Operating and Financial Review | Financial Review
Basis of presentation of financial information
Financial information is presented in accordance with International Financial Reporting Standards (IFRS). The reporting currency of Xstrata plc is US dollars. Financial statements of subsidiaries are maintained in their functional currencies and converted to US dollars on consolidation of Group results.
For details of the significant impacts of the introduction of IFRS refer to the note 'IFRS reconciliation to UK GAAP'.
Unless indicated to the contrary, revenue, earnings before interest, taxation, depreciation and amortisation (EBITDA) and earnings before interest and taxation (EBIT) are reported in the Chief Executive's Report and the Operating and Financial Review before non-trading items (BNI). Non-trading items are material items of income and expense which, due to their nature or expected infrequency, are presented separately in the income statement.
Unless indicated to the contrary, all data and commentary in the Chief Executive's Report and the Operating and Financial Review exclude the discontinued Forestry operation and all dollar and cent figures provided refer to US dollars and cents.
Consolidated operational results
Group revenue increased by 25% in 2005, exceeding $8 billion as robust demand supported price increases across all of Xstrata's commodities. The strong price increases in the thermal and coking coal and ferroalloys markets seen in the first half of the year eased in the second half, but improved demand in LME-traded commodities boosted prices of copper, zinc and lead, significantly increasing earnings.
Higher revenues drove profits and cash flow to record levels. Despite a weaker US dollar against all of Xstrata's local currencies, EBITDA for the year ended 31 December 2005 increased by 50% to $3,103 million and EBIT improved by 68% to $2,520 million.
Minera Alumbrera open pit at night
| Consolidated Results (includes minority interests) $m |
Year ended 31.12.05 |
Year ended 31.12.04 |
|
|---|---|---|---|
| Alloys | 1,115.5 | 953.0 | |
| Coal | 3,400.4 | 2,693.4 | |
| Copper | 2,007.8 | 1,598.3 | |
| Zinc | 1,448.9 | 1,165.3 | |
| Technology | 77.2 | 52.4 | |
| Total Group Revenue | 8,049.8 | 6,462.4 | |
| Attributable Total Group Revenue | 7,228.3 | 5,980.2 | |
| Alloys | 349.9 | 203.0 | |
| Coal | 1,346.5 | 916.0 | |
| Copper* | 1,131.1 | 856.7 | |
| Zinc | 303.1 | 145.5 | |
| Technology | 13.5 | 19.2 | |
| Share of earnings from Falconbridge | 21.0 | – | |
| Corporate and unallocated | -62.0 | -75.0 | |
| Total Group EBITDA | 3,103.1 | 2,065.4 | |
| Attributable Total Group EBITDA | 2,715.3 | 1,769.0 | |
| Alloys | -29.9 | -25.0 | |
| Coal | -267.2 | -248.2 | |
| Copper | -209.7 | -212.4 | |
| Zinc | -64.4 | -66.4 | |
| Technology | -3.4 | -3.7 | |
| Corporate and unallocated | -3.9 | -5.1 | |
| Depreciation & Amortisation | -578.5 | -560.8 | |
| Attributable Total Group Depreciation & Amortisation | -510.2 | -490.6 | |
| Alloys | -2.9 | -6.8 | |
| Copper | -1.9 | – | |
| Technology | -0.3 | – | |
| Impairment of assets | -5.1 | -6.8 | |
| Attributable Total Group impairments | -5.1 | -6.8 | |
| Alloys | 317.1 | 171.2 | |
| Coal | 1,079.3 | 667.8 | |
| Copper* | 919.5 | 644.3 | |
| Zinc | 238.7 | 79.1 | |
| Technology | 9.8 | 15.5 | |
| Share of earnings from Falconbridge | 21.0 | – | |
| Corporate and unallocated | -65.9 | -80.1 | |
| Total Group EBIT | 2,519.5 | 1,497.8 | |
| Attributable Total Group EBIT | 2,200.0 | 1,271.6 | |
| *Excludes share of results from associates | |||
| EBIT Variances | $m |
|---|---|
| EBIT 31.12.04 | 1,497.8 |
| Sales price* | 1,422.5 |
| Volumes | -8.6 |
| Unit cost – real | 18.6 |
| Unit cost – inflation | -131.0 |
| Unit cost – foreign exchange | -91.2 |
| Foreign currency hedging | -173.0 |
| Other income and expenses | -1.7 |
| Corporate social involvement | -14.2 |
| Depreciation and amortisation (excluding foreign exchange) | 0.3 |
| EBIT 31.12.05 | 2,519.5 |
| *Net of commodity price linked costs, treatment and refining charges | |
Higher received coal prices and copper prices contributed over half of the increase in Group EBIT in 2005, adding $623 million and $444 million respectively. Ferrochrome and vanadium price increases contributed $221 million and higher zinc and lead prices $134 million to EBIT.
Lower volumes in a number of commodities compared to the previous year reduced EBIT by $9 million. The greatest impact was from lower gold production at the Alumbrera copper-gold mine, down by 9% due to lower gold grades, and from lower vanadium sales due to the closure of two operations in 2004. Chrome volumes also reduced due to a number of furnaces being temporarily suspended for routine maintenance during the winter period when energy prices are high.
