Notes to the Financial Statements
1. Corporate Information
The consolidated financial statements were authorised for issue in accordance with a Directors’ resolution on 20 March 2007. The ultimate parent entity of the Group, Xstrata plc, is a publicly traded limited company incorporated in England and Wales and domiciled in Switzerland. Its ordinary shares are traded on the London and Swiss stock exchanges.
The principal activities of the Group are described in note 9.
2. Statement of compliance
The accounting policies adopted are in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC), as adopted by the European Union, effective for the Group’s reporting for the year ended 31 December 2006.
3. Basis of preparation
The consolidated financial statements are presented in US dollars, which is the parent’s functional and presentation currency, and all values are rounded to the nearest million except where otherwise indicated.
The accounting policies in note 6 have been applied in preparing the financial statements.
4. Significant accounting judgements and estimates
Estimates
The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the year. Actual outcomes could differ from these estimates.
The below are the most critical estimates and assumptions:
Estimated recoverable reserves and resources
Estimated recoverable reserves and resources are used to determine the depreciation of mine production assets, in accounting for deferred stripping costs and in performing impairment testing. Estimates are prepared by appropriately qualified persons, but will be impacted by forecast commodity prices, exchange rates, production costs and recoveries amongst other factors. Changes in assumptions will impact the carrying value of assets and depreciation and impairment charges recorded in the income statement.
Environmental protection, rehabilitation and closure costs
The provisions for environmental protection, rehabilitation and closure costs are based on estimated future costs using information available at the balance sheet date. To the extent the actual costs differ from these estimates, adjustments will be recorded and the income statement may be impacted.
Impairment testing
note 15 outlines the significant assumptions made in performing impairment testing of goodwill and certain intangible assets. Similar assumptions are made when testing other non-current assets. Changes in these assumptions may alter the results of impairment testing and the resulting carrying values of assets.
Defined benefit pension plans
note 35 outlines the significant assumptions made when accounting for defined benefit pension plans. Changes to these assumptions may alter the resulting accounting and ultimately the amount charged to the income statement.
5. Changes in accounting policies, new standards and interpretations not applied
Changes in accounting policies
The accounting policies adopted are consistent with those of the previous year except as follows:
The Group has adopted the following new and amended standards in the current year:
| IFRS 1 | ‘Amendments relating to IFRS 6’ |
| IFRS 4 & IAS 39 | ‘Amendments - Financial guarantee contracts’ |
| IFRS 6 | ‘Amendments relating to IFRS 6’ |
| IAS 21 | ‘Amendments to IAS 21 - The effects of changes in foreign exchange rates - net investment in foreign operations’ |
| IAS 39 | ‘Amendment - Fair value option’ |
| IAS 39 | ‘Amendment - Cash flow hedge accounting for forecast intra-group transactions’ |
Adoption of the above new standards and amendments did not have a material impact on the financial statements.
The Group has also early adopted the following IFRIC interpretations:
| IFRIC 8 | ‘Scope of IFRS 2’ |
| IFRIC 9 | ‘Re-assessment of embedded derivatives’ |
These interpretations did not have a material impact on the financial statements.
New standards and interpretations not applied
The IASB and IFRIC have issued the following standards and interpretations with an effective date after the date of these financial statements, consequently these pronouncements will impact the Group in future periods.
| Effective date | ||
|---|---|---|
| IFRS 7 | ‘Financial instrument disclosures’ | 1 January 2007 |
| IFRS 8 | ‘Operating segments’ | 1 January 2009 |
| IAS 1 | ‘Amendment: Capital disclosures’ | 1 January 2007 |
| IFRIC 7 | ‘Applying the restatement approach under IAS 29’ | 1 March 2006 |
| IFRIC 10 | ‘Interim financial reporting and impairment’ | 1 November 2006 |
| IFRIC 11 | ‘Group and treasury share transactions’ | 1 March 2007 |
The Directors do not anticipate that the adoption of these standards and interpretations on their effective dates will have a material impact on the Group’s financial statements in the period of initial application.
Upon adoption of IFRS 7, the Group will have to disclose additional information about its financial instruments, their significance and the nature and extent of risks that they give rise to. More specifically the Group will need to disclose the fair value of its financial instruments and its risk exposure in greater detail. There will be no impact on income or net assets.
Upon adoption of IFRS 8, the Group will be required to disclose segment information based on the information management uses for internally evaluating the performance of operating segments and allocating resources to those segments. This information may be different from that reported in the balance sheet and income statement but the Group will provide an explanation for such differences. There will be no impact on the income or net assets.
6. Principal Accounting Policies
Basis of consolidation
The financial statements consolidate the financial statements of Xstrata plc (the Company) and its subsidiaries (the Group). All inter-entity balances and transactions, including unrealised profits and losses arising from intra-group transactions, have been eliminated in full. The results of subsidiaries acquired or sold are consolidated for the periods from or to the date on which control passes. Control is achieved where the Group has the power to govern the financial and operating policy of an entity so as to obtain benefits from its activities. Where there is a loss of control of a subsidiary, the financial statements include the results for the part of the reporting period during which Xstrata plc has control. Subsidiaries use the same reporting period and same accounting policies as Xstrata plc.
Interests in Joint Ventures
A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. The financial statements of the joint ventures are prepared for the same reporting period as the Company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist.
Jointly controlled operations
A jointly controlled operation involves the use of assets and other resources of the Group and other venturers rather than the establishment of a corporation, partnership or other entity.
The Group accounts for the assets it controls and the liabilities it incurs, the expenses it incurs and the share of income that it earns from the sale of goods or services by the joint venture.
Jointly controlled assets
A jointly controlled asset involves joint control and offers joint ownership by the Group and other venturers of assets contributed to or acquired for the purpose of the joint venture, without the formation of a corporation, partnership or other entity.
The Group accounts for its share of the jointly controlled assets, any liabilities it has incurred, its share of any liabilities jointly incurred with other ventures, income from the sale or use of its share of the joint venture’s output, together with its share of the expenses incurred by the joint venture, and any expenses it incurs in relation to its interest in the joint venture.
Jointly controlled entities
A jointly controlled entity involves the establishment of a corporation, partnership or other legal entity in which the Group has an interest along with other venturers.
The Group recognises its interest in jointly controlled entities using the proportionate method of consolidation whereby the Group’s share of each of the assets, liabilities, income and expenses of the joint venture are combined with the similar items, line by line, in its consolidated financial statements.
When the Group contributes or sells assets to a joint venture, any portion of gain or loss from the transaction is recognised based on the substance of the transaction. When the Group has transferred the risk and rewards of ownership to the joint venture, the Group only recognises the portion of the gain or loss attributable to the other venturers, unless the loss is reflective of an impairment, in which case the loss is recognised in full. When the Group purchases assets from the joint venture, it does not recognise its share of the profits of the joint venture from the transaction until it resells the assets to an independent party. Losses are accounted for in a similar manner unless they represent an impairment loss, in which case they are recognised immediately.
Joint ventures are accounted for in the manner outlined above, until the date on which the Group ceases to have joint control over the joint venture.
Investments in Associates
Entities in which the Group has significant influence and which are neither subsidiaries nor joint ventures, are associates, and are accounted for under the equity method of accounting.
Under the equity method of accounting, the investment in the associate is recognised on the balance sheet on the date of acquisition at the fair value of the purchase consideration and therefore includes any goodwill on acquisition. The carrying amount is adjusted by the Group’s share of the post acquisition profit or loss; depreciation, amortisation or impairment arising from fair value adjustments made at date of acquisition and certain inter-entity transactions together with a reduction for any dividends received or receivable from the associate. Where there has been a change recognised directly in the equity of the associate, the Group recognises its share of such changes in equity.
The financial statements of the associates are prepared for the same reporting period as the Company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist. Adjustments are made in the consolidated financial statements to eliminate the Group’s share of unrealised gains and losses on transactions between the Group and its associates.
The Group discontinues its use of the equity method from the date on which it ceases to have significant influence, and from that date, accounts for the investment in accordance with IAS 39 (with its initial cost being the carrying amount of the associate at that date), provided the investment does not then qualify as a subsidiary or joint venture.
The Group’s income statement reflects the share of associates’ results after tax and the Group’s statement of recognised income and expense includes any amounts recognised by associates outside of the income statement.
Business Combinations
Business combinations after 1 January 2004, are accounted for in accordance with the below policy. Business combinations that occurred prior to this date have been accounted for in accordance with the Group’s UK GAAP accounting policy at the time of the combination.
On the acquisition of a subsidiary, the purchase method of accounting is used whereby the purchase consideration is allocated to the identifiable assets, liabilities and contingent liabilities (identifiable net assets) on the basis of fair value at the date of acquisition. Those mineral reserves and resources that are able to be reliably valued are recognised in the assessment of fair values on acquisition. Other potential reserves, resources and mineral rights, for which in the Directors’ opinion, values cannot be reliably determined, are not recognised.
When the cost of acquisition exceeds the fair values attributable to the Group’s share of the identifiable net assets the difference is treated as purchased goodwill, which is not amortised but is reviewed for impairment annually or where there is an indication of impairment. If the fair value attributable to the Group’s share of the identifiable net assets exceeds the cost of acquisition the difference is immediately recognised in the income statement.
Minority interests represent the portion of profit or loss and net assets in subsidiaries that are not held by the Group and are presented in equity in the consolidated balance sheet, separately from the parent shareholders equity.
When a subsidiary is acquired in a number of stages, the cost of each stage is compared with the fair value of the identifiable net assets at the date of that purchase. Any excess is treated as goodwill, or any discount is immediately recognised in the income statement. On the date control is obtained, the identifiable net assets are recognised in the Group balance sheet at fair value and the difference between the fair value recognised and the value on the date purchase is recognised in the asset revaluation reserve.
Similar procedures are applied in accounting for the purchases of interests in associates. Any goodwill arising on such purchases is included within the carrying amount of the investment in the associates, but not thereafter amortised. Any excess of the Group’s share of the net fair value of the associate’s identifiable assets, liabilities and contingent liabilities over the cost of the investment is included in income in the period of the purchase.
oreign currencies
Financial statements of subsidiaries, joint ventures and associates, are maintained in their functional currencies and converted to US dollars for consolidation of the Group results. The functional currency of each entity is determined after consideration of the primary economic environment of the entity.
Transactions in foreign currencies are translated at the exchange rates ruling at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at year end exchange rates. All differences that arise are recorded in the income statement. Non-monetary assets measured at historical cost in a foreign currency are translated using the exchange rates at the date of the initial transactions. Where non-monetary assets are measured at fair value in a foreign currency, they are translated at the exchange rates when the fair value was determined. Where the exchange difference relates to an item which has been recorded in equity, the related exchange difference is also recorded in equity.
