | 8.7 | 25.2 |
| Equity settled share-based payments | – | – | – | – | 5.7 | 5.7 |
| Exercise of pre-FRS 20 option awards | – | – | – | – | -4.1 | -4.1 |
| Dividends | – | – | – | – | -154.2 | -154.2 |
| At 31 December 2005 | 316.3 | 2,500.1 | 949.2 | -35.6 | 322.4 | 4,052.4 |
| US$m | Share capital |
Share premium account |
Other reserves |
Own shares |
Profit and loss account |
2004 |
|---|---|---|---|---|---|---|
| Capital and Reserves | ||||||
| At 1 January 2004 | 315.8 | 2,481.5 | 949.2 | -32.9 | 5.7 | 3,719.3 |
| Equity settled share-based payments | – | – | – | – | 2.9 | 2.9 |
| Attributable profit for the year | – | – | – | – | 185.0 | 185.0 |
| Dividends | – | – | – | – | -133.8 | -133.8 |
| At 31 December 2004 | 315.8 | 2,481.5 | 949.2 | -32.9 | 59.8 | 3,773.4 |
Own shares
Own shares comprise shares of Xstrata plc held in the ESOP.
The shares acquired by the ESOP will either be from the stock market or from share issues at the market price from the Company. The ESOP is used to co-ordinate the funding and manage the delivery of ordinary shares for options and LTIP awards granted under the LTIP and Xstrata AG incentive plan. The trustee of the ESOP is permitted to place the shares back into the market and may hold up to 5% of the issued share capital of the Company at any one time. At 31 December 2005, 3,603,888 (2004: 4,109,545) shares, equivalent to 0.6% (2004: 0.7%) of the total issued share capital, were held by the trust with a cost of US$35.6 million (2004 US$32.9 million) and market value of US$84.4 million (2004 US$73.3 million). The trust has waived the right to receive dividends from the shares that it holds. Costs relating to the administration of the trust are expensed in the period in which they are incurred.
10. Other income and expenses
The audit fee is US$50,000 (2004 US$42,000) in respect of the Company. Refer to note 11 of the consolidated financial statements for further information of Auditors' remuneration.
Refer to the Remuneration report on pages 112 to 115 of the Annual Review 2005 for the remuneration of Directors.
11. Share-based Payments
The Group operates a number of share option plans which are outlined below and result in the Company granting options and awards over its shares.
The expense recognised for share-based payments during the year ended 31 December 2005 was US$17 million (2004 US$8.6 million). The proportion of that expense arising from equity-settled share-based awards was US$5.7 million (2004 US$2.9 million).
Xstrata plc Long Term Incentive Plan (LTIP)
The LTIP has two elements:
- (i) A contingent award of free ordinary shares that vests after three years, subject to, and to the extent that, performance criteria determined at the time of grant have been satisfied; and
- (ii) A share option to acquire ordinary shares at a specified exercise price after the third anniversary of grant, subject to, and to the extent that, performance criteria determined at the time of grant have been satisfied.
No consideration will be payable on the vesting of an LTIP award of free ordinary shares. On exercise of an option, a participant will be required to pay an exercise price which will not be less than the market value of an ordinary share on the date of grant.
Of the below options, 1.6 million options (2004: 1.4 million) are accounted for as cash-settled share-based payments, whilst the remainder of the LTIP awards granted after 7 November 2002 are accounted for as equity-settled awards.