The north Queensland copper operations produced record copper-in-concentrate volumes but smelter production fell by 7% following maintenance work and limitations to furnace production due to gas off-take restrictions. Hard coking coal production also fell by 7%, impacted by a roof fall at Oaky Creek, which resulted in 130,000 tonnes of lost production, and planned lower production from the higher cost Oaky Creek open cut mine. Despite this, coking coal sales remained at a similar level to the previous year. Production of semi-soft coking coal declined from increased levels of production in 2004 in response to steel producers' preference for hard coking coal in order to maximise output. Lower volumes were partially offset by higher thermal coal volumes and improved zinc and lead production at Mount Isa following the commissioning of the new Black Star zinc-lead mine and higher production from George Fisher.
Despite the substantial, ongoing increases in costs being experienced across the mining industry, Xstrata achieved a reduction in unit costs in real terms of $19 million during the period. The combined impact of efficiency programmes, which delivered $106 million of savings, was offset by specific cost increases that are being experienced across the mining industry, including freight, consumables, fuel and energy price increases. In particular, Xstrata Zinc achieved significant cost savings through improved capacity utilisation from the combined impact of the start-up of the Black Star mine and higher volumes from the George Fisher mine at Mount Isa.
Efficiency improvements in the ferrochrome business produced benefits in 2005, by focussing on initiatives to improve the quality of feed to the smelters and minimise metallurgical coke requirements. Significant progress was also made in reducing operating costs at the Xstrata-Merafe Chrome Venture's Boshoek operation during the year.
Productivity improvements at Xstrata Coal's New South Wales operations, particularly at the Beltana mine, largely mitigated increased cost inflation. Productivity improvements at the Oaky North underground operation in Queensland were more than offset by an unexpected roof fall at the same underground operation, port congestion at the Dalrymple Bay Coal Terminal and higher prices for key inputs. The benefit of ongoing efficiency programmes and improved ore grades in Xstrata Copper in North Queensland more than offset higher fuel, power and reagent costs. The Alumbrera copper operation in Argentina benefited from record processing volumes as the benefits of the flotation expansion were realised, but overall costs were impacted by higher smelting, refining and freight rates, and the impact of lower gold head grades.
Other income and expenses include Windimurra closure costs, the impact of one-off gains in 2004 which were not repeated in the period under review and a higher Group share-based payments charge under IFRS. These are more than offset by equity-accounted income of $21 million from Xstrata's 19.9% stake in Falconbridge Limited.
The weaker US dollar during 2005 gave rise to an unfavourable foreign exchange variance of $264 million. This was mainly due to a 3% strengthening of the Australian dollar and lower currency hedging gains compared to the previous year.
| Average commodity prices |
Unit | Average price 2005 |
Average price 2004 |
% change |
|---|---|---|---|---|
| Australian FOB export coking* | $/t | 111.5 | 65.3 | 71 |
| Australian FOB export semi-soft coking* | $/t | 70.3 | 47.2 | 49 |
| Australian FOB export thermal coal* | $/t | 51.2 | 40.9 | 25 |
| South African export thermal coal* | $/t | 48.5 | 39.0 | 24 |
| Copper (LME average) | $/t | 3684 | 2866 | 29 |
| Lead (LME average) | $/t | 976 | 886 | 10 |
| Zinc (LME average) | $/t | 1382 | 1048 | 32 |
| Ferrochrome (Metal Bulletin) | ¢/lb | 73.0 | 68.0 | 7 |
| Ferrovanadium (Metal Bulletin) | $/kg | 70.5 | 27.2 | 159 |
| *Average received price | ||||
| Currency Table to $ (USD) |
Average 2005 |
Average 2004 |
% change (+/–) |
At 31.12.05 |
At 31.12.04 |
|---|---|---|---|---|---|
| USD:ARS | 2.92 | 2.94 | +1 | 3.03 | 2.97 |
| AUD:USD | 0.76 | 0.74 | +3 | 0.73 | 0.78 |
| USD:CHF | 1.25 | 1.24 | +1 | 1.31 | 1.14 |
| EUR:USD | 1.24 | 1.24 | – | 1.18 | 1.36 |
| GBP:USD | 1.82 | 1.83 | +1 | 1.72 | 1.92 |
| USD:ZAR | 6.37 | 6.43 | +1 | 6.33 | 5.67 |
| Earnings Summary $m |
Year ended 31.12.05 |
Year ended 31.12.04 |
|---|---|---|
| EBIT | 2,519.5 | 1,497.8 |
| Net interest (excluding loan issue costs written-off and realised net foreign currency translation gains) | -91.9 | -91.4 |
| Income tax expense | -551.0 | -218.9 |
| Discontinued operations | – | -2.1 |
| Minority interests | -216.5 | -158.2 |
| Attributable profit | 1,660.1 | 1,027.2 |
| Earnings per share (BNI)* | 271¢ | 164¢ |
| Profit on sale of investments | – | 10.2 |
| Restructuring costs | – | -9.0 |
| WMC offer costs | -10.3 | – |
| Loan issue costs written-off | -17.3 | -35.1 |
| Net recycled gains from foreign currency translation reserve | 61.9 | 68.6 |
| Income tax on non-trading items | 8.3 | 5.2 |
| Profit on sale of discontinued forestry operation | 3.7 | – |
| 46.3 | 39.9 | |
| Attributable profit | 1,706.4 | 1,067.1 |
| Earnings per share* | 2.79¢ | 1.70¢ |
| *Computed using same weighted average number of shares used to compute the statutory basic earnings per share | ||
The effective tax rate for 2005 was 22%. Increased taxable earnings in 2005 led to a higher weighted average statutory tax rate of 24.2% from 22.4% in 2004. The effective tax rate benefited from a decrease in corporate tax rates in South Africa and the recognition of research and development allowances in Australia.