On consolidation of foreign operations into US dollars, income statement items are translated at weighted average rates of exchange where this is a reasonable approximation of the exchange rate at the dates of the transactions. Balance sheet items are translated at closing exchange rates. Exchange differences on the re-translation of the investments in foreign subsidiaries, joint ventures and associates at closing rates, together with differences between income statements translated at average and at closing rates, are recorded in a separate component of equity. Exchange differences relating to quasi equity inter-company loan balances with the foreign operations which form part of the net investment in the foreign operation are also recognised in this component of equity. On disposal or partial disposal of a foreign entity or on repayment of loans forming part of the net investment in the foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement.
Exchange differences on foreign currency borrowings to finance net investments and tax charges/credits attributable to those exchange differences are also recorded in a separate component of equity to the extent that the hedge is effective. Upon full or partial disposal or repayment of the net investment in the foreign operation (including loans that form part of the net investment), the cumulative amount of the exchange differences is recognised in the income statement when the gain or loss on disposal or on loan repayment is recognised.
The following exchange rates to the US dollar (US$) have been applied:
| 31 December 2006 | Average 12 months 2006 | 31 December 2005 | Average 12 months 2005 | |
|---|---|---|---|---|
| Argentine pesos (US$:ARS) | 3.0610 | 3.0745 | 3.0300 | 2.9224 |
| Australian dollars (AUD:US$) | 0.7886 | 0.7535 | 0.7328 | 0.7624 |
| Canadian dollars (US$:CAD) | 1.1659 | 1.1342 | 1.1620 | 1.2113 |
| Chilean pesos (US$:CLP) | 532.32 | 530.54 | n/a | n/a |
| Colombian pesos (US$:COP) | 2,240.00 | 2,359.39 | n/a | n/a |
| Euros (EUR:US$) | 1.3200 | 1.2566 | 1.1850 | 1.2444 |
| Great Britain pounds (GBP:US$) | 1.9589 | 1.8437 | 1.7229 | 1.8195 |
| Peruvian nuevo sol (US$:PEN) | 3.1950 | 3.2737 | n/a | n/a |
| South African rand (US$:ZAR) | 7.0061 | 6.7701 | 6.3288 | 6.3661 |
| Swiss francs (US$:CHF) | 1.2190 | 1.2529 | 1.3134 | 1.2463 |
Revenue
Revenue associated with the sale of commodities is recognised when all significant risks and rewards of ownership of the asset sold are transferred to the customer, usually when insurance risk has passed to the customer and the commodity has been delivered to the shipping agent. Sales revenue is recognised at the fair value of consideration received, which in most cases is invoiced amounts, with most sales being priced free on board (FOB), free on rail (FOR) or cost, insurance and freight (CIF). Revenues from the sale of by-products are also included in sales revenue. Revenue is recognised, at fair value of the consideration receivable, to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. Revenue excludes treatment and refining charges unless payment of these amounts can be enforced by the Group at the time of the sale.
For some commodities the sales price is determined provisionally at the date of sale, with the final price determined at a mutually agreed date, generally at a quoted market price at that time. In order to ensure that revenue is recorded at the fair value of consideration to be received, adjustments are made to the invoice price based on the forward metal prices published at the balance sheet date.
Interest income
Interest income is recognised as earned on an accruals basis using the effective interest method in the income statement.
Exceptional items
Exceptional items represent significant items of income and expense which due to their nature or the expected infrequency of the events giving rise to them, are presented separately on the face of the income statement to give a better understanding to shareholders of the elements of financial performance in the year, so as to facilitate comparison with prior periods and to better assess trends in financial performance. Exceptional items include, but are not limited to, goodwill impairments, acquisition and integration costs which have not been capitalised, profits and losses on the sale of investments, profits and losses from the sale of operations, recycled gains and losses from the foreign currency translation reserve, foreign currency gains and losses on borrowings, restructuring and closure costs, loan issue costs written-off on facility refinancing and the related tax impacts of these items.
Property, plant and equipment
Land and buildings, plant and equipment
On initial acquisition, land and buildings, plant and equipment are valued at cost, being the purchase price and the directly attributable costs of acquisition or construction required to bring the asset to the location and condition necessary for the asset to be capable of operating in the manner intended by management.
In subsequent periods, buildings, plant and equipment are stated at cost less accumulated depreciation and any impairment in value, whilst land is stated at cost less any impairment in value and is not depreciated.
Depreciation is provided so as to write off the cost, less estimated residual values of buildings, plant and equipment (based on prices prevailing at the balance date) on the following bases:
Mine production assets are depreciated using a unit of production method based on estimated economically recoverable reserves, which results in a depreciation charge proportional to the depletion of reserves. Buildings, plant and equipment unrelated to production are depreciated using the straight-line method based on estimated useful lives.
Where parts of an asset have differing useful lives, depreciation is calculated on each separate part. Each item or part’s estimated useful life has due regard to both its own physical life limitations and the present assessment of economically recoverable reserves of the mine property at which the item is located, and to possible future variations in those assessments. Estimates of remaining useful lives and residual values are reviewed annually. Changes in estimates which affect unit of production calculations are accounted for prospectively.
The expected useful lives are as follows:
| Buildings | 15 - 40 years |
| Plant and Equipment | 4 - 30 years |
| Furniture and Fixtures | 5 - 15 years |
| Other | 3 - 5 years |
The net carrying amounts of land, buildings, plant and equipment are reviewed for impairment either individually or at the cash-generating unit level when events and changes in circumstances indicate that the carrying amount may not be recoverable. To the extent that these values exceed their recoverable amounts, that excess is fully provided against in the financial year in which this is determined.
Expenditure on major maintenance or repairs includes the cost of replacement of parts of assets and overhaul costs. Where an asset or part of an asset is replaced and it is probable that future economic benefits associated with the item will be available to the Group, the expenditure is capitalised and the carrying amount of the item replaced derecognised. Similarly, overhaul costs associated with major maintenance are capitalised and depreciated over their useful lives where it is probable that future economic benefits will be available and any remaining carrying amounts of the cost of previous overhauls are derecognised. All other costs are expensed as incurred.
Where an item of property, plant and equipment is disposed of, it is derecognised and the difference between its carrying value and net sales proceeds is disclosed as a profit or loss on disposal in the income statement.
Any items of property, plant or equipment that cease to have future economic benefits expected to arise from their continued use or disposal are derecognised with any gain or loss included in the income statement in the financial year in which the item is derecognised.
Exploration and evaluation expenditure
Exploration and evaluation expenditure relates to costs incurred on the exploration and evaluation of potential mineral reserves and includes costs such as exploratory drilling and sample testing and the costs of pre-feasibility studies. Exploration and evaluation expenditure for each area of interest, other than that acquired from the purchase of another mining company, is carried forward as an asset provided that one of the following conditions is met:
- such costs are expected to be recouped in full through successful development and exploration of the area of interest or alternatively, by its sale; or
- exploration and evaluation activities in the area of interest have not yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in relation to the area are continuing, or planned for the future.
Purchased exploration and evaluation assets are recognised as assets at their cost of acquisition or at fair value if purchased as part of a business combination.
An impairment review is performed, either individually or at the cash-generating unit level, when there are indicators that the carrying amount of the assets may exceed their recoverable amounts. To the extent that this occurs, the excess is fully provided against, in the financial period in which this is determined. Exploration assets are reassessed on a regular basis and these costs are carried forward provided that at least one of the conditions outlined above is met.
Expenditure is transferred to mine development assets or capital work in progress once the work completed to date supports the future development of the property and such development receives appropriate approvals.
Mineral properties and mine development expenditure
The cost of acquiring mineral reserves and mineral resources is capitalised on the balance sheet as incurred. Capitalised costs (development expenditure) include interest and financing costs relating to the construction of plant and equipment and costs associated with a start up period where the asset is available for use but incapable of operating at normal levels without a commissioning period.
Mineral reserves and capitalised mine development expenditure are, upon commencement of production, depreciated using a unit of production method based on the estimated economically recoverable reserves to which they relate or are written off if the property is abandoned. The net carrying amounts of mineral reserves and resources and capitalised mine development expenditure at each mine property are reviewed for impairment either individually or at the cash-generating unit level when events and changes in circumstances indicate that the carrying amount may not be recoverable. To the extent that these values exceed their recoverable amounts, that excess is fully provided against in the financial year in which this is determined.
Capital work in progress
Assets in the course of construction are capitalised in the capital work in progress account. On completion, the cost of construction is transferred to the appropriate category of property, plant and equipment.
The cost of property, plant and equipment comprises its purchase price and any costs directly attributable to bringing it into working condition for its intended use.
Costs associated with a start up period are capitalised where the asset is available for use but incapable of operating at normal levels without a commissioning period.
Capital work in progress is not depreciated.
The net carrying amounts of capital work in progress at each mine property are reviewed for impairment either individually or at the cash-generating unit level when events and changes in circumstances indicate that the carrying amount may not be recoverable. To the extent that these values exceed their recoverable amounts, that excess is fully provided against in the financial period in which this is determined.
Leasing and hire purchase commitments
The determination of whether an arrangement is, or contains a lease is based in the substance of the arrangement at inception date, including whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or whether the arrangement conveys a right to use the asset. A reassessment after inception is only made in specific circumstances.
Assets held under finance leases, where substantially all the risks and rewards of ownership of the asset have passed to the Group, and hire purchase contracts are capitalised in the balance sheet at the lower of the fair value of the leased property or the present value of the minimum lease payments during the lease term calculated using the interest rate implicit in the lease agreement. These amounts are determined at the inception of the lease and are depreciated over the shorter of their estimated useful lives or lease term. The capital elements of future obligations under leases and hire purchase contracts are included as liabilities in the balance sheet. The interest elements of the lease or hire purchase obligations are charged to the income statement over the periods of the leases and hire purchase contracts and represent a constant proportion of the balance of capital repayments outstanding.
Leases where substantially all the risks and rewards of ownership have not passed to the Group are classified as operating leases. Rentals payable under operating leases are charged to the income statement on a straight-line basis over the lease term.
Deferred stripping costs
In open pit mining operations, it is necessary to remove overburden and other waste in order to access the ore body. During the pre-production phase, these costs are capitalised as part of the cost of the mine property and depreciated based on the mine’s strip ratio (refer below).
The costs of removal of the waste material during a mine’s production phase are deferred, where they give rise to future benefits. The deferral of these costs, and subsequent charges to the income statement are determined with reference to the mine’s strip ratio.