The movement in the number of free ordinary shares and share options are as follows:
2005
| Scheme | Excercise price |
Exercise period | At 1 Jannuary 2005 No. |
Granted during the year No. |
Excercised during the year No. |
Forfeited and lapsed during the year* No. |
At 31 December 2005 No. |
|---|---|---|---|---|---|---|---|
| Shares: | |||||||
| 2002 | – | May 2005 – May 2012 | 85,849 | – | -78,676 | -7,173 | – |
| 2003 | – | February 2006 – February 2013 | 717,066 | – | – | -3,364 | 713,702 |
| 2004 | – | March 2007 – March 2014 | 1,659,447 | – | – | -5,708 | 1,653,739 |
| 2005 | – | March 2008 – March 2015 | – | 1,325,723 | – | -17,497 | 1,308,226 |
| 2,462,362 | 1,325,723 | -78,676 | -33,742 | 3,675,667 | |||
| Options: | |||||||
| 2002 | GBP6.23 | May 2005 – May 2012 | 633,678 | – | -473,365 | -53,869 | 106,444 |
| 2002 | GBP6.44 | May 2005 – May 2012 | 33,279 | – | -30,617 | -2,662 | – |
| 2002 | GBP6.30 | May 2005 – May 2012 | 22,620 | – | -20,810 | -1,810 | – |
| 2003 | GBP3.60 | February 2006 – February 2013 | 2,221,891 | – | – | -10,420 | 2,211,471 |
| 2004 | GBP7.35 | March 2007 – March 2014 | 5,468,301 | – | – | -19,026 | 5,449,275 |
| 2004 | GBP7.03 | March 2007 – March 2014 | 63,163 | – | – | – | 63,163 |
| 2005 | GBP10.60 | March 2008 – March 2015 | – | 4,419,089 | – | -58,324 | 4,360,765 |
| 8,442,932 | 4,419,089 | -524,792 | -146,111 | 12,191,118 | |||
| *Comprised 26,901 free shares and 91,221 options and that were forfeited and 6,841 free shares and 54,890 options that lapsed during the year. | |||||||
Of the above awards at 31 December 2005, 3,267,774 options and 996,873 free shares are held by Directors and employees of the Company or are held by employees of the Group who provide services to the Company.
The number of share options and the weighted average exercise prices (WAEP) of share options held by these individuals is as follows:
- Outstanding at 1 January 2005: 2,551,102 at a WAEP of GBP6.09 per share option
- Outstanding at 31 December 2005: 3,267,774 at a WAEP of GBP7.19 per share option
- Granted during the year: 800,954 at a WAEP of GBP10.60 per share option
- Exercised during the year: 79,810 at a WAEP of GBP6.33 per share option
- Lapsed during the year: 4,472 at a WAEP of GBP6.38 per share option
- Exercisable at 31 December 2005: 8,022 at a WAEP of GBP6.23 per share option
The weighted average remaining contractual life of the above options at 31 December 2005 is 8.2 years and the weighted average share price at the date that the options were exercised during the year was GBP9.79 per share. Exercise prices of options outstanding at 31 December 2005 range from GBP3.60 per share option to GBP10.60 per share option. The number of shares exercisable at a price of GBP3.60 per share is 833,699.
During the year 240,285 free shares were granted to these individuals. Of the free shares held by these individuals at 1 January 2005, 44,096 were exercised during the year and 3,818 lapsed during the year. No free shares held by these individuals at 31 December 2005 are exercisable, and the weighted average remaining contractual life of free shares outstanding at 31 December 2005 is 8.2 years.