Non-recurring items totalled $46 million. In total $27.6 million was written off in relation to the unsuccessful offer for WMC. The net foreign currency translation gain of $62 million represents the effect, mainly in the first half, of the release of cumulative foreign currency translation gains and losses on repayment of inter-company loans that are considered equity in nature. In accordance with IFRS, these gains and losses are recorded in the foreign currency translation reserve until the loans are repaid, at which point they are recycled through the income statement.
Xstrata's forestry division was sold in January 2005, giving rise to a $4 million profit on disposal.
John Ayres skimming lead at Northfleet
Chair lift to and from the surface at Kroondal Mine
| EBIT sensitivities $m |
Impact on 2006 EBIT* |
Indicative full year EBIT* * |
|---|---|---|
| 1¢/lb movement in ferrochrome price | 10.6 | 12.5 |
| $1/kg movement in ferrovanadium price | 3.3 | 3.9 |
| $1/tonne movement in Australian thermal export FOB coal price | 20.1 | 32.9 |
| $1/tonne movement in Australian coking export FOB coal price | 2.9 | 5.7 |
| $1/tonne movement in South African export thermal FOB coal price | 3.1 | 13.8 |
| 1¢/lb movement in copper price | 6.9 | 9.1 |
| $10/oz movement in gold price | 4.3 | 6.6 |
| 1¢/lb movement in zinc price | 9.5 | 10.0 |
| $10/tonne movement in zinc treatment charge price | 1.1 | 3.7 |
| 1¢/lb movement in lead price | 2.6 | 4.0 |
| 10% movement ARS | 6.5 | 6.5 |
| 10% movement AUD | 179.9 | 245.1 |
| 10% movement EUR | 24.5 | 24.5 |
| 10% movement GBP | 1.0 | 1.0 |
| 10% movement ZAR | 129.2 | 129.2 |
| *After impact of currency and commodity hedging, and contracted, priced sales as at 31 December 2005 | ||
| **Assuming current annualised production and sales profiles, no currency or commodity hedging and no contracted, priced sales and purchases at 31 December 2005 | ||
Xstrata's sensitivity to Australian export thermal coal prices is reduced by the sales already priced for 2006. Xstrata Zinc has secured a substantial amount of its concentrate requirements for the remainder of 2006 into the San Juan de Nieva and Nordenham zinc smelters in Spain and Germany respectively. Forward sales have been entered into for a minor proportion of 2006 copper zinc, lead and gold production, as shown in the hedging summary below.
Cash Flow, Net Debt and Financing Summary
Xstrata's operations generated $1,924 million of free cash flow during 2005 after funding sustaining capital expenditure of $412 million. Despite tax paid increasing by $323 million versus the prior period, cash flow before capital expenditure increased by 42% to $2,325 million compared to 2004.
Net debt increased by $1,139 million as strong cash generation was offset by the cash portion of the acquisition of 19.9% of Falconbridge Limited and returned $522 million to shareholders through the repurchase of 4.1% of Xstrata's issued share capital under the Equity Capital Management Programme. In addition, in 2005 Xstrata invested $517 million of capital at operations to enhance production capacities (including expenditure funded via finance leases), acquired African Carbon Group for $60 million and distributed dividend payments to shareholders of $154 million.
| Cash flow summary $m |
Year ended 31.12.05 |
Year ended 31.12.04 |
|---|---|---|
| Cash generated from operations | 2,779.9 | 1,784.9 |
| Net interest paid | -91.5 | -90.7 |
| Dividends received | 16.7 | 1.6 |
| Tax paid | -380.2 | -57.6 |
| Cash flow before capital expenditure | 2,324.9 | 1,638.2 |
| Sustaining capital expenditure | -411.6 | -262.7 |
| Disposals of fixed assets | 10.8 | 15.2 |
| Free cash flow | 1,924.1 | 1,390.7 |
| Expansionary capital expenditure | -455.3 | -167.5 |
| Cash flow before acquisitions | 1,468.8 | 1,223.2 |
| Investments | -1,472.0 | -3.3 |
| Purchase of subsidiaries net of cash acquired | -60.3 | – |
| Payments to Chrome Venture partner | -7.3 | – |
| Purchase of Las Bambas | – | -91.0 |
| Disposal of Ravenswood gold operation | – | 34.5 |
| Disposal of Queensland coal assets | – | 38.9 |
| Disposal of investments | – | 12.1 |
| Repayments from Chrome Venture partner | 7.3 | – |
| Sale of Forestry operation, net of cash disposed | 25.2 | – |
| Net cash flow before financing | -38.3 | 1,121.4 |
| Purchase of own shares | -521.6 | -51.3 |
| Sale of own shares | 24.9 | 0.4 |
| Equity dividends paid | -154.2 | -133.8 |
| Dividends paid to minority interests | -148.2 | -43.1 |
| Foreign exchange adjustment | 4.6 | -1.8 |
| Debt acquired with operations | -6.4 | – |
| Debt disposed of with operations | 13.2 | – |
| Issue of convertible debenture | -375.0 | – |
| Convertible bond IAS 32/39 movements | 119.5 | – |
| Borrowing costs written off | -17.3 | -35.1 |
| New finance leases | -62.5 | -111.6 |
| Redemption of Alumbrera capital to minority interests | – | -81.0 |
| Other non-cash movements | 22.2 | -7.6 |
| Movement in net debt | -1,139.1 | 749.5 |
| Net debt at the start of the year | -1,472.0 | -2,221.5 |
| Net debt at the end of the period* | -2,611.1 | -1,472.0 |
| *Includes 100% of Alumbrera cash and third party shareholder loans | ||
The financial instruments accounting standards IAS 32 and IAS 39 were adopted effective 1 January 2005, resulting in a portion of the convertible bond net proceeds being reallocated to equity. Borrowing costs written off relate to the payment of debt arrangement fees in connection with the bid for WMC Resources.
