Directors’ Report

Results and dividends

The Group’s financial results, including statutory and pro forma income statements, are set out in the Financial Information section and in the Financial Review section of this report.

The Board recommends a final dividend of 30¢ per share amounting to $281 million. On a rights issue-adjusted basis, which takes into account the bonus element of the discounted rights issue, this amounts to a full year dividend of 41.6¢ per share, a 36% increase on the comparable 2005 rights issue-adjusted figure. The shareholders will be asked to approve the dividend at the Annual General Meeting on 8 May 2007, for payment on 18 May 2007 to ordinary shareholders whose names were on the register on 27 April 2007.

Principal activities

Xstrata is a major global diversified mining group, listed on the London and Swiss stock exchanges. Additional information on the Group’s operations is provided in the Business Overview and Strategy, Financial Review, Operational Review sections of this report.

Review of the business, future developments and post balance sheet events

A review of the business, future developments and post balance sheet events of the Group is presented in the Chairman’s Statement,

Chief Executive’s Report and the Business Review from page 2 to page 95.

A full description of the acquisition of Falconbridge Limited and its financing, other acquisitions, disposals, and changes to Group companies undertaken during the year, including post balance sheet events, is included in the Financial Review on pages 40 to 55.

Exploration and research, development

The Group business units carry out exploration and research and development activities that are necessary to support and expand their operations.

Financial instruments

The Group’s financial risk management objectives and policies are discussed on pages 40 to 55 of the Financial Review.

Health, safety, environment & community (HSEC)

A review of health, safety and environmental performance and community participation is presented in the Sustainable Development section of this report on pages 96 to 100.

Political and charitable donations

In accordance with Xstrata’s corporate social involvement (CSI) policy, no political donations were made in 2006. Xstrata’s corporate social involvement expenditure supports initiatives that benefit the communities local to the Group’s operations in the areas of health, education, environment, culture and art, social and community development, enterprise and job creation. In 2006, Xstrata set aside over $49 million for CSI initiatives.

Employee policies and involvement

The Group’s policy and performance regarding employee involvement, disabled employees, labour relations and employee share schemes is described in the Sustainable Development section on pages 96 to 100.

Corporate governance

A report on corporate governance and compliance with the provisions of the Combined Code is set out on pages 115 to 125.

Disclosure of information to auditors

Having made enquiries of fellow directors and of the company’s auditors, each director confirms that to the best of each director’s knowledge and belief, there is no information relevant to the preparation of their report of which the company’s auditors are unaware; and, each director has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the company’s auditors are aware of the information.

Going concern

The Directors believe, after making inquiries that they consider to be appropriate, that the company has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements.

Directors and their interests

The directors as at 31 December 2006 were:

In addition to the directors listed above, David Issroff was a director until his resignation on 10 May 2006.

In accordance with the Articles of Association, four directors will retire and offer themselves for re-election. Details of the resolutions that will be put to the Annual General Meeting are given in the Notice to the Annual General Meeting. Further details about the directors and their roles within the Group are given in the directors’ biographies on page 106.

Details of interests in the share capital of the company of those directors in office as at 31 December 2006 are given below. As of the date of this report, there have been no changes. None of the shares were held non-beneficially. No director was interested in the shares of any subsidiary company.

The company launched a Rights Issue in accordance with the terms of the Rights Issue Prospectus dated 3 October 2006 offering shareholders the right to acquire one new ordinary shares of $0.50 each in the company for every three existing shares held on the Record Date, at a price of £12.65 per share. Following completion of the Rights Issue, the company was notified by Mick Davis, Paul Hazen, Robert MacDonnell, David Rough and Ian Strachan that they had fully taken up their rights to acquire shares.

In addition to the above interests in shares, the executive directors, along with other employees, also have interests in the share capital of the company in the form of conditional rights to free shares, options to subscribe for shares and deferred bonus shares. Details of these interests are disclosed in the Directors’ Remuneration Report on pages 126 to 139.

Share capital

Details of the authorised and issued share capital of the company, including the rights pertaining to each share class, are set out in Note 26 to the Financial Statements.

The ordinary issued share capital was increased on 28 March 2006 when the Directors issued and allotted 3,000,000 new ordinary shares of $0.50 shares each to K.B. (C.I.) Nominees Limited for the purposes of the company’s Employee Share Ownership Trust, an employees’ share scheme. The 3,000,000 new ordinary shares rank pari passu with the existing ordinary shares, trade on the London Stock Exchange and the SWX and were admitted to the Official List on 25 April 2006.