2004
| Scheme | Excercise price |
Exercise period | At 1 Jannuary 2004 No. |
Granted during the year No. |
Excercised during the year No. |
Forfeited and lapsed during the year No. |
At 31 December 2004 No. |
|---|---|---|---|---|---|---|---|
| Shares: | |||||||
| 2002 | – | May 2005 – May 2012 | 88,138 | – | – | -2,289 | 85,849 |
| 2003 | – | February 2006 – February 2013 | 739,655 | – | – | -22,589 | 717,066 |
| 2004 | – | March 2007 – March 2014 | – | 1,741,713 | – | -82,266 | 1,659,447 |
| 827,793 | 1,741,713 | – | -107,144 | 2,462,362 | |||
| Options: | |||||||
| 2002 | GBP6.23 | May 2005 – May 2012 | 657,687 | – | – | -24,009 | 633,678 |
| 2002 | GBP6.44 | May 2005 – May 2012 | 33,279 | – | – | – | 33,279 |
| 2002 | GBP6.30 | May 2005 – May 2012 | 22,620 | – | – | – | 22,620 |
| 2003 | GBP3.60 | February 2006 – February 2013 | 2,291,898 | – | – | -70,007 | 2,221,891 |
| 2004 | GBP7.35 | March 2007 – March 2014 | – | 5,742,525 | – | -274,224 | 5,468,301 |
| 2004 | GBP7.03 | March 2007 – March 2014 | – | 63,163 | – | – | 63,163 |
| 3,005,484 | 5,805,688 | – | -368,240 | 8,442,932 |
Of the above awards at 31 December 2004, 2,551,102 options and 804,502 free shares are held by Directors and employees of the Company or are held by employees of the Group who provide services to the Company.
The number of share options and weighted average exercise prices (WAEP) of share options held by these individuals is as follows:
- Outstanding at 1 January 2004: 926,003 at a WAEP of GBP3.87 per share option
- Outstanding at 31 December 2004: 2,551,102 at a WAEP of GBP6.09 per share option
- Granted during the year: 1,625,099 at a WAEP of GBP7.35 per share option
None of the options held by these individuals at 31 December 2004 were exercisable and the average remaining contractual life of the options was 8.8 years. Exercise prices ranged from GBP3.60 per share option to GBP7.35 per share option. The number of shares exercisable at GBP3.60 is 833,699.
During the year 487,530 free shares were issued to these individuals, whilst 316,972 free shares were held at 1 January 2004. None of the free shares held by these individuals were exercisable at 31 December 2004 and the weighed average remaining contractual life of the free shares was 8.8 years.
The fair value of the share-based compensation plans (including free shares and options) are estimated using a binomial model at the date of grant and the fair value is updated at 31 December for a limited number of options that are permitted to be cash-settled. The main weighted average assumptions used are:
| date of grant 2005 |
31 December 2005 |
date of grant 2004 |
31 December 2004 |
|
|---|---|---|---|---|
| Dividend yield (%) | 3.14 | 3.16 | 3.25 | 3.23 |
| Expected volatility (%) | 31.18 | 29.25 | 37.57 | 36.19 |
| Risk-free interest rate (%) | 4.86 | 4.18 | 4.78 | 4.52 |
| Earliest exercise date | 11 Mar 2008 | 11 Mar 2008 | 4 Mar 2007 | 4 Mar 2007 |
| Latest exercise date | 10 Mar 2015 | 10 Mar 2015 | 4 Mar 2014 | 4 Mar 2014 |
| Expected exercise date | 10 Sep 2011 | 10 Sep 2011 | 4 Sep 2010 | 4 Sep 2010 |
| Share price at date of grant (GBP) | 10.48 | 10.48 | 7.33 | 7.33 |
| Exercise price (GBP) | 10.6 | 10.6 | 7.35 | 7.35 |
| Free share fair value at date of grant (GBP) | 9.54 | 9.54 | 6.37 | 6.37 |
| Option fair value at date of grant (GBP) | 3.05 | 3.05 | 2.34 | 2.34 |
The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historic volatility is indicative of future trends, which may also not necessarily be the actual outcome.
The amount of 2004 and 2005 LTIP awards that vest are subject to the satisfaction of certain performance criteria being met over a three-year performance period. Half of the options and Free Share Awards are conditional on Total Shareholder Return (TSR) relative to a peer group and half are conditional on the Group's real cost savings relative to targets set on a stretching scale over the three-year period. For the awards conditional on TSR, 25% of the combined award will vest if TSR growth is at the median of the specified peer group, the full 50% of the combined award will vest for performance at or above the second decile with straight line vesting between these points. No vesting will occur for below median performance. For the remaining award, vesting is conditional on the Group's real cost savings relative to targets set on a stretching scale: 5% of the combined award will vest for 1% cost savings, 35% for 2% cost savings and 50% for 3% or more cost savings, with straight line vesting between these points. No vesting will occur if cost savings are less than 1%. Real cost savings will be measured in relation to operating costs after adjusting for the effects of inflation, excluding depreciation, commodity price linked costs, effects of currencies on translation of local currency costs and planned life of mine adjustments. The 2003 LTIP awards are only subject to the TSR performance criteria. No other features of the LTIP awards were incorporated into the measurement of fair value.