| Reconciliation of EBITDA to cash generated from operations $m |
Year ended 31.12.05 |
Year ended 31.12.04 |
|---|---|---|
| EBITDA | 3,103.1 | 2,065.4 |
| Discontinued operations EBITDA | – | 0.1 |
| Share of results from associates | -23.4 | -2.3 |
| Non-trading items | -10.3 | 1.2 |
| Net profit on disposal of property, plant & equipment | -15.9 | -4.2 |
| Net profit on disposal of investments | – | -10.2 |
| Increase in inventories | -125.4 | -36.6 |
| Increase in trade and other receivables | -333.8 | -258.0 |
| Increase in deferred stripping and other assets | -80.3 | -24.6 |
| Increase in trade and other payables | 236.2 | 64.8 |
| Movement in provisions and other non-cash items | 29.7 | -10.7 |
| Cash generated from operations | 2,779.9 | 1,784.9 |
The increase in receivables was primarily due to higher sales prices across all of Xstrata's commodity businesses, a reduction in the use of debtor financing in South Africa and the timing of copper sales which accelerated in the last quarter of the year, reaping the benefit of very strong prices. The value of concentrate stocks increased at the European zinc smelters due to higher metals prices. This increase in inventories was partially offset by a drawdown of thermal coal stockpiles in South Africa. Underlying trade creditors increased as a result of higher payables as a consequence of the higher prices inherent in concentrate stocks for the European zinc smelters, in addition to timing of payments around the year end.
As a consequence of the ongoing development of Australian operations, stripping ratios increased, with overburden removal at both the Black Star zinc lead open pit at Mount Isa and at the Ernest Henry copper operation, resulting in increased deferred stripping costs.
| Net debt summary $m |
As at 31.12.05 |
As at 31.12.04 |
|---|---|---|
| Cash | 524.1 | 459.6 |
| External borrowings | -2,917.6 | -1,760.1 |
| Arrangement fees | 11.2 | 13.5 |
| Finance leases | -228.8 | -185.0 |
| Net debt* | -2,611.1 | -1,472.0 |
| Net debt to equity | 32.1% | 20.1% |
| By currency: | ||
| AUD | 35.0 | -51.1 |
| EUR | 8.3 | – |
| GBP | 10.2 | 8.5 |
| USD | -2,663.6 | -1,441.8 |
| ZAR | -3.8 | 10.1 |
| Other | 2.8 | 2.3 |
| Net debt by currency | -2,611.1 | -1,472.0 |
| *Includes 100% of Alumbrera cash | ||
Finance leases included in debt increased primarily in respect of rail infrastructure associated with the Rolleston thermal coal project in Queensland, Australia.
Working Capital
The differences between the working capital balances below and the movements shown in the EBITDA cash flow reconciliation reflect non-cash items such as movements in exchange rates and non-current assets, such as deferred stripping.
| Working Capital $m |
As at 31.12.05 |
As at 31.12.04 |
|---|---|---|
| Inventories | 890.7 | 825.9 |
| Trade and other receivables | 1,138.3 | 794.0 |
| Prepayments | 98.8 | 103.9 |
| Trade and other payables | -945.8 | -788.8 |
| Net working capital | 1,182.0 | 935.0 |
Treasury Management and Financial Instruments
Group Treasury has responsibility for the strategic planning of the Group's financing activities. Its responsibilities include: management of the Group's cash resources and debt funding programmes, funding acquisitions and investments, management of interest rate and foreign exchange exposures, and co-ordinating relationships with banks, rating agencies and other financial institutions.
The Group is generally exposed to US dollars through its revenue stream. The Group will seek to source debt capital in US dollars directly or by borrowing in other currencies and swapping them into US dollars, thus matching the negative exposure of our debt service obligations against the positive exposure of our revenue.
