Zinc

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Zinc | Northfleet | England

Ian Ramsey, taps the furnace in the silver plant at Northfleet

Markets

Zinc

The refined zinc market was again in supply deficit in 2005 by around 500,000 tonnes, as strong growth in China drove a 3.6% increase in global demand for refined zinc to 10.7 million tonnes. This was reflected in a drawdown of 235,000 tonnes of LME stocks and 265,000 tonnes of stocks held elsewhere during the year. LME stocks fell by 37% to 394,125 tonnes at the end of the year, the lowest level recorded since mid 2001.

Domestic consumption in China continued to grow strongly, reflecting strong economic growth and a surge in new galvanizing capacity due to booming demand from the automotive and home appliance sectors, as well as from construction and infrastructure investment.

While demand continued to grow, global zinc metal production remained relatively flat at 10.2 million tonnes in 2005, as increases in output in China, India and Kazakhstan were largely balanced by lower production in Canada, Peru, Belgium, Norway and Russia, smelting capacity reduction in France and plant closures in Italy, Spain, and Germany.

Strong market fundamentals drove prices up, particularly in the second half of the year, rising by 51% to finish the year at $1,915 per tonne. The average LME zinc price increased by 32% in 2005 to $1,382 per tonne, up from $1,048 per tonne in the previous year.

Global zinc mine production in 2005 increased by 3% to 9.9 million tonnes. Mine output increased mainly in China, India, Morocco, Sweden and Australia while it fell in Canada and Mexico. The concentrates market remained tight during the year, resulting in a further drop in average negotiated treatment charges, which fell from $141 per tonne in 2004 to $126 per tonne in 2005. This tightness in the supply of zinc concentrate is anticipated to continue throughout 2006 and possibly into 2007.

Zinc supply is expected to remain in deficit throughout 2006 and potentially into 2007 as commissioning of new mines is not expected to have a significant effect before 2008. Refined zinc production should remain constrained by the acute tightness in the concentrate market while expansions in Asian galvanising production capacity should underpin strong and steady demand growth. As a result, zinc stocks are expected to continue to be drawn down, supporting strengthened prices.

Lead

Global consumption of refined lead rose by over 4% to 7.4 million tonnes in 2005. China remains a significant and growing influence in the global lead market, where lead usage has risen strongly in recent years, driven by surging battery production due to the country's rapidly expanding automobile sector.

Global production of refined lead increased by 5% to 7.2 million tonnes in 2005; around half of this amount came from secondary production, mainly from battery recycling. In China, primary lead production increased by 16% while secondary production increased by 9%.

As a result, the refined lead market was in supply deficit in 2005 with lead stocks at LME warehouses remaining at very low levels during the period. At the end of 2005, LME stocks were at 43,625 tonnes, representing less than one week of global consumption.

During the year the cash price for lead traded between $824 and a high of $1,156 per tonne to finish the year at $1,100 per tonne. The average price in 2005 was $976 per tonne, 10% higher than $886 per tonne the year before. Backwardation was again a key feature of trading throughout the year, reflecting the tight physical market.

The lead market is expected to be largely balanced in 2006 with global lead consumption anticipated to continue to grow, but at a lower rate than in 2005. Battery demand is anticipated to continue to increase while non-battery uses for lead are expected to follow the current downward trend. China will continue to be a dominant force in consumption and production. Exports of refined lead from China remained at similar levels to the year before but in the future are expected to show a declining trend as domestic demand continues to grow. Lead stocks should continue to remain at very low levels and consequently the market is expected to remain fairly tight throughout 2006, supporting lead prices.

Operations

Zinc Lead Australia

The transformation programme put in place at Xstrata Zinc's operations at Mount Isa in 2004 resulted in improved performance and strong growth from these operations during 2005. EBIT from the Australian zinc-lead operations increased sharply to $97 million in 2005, up from $12 million the previous year, driven by higher sales prices for both zinc and lead and improved production, which more than offset the negative impact of a stronger Australian dollar. In 2005 several actions were carried out in order to reduce the operating costs in the Mount Isa operations. These, together with the start up of Black Star Open Cut and the increase in production both in George Fisher Mine and in Mount Isa Lead Mine, resulted in a reduction of 18% in Mount Isa Mines and Concentrator unit operating costs compared with 2004.

Ore throughput at the Mount Isa zinc operations increased to 4.4 million tonnes, up by 37% compared to 2004. George Fisher produced 2.6 million tonnes of ore for the full year, 7% higher than 2004. In particular, the second half of the year saw significant production increases as a result of better mine planning, renewal of mining equipment and improved geotechnical control of stoping. A new pastefill plant was commissioned in June 2005, achieving an increase in the regional ground stability and allowing better ore recoveries. Ore production is expected to increase further in 2006 following improvements in the ore hoisting capacity.

The Mount Isa Lead Mine produced 0.8 million tonnes in 2005, 9% higher than 2004. Operations at the Mount Isa Lead Mine ceased on 31 December 2005 due to depletion of reserves, after operating for more than 80 years.

Improved ore production from both George Fisher and the Mount Isa Lead Mine during the year, together with additional ore produced from the new Black Star zinc-lead open cut mine, resulted in significant improvements in throughput in both the zinc concentrator and the lead smelter in 2005.