FRS 20 has not been applied to equity-settled share-based payments granted on or before 7 November 2002 and consequently the above 2002 share options and free shares are not accounted for under FRS 20.
Xstrata AG incentive plan
With the merger of Xstrata AG into Xstrata plc, Xstrata plc assumed the obligations of Xstrata AG under the scheme with the number of options and exercise price adjusted accordingly. The share options have a two year vesting period followed by a three year exercise period. The exercise price was the share price at the date of granting of the share options. There are no other conditions attaching to these options and they can be cash-settled by the holder. No further options will be granted under this incentive plan. All of the options below are accounted for as cash-settled share-based awards. The movement in the number of share options are as follows:
2005
| Scheme | Exercise price |
Exercise period | At 1 January 2005 No. |
Granted during the year No. |
Exercised during the year No. |
Lapsed during the year No. |
At 31 December 2005 No. |
|---|---|---|---|---|---|---|---|
| Options: | |||||||
| 2000 | CHF22.28 | Jan 2002 – Jan 2005 | 690,287 | – | – | -690,287 | – |
| 2001 | CHF28.64 | Jan 2003 – Jan 2006 | 511,589 | – | -351,076 | – | 160,513 |
| 2002 | CHF14.98 | Jan 2004 – Jan 2007 | 671,854 | – | -659,036 | – | 12,818 |
| 1,873,730 | – | -1,010,112 | -690,287 | 173,331 |
The number of share options that were exercisable at 31 December 2005 was 173,331. For the share options outstanding at 31 December 2005, the weighted average remaining contractual life was 0.2 years. The weighted average share price at the dates that the share options were exercised during the year was CHF26.99 per share. The weighted average exercise prices (WAEP) of share options is as follows:
- Outstanding at 1 January 2005: CHF21.40 per share option
- Outstanding at 31 December 2005: CHF27.63 per share option
- Exercised during the year: CHF19.73 per share option
- Lapsed during the year: CHF22.28 per share option
- Exercisable at 31 December 2005: CHF27.63 per share option
2004
| Scheme | Exercise price |
Exercise period | At 1 January 2004 No. |
Granted during the year No. |
Exercised during the year No. |
Lapsed during the year No. |
At 31 December 2004 No. |
|---|---|---|---|---|---|---|---|
| Options: | |||||||
| 2000 | CHF22.28 | Jan 2002 – Jan 2005 | 690,287 | – | – | – | 690,287 |
| 2001 | CHF28.64 | Jan 2003 – Jan 2006 | 511,589 | – | – | – | 511,589 |
| 2002 | CHF14.98 | Jan 2004 – Jan 2007 | 898,768 | – | -226,914 | – | 671,854 |
| 2,100,644 | – | -226,914 | – | 1,873,730 |
The number of share options that were exercisable at 31 December 2004 was 1,873,730. For the share options outstanding at 31 December 2004, the weighted average remaining contractual life was 1.1 years. The weighted average share price at the dates that the share options were exercised during the year was CHF20.18 per share. The weighted average exercise prices (WAEP) of share options is as follows:
- Outstanding at 1 January 2004: CHF20.71 per share option
- Outstanding at 31 December 2004: CHF21.40 per share option
- Exercised during the year: CHF14.98 per share option
- Exercisable at 31 December 2004: CHF21.40 per share option
As at 31 December 2005, the Company held 3,603,888 shares (2004: 4,109,545 shares) to hedge its exposure under the above share and option plans.