Currency Hedging
Currency hedging may be used to reduce the Group's short-term exposure to fluctuations in the local currency exchange rates to the US dollar, Sterling and Euro. The currency hedging gains reflected in the income statement for the period ended 31 December 2005 amounted to $45 million compared to $218 million for the corresponding period in 2004. The unrealised mark-to-market loss on currency hedging in place at 31 December 2005 was $14 million. The majority of Australian dollar hedging relates to contracted US dollar priced sales.
| Foreign currency forward contracts $m |
Currencies | Forward sale $m 31.12.05 |
Weighted average exchange rate |
Fair value $m 31.12.04 |
|---|---|---|---|---|
| Maturing 2006 | ||||
| Coal NSW | $ to AUD | 437.8 | 0.7474 | -9.6 |
| Coal Qld | $ to AUD | 214.3 | 0.7449 | -3.9 |
| Copper | $ to AUD | 8.9 | 0.7596 | -0.3 |
| $ to AUD | 661.0 | 0.7468 | -13.8 | |
| Coal NSW | AUD to GBP | 5.2 | 0.3927 | -0.4 |
| Total | 666.2 | -14.2 | ||
Commodity Hedging
The Group is exposed to fluctuations in commodity prices, with the commodity mix spread relatively evenly between those which are priced by reference to prevailing market prices on terminal markets and those that are set on a contract basis with customers, generally on an annual basis. Commodity hedging is in the form of forward and option contracts covering a portion of planned attributable gold, copper, zinc, silver, lead and coal production.
Hedges relating to sales in 2006 are classified as cash flow hedges and shown in the table below. The fair value of these hedges is deferred within equity on the balance sheet until the sale is recorded. The unrealised mark-to-market loss on commodity hedging maturing in 2006 and in place at 31 December 2005 was $85 million.
| Commodity forward and option contracts maturing in 2006 |
Commodity | Volume | Average price $* |
Fair value $m 31.12.05 |
|---|---|---|---|---|
| Thermal coal (tonnes) | $ Coal | 4,625,000 | 51.28 | 13.4 |
| Gold (ounces) | AUD Gold | 58,843 | 500.40 | -1.9 |
| Gold (ounces) | $ Gold | 102,668 | 373.06 | -15.9 |
| Gold (ounces) | $ Gold | 51,000 | 500–590 | 0.2 |
| Copper (tonnes) | $ Copper | 49,750 | 2,746.62 | -63.0 |
| Zinc (tonnes) | $ Zinc | 12,104 | 1,412.05 | -6.0 |
| Lead (tonnes) | $ Lead | 58,375 | 956.68 | -5.7 |
| Silver (ounces) | $ Silver | 4,900,000 | 7.68 | -6.3 |
| Total | -85.2 | |||
| *The average price is stated in US dollars and where necessary has been converted from foreign currencies at period end exchange rates | ||||
Cash flow hedging
The Group has undertaken short dated commodity hedging in respect of a minor portion of production during the course of the year. Gold and silver are principally produced as by-products from our major operating assets, hedging these commodities effectively locks in a portion of the operating costs associated with these assets. Xstrata Coal has an ongoing hedging programme for thermal coal, principally from South Africa, and hedges a portion of forecast production when pricing opportunities exist in the forward market.
As indicated in the 2005 Interim Report, the Ernest Henry copper gold operation is scheduled in 2006 to enter a period of abnormally low ore grades for several months. As a consequence, unit costs are expected to increase temporarily. A decision was made during the first half of 2005 to lock in the profitability of the operation through the forward sale of copper for this period. As a result of the more favourable outlook for copper prices into 2006, relating to 27,800 tonnes of copper have been redesignated as hedges against 2005 copper sales with the full earnings impact of $35 million recognised in the profit and loss statement at the balance sheet date. Zinc hedges maturing in 2006 relate to a specific shipment of zinc which was delayed from the final quarter of 2005 into 2006.
Copper and zinc are often sold under terms whereby sales are priced according to future quotational periods. These terms are negotiated by concentrate purchasers to match the pricing period with the expected timing of cathode sales. In certain circumstances, forward contracts have been undertaken to lock in the final price at the time at which the sale is recognised. Hedges that relate to 2005 sales for which the quotational period is still open are shown in the table below and have been recognised in the income statement at the balance date. As a result, these hedges will have no further earnings impact.
| Commodity forward contracts |
Commodity | Volume | Average price $* |
Fair value $m 31.12.05 |
|---|---|---|---|---|
| Maturing in 2006 | ||||
| Gold (ounces) | AUD Gold | 28,252 | 479.48 | -1.5 |
| Gold (ounces) | $ Gold | 36,332 | 378.08 | -5.1 |
| Copper (tonnes) | $ Copper | 56,050 | 3,056.54 | -75.9 |
| Zinc (tonnes) | $ Zinc | 41,321 | 1,412.05 | -20.4 |
| Total | -102.9 | |||
| *The average price is stated in US dollars and where necessary has been converted from foreign currencies at period end exchange rates | ||||
Interest Rate Hedging
The Group normally borrows and invests at floating rates of interest and will generally swap any fixed rate exposure into floating interest rates. A limited amount of fixed rate hedging may be undertaken during periods where the Group's exposure to movements in short-term interest rates is more significant. The unrealised mark-to-market loss on interest rate hedging in place at 31 December 2005 was $9.7 million.
| Interest rate swaps |
Principal $m |
Average rate % |
Fair value $m 31.12.05 |
|---|---|---|---|
| Maturing in 2010 | |||
| Interest rate swapped from fixed rates | 600 | 4.5 | -9.7 |
| Total | -9.7 |
Consolidated Capital Expenditure
Capital expenditure increased in 2005 as a number of Xstrata's major projects were initiated during the year to take advantage of the strong commodity price environment. Total capital expenditure across the Group increased by $398 million or 72% to $947 million.
