Chairman's Statement

Willy R Strothotte

Xstrata continued its growth trajectory in 2005, propelled by strong financial and operational performance. Since the year end, Xstrata's market value has risen to around $18 billion from around $12 billion a year ago and approximately $800 million at the start of 2002.

Robust commodity markets continued to exert a significant positive influence on Xstrata's profitability as prices continued to rise for each of our commodities, fuelled by continued growth in demand from Asia and in particular, China and India, and less consistent, but increasingly positive economic performance in Europe and the United States. Xstrata achieved record attributable profits of $1.7 billion and earnings per share of $2.79, an increase of over 60% from the previous year.

Strong demand for energy and metals also led to increased competition for mining supplies, skilled labour, fuel and energy, as producers accelerated growth projects to feed increasing demand and, inevitably, this led to higher prices for the key inputs into our operations. Against this background, Xstrata's commodity businesses successfully contained and reduced real unit costs, ensuring ongoing improvements to margins, with the EBITDA margin rising to 38.5% in 2005. For the second consecutive year, Xstrata was the only London-listed diversified mining company to cut costs in real terms, reducing our operating cost base by $19 million in total.

Xstrata's consistent record in reducing the size of its operating cost base in real terms each year since the IPO in 2002 indicates the progress we have made in improving the quality of our entire portfolio. The introduction of new mining methods such as longwall coal operations in Australia, on-going technology improvements, for example at the San Juan de Nieva zinc smelter in Spain, greater capital efficiencies, in particular at the Mount Isa complex in Queensland, growth projects with significantly low-cost profiles including the Lion ferrochrome smelting complex and Rolleston coal mine and other productivity improvements have significantly improved the overall margins and cash generation ability of our businesses. Xstrata is thus better placed to secure benefits from the current high commodity price environment and better positioned to maintain cash flow and profitability when prices return in due course to more normalised levels.

Returns to shareholders also increased in line with this strong performance, through the repurchase of Xstrata shares through the equity capital management programme, share price performance and increased dividend payments. As at 1 March 2006, Xstrata had achieved total shareholder return since IPO of 278%, compared to 26% for the FTSE100 index over the same period. Due to the Board's increased confidence in the outlook for our key markets and in Xstrata's ability to capitalise on a continuation of robust commodity prices, an additional increase was approved to the final dividend, up by over 56% from the previous year.

Governance and corporate responsibility

Our commitment to achieving growth and value creation for shareholders in a manner which is sustainable, responsible and contributes to lasting social and economic benefits remains at the heart of our strategy. Xstrata maintains a robust Board comprising nine non-executive directors, six of whom are independent. During the year David Rough, as senior independent director and Deputy Chairman, led a formal assessment of the Board's performance, including individual assessments of Board members.

In February 2005 Xstrata's Board formed a health, safety, environment and community (HSEC) committee to assess and guide Xstrata's strategies, leadership, systems and performance and to ensure the Board is fully informed about industry developments, risks and opportunities in these critical areas of our business. A specialist health and safety adviser was appointed to the committee, Professor Jim Joy, whose input has benefited both the Board committee and executive management, particularly with regard to the comprehensive safety programmes implemented at our South African operations in 2005.

These programmes have been designed to bring about a step change in safety performance at every level of our South African workforce and specifically to eliminate fatalities and critical incidents through enhanced leadership, behavioural change and hazard management. The Board is closely monitoring the additional investment and focus being brought to bear on our South African operations and both Xstrata Coal South Africa and Xstrata Alloys provide six-monthly progress reports to the Board HSEC committee. Despite initial positive signs of progress from these businesses, it is with deep regret that I must report that in 2005, Xstrata's operations sustained seven fatal incidents, resulting in the loss of nine employees' and contractors' lives. Again, the majority of these incidents occurred in Africa, while one incident occurred at a zinc plant in Spain and another in Peru at the Las Bambas exploration site. Fatalities are simply unacceptable and the elimination of fatal incidents is the Group's greatest challenge for 2006. The extraordinary level of activity occurring to address safety in our South African operations aims to change attitudes and eliminate at-risk behaviour and, as such, requires a longer-term approach. I am confident, however, that our programmes are already beginning to bring about lasting improvements that will help us achieve our goal of zero harm at work for all our employees. Across the Group, Xstrata's injury prevention programmes continued to achieve substantial reductions in injury frequency rates and in 2005, the Group total recordable injury frequency rate improved by 19% and lost time injuries were reduced by 18% to 4.3 per million hours worked.

Xstrata's HSEC Assurance Programme is, I believe, at the forefront of best practice in the industry and is a vital management tool in this area. The programme provides assurance to the Board that our operations and commodity businesses have the appropriate management systems in place and are performing in line with the expectations we have set through the HSEC policy and management standards. The programme was initiated in 2005 and has provided a comprehensive analysis of Xstrata's HSEC systems and performance across our sites. The results of the initial baseline audits, carried out at every managed operation in 2005, have confirmed several areas of high performance, in addition to areas to which we are dedicating additional resources in 2006.

As part of our efforts to operate with the maximum transparency commercially possible and continually improve communications with stakeholders, this year's annual report includes a brief section outlining Xstrata's strategy in greater detail, both as a Group and at the commodity business level. We have also outlined performance against the key financial and non-financial indicators used by the Board and executive committee to assess Xstrata's progress against our strategic objectives. Further, comprehensive information on our approach to sustainable development and environmental and social performance is provided in the Group 2005 Sustainability Report, published separately and available from our website. Several Xstrata sites are also producing standalone sustainability reports this year, with more planned for 2006. As ever, we welcome and actively seek feedback from the many stakeholders in our business on any aspect of our performance and corporate reporting.

Outlook and prospects

The prospects for our business remain very strong. The world's economies are in general showing positive signs of growth. Asia is set to continue its economic development and demand for basic materials, driven by a revival of Japan's economy, a major consumer of commodities, and even more profoundly by continued demand growth from China and India. Demand for power continues to grow in the United States and Europe and has improved the outlook for thermal coal into these markets, given coal's reliability and relative cost position.

Xstrata is well positioned to capitalise on the growth in these markets. Major organic greenfield and brownfield growth projects are underway across Xstrata's commodities to maintain and improve our competitive position, optimise the portfolio and secure a growing share of continuing increased demand for our products. The company is also optimally placed to continue to play a key role in the ongoing consolidation of our sector, a process in which we continue to seek opportunities, while maintaining a disciplined focus on creating and safeguarding shareholder value.

The proposed acquisition of one-third of Cerrejón, subject to shareholder approval, is one such opportunity that will position Xstrata to supply the growing US and European markets and cements our position as the global leader in export thermal coal.

The achievements of the last four years are owed most of all to the leadership of our executive team and to the skills and commitment of all our people. My fellow Board members and I take great pride in the operational excellence of our employees that has enabled Xstrata to achieve record profits and continued growth in 2005 and we are confident that 2006 will prove to be another strong year for Xstrata.

Willy R Strothotte