Copper

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Copper | Alumbrera | Argentina

Sonia Morales, Mineworker – takes a lunch break from driving her truck in the Minera Alumbrera open pit copper-gold mine

Markets

In 2005, a number of supply disruptions coupled with continued strong Chinese demand and critically low exchange stocks drove copper prices to record nominal highs. The LME copper price averaged 167¢ per pound over the year, an increase of 29% over the corresponding period in 2004.

Despite weak copper demand from the major Western consuming regions, strong Chinese consumption curtailed growth in exchange inventories. From 125,000 tonnes in January 2005, global exchange stocks finished the year at 156,000 tonnes, representing 3.4 days of global consumption.

In 2005, disruptions to global mine supply were coupled with unexpected shortfalls in smelter and refined production. While the concentrate market remained in oversupply during the year, mine disruptions resulted in a lower than anticipated concentrate surplus. Global concentrate production increased by just 1.8% in 2005. Refined cathode production increased by 5% in 2005 as refined copper supply remained in deficit throughout 2005.

Spot mine/smelter treatment and refining charges (TC/RCs) declined from a peak of $175 per dry metric tonne and 17.5¢ per pound in April to $150 per dry metric tonne and 15¢ per pound by year end.

This decline was also reflected in the contract market, where terms eased from $113 per dry metric tonne and 11.3¢ per pound in the mid-year contract talks, to $95 per dry metric tonne and 9.5¢ per pound for 2006 calendar year shipments.

Production of refined copper is anticipated to increase in 2006 as increased smelting capacity in India and China addresses the surplus concentrate inventory built up in 2005. The expected increase in smelter demand is forecast to exceed available concentrate, and pull the concentrate market back into deficit over 2006. An expected recovery in Western demand and continuing strong demand from China suggest that exchange stocks are likely to remain well below historical levels and that the market will remain sensitive to further supply-side disruptions. LME prices reached new record levels during the first months of 2006.

Operations

Australia

The North Queensland division achieved a strong increase in EBIT to $487.7 million in 2005, up by 77% on 2004. EBITDA increased by 61% from $369 million in 2004 to $594.4 million in 2005. The main contributor to this result was the strong copper price, which added over $259 million to EBIT. This was partially offset by the negative impact of currency movements which reduced earnings by $22 million and by higher inflationary costs of $32 million. Revenue increased by 33% to $1,158.4 million.

At the Ernest Henry operation, copper head grade improved to 1.21% from 1.14% in 2004. Further efficiency gains in the concentrator resulted in a mill throughput increase of almost 6%. The combination of higher head grades, increased throughputs and improved metallurgical performance resulted in a 13% increase in copper-in-concentrate production compared to 2004. Gold production was 17% higher for similar reasons. Material mined at Ernest Henry was 19% higher compared to the prior year, as stripping ratios increased in the mine.

In the Mount Isa copper operations, ore production from the underground mines increased by 4% on 2004, which resulted in a corresponding increase in contained metal produced of just over 4%. Overall the North Queensland division achieved record copper-in-concentrate production in 2005 from the Mount Isa and Ernest Henry operations of 306,492 tonnes, an increase of 8% over 2004 production.

Copper smelter production was almost 7% lower than 2004, primarily as a result of maintenance and improvement activities undertaken in the converter section of the smelter during the first quarter, and limitations to furnace production resulting from gas off-take restrictions as a result of reduced availability from the Southern Cross acid plant and maintenance requirements in the final quarter. These activities negatively offset the excellent outputs achieved in the second and third quarters of 2005 as the benefits of the improvement initiatives were realised. Consequentially, the Townsville copper refinery produced 219,198 tonnes of saleable cathode, 8% lower than in 2004, due to the lower anode supply.

North Queensland unit costs on a C1 basis were 71.4¢ per pound compared to 59.4¢ per pound in 2004. The unit costs were impacted by increased mining volumes at Ernest Henry, lower cathode production, higher treatment and refining costs and a stronger Australian dollar. In common with other Australian producers, the Australian division has been subjected to higher than inflation costs in diesel, energy and consumables.