Of the above awards all of the options are held by Directors and employees of the Company or are held by employees of the Group who provide services to the Company.
Directors' Service contracts
Options were granted to two executive Directors of the Company pursuant to the terms of on which they were recruited. The options are to be equity-settled. The exercise price was the share price at the date of granting of the share options. If the holder ceases to be employed by the Group for any reason, they may exercise any vested options within six months of such cessation, after which the options lapse. Any unvested options will lapse if the holder is dismissed lawfully under the terms of their contract or if they voluntarily resign except where they have a valid reason to terminate their employment as defined in their employment contract, in which case all unvested options shall immediately vest and become exercisable for a period of six months. In all other cases, they will remain exercisable for a period of six months.
The movement in the number of share options are as follows:
2005
| Exercise price |
Exercise period | At 1 January 2005 No. |
Granted during the year No. |
Exercised during the year No. |
Lapsed during the year No. |
At 31 December 2005 No. |
|---|---|---|---|---|---|---|
| CHF12.53 | Dec 2004 – Dec 2011 | 444,860 | – | -444,860 | – | – |
| GBP4.29 | Oct 2005 – Oct 2012 | 444,860 | – | – | – | 444,860 |
| GBP4.12 | Jan 2006 – Jan 2013 | 222,430 | – | – | – | 222,430 |
| GBP4.72 | Oct 2006 – Oct 2013 | 444,860 | – | – | – | 444,860 |
| GBP6.35 | Jan 2007 – Jan 2014 | 222,430 | – | – | – | 222,430 |
| 1,779,440 | – | -444,860 | – | 1,334,580 |
The number of share options that were exercisable at 31 December 2005 was 444,860. For the share options outstanding at 31 December 2005, the weighted average remaining contractual life was 7.4 years. The weighted average share price at the dates that the share options were exercised during the year was CHF23.45 per share. The weighted average exercise prices (WAEP) of share options is as follows:
- Outstanding at 1 January 2005: CHF12.53 and GBP4.75 per share option
- Outstanding at 31 December 2005: GBP4.75 per share option
- Exercised during the year: CHF12.53 per share option
- Exercisable at 31 December 2005: GBP4.29 per share option
2004
| Exercise price |
Exercise period | At 1 January 2004 No. |
Granted during the year No. |
Exercised during the year No. |
Lapsed during the year No. |
At 31 December 2004 No. |
|---|---|---|---|---|---|---|
| GBP4.29 | Oct 2005 – Oct 2012 | 444,860 | – | – | – | 444,860 |
| GBP4.12 | Jan 2006 – Jan 2013 | 222,430 | – | – | – | 222,430 |
| GBP4.72 | Oct 2006 – Oct 2013 | 444,860 | – | – | – | 444,860 |
| GBP6.35 | Jan 2007 – Jan 2014 | 222,430 | – | – | – | 222,430 |
| 1,779,440 | – | – | – | 1,779,440 |
The number of share options that were exercisable at 31 December 2004 was 444,860. For the share options outstanding at 31 December 2004, the weighted average remaining contractual life was 8.3 years. The weighted average exercise prices (WAEP) of share options is as follows:
- Outstanding at 1 January 2004: CHF12.53 and GBP4.75 per share option
- Outstanding at 31 December 2004: CHF12.53 and GBP4.75 per share option
- Exercisable at 31 December 2004: CHF12.53 per share option
FRS 20 has not been applied to equity-settled share-based payments granted on or before 7 November 2002 and consequently the above share options are not accounted for under FRS 20.