Black Star open cut mine at Mount Isa: Environmental advisor Anne Moore checks levels of chemicals added to water to suppress dust and decrease water usage

Finished zinc product at Nordenham

The new Black Star mine produced a total of 1.4 million tonnes of ore during the year, following its commissioning on time and on budget in February 2005. Ore production is anticipated to increase substantially from this low cost operation in 2006.

Improvements in operational and maintenance practices, together with increased ore feed, resulted in a 23% rise in zinc concentrate production to 457,122 tonnes, while lead concentrate production improved by 29% over 2004 production to 277,753 tonnes.

Lead smelter production increased in line with additional feed available and an increase in sinter plant utilisation due to a number of reliability improvements. Crude lead production of 160,117 tonnes represents an increase of 14% over 2004. Anticipated further production increases in the second half of 2005 were hampered by a delay to the blast furnace cooling water system upgrade. The upgrade is due to be completed in the first half of 2006 and will increase smelter production to 170,000 tonnes per annum.

Jesus Angel Barros Abarno at the melting and casting plant at San Juan de Nieva

Cell house at San Juan de Nieva

McArthur River Mine (MRM) underground mining operations were scaled down significantly at the beginning of October as open pit mining commenced at the test pit. Production from the mine increased by 20% over the previous year, although the head grade declined from 12.7% in 2004 to 11.9% zinc in 2005, due to the depletion of the number 2 orebody, the mining of bulk stopes and open pit tonnes with lower head grades during the last quarter. As a result, zinc in bulk concentrate decreased by 4% compared to the previous year to 153,644 tonnes.

During the second half of 2005, Xstrata acquired the remaining 25% interest in the McArthur River Joint Venture from its joint venture partner, ANT Minerals Pty Ltd. As a result of the transaction, MRM is 100% owned by Xstrata.

Zinc Europe

The profitability of the European zinc operations also improved strongly during 2005, with EBIT rising by 115% to $124 million, again driven by higher sales prices for zinc and a strong cost performance, particularly at San Juan de Nieva smelter in Spain, the largest and most efficient electrolytic zinc plant in the world.

In 2005, production at San Juan smelter exceeded half a million tonnes of melted zinc for the first time. The smelter produced 482,052 tonnes of saleable zinc, 9,608 tonnes more than the previous year and 692,408 tonnes of saleable sulphuric acid.

The Arnao plant produced 16,142 tonnes of zinc oxide and the Hinojedo roaster produced 29,577 tonnes of liquid sulphur dioxide. As a result of improvements in the operational efficiency of the roasting plants, a record of 896,335 tonnes of calcine has been achieved.

Production at the Nordenham plant in Germany was slightly lower than in 2004 mainly as a result of a transformer failure during the first half of the year.

Lead Europe

In 2005, lead production at Northfleet in the United Kingdom increased by 28% to 161,350 tonnes due to higher production from Mount Isa. Similarly, silver production rose by 32% to 11,859,000 ounces. As a result of improved production and higher sales prices, revenue improved by just over $100 million to $258 million in 2005 and EBIT rose by 84% to $18 million. Single streaming was maintained throughout the year and cycle times have continued to reduce, contributing to improved efficiency at Northfleet. Recent monthly performance indicates a plant capacity in excess of 180,000 tonnes of lead per annum.

Developments

Zinc Lead Australia

An upgrade of the hoist is planned for George Fisher mine in 2006 to increase the annualised hoisting rate to 3.5 million tonnes per annum. The upgrade is expected to be completed by July 2006 with expenditure of around $3.6 million, thereby removing the most significant factor in restricting mine production during 2005.

The Stage 2 North and the Stage 2 East Black Star cutbacks commenced in June and are at an advanced stage of development. Stage 2 East will continue to be developed throughout 2006. Mining Stage 3 has commenced during 2005 and will deliver mainly overburden waste during 2006 with ore production scheduled for early 2007. Relocation of the underground portal was completed in October 2005 and the next scheduled move is November 2006.

An independent ore feed system for the concentrator plant is due to be completed in February 2006. This feed system will replace the existing crushing system to provide evenly blended ore feed, a significant reduction of maintenance costs, increased plant feed reliability and better labour utilization. A new zinc filter plant is due for completion in the first quarter of 2006 and is expected to reduce costs by minimising the loss of concentrate and will remove a potential throughput bottleneck.

In August 2005, Xstrata Zinc announced its intention to convert the McArthur River zinc-lead mine (MRM) in the Northern Territory, Australia, from an underground to an open cut operation to enable production to continue at the mine. The switch of mining method entails an investment of AUD66 million over two years and requires government approval. Xstrata has lodged a full Environmental Impact Statement (EIS) with the Northern Territory government which has been available for public review. Xstrata Zinc subsequently submitted a supplementary EIS in December 2005, in response to submissions received as part of the consultation process.

In February 2006, the Northern Territory Environment Minister declined to recommend that Xstrata's proposal should be approved. Following a review by the Federal Government, the Northern Territory Mines Minister will make the final decision, expected in April 2006.