The mine’s strip ratio represents the ratio of the estimated total volume of waste, to the estimated total quantity of economically recoverable ore, over the life of the mine. These costs are deferred where the actual stripping ratios are higher than the average life of mine strip ratio.
The costs charged to the income statement are based on application of the mine’s strip ratio to the quantity of ore mined in the period.
Where the ore is expected to be evenly distributed, waste removal is expensed as incurred.
Biological assets
Biological assets, being cattle, are carried at their fair value less estimated selling costs. Any changes in fair value less estimated selling costs are included in the income statement in the period in which they arise.
Intangible assets
Purchased intangible assets are recorded at the cost of acquisition including expenses incidental to the acquisition, less accumulated amortisation and any impairment in value.
Intangible assets acquired as part of an acquisition of a business are capitalised separately from goodwill if the asset is separable or arises from contractual or legal rights, and the fair value can be measured reliably on initial recognition.
Internally generated goodwill is not recognised.
Intangible assets are amortised using a straight-line method based on estimated useful lives, except goodwill and those intangible assets which the Directors regard as having indefinite useful lives, which are not amortised but are reviewed for impairment at least annually, and whenever events or circumstances indicate that the carrying amount may not be recoverable. Intangible assets are regarded as having an indefinite life when, based on an analysis of all the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash flows. Such analyses are performed annually. Estimated useful lives are determined as the period over which the Group expects to use the asset or the number of production (or similar) units expected to be obtained from the asset by the Group and for which the Group retains control of access to those benefits.
For intangible assets with a finite useful life, the amortisation method and period are reviewed annually and impairment testing is undertaken when circumstances indicate the carrying amount may not be recoverable.
Where an intangible asset is disposed of, it is derecognised and the difference between its carrying value and the net sales proceeds is reported as a profit or loss on disposal in the income statement.
Coal export rights
Coal export rights are carried at cost and are considered to have an indefinite useful life. As a result they are not amortised but are subject to an asset impairment review at least annually and more regularly if indicators of impairment exist.
Software and technology patents
Software and technology patents are carried at cost and amortised over a period of 3 years and 20 years respectively.
Impairment of assets
The carrying amounts of non-current assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amounts may not be recoverable. If there are indicators of impairment, a review is undertaken to determine whether the carrying amounts are in excess of their recoverable amounts. An asset’s recoverable amount is determined as the higher of its fair value less costs to sell and its value-in-use. Such review is undertaken on an asset by asset basis, except where such assets do not generate cash flows independent of other assets, in which case the review is undertaken at the cash-generating unit level.
Where a cash-generating unit, or group of cash-generating units, has goodwill allocated to it, or includes intangible assets which are either not available for use or which have an indefinite useful life (and which can only be tested as part of a cash-generating unit), an impairment test is performed at least annually or whenever there is an indication that the carrying amounts of such assets may be impaired.
If the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recorded in the income statement to reflect the asset at the lower amount. In assessing the recoverable amount of assets, the relevant future cash flows expected to arise from the continuing use of such assets and from their disposal are discounted to their present value using a market-determined pre-tax discount rate which reflects current market assessments of the time value of money and asset-specific risks for which the cash flow estimates have not been adjusted.
An impairment loss is reversed in the income statement if there is a change in the estimates used to determine the recoverable amount since the prior impairment loss was recognised. The carrying amount is increased to the recoverable amount but not beyond the carrying amount net of depreciation or amortisation which would have arisen if the prior impairment loss had not been recognised. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. Goodwill impairments are not reversed.
Non-current assets held for sale and discontinued operations
Non-current assets held for sale
Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the assets or disposal groups are available for immediate sale in their present condition. The Group must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year of the date of classification.
Non-current assets (or disposal groups) held for sale are carried at the lower of the carrying amount prior to being classified as held for sale, and the fair value less costs to sell. A non-current asset is not depreciated while classified as held for sale.
A non-current asset held for sale is presented separately in the balance sheet. The assets and liabilities of a disposal group classified as held for sale are presented separately as one line in the assets and liabilities sections on the face of the balance sheet.
Discontinued Operations
A discontinued operation is a component of an entity whose operations and cash flows are clearly distinguished, operationally and for financial reporting purposes from the rest of the entity, that has been disposed of or classified as held for sale. To be classified as a discontinued operation one of the following criteria must be met:
- the operation must represent a separate major line of business or geographical area of operations; or
- the operation must be part of a single coordinated plan to dispose of a separate major line of business or geographical areas of operations; or
- the operation must be a subsidiary acquired exclusively with a view for resale.
Where the operation is discontinued at the balance sheet date, the results are presented in one line on the face of the income statement, and prior period results are represented as discontinued.
Financial instruments
The Group applied the below accounting policies from 1 January 2005. Prior to this time the Group accounted for financial instruments in accordance with UK GAAP.
Investments and other financial assets
Financial assets are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments or available-for-sale financial assets, as appropriate. The Group determines the classification of its financial assets at initial recognition. Where as a result of a change in intention or ability, it is no longer appropriate to classify an investment as held to maturity, the investment is reclassified into the available-for-sale category. When financial assets are recognised initially, they are measured at fair value on the trade date, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs.
Financial assets at fair value through profit or loss
Financial assets classified as held for trading are included in the category ‘financial assets at fair value through profit or loss’. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated as and are effective hedging instruments. Other assets can be designated to this category on initial recognition. Gains or losses on these items are recognised in income.
Held-to-maturity investments
Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Group has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this classification. Other long term investments that are intended to be held-to-maturity, such as bonds, are subsequently measured at amortised cost. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. This calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. For investments carried at amortised cost, gains and losses are recognised in income when the investments are derecognised or impaired, as well as through the amortisation process.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, do not qualify as trading assets and have not been designated as either fair value through profit and loss or available-for-sale. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in income when the loans and receivables are derecognised or impaired, as well as through the amortisation process.
Available-for-sale financial assets
Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition available-for sale financial assets are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the income statement.
Listed share investments are carried at fair value based on stock exchange quoted prices at the balance sheet date. Unlisted shares are carried at fair value where it can be reliably obtained, otherwise they are stated at cost less any impairment.
Trade and other receivables
Trade and other receivables are recognised and carried at their original invoiced value or their recoverable amount if this differs from the invoiced amount. Where the time value of money is material, receivables are carried at amortised cost. A provision is made where the estimated recoverable amount is lower than the carrying amount.
Fair values
The fair value of quoted financial assets is determined by reference to bid prices at the close of business on the balance sheet date. Where there is no active market, fair value is determined using valuation techniques. These include recent arm’s length market transactions; reference to current market value of another instrument which is substantially the same; discounted cash flow analysis and pricing models.
Derivative financial instruments are valued using applicable valuation techniques such as those outlined above.
Derecognition of financial assets and liabilities
Financial assets
A financial asset is derecognised where:
- the rights to receive cash flows from the asset have expired;
- the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement; or
- the Group has transferred its rights to receive cash flows from the asset and either has transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
Where the Group has transferred its right to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, it continues to recognise the financial asset to the extent of its continuing involvement in the asset.
Financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
Gains on derecognition are recognised within finance income and losses within finance costs.
Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement.
Impairment of financial assets
The Group assesses at each balance sheet date whether a financial asset is impaired.
Financial assets carried at amortised cost
If there is objective evidence that an impairment loss on loans and receivables and held to maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (ie the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced and the amount of the loss is recognised in the income statement.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date.
Assets carried at cost
If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value (because its fair value cannot be reliably measured), the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.
Available-for-sale financial assets
If an available-for-sale financial asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in profit or loss, is transferred from equity to the income statement. Reversals in respect of equity instruments classified as available-for-sale are not recognised in profit. Reversals of impairment losses on debt instruments are reversed through profit or loss, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in profit or loss.
Rehabilitation Trust Fund
Investments in the rehabilitation trust funds are measured at fair value based on the market price of investments held by the trust. In accordance with IFRIC 5, movements in the fair value are recognised in the income statement. Such amounts relate to trusts in South Africa which receive cash contributions to accumulate funds for the Group’s rehabilitation liability relating to the eventual closure of the Group’s coal operations.
Derivative financial instruments and hedging
The Group uses derivative financial instruments such as interest rate swaps, forward currency and commodity contracts to hedge its risks associated with interest rate, foreign currency and price fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.
Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are taken directly to profit or loss for the year.
The fair value of forward currency and commodity contracts is calculated by reference to current forward exchange rates and prices for contracts with similar maturity profiles. The fair value of interest rate swap contracts is determined by reference to market values for similar instruments.
For the purpose of hedge accounting, hedges are classified as:
- fair value hedges;
- cash flow hedges; or
- hedges of a net investment in a foreign operation.
At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.
Hedges which meet the strict criteria for hedge accounting are accounted for as follows:
Fair value hedges
Fair value hedges are hedges of the Group’s exposure to changes in the fair value of a recognised asset or liability that could affect profit or loss. The carrying amount of the hedged item is adjusted for gains and losses attributable to the risk being hedged, the derivative is re-measured at fair value and gains and losses from both are taken to profit or loss.
For fair value hedges relating to items carried at amortised cost, the adjustment to carrying value is amortised through profit or loss over the remaining term to maturity. Any adjustment to the carrying amount of a hedged financial instrument for which the effective interest method is used is amortised to profit or loss.
Amortisation begins when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged.
The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or the Group revokes the designation.
Cash flow hedges
Cash flow hedges are a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective portion is recognised in profit or loss.
Amounts taken to equity are transferred to the income statement when the hedged transaction affects profit or loss. Where the hedged item is the cost of a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or liability.
If the forecast transaction is no longer expected to occur, amounts previously recognised in equity are transferred to profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction occurs. If the related transaction is not expected to occur, the amount is taken to profit or loss.
Hedges of a net investment
Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised directly in equity while any gains or losses relating to the ineffective portion are recognised in profit or loss. On disposal of the foreign operation, the cumulative value of any such gains or losses recognised directly in equity is transferred to profit or loss.
Own shares
The cost of purchases of own shares held by the Employee Share Ownership Plan (ESOP) trust are deducted from equity. Where they are issued to employees or sold, no gain or loss is recognised in the income statement. Any proceeds received on disposal of the shares or transfer to employees are also recognised in equity.
Own shares purchased under the Equity Capital Management Program (ECMP) are deducted from equity. No gain or loss is recognised in the income statement on the purchase, sale, issue or cancellation of such shares. Such gains and losses are recognised directly in equity.