On 17 May 2006 the company successfully completed the Placing of 61,994,320 ordinary shares with institutions at a price of £21.00. The Placing consisted of 29,450,976 shares held by Batiss Investments Limited pursuant to the Xstrata Group’s equity capital management programme and 32,543,344 new ordinary shares issued by the company ranking pari passu with the existing ordinary shares, trade on the London Stock Exchange and the SWX and were admitted to the Official List of 22 May 2006. The Placing was in connection with the acquisition of the initial 19.8% stake in Falconbridge Limited, and the acquisition of a one third interest in Cerrejon.

The company published a Class 1 Circular on 30 May 2006 ("the Circular") in connection with the proposed (at that time) acquisition of Falconbridge Limited. It was proposed that part of the financing of the acquisition would be raised through an Equity Bridge Facility, as described in the Circular. At an Extraordinary General Meeting of the company held on 30 June 2006, a resolution was passed by the shareholders increasing the authorised share capital of the company from $437,500,000.50 and £50,000 to $7,554,974,199.00 and £50,000 by the creation of an additional 14,234,948,397 ordinary shares of $0.50 each in the capital of the company having the rights and privileges and being subject to the restrictions contained in the Articles of Association of the company and ranking pari passu in all respects with the existing ordinary shares of $0.50 each in the capital of the company. The purpose of this increase was to provide sufficient authorised but unissued share capital to enable the company to refinance the whole of the maximum amount permitted to be drawn under the Equity Bridge Facility.

The directors of the company stated in the Circular that it was their intention at the first Annual General Meeting of the company following the full refinancing of the Equity Bridge Facility, to seek shareholder approval to reduce the authorised share capital. At the Annual General Meeting on 8 May 2007, the Directors intend to seek shareholder approval to reduce the authorised share capital of the company from $7,554,974,199.00 to $750,000,000.00 (represented by 1,500,000,000 ordinary shares) by the cancellation of 13,609,948,397 ordinary shares.

On 15 August 2003 Xstrata Capital Corporation A.V.V. ("Xstrata Capital") issued $600,000,000 3.95% guaranteed convertible bonds due 2010. The bonds are convertible into preference shares issued by Xstrata Capital and then exchanged for Xstrata ordinary shares.

During the course of the year, certain bondholders gave notice to convert their bonds into Xstrata Capital preference shares which were then exchanged into Xstrata ordinary shares. The total number of shares issued in the year resulting from these conversions totalled 39,317,027 shares. Bonds to the amount of $14,730,000 remain outstanding and if converted would result in the issue of a further 1,684,220 ordinary shares.

Under the terms of a Rights Issue Prospectus dated 3 October 2006, the company announced a 1 for 3 Rights issue of up to 235,787,596 new ordinary shares at a price of £12.65 per new share. The purpose of the Rights issue was to refinance part of the debt raised to finance the cash consideration paid in respect of the Falconbridge acquisition. On 30 October 2006 the company announced that valid acceptances had been received in respect of 234,461,198 new shares, and the rump of 1,326,398 new shares had been sold to purchasers at an average price of £22.341 for each new share. The new shares were allotted on 30 October 2006, rank pari passu with the existing ordinary shares, were admitted to the Official List on 5 October 2006 and trade on the London Stock Exchange and the SWX.

On 16 October 2006, the Financial Services Authority as UK Listing Authority approved the admission to the Official List by way of blocklisting of 13,575,432 ordinary shares of $0.50 each to be issued upon conversion of the Xstrata Capital Corporation A.V.V. $375,000,000 4% Guaranteed Convertible Bonds due 2017.

The ordinary issued share capital was increased on 31 January 2007 when the directors issued and allotted four million new ordinary shares of $0.50 shares each to K.B. (C.I.) Nominees Limited for the purposes of the company’s Employee Share Ownership Trust, an employees’ share scheme. The four million new ordinary shares rank pari passu with the existing ordinary shares, trade on the London Stock Exchange and the SWX and were admitted to the Official List on 7 February 2007.

There are no Treasury shares held by the company at the date of this report.

The ordinary issued share capital of the company at the date of this report is 970,013,007 ordinary shares.

Major interests in shares

On 20 March 2007, the following major interest in the ordinary issued shares of $0.50 each of the company had been notified to the company in accordance with Sections 198 to 208 of the Act:

Directors’ liabilities

The company has granted qualifying third party indemnities to each of its directors against any liability which attaches to them in defending proceedings brought against them, to the extent permitted by the Companies Acts. In addition, directors and officers of the company and its subsidiaries are covered by Directors & Officers liability insurance.