Sustaining capital expenditure of $430 million in 2005 included:
- $188 million at Xstrata Coal, including the $52 million (AUD68 million) longwall system at the Ulan underground mine and $12 million (AUD16 million) underground drift conveyor system at the same operation, both completed within budget; and
- $115 million at Xstrata Copper including $21 million for continued mobile equipment replacements to assist in mining at greater depth at Ernest Henry and a total of $50 million for mine development, infrastructure maintenance and ore handling projects at Mount Isa which resulted in increased concentrate output during 2005.
While this capital expenditure is sustaining in nature, these projects will have a material positive impact on costs and efficiencies at Xstrata's operations.
Sustaining capital expenditure in 2006 is anticipated to decrease slightly from 2005 levels, to around $400 million, as Xstrata's businesses continue to upgrade and invest in operations to increase efficiencies and production capacity. In particular, increased capital will be directed to the Mount Isa Mines copper and zinc operations to upgrade smelters and the zinc concentrator, undertake work on the shafts and improve paste filling capabilities in 2006.
Total expansionary capital expenditure increased to $517 million in 2005. Despite significant cost pressures due to rising input prices, particularly raw materials and labour, Xstrata's businesses delivered a number of capital growth projects during the year on time and within budget.
Significant progress was achieved in 2005 in delivering two of the Group's major growth projects: the Rolleston coal development in Queensland, Australia, and the Project Lion ferrochrome smelter and related mine development in South Africa.
At Rolleston, first production began as scheduled in September 2005, with total expenditure in 2005 of $135 million. Phase one of Project Lion has also progressed well, incurring $132 million in 2005 – the largest part of the project's total cost. Again, despite escalating input prices, in particular steel, the project remains both on budget and schedule for commissioning in the second half of 2006.
| Capital expenditure summary $m |
Year ended 31.12.05 |
Year ended 31.12.04 |
|---|---|---|
| Alloys | 34.8 | 10.1 |
| Coal | 187.7 | 132.3 |
| Copper | 115.3 | 94.6 |
| Zinc | 88.8 | 65.7 |
| Technology | 0.7 | 0.5 |
| Unallocated | 2.6 | 3.0 |
| Total Sustaining | 429.9 | 306.2 |
| Attributable Sustaining | 415.8 | 286.6 |
| Alloys | 168.8 | 36.9 |
| Coal | 280.9 | 172.1 |
| Copper* | 35.3 | 4.7 |
| Zinc | 32.2 | 29.6 |
| Total Expansionary | 517.2 | 243.3 |
| Attributable Expansionary | 512.3 | 241.9 |
| Alloys | 203.6 | 47.0 |
| Coal | 468.6 | 304.4 |
| Copper* | 150.6 | 99.3 |
| Zinc | 121.0 | 95.3 |
| Technology | 0.7 | 0.5 |
| Unallocated | 2.6 | 3.0 |
| Total | 947.1 | 549.5 |
| Attributable total | 928.1 | 528.5 |
| *Excludes Las Bambas project acquisition in August 2004 | ||
Other major items of expansionary capital expenditure in 2005 included:
- the commencement of construction of a UG2 mine and concentrator under the Mototolo joint venture with Anglo Platinum in South Africa;
- the continued development of the Black Star zinc lead mine which led to substantial improvements in operating performance from the Australian zinc lead operations in 2005;
- $24 million to upgrade the coal flotation plant at Newlands to coincide with operations beginning at the Northern underground mine in the first quarter of 2006; and
- the initiation of the drilling programme at Xstrata Copper's Las Bambas exploration project at a cost of $10 million.
Expansionary capital expenditure is also anticipated to remain at a similar level to 2005 expenditure of around $500 million, as large-scale expansion projects are completed, new projects initiated and additional investment is made in a number of low capital cost, high return incremental expansion projects from the portfolio. Feasibility studies have confirmed the potential attraction of the development of the Goedgevonden coal mine and number 5 coal seam at South Witbank and Tavistock mines in South Africa. These projects are contingent on infrastructure and market considerations and, if approved, would result in additional capital expenditure in 2006.
Expenditure will continue on the Rolleston thermal coal mine as it moves towards full production in 2008, although at a lower rate than in 2005. Phase one of Project Lion will be completed during 2006, with commissioning expected in the second half. In total, capital expenditure of around $130 million is anticipated in 2006 for these two major growth projects. In addition, Xstrata Coal is planning a number of incremental expansions in its highly-efficient New South Wales operations. Other major expansionary capital projects include the following:
- construction of Project Bokamoso, a pelletising and sintering plant with a production capacity of 1.2 million tonnes per annum in South Africa, at an approximate cost of $75 million during the year;
- investment in a second rotary holding furnace at the Mount Isa copper smelter, which together with a copper slag cleaning furnace and associated smelter expansion projects, is expected to increase throughput to 300,000 tonnes per annum, to match the future copper-in-concentrate output from the North Queensland operations and improve efficiency at a total cost of approximately $56 million;
- construction will continue on the UG2 mine and concentrator for the Mototolo joint venture with Anglo Platinum, with Xstrata's share estimated at approximately $68 million for 2006;
- the Stage 2 East cutback will be developed at the Black Star mine at Mount Isa at a cost of some $20 million;
- a further expansion to the concentrator at Minera Alumbrera in Argentina will increase capacity to 40 million tonnes per annum and will be completed in 2006 incurring expenditure of approximately $12 million during the year;
- Xstrata Copper's drilling programme at Las Bambas will accelerate, with total expenditure of around $24 million in 2006;
- dependent on final approval being granted by the Northern Territory Mines Minister, estimated capital expenditure in 2006 to commence the conversion of McArthur River Mine to an open cut operation would be around $35 million; and
- approximately $15 million will be incurred to complete the development of the Northern 3500 underground copper orebody at Mount Isa's Enterprise copper mine, enabling improved utilisation of the existing hoisting and concentrating facilities and achieving rated capacity of 3.5 million tonnes per annum.