Interest-bearing loans and borrowings
Loans are recognised at inception at fair value of the proceeds received, net of directly attributable transaction costs. Subsequently they are measured at amortised cost using the effective interest method. Finance costs are recognised in the income statement using the effective interest method.
Convertible borrowings
On issue of a convertible borrowing, the fair value of the liability component is determined by discounting the contractual future cash flows using a market rate for a non-convertible instrument with similar terms. This value is carried as a liability on the amortised cost basis until extinguished on conversion or redemption. The remainder of the proceeds is allocated to a separate component of equity, net of issue costs, which remains constant in subsequent periods. Issue costs are apportioned between the liability and equity components based on their respective carrying amounts when the instrument was issued.
On conversion, the liability is reclassified to equity and no gain or loss is recognised in the profit or loss. Where the convertible borrowing is redeemed early or repurchased in a way that does not alter the original conversion privileges, the consideration paid is allocated to the liability and equity components. The consideration relating to the equity component is recognised in equity and the amount of gain or loss relating to the liability element in profit or loss.
The finance costs recognised in respect of the convertible borrowings includes the accretion of the liability component to the amount that will be payable on redemption.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined on a weighted average basis or using first-in-first-out basis and includes all costs incurred in the normal course of business including direct material and direct labour costs, and an allocation of production overheads, depreciation and amortisation and other costs, based on normal production capacity, incurred in bringing each product to its present location and condition. Cost of inventories includes the transfers from equity of gains and losses on qualifying cash flow hedges in respect of the purchase of materials. Inventories are categorised, as follows:
- Raw materials and consumables: Materials, goods or supplies (including energy sources) to be either directly or indirectly consumed in the production process.
- Work in progress: Items stored in an intermediate state that have not yet passed through all the stages of production.
- Finished goods: Products and materials that have passed all stages of the production process.
Net realisable value represents estimated selling price in the ordinary course of business less any further costs expected to be incurred to completion and disposal.
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank, cash in hand and short term deposits with an original maturity of 3 months or less.
For the cash flow statement, cash and cash equivalents include certain bank overdrafts where the facility forms part of the working capital cash management activities.
Government grants
Government grants are recognised where there is reasonable assurance that the grant will be received and all the attaching conditions will be complied with. Government grants in respect of capital expenditure are credited to the carrying amount of the related asset and are released to the income statement over the expected useful lives of the relevant assets. Grants which are not associated with an asset are credited to income so as to match them with the expense to which they relate.
Environmental protection, rehabilitation and closure costs
Provision is made for close down, restoration and for environmental rehabilitation costs (which include the dismantling and demolition of infrastructure, removal of residual materials and remediation of disturbed areas) in the financial period when the related environmental disturbance occurs, based on the estimated future costs using information available at the balance sheet date. The provision is discounted using a current market-based pre-tax discount rate and the unwinding of the discount is included in interest expense. At the time of establishing the provision, a corresponding asset is capitalised, where it gives rise to a future benefit, and depreciated over future production from the operations to which it relates.
The provision is reviewed on an annual basis for changes to obligations or legislation or discount rates that effect change in cost estimates or life of operations. The cost of the related asset is adjusted for changes in the provision resulting from changes in the estimated cash flows or discount rate, and the adjusted cost of the asset is depreciated prospectively.
Rehabilitation trust funds holding monies committed for use in satisfying environmental obligations are included within Other financial assets on the balance sheet.
Employee Entitlements
Provisions are recognised for short term employee entitlements, on an undiscounted basis, for services rendered by employees that remain unpaid at the balance sheet date.
Provisions for long term employee entitlements are measured using the projected unit credit method and discounted at an interest rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the liabilities.
In some of the Group’s Australian operations, long service leave (an employee entitlement for which a provision is recorded) is administered by an independent fund. The fund collects levies from employers throughout the industry based on the expected cost of future liabilities. When the Group makes long service leave payments to employees covered by the fund, it is reimbursed for the majority of the payment. To reflect the expected reimbursement for future long service leave payments from the fund, a receivable is recorded based on the present value of the future amounts expected to be reimbursed.
Other Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive), as result of past events, and it is probable that an outflow of resources that can be reliably estimated will be required to settle the obligation. Where the effect is material, the provision is discounted to net present value using an appropriate current market-based pre-tax discount rate and the unwinding of the discount is included in finance costs.
Taxation
Current tax
Current tax for each taxable entity in the Group is based on the local taxable income at the local statutory tax rate enacted or substantively enacted at the balance sheet date and includes adjustments to tax payable or recoverable in respect of previous periods.
Deferred tax
Deferred tax is recognised using the balance sheet method in respect of all temporary differences between the tax bases of assets and liabilities, and their carrying amounts for financial reporting purposes, except as indicated below:
Deferred income tax liabilities are recognised for all taxable temporary differences, except:
- where the deferred income tax liability arises from the initial recognition of goodwill, or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
- in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised, except:
- where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
- in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.
The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. To the extent that an asset not previously recognised fulfils the criteria for recognition, a deferred income tax asset is recorded.
Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which the asset is realised or the liability is settled, based on tax rates and tax laws enacted or substantively enacted at the balance sheet date.
Current and deferred tax relating to items recognised directly in equity are recognised in equity and not in the income statement.
Pensions and other post-retirement obligations
The Group’s contributions to its defined contribution pension plans are charged to the income statement in the year to which they relate.
The Group contributes to separately administered defined benefit pension plans.
For defined benefit funds, plan assets are measured at fair value, while plan liabilities are measured on an actuarial basis using the projected unit credit method and discounted at an interest rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the plan liabilities. The expected return on plan assets is based on an assessment made at the beginning of the year of long term market returns on scheme assets, adjusted for the effect on the fair value of plan assets of contributions received and benefits paid during the year. In measuring its defined benefit liability past service costs are recognised as an expense on a straight-line basis over the period until the benefits become vested. To the extent that the benefits vest immediately following the introduction of, or changes to, a defined benefit plan, the past service costs are recognised immediately. When a settlement (eliminating all obligations for part or all of the benefits that have already accrued) or a curtailment (reducing future obligations as a result of material reduction in the scheme membership or a reduction in future entitlement) occurs, the obligation and related plan assets are re-measured using current actuarial assumptions and the resultant gain or loss recognised in the income statement during the period in which the settlement or curtailment occurs.
The service cost of providing pension benefits to employees for the year is determined using the projected unit method and is recognised in the income statement. The difference between the expected return on plan assets and the unwinding of the discount on plan liabilities is recognised in the income statement.
Actuarial gains or losses are recognised directly in equity through the statement of recognised income and expenses. The full pension surplus or deficit is recorded in the balance sheet, with the exception of the impact of any recognition of past service costs. Surpluses recorded are restricted to the sum of any unrecognised past service costs and present value of any amounts the Group expects to recover by way of refunds from the plan or reductions in future contributions.
The Group also provides post-retirement healthcare benefits to certain employees in Canada, the Dominican Republic, South Africa and the United States. These are accounted for in a similar manner to the defined benefit pension plans. These benefits are unfunded.
Ordinary share capital
Ordinary shares issued by the Company are recorded at the net proceeds received, which is the fair value of the consideration received less costs that are incurred in connection with the share issue. The nominal par value of the shares issued is taken to the share capital account and any excess is recorded in the share premium account, including the costs that were incurred with the share issue.
Share-based compensation plans
The Group makes share-based awards, including free shares and options, to certain employees.
Equity-settled awards
For equity-settled awards, the fair value is charged to the income statement and credited to retained earnings, on a straight line basis over the vesting period, after adjusting for the estimated number of awards that are expected to vest (taking into account the achievement of non-market based performance conditions). The fair value of the equity-settled awards is determined at the date of the grant. In calculating fair value, no account is taken of any vesting conditions, other than conditions linked to the price of the shares of the Company (market conditions). The fair value is determined by external experts using option pricing models. At each balance sheet date prior to vesting, the cumulative expense representing the extent to which the vesting period has expired and management’s best estimate of the awards that are ultimately expected to vest is computed (after adjusting for non-market performance conditions). The movement in cumulative expense is recognised in the income statement with a corresponding entry within equity.
No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.
Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified over the original vesting period. In addition, an expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification, over the remainder of the new vesting period.
Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. Any compensation paid up to the fair value of the awards at the cancellation or settlement date is deducted from equity, with any excess over fair value being treated as an expense in the income statement. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the new awards are treated as if they are a modification of the original award, as described in the previous paragraph.
Cash-settled awards
For cash-settled awards, the fair value is re-calculated at each balance date until the awards are settled based on the estimated number of awards that are expected to vest adjusting for market and non-market based performance conditions. During the vesting period, a liability is recognised representing the portion of the vesting period which has expired at the balance sheet date times the fair value of the awards at that date. After vesting the full fair value of the unsettled awards at each balance date is recognised as a liability. Movements in the liability are recognised in the income statement. The fair value is recalculated using an option pricing model (refer to note 37).
The Group has taken advantage of the transitional provisions on adoption of IFRS in relation to unvested equity-settled awards and has applied the above policies only to awards granted after 7 November 2002 that had not vested prior to 1 January 2005.
Equity settled awards that do not meet the criteria above are accounted for in accordance with the Group’s historical UK GAAP accounting policy which was to recognise only the intrinsic value or cost of the potential awards as an expense. The cost of these awards were accrued over the performance period of each plan based on the intrinsic value of the equity settled award.
Borrowing costs
Borrowing costs are recognised as an expense in the period they incurred, except to the extent they are related to the establishment of a loan facility. In such cases they are capitalised and amortised over the life of the facility.
Comparatives
Where applicable, prior year figures have been adjusted to disclose them on the same basis as current period figures. The most significant adjustment relates to the classification of deferred stripping. Deferred stripping costs, which were previously classified within other assets on the balance sheet, have been reclassified to property, plant and equipment to more accurately reflect the nature of the asset. Previously, when the costs deferred were charged to the income statement, the amount charged was recorded in cost of sales. Consistent with the adjusted presentation in the balance sheet, amounts charged to the income statement are now included in depreciation - cost of sales. This change in classification has resulted in the reclassification from other assets to property, plant and equipment of US$304 million as at 31 December 2006 (2005 US$141 million). The reclassification from cost of sales to depreciation cost of sales was US$18 million for the year ended 31 December 2006 (2005 US$nil).
7. Acquisitions
Business combinations
Cerrejón
On 20 April 2006, the Group acquired a 331?3% interest in the Cerrejón thermal coal operation in Colombia (Cerrejón) for a cash consideration of US$1,719 million from Glencore International AG (also refer to note 36).