Walnut grafting at Pozo de Piedra in the province of Catamarca in Argentina

Underground miners attaching their self rescuers and cap lamps on the R62 platform at Mount Isa

South America

Alumbrera's financial performance in 2005 was positively influenced by the buoyant price environment and strong copper production performance. Revenue increased by 17% from $724.1 million to $849.4 million. EBIT increased by 17% from $369 million to $432 million and EBITDA improved to $537 million, 10% higher than the previous year. Concentrate sales increased by 3% over last year. Gold production was lower compared to 2004, due to lower gold grade ores.

The operating performance at Alumbrera was characterised by record full year mill throughputs and further efficiency initiatives. Mill throughput was 4% higher and concentrate production was 6% higher than the corresponding period last year, as the benefits from the flotation expansion completed in 2004 were fully realised. Total material mined was 3% higher than last year as a result of pit optimisation initiatives.

Cash operating costs (C1) averaged 35.1¢ per pound of copper produced (net of gold credits). The increase in C1 cash costs compared to 2004 was primarily due to lower gold head grades and therefore gold production, higher smelting and refining charges, and higher sea freight costs. The Alumbrera business has also been subjected to higher than inflation cost rises in diesel, energy and consumables.

Developments

Australia

During 2004 capital expenditure of $25 million was approved to develop the Northern 3500 underground copper ore body at Mount Isa's Enterprise copper mine. The project will provide an additional high-grade mining zone in Enterprise, enabling the mine to maintain its rated capacity of 3.5 million tonnes per annum and improve the utilisation of the existing hoisting and concentrator capacity. Capital work is progressing according to schedule and on budget with capital expenditure of AUD16 million to the end of 2005. Initial production is expected to commence in late 2006.

Also in 2004, Xstrata Copper announced the approval of an AUD7.2 million ($5 million) leaching plant to recover around 2,500 tonnes per annum of additional copper from the electrostatic dust precipitator in the Mount Isa copper smelter. The plant is scheduled for commissioning in the first half of 2006.

In November 2004, capital expenditure of AUD41 million ($29.3 million) was approved to expand the capacity of the Mount Isa copper smelter and improve its efficiency. The project comprises the installation of a second rotary holding furnace, a copper slag cleaning furnace and associated plant and equipment. These initiatives are all designed to increase the smelter's capacity from 240,000 tonnes per annum to 280,000 tonnes per annum and to obviate the current need for slag re-treatment through the smelter. This project is progressing in the tender and construction phases and is scheduled for completion in mid-2006. In addition, in late 2005 a decision was made to increase the copper smelter and refinery capacities to 300,000 tonnes per year to match the future copper-in-concentrate production from the Ernest Henry and Mount Isa copper mines. Additional capital expenditure of approximately AUD32 million (US$23.7 million) in 2006 will see anode production at the new rate before the end of 2006 with refinery production matching this from early 2007.

In addition to the ore definition programme at Mount Isa that last year yielded 16 million tonnes or a further two years of underground ore reserves, management has established a dedicated project team to evaluate the potential to exploit the significant known resources contained within the 500 orebody and "halo" mineralisation surrounding the 1100 orebody. Pre-feasibility work will be undertaken on both of these projects during 2006.

Exploration activity in north-west Queensland is continuing to focus on leveraging value from Xstrata Copper's strong regional asset and infrastructure base in north Queensland, targeting mineralisation in the Mount Isa/Cloncurry district.

Environmental sampler Graham Milligan at Mount Isa environmental monitoring station

In March 2005, Xstrata Copper agreed to invest AUD$6.6 million ($5 million) in Australian-listed exploration company, Universal Resources Limited. This investment provides Xstrata Copper with the right to explore and options to acquire 51% of the Roseby copper deposits in the Mount Isa Inlier in north-west Queensland. Of Xstrata Copper's investment in Universal, AUD4.4 million is being used to part-fund the Roseby Feasibility Project now scheduled for completion in April 2006. The remaining AUD2.2 million is funding an exploration project undertaken by Xstrata Copper for additional copper sulphide mineralisation within the Roseby tenement area during 2005 and 2006. Known as the Sulphide Extension Exploration Project (SEEP), principal exploration targets are expected to be beneath and adjacent to the native copper deposits within the Roseby Feasibility Project. Exploration activities, largely comprising geophysics and drilling, commenced during the second half of 2005 and are planned to continue throughout 2006.