Xstrata AG Directors' Incentive Scheme
With the merger of Xstrata AG into Xstrata plc, Xstrata plc assumed the obligations of Xstrata AG under the scheme with the number of options and exercise price adjusted accordingly. The share options have a two year vesting period followed by a three year exercise period. The exercise price was the share price at the date of granting of the share options. There are no other conditions attaching to these options and they can be cash-settled by the holder and consequently are accounted for as cash-settled awards under FRS 20. No further options will be granted under this incentive plan. The movement in the number of share options are as follows:
2005
| Scheme | Exercise price |
Exercise period | At 1 January 2005 No. |
Granted during the year No. |
Exercised during the year No. |
Lapsed during the year No. |
At 31 December 2005 No. |
|---|---|---|---|---|---|---|---|
| Options: | |||||||
| 2000 | CHF22.28 | Jan 2002 – Jan 2005 | 76,079 | – | – | -76,079 | – |
| 2001 | CHF28.64 | Jan 2003 – Jan 2006 | 15,231 | – | – | – | 15,231 |
| 91,310 | – | – | 15,231 |
The number of share options that were exercisable at 31 December 2005 was 15,231. For the share options outstanding at 31 December 2005, the weighted average remaining contractual life was 0.1 years. The weighted average exercise prices (WAEP) of share options is as follows:
- Outstanding at 1 January 2005: CHF23.34 per share option
- Outstanding at 31 December 2005: CHF28.64 per share option
- Lapsed during the year: CHF22.28 per share option
- Exercisable at 31 December 2005: CHF28.64 per share option
2004
| Scheme | Exercise price |
Exercise period | At 1 January 2004 No. |
Granted during the year No. |
Exercised during the year No. |
Lapsed during the year No. |
At 31 December 2004 No. |
|---|---|---|---|---|---|---|---|
| Options: | |||||||
| 1999 | CHF12.07 | Feb 2001 – Jan 2004 | 72,384 | – | -72,384 | – | – |
| 2000 | CHF22.28 | Jan 2002 – Jan 2005 | 76,079 | – | – | – | 76,079 |
| 2001 | CHF28.64 | Jan 2003 – Jan 2006 | 15,231 | – | – | – | 15,231 |
| 2002 | CHF14.98 | Jan 2004 – Jan 2007 | 45,602 | – | -45,602 | – | – |
| 209,296 | – | -117,986 | – | 91,310 |
The number of share options that were exercisable at 31 December 2004 was 91,310. For the share options outstanding at 31 December 2004, the weighted average remaining contractual life was 0.3 years. The weighted average share price at the dates that the share options were exercised during the year was CHF15.07 per share. The weighted average exercise prices (WAEP) of share options is as follows:
- Outstanding at 1 January 2004: CHF17.62 per share option
- Outstanding at 31 December 2004: CHF23.34 per share option
- Exercised during the year: CHF14.98 per share option
- Lapsed during the year: CHF12.07 per share option
- Exercisable at 31 December 2004: CHF23.34 per share option
Of the above awards all of the options are held by Directors and employees of the Company or are held by employees of the Group who provide services to the Company.
Deferred Bonus
As detailed within the Remuneration Report on pages 102 to 115 of the Annual Review 2005, the maximum bonus payable under the Bonus Plan for Executive Directors and members of the Executive Committee is 300% of salary. Bonuses are payable in three tranches as follows:
- the maximum bonus, which any one participant is eligible to receive in cash, will be limited to 100% of the individual's base salary;
- any additional bonus up to a further 100% of base salary will be deferred for a period of one year; and
- any remaining bonus will be deferred for a period of two years.
The deferred elements will take the form of awards of Xstrata shares conditional on the participant remaining in employment throughout the deferral period. The number of shares awarded will be determined by reference to the market value of the shares at the date the bonus payment is determined. The deferred element has been treated as an equity-settled share-based payment in accordance with FRS 20.
In 2005 the Xstrata Remuneration Committee resolved that during the bonus deferral period dividend equivalents would accrue in relation to the deferral, to be delivered at the end of the deferral period and subject to the deferral award vesting.
As dividend equivalents are receivable on the deferred amounts, the fair value of the deferral is technically equal to the value of the bonuses deferred. The total value of 2005 bonuses deferred was US$7.5 million (2004 US$5.4 million) or 258,242 shares (2004 271,987 shares).