The provisional fair values of the identifiable assets and liabilities of the 331/3% interest in Cerrejón as at the date of acquisition were:
| US$m | IFRS carrying value | Fair value adjustments | Provisional fair value to Group |
|---|---|---|---|
| Intangible assets | 118 | (118) | - |
| Property, plant and equipment | 347 | 1,341 | 1,688 |
| Financial assets | 14 | 56 | 70 |
| Inventories | 44 | - | 44 |
| Trade and other receivables | 36 | 49 | 85 |
| 559 | 1,328 | 1,887 | |
| Trade and other payables | (30) | (49) | (79) |
| Provisions | (8) | 5 | (3) |
| Deferred tax liabilities | (77) | (400) | (477) |
| Income taxes payable | (17) | - | (17) |
| Financial liabilities | (5) | (55) | (60) |
| Net assets | 422 | 829 | 1,251 |
| Goodwill arising on acquisition | 464 | ||
| 1,715 | |||
| Consideration: | |||
| Net cash acquired with the joint venture interest | (9) | ||
| Acquisition costs | 5 | ||
| Cash paid | 1,719 | ||
| 1,715 |
These fair values are provisional due to the complexity of the acquisition. The review of the fair value of the assets and liabilities acquired will continue for 12 months from the acquisition date.
From the date of acquisition, Cerrejón has contributed US$76 million to the profit of the Group.
The goodwill balance is the result of the requirement to recognise a deferred tax liability calculated as the difference between the tax effect of the fair value of the assets and liabilities acquired and their tax bases.
Tintaya
On 21 June 2006, the Group acquired 100% of the Tintaya copper mine in Peru (Tintaya) for a consideration of US$852 million (including working capital adjustments and deferred purchase consideration) from BHP Finance International Limited.
The provisional fair values of the identifiable assets and liabilities of Tintaya as at the date of acquisition were:
| US$m | IFRS carrying value | Fair value adjustments | Provisional fair value to Group |
|---|---|---|---|
| Property, plant and equipment | 303 | 488 | 791 |
| Prepayments | 1 | - | 1 |
| Inventories | 90 | - | 90 |
| Trade and other receivables | 143 | (4) | 139 |
| 537 | 484 | 1,021 | |
| Trade and other payables | (33) | - | (33) |
| Provisions | (50) | (44) | (94) |
| Deferred tax liabilities | (9) | (130) | (139) |
| Income taxes payable | (33) | - | (33) |
| Net assets | 412 | 310 | 722 |
| Goodwill arising on acquisition | 125 | ||
| 847 | |||
| Consideration: | |||
| Net cash acquired with the subsidiary | (5) | ||
| Cash paid | 816 | ||
| Contingent consideration | 36 | ||
| 847 |
The fair values are provisional due to the complexity of the acquisition. The review of the fair value of the assets and liabilities acquired will continue for 12 months from the acquisition date.
From the date of acquisition, Tintaya has contributed US$189 million to the profit of the Group.
The goodwill balance is the result of the requirement to recognise a deferred tax liability calculated as the difference between the tax effect of the fair value of the assets and liabilities acquired and their tax bases.
Falconbridge Limited
Falconbridge Limited (Falconbridge), a company in which the Group held a 19.9% interest in at 31 December 2005, was a diversified
Canadian mining company listed on the Toronto and New York stock exchanges. On 2 August 2006 the Group acquired an additional 4.4% of Falconbridge’s issued and outstanding common shares. On 15 August 2006, a further 67.8% of Falconbridge was purchased for CAD62.50 per share to bring its total beneficial ownership to 92.1%. The remainder of the issued and outstanding common shares were purchased during the period to 1 November 2006 for CAD62.50 per share. The total cash cost of the acquisition, including amounts paid in 2005, was US$18,819 million.
Control of Falconbridge was obtained on 15 August 2006 and for the purposes of the acquisition accounting, the share purchases during the year have been treated as occurring simultaneously.
The provisional fair values of the identifiable assets and liabilities of Falconbridge as at the date of acquisition were:
| US$m | IFRS carrying value | Fair value adjustments | Provisional fair value to Group |
|---|---|---|---|
| Intangible assets | 113 | 154 | 267 |
| Property, plant and equipment | 6,437 | 12,255 | 18,692 |
| Inventories | 2,340 | (34) | 2,306 |
| Trade and other receivables | 1,380 | (8) | 1,372 |
| Investments in associates | 39 | 95 | 134 |
| Available-for-sale financial assets | 140 | - | 140 |
| Derivative financial assets | 56 | - | 56 |
| Other financial assets | 125 | - | 125 |
| Prepayments | 61 | - | 61 |
| 10,691 | 12,462 | 23,153 | |
| Trade and other payables | (1,827) | 23 | (1,804) |
| Interest-bearing loans and borrowings | (3,765) | (35) | (3,800) |
| Derivative financial liabilities | (125) | - | (125) |
| Provisions | (848) | (391) | (1,239) |
| Pension deficit | (235) | - | (235) |
| Deferred tax liabilities | (393) | (2,688) | (3,081) |
| Income tax payable | (326) | (13) | (339) |
| Net assets | 3,172 | 9,358 | 12,530 |
| Minority interests | (45) | - | (45) |
| Net attributable assets | 3,127 | 9,358 | 12,485 |
| Goodwill* | - | 2,859 | 2,859 |
| Net attributable assets including goodwill | 3,127 | 12,217 | 15,344 |
| US$m | IFRS carrying value | Fair value adjustments | Provisional fair value to Group |
|---|---|---|---|
| Total consideration: | |||
| Net cash acquired with the subsidiary | (879) | ||
| Acquisition costs | 68 | ||
| Cash paid for 19.9% acquired in 2005 | 1,715 | ||
| Cash paid for 80.1% acquired in 2006 | 17,036 | ||
| 17,940 | |||
| Goodwill arising on acquisition on 19.9% interest in Falconbridge in 2005: | |||
| Cash paid | 1,715 | ||
| Less fair value of the 19.9% share of the attributable net assets acquired** | (1,715) | ||
| Goodwill | - | ||
| Goodwill arising on acquisition on 80.1% interest in Falconbridge in 2006: | |||
| 80.1% of net cash acquired with the subsidiary | (704) | ||
| Acquisition costs | 68 | ||
| Cash paid | 17,036 | ||
| 16,400 | |||
| Less 80.1% share of the attributable net assets acquired | (12,291) | ||
| Goodwill on 80.1% acquisition*** | 4,109 | ||
| Goodwill from above* | 2,859 | ||
| Total goodwill | 6,968 | ||
| * This goodwill balance is the result of the requirement to recognise a deferred tax liability calculated as the difference between the tax effect of the fair value of the assets and liabilities and their tax bases. | |||
| ** In accordance with IFRS, this represents 19.9% of the fair value of the net assets at the date of acquisition in 2005. | |||
| *** Included in this goodwill are certain intangible assets that cannot be individually separated or reliably measured from the acquisition due to their nature. These items include the expected value of synergies and an assembled workforce. | |||
These fair values are provisional due to the complexity of the acquisition. The review of the fair value of the assets and liabilities acquired will continue for 12 months from the acquisition date.
From the date of acquisition, Falconbridge has contributed a profit of $1,024 million prior to the exceptional goodwill impairment expense of $1,378 million to the profit of the Group.
Tavistock TESA Joint Venture
On 1 December 2006, the Group agreed to purchase the remaining 50% interest in the Tavistock TESA joint venture in South Africa from its joint venture partner, Total Coal South Africa (Pty) Ltd for US$49 million (refer to note 33).
If all of the above combinations had of taken place at the beginning of the year, the Group’s revenue would have been US$26,877 million, EBITDA would have been US$9,860 million, EBIT would have been US$6,381 million and profit would have been US$3,477 million.
Prior year business combinations
African Carbon Group (ACG)
On 4 January 2005, the Group acquired 100% of the voting shares of a char producer, an input into the ferrochrome production process, ACG comprising African Fine Carbon (Pty) Limited and African Carbon Producers (Pty) Limited, unlisted companies situated in South Africa, for a cash consideration of US$64 million.
The fair values of the identifiable assets and liabilities of ACG as at the date of acquisition were:
| US$m | IFRS carrying value | Fair value adjustments | Provisional fair value to Group |
|---|---|---|---|
| Property, plant and equipment | 22 | 4 | 26 |
| Inventories | 3 | - | 3 |
| Trade and other receivables | 5 | - | 5 |
| Cash and cash equivalents | 3 | - | 3 |
| 33 | 4 | 37 | |
| Interest-bearing loans and borrowings | (7) | - | (7) |
| Deferred tax liabilities | (3) | - | (3) |
| Income taxes payable | (2) | - | (2) |
| Trade and other payables | (12) | - | (12) |
| Net assets | 9 | 4 | 13 |
| Goodwill arising on acquisition | 51 | ||
| 64 | |||
| Cost: | |||
| Cash | 63 | ||
| Acquisition costs | 1 | ||
| Cash paid | 64 | ||
| Cash outflow on acquisition: | |||
| Net cash acquired with the subsidiary | (3) | ||
| Cash paid | 64 | ||
| Net cash outflow | 61 |
Included in goodwill recognised above are supplier contracts and technology which have not been recognised separately as they cannot be accurately valued due to their nature. The recognition of goodwill also is appropriate because of the synergies obtained as char is used in the ferrochrome production process.
Interests in joint ventures
ARM
Effective 1 July 2006, the Group concluded an agreement with African Rainbow Minerals Limited (ARM), to establish a new black majority owned company, ARM Coal, to be 51% owned by ARM and 49% by Xstrata. ARM is listed on the Johannesburg Stock Exchange and is controlled by historically disadvantaged South Africans (HDSAs).
ARM Coal holds a 20% participation share in the Group’s existing South African coal business, and a majority 51% interest in the Goedgevonden project, through a joint venture with the Group.
ARM contributed ZAR400 million (US$56 million) in cash for its 51% shareholding in ARM Coal. The Group facilitated ARM Coal’s entry by funding the acquisition of 51% of the Goedgevonden project for ZAR 765 million (US$107 million) and will provide all the funding required to commission this project. The Group’s funding, including debt allocated to the existing South African coal business, was on preferential terms through the use of interest and capital repayment holidays. ARM Coal receives a proportion of the cash flows from operations with the balance used to repay debt.
In August 2006, ARM exercised an option to acquire a further 10% direct interest in the Group’s coal operations in South Africa, excluding the Goedgevonden project, for ZAR400 million (US$56 million).
This provided HDSA with an effective interest in Xstrata’s South African coal business of 36%.