Ramón Chile, overlooking Minera Alumbrera's open pit

South America

A further incremental expansion to the Alumbrera concentrator was approved in June 2005 and is expected to increase mill throughputs by 8%, from 37 million tonnes per annum to 40 million tonnes per annum. The project, which will cost $15.5 million, is scheduled for commissioning in December 2006. The expansion will further improve mill productivities and fully utilise the downstream capacity of the pipeline and filter plant and is progressing on time and on budget.

Following the recent successes of continual additions to the ore reserve base at Alumbrera, with 120 million tonnes of reserves added over the past two years, management has continued with the in-pit resource definition programme into 2006, with the objective of further extending the ore reserve base at the mine during the year. In addition, Xstrata Copper has continued its Alumbrera district exploration programme independently of the Alumbrera Joint Venture work. Exploration drilling at the Filo Colorado prospect in Catamarca is expected to commence in the first half of 2006, on completion of access road construction.

Following the successful outcome in August 2004 of the competitive tender for the highly prospective Las Bambas exploration district in southern Peru, a vigorous start was made in 2005 to the exploration programme required to advance the project work. A substantial camp was constructed at site, a workforce of around 300 employees and contractors hired and drilling and other contractors mobilised.

During the year, 56,000 metres of diamond drilling was completed at Las Bambas, focused on three major known zones of copper mineralisation, at Ferrobamba, Chalcobamba and Sulfobamba. By year end, logging, sampling and assaying were complete with geological modelling and mineral resource estimation work well advanced. This work has enabled the publication of an initial Mineral Resources Statement for Las Bambas, which shows combined Indicated and Inferred Resources across three mineralised systems of 300 million tonnes at 1.1% copper with supplementary molybdenum and gold values. Included in these initial resources are 84 million tonnes of skarn mineralisation at 1.7% copper in Indicated Resources at the Ferrobamba deposit.

These encouraging results have given sufficient confidence to double the size of last year's programme for the current year, with 100,000 metres of drilling planned to establish the depth and lateral extensions to the known main zones and to commence exploration work in additional mineralised zones in the Las Bambas district.

Philippines

Xstrata holds an option to acquire 62.5% of the Tampakan copper-gold deposit in the Philippines. In April 2005, agreement was reached with the current project owner, Indophil Resources, to accelerate the development and completion of a project pre-feasibility study by September 2006. Pre-feasibility study activities continue according to the agreed programme, with the publication in November 2005 of a new Mineral Resource estimate totalling 1,100 million tonnes at 0.73% copper and 0.29 grams per tonne gold at a cut-off grade of 0.4% copper. During 2006 the focus of Xstrata's activities will be to support Indophil's work programme and to evaluate the project in sufficient detail to enable a decision regarding the exercise of the option in the second half of the year.

Ernest Henry mine concentrator at dusk

Sally Kapernick with student Madison Smith at Cloncurry State School. The Xstrata Community Partnership Program in north Queensland provided support to enable computer cabling to reach all classrooms

Health, Safety, Environment and Community (HSEC)

Xstrata Copper has in place policies and procedures to ensure the highest standards of health, safety, environmental and community performance. Xstrata Copper is a signatory to the Minerals Council of Australia's 'Enduring Value' framework for sustainable development and in line with this commitment, both the north Queensland and Alumbrera divisions produced a 2004 Sustainability Report. During 2006, every Xstrata Copper site will produce a 2005 site-specific sustainability report.

In relation to safety performance across the businesses, a strong leadership and organisational focus has helped Xstrata Copper to continue its dramatic improvement in safety performance. The total recordable injury frequency rate (TRIFR) was almost halved during the course of the year from 24 in 2004 to 12.9 in 2005. The lost time injury frequency rate (LTIFR) also continued to improve from 3.0 in 2004 to 2.5 in 2005. Minera Alumbrera continued to set the benchmark for safety performance across the operating divisions, although North Queensland demonstrated significant improvements across its operations during the year.