Creditor payment policy and practice

In view of the international nature of the Group’s operations there is no specific Group-wide policy in respect of payments to suppliers. Individual operating companies are responsible for agreeing terms and conditions for their business transactions and ensuring that suppliers are aware of the terms of payment. It is Group policy that payments are made in accordance with those terms, provided that all trading terms and conditions have been met by the supplier.

Xstrata plc is a holding company with no business activity other than the holding of investments in the Group and therefore had no trade creditors at 31 December 2006.

Annual General Meeting

The Annual General Meeting of the company will be held at Theater-Casino Zug, Artherstrasse 2-4, Zug, Switzerland on Tuesday, 8 May 2007 at 11:00 am (Central European Summer Time). No satellite meeting will be held in London but a live webcast will be provided of the AGM through the company’s website www.xstrata.com. A telephone dial-in facility will also be provided on a listen-only basis. Further details of the dial in facility and webcast will be available from Xstrata’s website www.xstrata.com at least one week in advance of the meeting.

Special business at the Annual General Meeting

The Notice convening the meeting is sent to shareholders separately with this Report. Resolutions 1 to 8 are termed ordinary business while resolutions 9 to 12 will be special business. These resolutions are:

Resolution 9 gives authority to the directors in accordance with Section 80 of the Companies Act 1985 (the "Act") to exercise all the powers of the company to allot relevant securities (within the meaning of Section 80(2) of the Act) of the company up to an aggregate nominal amount of $161,663,784.50 (equivalent to 323,327,569 ordinary shares of $0.50 each) (being the lesser of the company’s authorised but unissued share capital and one third of its issued capital).

This represents 33.33% of the issued ordinary share capital of the company as of the date of this report. The authority extends until the end of the next AGM. The Board does not have any present intention of exercising this authority other than for the purposes of the company’s employee share schemes.

Resolution 10 will be proposed as a Special Resolution and will empower the directors to allot for cash, equity securities of a nominal amount not exceeding $24,249,567.50 (equivalent to 48,499,135 ordinary shares of $0.50 each, representing 5% of the issued share capital) without first offering such securities to existing ordinary shareholders. The authority extends until the end of the next AGM. Any issue of shares for cash will, however, still be subject to the requirements of the UK Listing Authority.

Resolution 11 will be proposed as a Special Resolution and will allow the company to take advantage of new Companies Act 2006 rules for communications between companies, shareholders and others that came into force on 20 January 2007. The key change in relation to such communications made by the new Act is that a shareholder is assumed to have agreed to a company publishing documents and information on a website if certain conditions are met and procedures followed. Shareholders can, however, ask for a hard copy of any document at any time.

Resolution 12 will be proposed as an ordinary resolution and which, if passed, will reduce the authorised share capital of the company from $7,554,974,199.00 to $750,000,000.00 (represented by 1,500,000,000 ordinary shares) by the cancellation of 13,609,948,397 ordinary shares. The reason for this reduction is explained above in the section headed Share Capital.

Electronic proxy voting

Registered shareholders have the opportunity to submit their votes (or abstain) on all resolutions proposed at the Annual General Meeting by means of an electronic voting facility operated by the company’s Registrar, Computershare Investor Services plc. This facility can be accessed by visiting www.computershare.com. As usual, paper proxy cards will be distributed to all registered shareholders with the Notice of Annual General Meeting.

CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the procedures described in the CREST Manual. CREST Personal Members or other CREST sponsored member and those CREST members who have appointed any voting service provider(s) should refer to their CREST sponsor or voting service provider(s) who will be able to take the appropriate action on their behalf. The company may treat as invalid a CREST proxy instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001.

Electronic copies of the Annual Review and Financial Statements 2006 and other publications

A copy of the 2006 Annual Report (which includes the Annual Review and Financial Statements, Directors’ Report, Corporate Governance Report and Remuneration Report), the Notice of the Annual General Meeting, the 2006 Sustainability Report and other corporate publications, reports, press releases and announcements are available on the company’s website at www.xstrata.com.

Auditors

A resolution will be put to the members at the forthcoming Annual General Meeting to re-appoint Ernst & Young LLP as auditors and to authorise the Board to determine the auditor’s remuneration.

By order of the Board
Richard Elliston
Company Secretary
20 March 2007