Mototolo project
During 2006, the Mototolo joint venture, the terms of which were agreed with Anglo Platinum in 2005 was completed. During the first half of 2006, the Group and Kagiso Trust Investments (‘Kagiso’) formed a black economic empowerment partnership in respect of Xstrata’s 50% interest in the Mototolo joint venture. Kagiso acquired 26% of the Group’s 50% interest, resulting in Kagiso owning a fully participative 13% interest in the earnings of the Mototolo joint venture. The Group retained a 37% interest in the Mototolo joint venture. To acquire this interest, Kagiso agreed to fund the joint venture expenditure costs (both incurred and in the future) in proportion to its interest.
Pooling and Sharing Venture
In 2004, the Group and Merafe Resources Limited formed a ferrochrome Pooling and Sharing Venture. On 1 July 2006, the Group’s participation in the pooled EBITDA changed from 83.0% to 79.5%. Refer below for further details.
Prior year interests in joint ventures
Mototolo project
On 3 August 2005, Anglo Platinum and the Group formed 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. This transaction was finalised in 2006. Anglo Platinum and the Group contributed a similar amount of in-situ PGM reserves and resources. Anglo Platinum now purchases the Group’s 50% share of PGM concentrate for further smelting, refining and marketing. The Group has constructed a benefication plant at its own cost to process the UG2 chrome tailings arising from the PGM concentrator and purchases Anglo Platinum’s share of chrome concentrate.
McArthur River Joint Venture
On 22 September 2005, the Group agreed to purchase the remaining 25% interest in the McArthur River joint venture in the Northern Territory, Australia, from its Joint Venture partner, ANT Minerals Pty Ltd. ANT Minerals is a consortium comprising Nippon Mining & Metals, Mitsui & Co and Marubeni Corporation.
Pooling and Sharing Venture
In 2005, the Group and Merafe Resources Limited (Merafe) formerly SA Chrome & Alloys Limited, the Group’s partner in the ferrochrome Pooling and Sharing Venture (PSV), acquired chrome ore reserves and resources from Samancor associated with the Kroondal and Marikana mining areas for a total consideration of US$16 million and US$29 million respectively. The Group’s share of the total consideration was US$30 million for the purchase of 50% of Kroondal and 74% of Marikana mining areas. In addition, Merafe acquired Samancor’s 50% stake in the Wonderkop joint venture for a total consideration of ZAR235 million (US$38 million). As a result of these transactions, Merafe’s participation in the earnings before interest, tax, depreciation and amortisation (EBITDA) of the enlarged Venture increased to 17% from 16 November 2005 and increased to 20.5% from 1 July 2006 as outlined below. The Board of Merafe also agreed to participate in the first stage of Project Lion at 20.5%, the Group’s new 360,000 tonnes per annum ferrochrome smelter. The Group’s 50% share in the Wonderkop JV was originally excluded from the PSV and has been placed into the PSV, together with Merafe’s 50% stake acquired from Samancor, effective 16 November 2005.
The Group assisted Merafe in making these acquisitions by providing a loan to fund Merafe’s share of the Marikana resources, which was repaid on 15 November 2005, and by standing as guarantor for a new loan facility provided to Merafe by the ABSA bank of South Africa (refer to note 36), which, together with equity financing, has funded Merafe’s acquisition of Samancor’s stake in the Wonderkop JV and the Kroondal resources.
The Group had previously established the PSV with Merafe, effective from 1 July 2004. Under the PSV, the Group and Merafe contribute assets in the ratio as stated in Year 3 onwards below in exchange for the revised participations in the pooled EBITDA as follows:
| Original PSV | Amended PSV | |||
|---|---|---|---|---|
| Xstrata | Merafe | Xstrata | Merafe | |
| Year 1 | 89.0% | 11.0% | 89.0% | 11.0% |
| Year 2 | 86.0% | 14.0% | 83.0% | 17.0% |
| Year 3 onwards | 82.5% | 17.5% | 79.5% | 20.5% |
Prior year investments in associates
Falconbridge Limited
On 14 August 2005, the Group acquired 73,115,756 common shares representing 19.9% of the common shares of Falconbridge from Brookfield Asset Management (Brookfield) for a consideration of CAD2.0 billion (US$1.7 billion), or CAD28 per share, settled by issuing short term promissory note A for US$1,327 million and promissory note B for US$375 million with coupons of 4% per annum.
On 22 August 2005, promissory note A was refinanced by drawing on the US$600 million term loan and the Group’s existing syndicated loan facility (refer note 28). On 6 September 2005, promissory note B was replaced by a US$375 million convertible debenture (refer note 29).
Following the acquisition of 19.9% from Brookfield, a further 550,240 shares in Falconbridge were acquired for a cash consideration of CAD15 million (US$13 million) to 5 September 2005, taking the Group’s holding to 20%. This interest was diluted to 19.9% at 31 December 2005 after Falconbridge issued additional share capital.
The Group treated this investment as an associate until 11 October 2005. Following the announcement of Inco Limited’s proposed friendly takeover offer to acquire Falconbridge for CAD34.00 per share on 11 October 2005, equity accounting was ceased as the Group no longer had significant influence over the investment and the investment was classified as an available-for-sale asset (refer to note 22).
From the date of acquisition until 11 October 2005, the 20% interest in the Falconbridge contributed US$21 million to the net profit of the Group (refer to note 20).
8. Discontinued operations and disposals
Disposals
Cook Coal Operation
On 19 October 2006, the Group disposed of its Cook coal operation to Caledon Resources Limited. A gain of $16 million was recognised on the disposal (refer to note 10).
Prior year disposals
Discontinued operations
Forestry
The wholly owned forestry operation in Chile, Forestal Los Lagos SA (FLL) was sold on 6 January 2005. The majority (89%) of the operation was purchased by Forestal Valdivia SA, a subsidiary of Forestal Arauco, an integrated private Chilean forestry company. The remaining 11% was purchased by Forestal del Sur SA, a privately-held forestry trading company. The disposal proceeds amount to US$24 million.
As a result of the sale, the Group was released from all of its obligations with respect to the US$12 million project debt related to FLL.
A gain of US$4 million was realised upon disposal of the investment in the forestry operation, mainly due to a US$5 million recycled cumulative foreign exchange net gain from foreign currency translation reserve within equity. There were no other income or expenses during 2005.
As the disposal occurred on 6 January 2005, the only cash flow in respect of this operation in the year ended 31 December 2005 was the disposal proceeds outlined above.
Earnings/(loss) per share from discontinued operations:
| (US$) | 2006 | 2005 |
|---|---|---|
| Basic earnings per share | - | 0.01 |
| Diluted earnings per share | - | 0.01 |
9. Segmental Analysis
The Group’s primary reporting format is business segments and its secondary format is geographical segments. The operating businesses are organised and managed separately according to the nature of the products produced, with each segment representing a strategic business unit that offers different products and serves different markets. Transfer prices between business segments are set on an arm’s length basis in a manner similar to transactions with third parties. The Group’s geographical segments are determined by the location of the Group’s assets and operations.
Business segments
The following tables present revenue and profit information and certain asset and liability information regarding the Group’s business segments for the years ended 31 December 2006 and 2005.
For the year ended 31 December
| US$m | Before exceptional items | Exceptional items | 2006 | Before exceptional items | Exceptional items | 2005 |
|---|---|---|---|---|---|---|
| Revenue | ||||||
| External parties: | ||||||
| Coal - Thermal | 3,019 | - | 3,019 | 2,864 | - | 2,864 |
| Coal - Coking | 598 | - | 598 | 536 | - | 536 |
| Coal | 3,617 | - | 3,617 | 3,400 | - | 3,400 |
| Chrome | 748 | - | 748 | 798 | - | 798 |
| Platinum | 12 | - | 12 | - | - | - |
| Vanadium | 199 | - | 199 | 318 | - | 318 |
| Copper | 7,007 | - | 7,007 | 2,008 | - | 2,008 |
| Nickel | 1,678 | - | 1,678 | - | - | - |
| Zinc Lead | 3,721 | - | 3,721 | 1,449 | - | 1,449 |
| Aluminium | 530 | - | 530 | - | - | - |
| Technology | 120 | - | 120 | 77 | - | 77 |
| Revenue (continuing operations) | 17,632 | - | 17,632 | 8,050 | - | 8,050 |
| Inter-segmental: | ||||||
| Coal | 3 | - | 3 | - | - | - |
| Copper | 23 | - | 23 | - | - | - |
| Nickel | 41 | - | 41 | - | - | - |
| Zinc Lead | 59 | - | 59 | - | - | - |
| Eliminations | (126) | - | (126) | - | - | - |
| 17,632 | - | 17,632 | 8,050 | - | 8,050 |
| US$m | Before exceptional items | Exceptional items | 2006 | Before exceptional items | Exceptional items | 2005 |
|---|---|---|---|---|---|---|
| Profit before interest, taxation, depreciation and amortisation (EBITDA) | ||||||
| Coal - Thermal | 947 | 16 | 963 | 1,066 | - | 1,066 |
| Coal - Coking | 300 | - | 300 | 278 | - | 278 |
| Coal | 1,247 | 16 | 1,263 | 1,344 | - | 1,344 |
| Chrome | 141 | - | 141 | 169 | - | 169 |
| Platinum | 11 | - | 11 | - | - | - |
| Vanadium | 111 | - | 111 | 181 | - | 181 |
| Copper | 3,349 | - | 3,349 | 1,131 | - | 1,131 |
| Nickel | 788 | - | 788 | - | - | - |
| Zinc Lead | 1,477 | - | 1,477 | 303 | - | 303 |
| Aluminium | 123 | - | 123 | - | - | - |
| Technology | 26 | - | 26 | 14 | - | 14 |
| Unallocated | (170) | 13 | (157) | (62) | (10) | (72) |
| Segment EBITDA (continuing operations) | 29 | 7,132 | 3,080 | (10) | 3,070 | |
| Share of results from associates (net of tax, continuing operations): | ||||||