McArthur River Mine's current Mine Management Plan, which has been approved by the Northern Territory Government's Department of Business, Industry and Resource Development, includes approval for a test pit on site to contribute ore for sampling and for processing. Approval has also been received to deepen the test pit to provide additional ore in the near term.

The McArthur River ore body remains one of the largest known deposits of zinc and lead in the world. The development of an open cut mine at McArthur River would enable Xstrata to continue operations at the site and retain the option to develop MRM as a source of zinc feed for a future zinc refinery using the Group's Albion process technology. This would significantly improve the profitability of mining operations at MRM. Given the power requirements associated with zinc refineries, the MRM site has been ruled out as a possible location for an Albion plant. Other sites continue to be assessed.

New respirator helmet used at Northfleet

Stockpile from the McArthur River open cut

Zinc Lead Europe

The San Juan de Nieva smelter has focused on process improvements to improve recoveries from lower grade zinc concentrates. Construction of a flotation plant at the San Juan de Nieva operation to recover silver concentrate is on schedule, with first silver concentrate production expected in the second half of 2006.

Despite continuing high energy prices in Germany, the Nordenham plant has secured a competitive offer for electric power which, together with a reduction in grid charges due to new German energy legislation, will contain the cost of electricity in 2006.

In Northfleet, single streaming cycle times reduced to 11.3 hours average for a month a year on year reduction of 52%. This was achieved through continuous improvement efficiency gains and with virtually no capital expenditure.

Development projects have started in the Northfleet silver refinery to reduce costs and increase efficiency. These will continue throughout 2006 and will be the main focus of development work along with a programme which will concentrate on reducing boundary lead emissions, developing a strategy to move towards total site water treatment and meeting all ongoing commitments under EU IPPC legislation.

Health, Safety, Environment and Community (HSEC)

All Xstrata Zinc operations were independently audited against Xstrata's HSEC policy and 17 HSEC management standards during 2005 and audit recommendations are being integrated into 2006 business plans.

Key environmental initiatives in 2005 included:

• commencement of phase two of the operation and rehabilitation of a quarry controlled by local authorities in Spain, using jarofix to return the land to its original landscape;
• reduction of raw water consumption in Nordenham, Germany;
• completion of the environmental impact assessment and enhancement of the biodiversity conservation plan at McArthur River mine in Australia;
• development of the George Fisher ultra-filtration plant at Mount Isa; and
• upgrading of the stack dust continuous monitoring system at Northfleet in the UK.

No category 4 or 5 environmental incidents occurred at Xstrata Zinc operations in 2005 and no environmental fines or penalties were issued.

Jean-Baptiste Bertin, plant engineer at the control room at Nordenham

Xstrata Zinc is committed to remaining a fatality-free business and, until 2005, had not sustained a fatality since the inception of Xstrata plc in 2002. This was not the case in 2005, when one contractor was fatally injured during demolition work at the Hinojedo operation in Spain. Findings from the investigation into this deeply regrettable incident have been integrated into the business and all operations are working to ensure that no further critical incidents occur.

Safety initiatives significantly improved other safety performance measures, with the lost time injury frequency rate and total recordable injury frequency rate improving by 25% and 5% respectively in 2005. These improvements are a result of intensive training programmes that have been implemented at all levels across all of Xstrata Zinc's operations.

Minimising atmospheric emissions at Mount Isa is a key focus for 2006, in line with Xstrata's ongoing commitment to minimise the environmental impact of our operations.

During 2006 work will continue to achieve Xstrata Zinc's target of achieving ISO14001 certification for all operations. Currently three out of seven sites are certified. McArthur River mine is implementing an Environmental Management System that is expected to be certified during 2007, dependent on approval being received for operations to continue at the mine. Xstrata Zinc operations continue to upgrade knowledge of eco-systems in and around all operations and in-depth biodiversity studies are being undertaken at every Xstrata Zinc site.

Community activities constituted a wide variety of contributions to social welfare such as education, health and enterprise and job creation. Xstrata's zinc-lead operations at Mount Isa, in conjunction with the coal and copper North Queensland operations, support local communities through the Xstrata Community Partnership programme, providing AUD4 million for community initiatives over three years. At Mount Isa, 122 new jobs were created in 2005.

McArthur River mine (MRM) undertook a wide range of community activities in 2005 including working with the Territory Government to provide training subsidies and youth programmes for indigenous people, sponsorship of a range of community cultural and educational events and infrastructure development. In addition, consultation continued with local communities regarding the proposed change of mining method and MRM continued to work closely with the local Aboriginal Association.

In Europe, Xstrata's Spanish operations undertook a health awareness campaign, focusing on the effects of alcohol in collaboration with the local municipal authorities, the regional government health service and the NGO "Alcoholics Anonymous". The Nordenham plant provided support for health initiatives and programmes to support the long-term unemployed and socially deprived, in addition to educational initiatives at local schools. At Northfleet, support focused on the GRAND project to develop young people's education and opportunities and collaboration with a range of local organisations on development plans for the region.

For 2006, Xstrata Zinc's operations will focus in particular on community initiatives in the areas of education, public health and young people's needs.