Directors' Added Value Plan (AVP)
The first cycle of the AVP began on 9 May 2005. A description of the performance requirements and the vesting schedule of the plan are detailed within the Remuneration Report on pages 102 to 115 of the Annual Review 2005.
The fair value of the equity-settled share-based payment under FRS 20 was US$6.9 million, estimated at 9 May 2005, using a Monte Carlo simulation model to incorporate the market based features of the plan.
For the 2005 plan cycle, the market capitalisation on 9 May 2005 was US$11.4 billion, the Participation Percentage was equal to 0.5% and the share price at the measurement date was US$18.00. In addition to these parameters, the key inputs used within the valuation model were:
| Xstrata plc | Xstrata share Indices1 |
|
|---|---|---|
| Dividend yield (%) | N/A | N/A2 |
| Expected volatility (%) | 32% | 21% |
| Risk-free interest rate (%) | 4.51% | 4.51% |
| Third anniversary of start of cycle | 9 May 2008 | 9 May 2008 |
| Fourth anniversary of start of cycle | 9 May 2009 | 9 May 2009 |
| Fifth anniversary of start of cycle | 9 May 2010 | 9 May 2010 |
| 1. There are two Xstrata Share Indices used within the valuation model; one is a market capitalisation weighted TSR index comprising 19 global mining firms who are considered to be Xstrata’s key competitors for both financial and human capital. The other is a market capitalisation price index comprising the same 19 constituents. | ||
| 2. When simulating the Xstrata Price Index, a dividend yield is included to account for the suppressing impact that a dividend payment has on the constituent share prices. A yield of 3.16% has been used. For the simulation of Xstrata’s TSR and the Index TSR a dividend yield is not required. | ||
The expected volatility reflects the assumption that the historic volatility is indicative of future trends, which may also not necessarily be the actual outcome. There is no disclosure of the number of equity instruments granted as the AVP is not an award over a fixed number of shares.
Directors' Glencore Option
As part of a package to attract him to take the position of chief executive of Xstrata AG in October 2001, Glencore International AG (Glencore) awarded Mick Davis an option over shares in Xstrata owned by Glencore, at an exercise price 46% higher than the share price on the day he joined and exercisable after three years from 18 September 2004 until 19 September 2011. Following the creation of the Company, the merger with Xstrata AG and the Rights Issue associated with the acquisition of MIM Holdings Limited, the option was over 1,334,669 shares in the Company, owned by Glencore, at an exercise price of CHF13.60 per share.
On 20 September 2005, these options were exercised and he has received from Glencore a cash consideration equating to the current value of the Option (CHF26.3 million, representing 1.334 million shares at CHF19.70 per share, being the difference between Xstrata plc's closing price of CHF33.30 per share on Monday 19 September 2005 and the exercise price of CHF13.60 per share). The Company did not incur any costs in respect of this exercise.
12. Guarantees
The Company has provided guarantees to Xstrata Capital Corporation AVV in respect of convertible bonds and debentures it has issued. Specifically, the Company has provided:
- unconditional and irrevocable guarantees to the holders of the convertible bonds and debentures in respect of the payment of all amounts due and payable under the convertible bonds and debentures. The amount due and payable under the convertible bonds and debentures at 31 December 2005 is US$988.6 million (2004 US$608.9 million); and
- guarantees to provide, in exchange for 975,000 (2004: 600,000) preference shares of Xstrata Capital Corporation AVV, ordinary share capital in the Company on the conversion of the bonds and debentures. The number of shares to be issued under these guarantees totals 73,281,309 (2004 61,180,977). These shares will be issued to the holder of the bonds and debentures in exchange for the preference shares in Xstrata Capital Corporation AVV they receive on conversion of the bonds and debentures. Refer to note 31 of the consolidated financial statements for details of the timing of potential conversion.