Acquisitions
The total cost of acquisitions completed in 2005 (including acquired debt) was $1,918 million, including the acquisition of 19.9% of Falconbridge Limited, compared to $94 million in 2004.
In January 2005, Xstrata Alloys acquired a controlling stake in the African Carbon Group ("ACG"), a char producer situated in the Mpumalanga province, South Africa. The acquisition extends Xstrata Alloys' strategy to secure its own supply of reductants.
In March 2005, Xstrata Copper acquired 13.2% of Universal Resources Limited, a listed Australian exploration company, for a cost of $5 million.
In May 2005, Xstrata Alloys and Merafe Resources Limited ("Merafe") signed an agreement with Samancor to acquire chrome ore reserves and resources associated with the Kroondal and Marikana mining areas for a total consideration of $16 million and $29 million respectively. Xstrata's share of the total consideration is $29.5 million.
In August 2005, Xstrata acquired a 19.9% stake in Falconbridge Limited for a total consideration of $1.7 billion, of which $375 million was settled by means of a guaranteed convertible debenture, convertible into ordinary Xstrata shares with the remainder in cash. The acquisition provided Xstrata with a meaningful stake in a major diversified mining company, with exposure to world class integrated businesses in copper and nickel, as well as to Falconbridge's zinc and aluminium businesses. Subsequently, on 11 October, Inco Limited made a bid to acquire Falconbridge Limited for 0.6713 of an Inco common share plus C$0.05 in cash for each Falconbridge common share, or C$34 in cash, subject to pro rata application should certain thresholds be met. Inco's offer has recently been extended and is currently due to close on 30 June 2006. The offer remains subject to approval from anti-trust authorities in the European Union and United States.
In September 2005, Xstrata Zinc increased its ownership of McArthur River Mine to 100%, through the purchase of the 25% stake formerly owned by ANT Minerals Pty Limited. The acquisition completed in December 2005.
Since the year end, in February 2006, Xstrata has entered into an alliance agreement with Erdene Gold Inc. ("Erdene") and has purchased 9.8% of Erdene's shares. The agreement allows Xstrata Coal the first option to enter into a joint venture and earn a 75% interest in coal opportunities identified by Erdene in Mongolia. Erdene is a diversified mineral exploration company with a significant profile and a large number of exploration projects in Mongolia, which include both coal and base metals. While this agreement is focused on the joint development of metallurgical and thermal coal projects, Xstrata will also have the right to participate in other mineral development opportunities with Erdene.
On 1 March 2006, Xstrata announced the proposed acquisition of Glencore International's one-third stake in the Cerrejón thermal coal operation in Colombia for a total consideration of $1.7 billion in cash, funded from new bank debt facilities. The acquisition is subject to shareholder approval and certain regulatory approvals.
Disposals and discontinued operations
In January 2005, Xstrata sold its wholly-owned forestry operation in Chile, Forestal Los Lagos SA ("FLL") realising a $4 million gain on the disposal.
In April 2005, Xstrata Alloys reached agreement with Precious Metals Australia Limited ("PMA") regarding the disposal of the Windimurra vanadium project. The sale was finalised in August 2005 and as a consequence, Xstrata is now released from all obligations associated with the Windimurra project.
Other changes to Group companies
In August 2005, Anglo Platinum and Xstrata Alloys announced the formation of the Mototolo Joint Venture to develop a platinum group metals (PGM) mine and concentrator on the Eastern Limb of the Bushveld Complex in Mpumalanga, South Africa. On 28 February 2006, Xstrata announced its partnership with Kagiso Investment Trust ("Kagiso"), through which Kagiso will acquire 26% of Xstrata's 50% interest in the joint venture, in return for funding its proportionate share of the capital expenditure required. Xstrata Alloys and Kagiso will jointly manage and vote the combined 50% share in the joint venture.
In December 2005, Xstrata Coal and its partners in the Xstrata Donkin Mine Development Alliance won the exclusive right to pursue exploration of the Donkin coal resource in Nova Scotia, Canada. Evaluation of the thermal and metallurgical coal resource will begin in early 2006, with feasibility studies expected to continue for approximately two years.
In February 2006, Erdene reached agreement with Kaoclay Resources Inc. ("Kaoclay") to acquire all of the outstanding shares of Kaoclay in exchange for shares and warrants of Erdene. Kaoclay is a Nova Scotia-based private company involved in energy and industrial mineral projects in North America, including a 20% interest in the exploration and development of the Donkin coal project in Nova Scotia through the Xstrata Donkin Mine Development Alliance.