| Coal | 2 | - | 2 | 2 | - | 2 |
| Copper | - | - | - | 16 | - | 16 |
| Zinc Lead | 2 | - | 2 | - | - | - |
| Unallocated | - | - | - | 5 | - | 5 |
| EBITDA (continuing operations) | 7,107 | 29 | 7,136 | 3,103 | (10) | 3,093 |
| Profit on sale of discontinued operations: | ||||||
| Forestry | - | - | - | - | 4 | 4 |
| Total | 7,107 | 29 | 7,136 | 3,103 | (6) | 3,097 |
| US$m | Before exceptional items | Exceptional items | 2006 | Before exceptional items | Exceptional items | 2005 |
|---|---|---|---|---|---|---|
| Depreciation and amortisation | ||||||
| Depreciation: | ||||||
| Coal | 356 | - | 356 | 266 | - | 266 |
| Chrome | 23 | - | 23 | 24 | - | 24 |
| Vanadium | 6 | - | 6 | 6 | - | 6 |
| Copper | 495 | - | 495 | 209 | - | 209 |
| Nickel | 162 | - | 162 | - | - | - |
| Zinc Lead | 149 | - | 149 | 63 | - | 63 |
| Aluminium | 25 | - | 25 | - | - | - |
| Technology | 1 | - | 1 | 1 | - | 1 |
| Unallocated | 4 | - | 4 | 2 | - | 2 |
| Depreciation (continuing operations) | 1,221 | - | 1,221 | 571 | - | 571 |
| Amortisation: | ||||||
| Coal | 1 | - | 1 | 1 | - | 1 |
| Copper | 4 | - | 4 | - | - | - |
| Nickel | 12 | - | 12 | |||
| Zinc Lead | 1 | - | 1 | 1 | - | 1 |
| Technology | 3 | - | 3 | 3 | - | 3 |
| Unallocated | 2 | - | 2 | 2 | - | 2 |
| Total (continuing operations) | 23 | - | 23 | 7 | - | 7 |
| Total: | ||||||
| Coal | 357 | - | 357 | 267 | - | 267 |
| Chrome | 23 | - | 23 | 24 | - | 24 |
| Vanadium | 6 | - | 6 | 6 | - | 6 |
| Copper | 499 | - | 499 | 209 | - | 209 |
| Nickel | 174 | - | 174 | - | - | - |
| Zinc Lead | 150 | - | 150 | 64 | - | 64 |
| Aluminium | 25 | - | 25 | - | - | - |
| Technology | 4 | - | 4 | 4 | - | 4 |
| Unallocated | 6 | - | 6 | 4 | - | 4 |
| Depreciation and amortisation (from continuing operations) | 1,244 | - | 1,244 | 578 | - | 578 |
| Impairment of assets | ||||||
| Chrome | - | - | - | 3 | - | 3 |
| Copper | - | 598 | 598 | 2 | - | 2 |
| Zinc Lead | - | 780 | 780 | - | - | - |
| Total impairment of assets | ||||||
| (continuing operations) | - | 1,378 | 1,378 | 5 | - | 5 |
| US$m | Before exceptional items | Exceptional items | 2006 | Before exceptional items | Exceptional items | 2005 |
|---|---|---|---|---|---|---|
| Profit before interest and taxation (EBIT) | ||||||
| Segment result: | ||||||
| Coal - Thermal | 640 | 16 | 656 | 833 | - | 833 |
| Coal - Coking | 250 | - | 250 | 244 | - | 244 |
| Coal | 890 | 16 | 906 | 1,077 | - | 1,077 |
| Chrome | 118 | - | 118 | 142 | - | 142 |
| Platinum | 11 | - | 11 | - | - | - |
| Vanadium | 105 | - | 105 | 175 | - | 175 |
| Copper | 2,850 | (598) | 2,252 | 920 | - | 920 |
| Nickel | 614 | - | 614 | - | - | - |
| Zinc Lead | 1,327 | (780) | 547 | 239 | - | 239 |
| Aluminium | 98 | - | 98 | - | - | - |
| Technology | 22 | - | 22 | 10 | - | 10 |
| Unallocated | (176) | 13 | (163) | (66) | (10) | (76) |
| Segment EBIT (continuing operations) | 5,859 | (1,349) | 4,510 | 2,497 | (10) | 2,487 |
| Share of results from associates (net of tax, | ||||||
| continuing operations): | ||||||
| Coal | 2 | - | 2 | 2 | - | 2 |
| Copper | - | - | - | 16 | - | 16 |
| Zinc Lead | 2 | - | 2 | - | - | - |
| Unallocated | - | - | - | 5 | - | 5 |
| EBIT (continuing operations) | 5,863 | (1,349) | 4,514 | 2,520 | (10) | 2,510 |
| Finance income | 112 | 170 | 282 | 36 | 88 | 124 |
| Finance expense | (646) | (235) | (881) | (128) | (44) | (172) |
| Profit before taxation | 5,329 | (1,414) | 3,915 | 2,428 | 34 | 2,462 |
| Income tax expense | (1,574) | 11 | (1,563) | (551) | 8 | (543) |
| Profit from continuing operations | 3,755 | (1,403) | 2,352 | 1,877 | 42 | 1,919 |
| Profit on sale of discontinued operations: | ||||||
| Forestry | - | - | - | - | 4 | 4 |
| Total | 3,755 | (1,403) | 2,352 | 1,877 | 46 | 1,923 |
| US$m | at 31 December 2006 | at 31 December 2005 |
|---|---|---|
| Total assets | ||
| Before tax assets and investments in associates: | ||
| Coal | 8,860 | 6,218 |
| Chrome | 1,146 | 1,106 |
| Platinum | 108 | - |
| Vanadium | 170 | 214 |
| Copper | 19,339 | 2,953 |
| Nickel | 8,359 | - |
| Zinc Lead | 6,365 | 1,831 |
| Aluminium | 1,916 | - |
| Technology | 104 | 73 |
| Unallocated* | 648 | 2,373 |
| Total segmental assets (continuing operations) | 47,015 | 14,768 |
| Deferred tax assets: | ||
| Chrome | 2 | 2 |
| Copper | 6 | - |
| Zinc Lead | 8 | 3 |
| Aluminium | 4 | - |
| Unallocated | 2 | 2 |
| Total (continuing operations) | 22 | 7 |
| Investment in associates: | ||
| Coal | 48 | 44 |
| Zinc Lead | 131 | - |
| Total (continuing operations) | 179 | 44 |
| Total assets | ||
| Coal | 8,908 | 6,262 |
| Chrome | 1,148 | 1,108 |
| Platinum | 108 | - |
| Vanadium | 170 | 214 |
| Copper | 19,345 | 2,953 |
| Nickel | 8,359 | - |
| Zinc Lead | 6,504 | 1,834 |
| Aluminium | 1,920 | - |
| Technology | 104 | 73 |
| Unallocated* | 650 | 2,375 |
| Total assets (from continuing operations) | 47,216 | 14,819 |
| *2005 amounts include available-for-sale financial assets not directly attributable to business segments. 2006 amounts include corporate assets not directly attributable to business segments. | ||
| US$m | at 31 December 2006 | at 31 December 2005 |
|---|---|---|
| Total liabilities | ||
| Before tax liabilities, interest bearing loans and borrowings: | ||
| Coal | 740 | 533 |
| Chrome | 106 | 94 |
| Platinum | 37 | - |
| Vanadium | 24 | 79 |
| Copper | 2,026 | 344 |
| Nickel | 706 | - |
| Zinc Lead | 1,113 | 525 |
| Aluminium | 225 | - |
| Technology | 55 | 22 |
| Unallocated | 773 | 269 |
| Total segmental liabilities (continuing operations) | 5,805 | 1,866 |
| Tax liabilities, interest bearing loans and borrowings*: | ||
| Coal | 1,826 | 1,271 |
| Chrome | 144 | 288 |
| Vanadium | - | 6 |
| Copper | 3,334 | 624 |
| Nickel | 1,109 | - |
| Zinc Lead | 664 | 126 |
| Aluminium | 382 | - |
| Technology | 3 | 6 |
| Unallocated | 14,227 | 2,495 |
| Total tax liabilities, interest bearing loans and borrowings (continuing operations) | 21,689 | 4,816 |
| Total liabilities | ||
| Coal | 2,566 | 1,804 |
| Chrome | 250 | 382 |
| Platinum | 37 | - |
| Vanadium | 24 | 86 |
| Copper | 5,360 | 967 |
| Nickel | 1,815 | - |
| Zinc Lead | 1,777 | 651 |
| Aluminium | 607 | - |
| Technology | 58 | 28 |
| Unallocated | 15,000 | 2,764 |
| Total liabilities (from continuing operations) | 27,494 | 6,682 |
| *These liabilities are included in Interest-bearing loans and borrowings, convertible borrowings, deferred tax liabilities and Income taxes payable line items in the balance sheet. | ||
| US$m | at 31 December 2006 | at 31 December 2005 |
|---|---|---|
| Net assets | ||
| Before tax assets and liabilities, investment in associates, interest bearing loans and borrowings: | ||
| Coal | 8,120 | 5,685 |
| Chrome | 1,040 | 1,012 |
| Platinum | 71 | - |
| Vanadium | 146 | 135 |
| Copper | 17,313 | 2,609 |
| Nickel | 7,653 | - |
| Zinc Lead | 5,252 | 1,306 |
| Aluminium | 1,691 | - |
| Technology | 49 | 51 |
| Unallocated* | (125) | 2,104 |
| Total segmental net assets (continuing operations) | 41,210 | 12,902 |
| Deferred tax assets, tax liabilities, interest bearing loans and borrowings: | ||
| Coal | (1,826) | (1,271) |
| Chrome | (142) | (286) |
| Vanadium | - | (6) |
| Copper | (3,328) | (624) |
| Nickel | (1,109) | - |
| Zinc Lead | (656) | (123) |
| Aluminium | (378) | - |
| Technology | (3) | (6) |
| Unallocated | (14,225) | (2,493) |
| Total (continuing operations) | (21,667) | (4,809) |
| Investment in associates: | ||
| Coal | 48 | 44 |
| Zinc Lead | 131 | - |
| Total (continuing operations) | 179 | 44 |
| Net assets | ||
| Coal | 6,342 | 4,459 |
| Chrome | 898 | 726 |
| Platinum | 71 | - |
| Vanadium | 146 | 128 |
| Copper | 13,985 | 1,985 |
| Nickel | 6,544 | - |
| Zinc Lead | 4,727 | 1,183 |
| Aluminium | 1,313 | - |
| Technology | 46 | 45 |
| Unallocated* | (14,350) | (389) |
| Net assets (from continuing operations) | 19,722 | 8,137 |
| *2005 amounts include available-for-sale financial assets not directly attributable to business segments. 2006 amounts include corporate assets and liabilities not directly attributable to business segments. | ||
| US$m | 2006 | 2005 |
|---|---|---|
| Capital expenditure | ||
| Sustaining: | ||
| Coal | 226 | 188 |
| Chrome | 36 | 26 |
| Vanadium | 4 | 9 |
| Copper | 191 | 115 |
| Nickel | 68 | - |
| Zinc Lead | 114 | 89 |
| Aluminium | 18 | - |
| Technology | 1 | 1 |
| Unallocated | 4 | 2 |
| Total sustaining (continuing operations) | 662 | 430 |
| Expansionary: | ||
| Coal | 289 | 281 |
| Chrome | 161 | 161 |
| Platinum | 58 | - |
| Vanadium | 1 | 7 |
| Copper | 159 | 36 |
| Nickel | 87 | - |
| Zinc Lead | 158 | 32 |
| Aluminium | 4 | - |
| Technology | 1 | - |
| Total expansionary (continuing operations) | 918 | 517 |
| Total: | ||
| Coal | 515 | 469 |
| Chrome | 197 | 187 |
| Platinum | 58 | - |
| Vanadium | 5 | 16 |
| Copper | 350 | 151 |
| Nickel | 155 | - |
| Zinc Lead | 272 | 121 |
| Aluminium | 22 | - |
| Technology | 2 | 1 |
| Unallocated | 4 | 2 |
| Total (from continuing operations) | 1,580 | 947 |
The average number of employees, which includes Executive Directors and excludes contractors, during the year was as follows:
| 2006 | 2005 | |
|---|---|---|
| Coal | 7,797 | 6,762 |
| Chrome | 6,374 | 4,408 |
| Platinum | 464 | - |
| Vanadium | 530 | 363 |
| Copper | 5,619 | 3,256 |
| Nickel | 1,586 | - |
| Zinc Lead | 4,562 | 2,742 |
| Aluminium | 1,125 | - |
| Technology | 65 | 56 |
| Unallocated | 77 | 41 |
| Total (continuing operations) | 28,198 | 17,628 |
| The average number of contractors during the year was as follows: | ||
| Coal | 5,378 | 4,061 |
| Chrome | 3,912 | 500 |
| Platinum | 227 | - |
| Vanadium | 1,177 | 75 |
| Copper | 3,135 | 1,018 |
| Nickel | 310 | - |
| Zinc Lead | 1,511 | 768 |
| Aluminium | 160 | - |
| Technology | 61 | 41 |
| Total | 15,882 | 6,463 |
Geographical segments
The following tables present revenue and profit information and certain asset and liability information regarding the Group’s geographical segments for the years ended 31 December 2006 and 2005.