Tragically, a fatality occurred at the Las Bambas exploration project in Peru early in 2005 with the death of Mr. Elmer Cordoba, caused by a fall.

Looking ahead, further safety performance improvements are expected in 2006 following the implementation of recommendations from the Xstrata plc HSEC Assurance Audits conducted at the copper operations during 2005. The ongoing implementation of behavioural safety systems will also facilitate further improvements in safety awareness and performances.

A strong culture of environmental compliance within Xstrata Copper was evidenced by the fact that no fines or environmental penalties were recorded during the year and the number of environmental incidents decreased by 19% in total.

At Alumbrera, during 2005 ISO 14001 accreditation was attained at the port, filter plant and concentrate pipeline facilities. Further work was also progressed on biodiversity and tailings/waste rock capping studies.

Xstrata Copper is targeting an increase from 80% to 95% capture of sulphur dioxide emissions from the Mount Isa copper smelter. Commencing in 2006, the programme includes installing copper smelter converter hoods to capture fugitive emissions, using software to identify air entry points into the copper smelter, resulting in greater process control, improved acid plant efficiency and improving co-ordination between copper smelter and acid plant operations.

The Townsville copper refinery was successfully nominated as one of the sites to trial the implementation of the Australian Federal Government's Energy Efficiency Opportunity programme.

In 2006, Xstrata Copper will also become a signatory to the Australian Federal Government's Greenhouse Challenge Plus programme, with the associated formal commitments to regular auditing of greenhouse gas emissions and the identification and implementation of greenhouse gas reduction initiatives.

In the area of community relations, Xstrata Copper continued its strong commitment to engagement and co-operation with its host communities and key stakeholders. Following extensive community consultation, Xstrata Copper developed and launched an AUD4 million Xstrata Community Partnership Programme in North Queensland. Commencing in 2005, the programme consists of 34 partnerships with government and community organisations, focusing on health and education. The programme has been further extended in 2006 to include additional initiatives in North Queensland. It will also comprise a commitment of AUD2.5 million over three years to social welfare, health and education initiatives on behalf of Xstrata's three commodity businesses operating in Queensland (copper, zinc and coal).

In Argentina, Minera Alumbrera continued to support local communities with an annual commitment of $1 million across an extensive set of programmes focusing on health, education and sustainable development. These programmes aim to improve the quality of life in local communities through improved literacy skills, provision of educational materials for over 200 primary and secondary schools, provision of improved health services to 90 regional medical posts and health centres and the promotion of sustainable development through 18 diverse agricultural programmes with local farmers. During the year, the Alumbrera social initiatives were significantly extended to include a $3 million commitment over four years to specified health and education infrastructure works in Catamarca, and $3 million over three years for identified health infrastructure in Tucuman, in both cases through partnerships with the respective provincial governments.

A range of social initiatives were implemented at the Las Bambas project in southern Peru during 2005, as exploration activities commenced. Priority areas for Xstrata Copper's community relations team during the year included relationship building and awareness workshops with local communities, commencement of capacity building programmes to improve the local skills base for project-related work, and partnering with local communities, NGOs, service providers and government organisations to commence sustainable, specific local projects targeted to improve nutrition levels within the communities. These projects include guinea pig breeding, trout farming, hydroponics and improved irrigation.

The Las Bambas corporate social involvement programme currently under development will commit $1 million per annum over the next three years towards sustainable agribusiness and tourism projects in the area. It will also include a skills training programme for members of the local communities.

As part of Xstrata Copper's acquisition of the Las Bambas project in August 2004, $45.5 million was paid into a community trust or fideicomiso social to be used for social development projects in the Grau and Cotabambas provinces. The trust is managed independently of Xstrata by local Mayors and Proinversion, the Peruvian Government's agency for the promotion of inward investment, with Xstrata retaining one seat on the managing committee.

During the year, Xstrata formed an Independent Advisory Group (IAG) to help ensure that the Las Bambas project manages the complex social and environmental issues associated with mining operations in a socially acceptable way. The IAG comprises people widely experienced in managing these issues in developing countries and will meet at least twice a year to provide recommendations and advice to Xstrata.