On 28 February 2006, Xstrata and African Rainbow Minerals Limited ("ARM") announced the formation of a new black-owned and controlled company, ARM Coal. ARM Coal will have a total participation interest of 26% of Xstrata's South African coal business.
Dividends
A 2005 interim dividend of 9¢ per share amounting to $55 million was paid on 14 October 2005. The proposed final 2004 dividend of 16¢ per share amounting to $100 million was paid on 20 May 2005. The directors propose a final 2005 dividend of 25¢ per share amounting to $150 million to be paid on 19 May 2006.
| Dividend dates | 2006 |
|---|---|
| Ex-dividend date | 26 April |
| Deadline for return of currency election forms | 28 April |
| Record date | 28 April |
| Applicable exchange rate date | 12 May |
| Payment date | 19 May |
As Xstrata plc is a Swiss tax resident company, the dividend payment will be taxed at source in Switzerland at the rate of 35%. A full or partial refund of this tax may be available in certain circumstances.
The final dividend is declared and will be paid in US dollars. Shareholders may elect to receive this dividend in Sterling, Euros or Swiss francs. The Sterling, Euro or Swiss francs amount payable will be determined by reference to the exchange rates applicable to the US dollar seven days prior to the dividend payment date. Dividends can be paid directly into a UK bank or building society account to shareholders who elect for their dividend to be paid in Sterling.
Further details regarding tax refunds on dividend payment, together with currency election and dividend mandate forms, are available from Xstrata's website (www.xstrata.com) or from the Company's Registrars.
Share Data
Under IFRS, own shares (treasury stock) are deducted from the total issued share capital when calculating earnings per share. During the period, 1.5 million shares were sold in the market and 1 million shares were issued relating to the disposal of Xstrata equity allotted to an Employee Share Ownership Trust, (an employees' share scheme as that term is defined for the purposes of the Companies Act 1985 and within the provisions), to service the exercise of employee share options.
| Share price |
XTA LSE (GBP) |
XTA SWX (CHF) |
|---|---|---|
| Closing price 31.12.04 | 9.31 | 20.50 |
| Closing price 31.12.05 | 13.60 | 30.75 |
| Year high | 14.90 | 33.95 |
| Year low | 8.70 | 19.20 |
| Year average | 11.52 | 26.14 |
| Shares in issue for EPS calculations |
Number of shares (000s) |
|---|---|
| 2005 | |
| Weighted average for year ended 31.12.05 used for 2005 statutory eps calculation | 612,421 |
| 2004 | |
| Weighted average for year ended 31.12.04 used for 2004 statutory eps calculation | 626,351 |
| Total issued share capital | 632,502 |
Equity Capital Management Programme
Under the equity capital management programme (ECMP), up to 10% of the issued capital of Xstrata plc can be purchased in the market by Batiss Investments (Batiss), a Guernsey-registered entity owned by a trust and independent of the Xstrata Group. During 2005, 26.1 million shares were purchased under the ECMP for $522 million. This brings the total purchases to 31 December 2005 to 29 million shares (4.7% of ordinary share capital) at an average cost of GBP 10.72 per share. No shares were sold under the ECMP during the period.
Future Application of Xstrata Shares Held by Batiss
Xstrata Capital intends that the shares held by Batiss will either be used by the Group as a source of financing for future acquisitions, in keeping with the Group's growth strategy, or placed in the market.
The decision when to place the shares in the market, use the shares to assist the Group in facilitating future transactions, or to repurchase shares for cancellation, will be considered in light of the Group's funding requirements and capital structure at the time.
Accounting Treatment
For so long as the shares continue to be held by Batiss they are disregarded for the purposes of calculating the earnings per share of Xstrata plc. Batiss will be consolidated by Xstrata as a special purpose entity, and the shares held by it will be accounted for as a deduction from shareholders' funds in the consolidated balance sheet of the Group.
If Xstrata shares held by Batiss are subsequently disposed of by way of a placing or as consideration for an acquisition by the Group, any gain or loss will be taken directly to the Group's reserves.
| Publicly disclosed major shareholders Name of shareholder |
Number of Ordinary shares of $0.50 each |
% of Ordinary issued share capital |
|---|---|---|
| Credit Suisse First Boston Equities Nominees Limited | 152,659,367 | 24.13* |
| Glencore International AG | 101,040,400 | 15.97* |
| Batiss Investments Limited | 29,450,976 | 4.66 |
| *Pursuant to a capital management programme, as announced on 29 May 2003, entered into by Credit Suisse First Boston Equities Limited (CSFB Equities) and Credit Suisse Securities (Europe) Limited (CSFB Europe), and Glencore International AG (Glencore), in connection with the Group’s acquisition of the MIM Group and the associated rights issue, Glencore, CSFB Equities and CSFB Europe are jointly interested in 253,699,767 ordinary shares representing 40.11% of the issued share capital of the Company. In addition to the interests arising as a result of CSFB Equities and CSFB (Europe) entering into the capital management programme, the company has been informed by CSFB Equities that the Credit Suisse Group has an interest in a further 1,330,165 Ordinary Shares, representing approximately 0.21% of the issued outstanding ordinary shares of Xstrata. | ||