For the year ended 31 December
| US$m | Before exceptional items | Exceptional items | 2006 | Before exceptional items | Exceptional items | 2005 |
|---|---|---|---|---|---|---|
| Revenue by origin | ||||||
| External parties: | ||||||
| Africa | 1,673 | - | 1,673 | 1,906 | - | 1,906 |
| Americas North | 4,408 | - | 4,408 | - | - | - |
| Americas South | 4,142 | - | 4,142 | 849 | - | 849 |
| Australasia | 4,815 | - | 4,815 | 4,086 | - | 4,086 |
| Europe | 2,594 | - | 2,594 | 1,209 | - | 1,209 |
| Revenue (continuing operations) | 17,632 | - | 17,632 | 8,050 | - | 8,050 |
| Inter-segmental: | ||||||
| Americas North | 188 | - | 188 | - | - | - |
| Americas South | 374 | - | 374 | - | - | - |
| Australasia | 611 | - | 611 | 362 | - | 362 |
| Europe | 15 | - | 15 | - | - | - |
| Eliminations | (1,188) | - | (1,188) | (362) | - | (362) |
| 17,632 | - | 17,632 | 8,050 | - | 8,050 | |
| Revenue by destination | ||||||
| External parties: | ||||||
| Africa | 228 | - | 228 | 237 | - | 237 |
| Americas North | 3,895 | - | 3,895 | - | - | - |
| Americas South | 689 | - | 689 | 711 | - | 711 |
| Asia | 5,279 | - | 5,279 | 3,391 | - | 3,391 |
| Australasia | 922 | - | 922 | 655 | - | 655 |
| Europe | 6,532 | - | 6,532 | 2,964 | - | 2,964 |
| Middle east | 87 | - | 87 | 92 | - | 92 |
| Revenue (continuing operations) | 17,632 | - | 17,632 | 8,050 | - | 8,050 |
| Inter-segmental: | ||||||
| Americas North | 493 | - | 493 | - | - | - |
| Americas South | 69 | - | 69 | - | - | - |
| Australasia | 18 | - | 18 | - | - | - |
| Europe | 608 | - | 608 | 362 | - | 362 |
| Eliminations | (1,188) | - | (1,188) | (362) | - | (362) |
| 17,632 | - | 17,632 | 8,050 | - | 8,050 |
| US$m | Before exceptional items | Exceptional items | 2006 | Before exceptional items | Exceptional items | 2005 |
|---|---|---|---|---|---|---|
| EBITDA | ||||||
| Africa | 439 | - | 439 | 620 | - | 620 |
| Americas North | 1,271 | - | 1,271 | - | - | - |
| Americas South | 2,493 | - | 2,493 | 544 | - | 544 |
| Australasia | 2,520 | 16 | 2,536 | 1,800 | - | 1,800 |
| Europe | 550 | - | 550 | 178 | - | 178 |
| Unallocated | (170) | 13 | (157) | (62) | (10) | (72) |
| Segment EBITDA (continuing operations) | 29 | 7,132 | 3,080 | (10) | 3,070 | |
| Share of results from associates (net of tax, continuing operations): | ||||||
| Australasia | 2 | - | 2 | 2 | - | 2 |
| Americas North | 2 | - | 2 | - | - | - |
| Americas South | - | - | - | 16 | - | 16 |
| Unallocated | - | - | - | 5 | - | 5 |
| EBITDA (continuing operations) | 7,107 | 29 | 7,136 | 3,103 | (10) | 3,093 |
| Profit on sale of discontinued operations: | ||||||
| Americas South | - | - | - | - | 4 | 4 |
| Total | 7,107 | 29 | 7,136 | 3,103 | (6) | 3,097 |
| US$m | Before exceptional items | Exceptional items | 2006 | Before exceptional items | Exceptional items | 2005 |
|---|---|---|---|---|---|---|
| Depreciation and amortisation | ||||||
| Depreciation: | ||||||
| Africa | 106 | - | 106 | 107 | - | 107 |
| Americas North | 297 | - | 297 | - | - | - |
| Americas South | 392 | - | 392 | 103 | - | 103 |
| Australasia | 386 | - | 386 | 324 | - | 324 |
| Europe | 36 | - | 36 | 35 | - | 35 |
| Unallocated | 4 | - | 4 | 2 | - | 2 |
| Depreciation (continuing operations) | 1,221 | - | 1,221 | 571 | - | 571 |
| Amortisation: | ||||||
| Americas North | 13 | - | 13 | - | - | - |
| Americas South | 3 | - | 3 | - | - | - |
| Australasia | 4 | - | 4 | 4 | - | 4 |
| Europe | 1 | - | 1 | 1 | - | 1 |
| Unallocated | 2 | - | 2 | 2 | - | 2 |
| Amortisation (continuing operations) | 23 | - | 23 | 7 | - | 7 |
| Total: | ||||||
| Africa | 106 | - | 106 | 107 | - | 107 |
| Americas North | 310 | - | 310 | - | - | - |
| Americas South | 395 | - | 395 | 103 | - | 103 |
| Australasia | 390 | - | 390 | 328 | - | 328 |
| Europe | 37 | - | 37 | 36 | - | 36 |
| Unallocated | 6 | - | 6 | 4 | - | 4 |
| Depreciation and amortisation (from continuing operations) | 1,244 | - | 1,244 | 578 | - | 578 |
| Impairment of assets | ||||||
| Africa | - | - | - | 3 | - | 3 |
| Americas South | - | - | - | 2 | - | 2 |
| Unallocated* | - | 1,378 | 1,378 | - | - | - |
| Total impairment of assets (continuing operations) | - | 1,378 | 1,378 | 5 | - | 5 |
| *Represented by: | ||||||
| Copper Americas | - | 598 | 598 | - | - | - |
| Zinc Lead | - | 780 | 780 | - | - | - |
| - | 1,378 | 1,378 | - | - | - |
| US$m | Before exceptional items | Exceptional items | 2006 | Before exceptional items | Exceptional items | 2005 |
|---|---|---|---|---|---|---|
| EBIT | ||||||
| Segment result: | ||||||
| Africa | 333 | - | 333 | 510 | - | 510 |
| Americas North | 961 | - | 961 | - | - | - |
| Americas South | 2,098 | - | 2,098 | 439 | - | 439 |
| Australasia | 2,130 | - | 2,130 | 1,472 | - | 1,472 |
| Europe | 513 | - | 513 | 142 | - | 142 |
| Unallocated | (176) | (1,349) | (1,525) | (66) | (10) | (76) |
| Segment EBIT (continuing operations) | 5,859 | (1,349) | 4,510 | 2,497 | (10) | 2,487 |
| Share of results from associates (net of tax, continuing operations): | ||||||
| Australasia | 2 | - | 2 | 2 | - | 2 |
| Americas North | 2 | - | 2 | - | - | - |
| Americas South | - | - | - | 16 | - | 16 |
| Unallocated | - | - | - | 5 | - | 5 |
| EBIT (continuing operations) | 5,863 | (1,349) | 4,514 | 2,520 | (10) | 2,510 |
| Finance income | 112 | 170 | 282 | 36 | 88 | 124 |
| Finance expense | (646) | (235) | (881) | (128) | (44) | (172) |
| Profit before taxation | 5,329 | (1,414) | 3,915 | 2,428 | 34 | 2,462 |
| Income tax expense | (1,574) | 11 | (1,563) | (551) | 8 | (543) |
| Profit from continuing operations | 3,755 | (1,403) | 2,352 | 1,877 | 42 | 1,919 |
| Profit on sale of discontinued operations: | ||||||
| Americas South | - | - | - | - | 4 | 4 |
| Total | 3,755 | (1,403) | 2,352 | 1,877 | 46 | 1,923 |
| US$m | at 31 December 2006 | at 31 December 2005 |
|---|---|---|
| Total assets | ||
| Before tax assets and investment in associates: | ||
| Africa | 3,761 | 3,415 |
| Americas North | 12,651 | - |
| Americas South | 17,632 | 1,460 |
| Australasia | 7,668 | 6,194 |
| Europe | 1,924 | 1,326 |
| Unallocated* | 3,379 | 2,373 |
| Total segmental assets (continuing operations) | 47,015 | 14,768 |
| Deferred tax assets: | ||
| Africa | 2 | 2 |
| Americas North | 10 | - |
| Europe | 8 | 3 |
| Unallocated | 2 | 2 |
| Total (continuing operations) | 22 | 7 |
| Investment in associates: | ||
| Africa | 2 | 1 |
| Americas North | 131 | - |
| Australasia | 46 | 43 |
| Total (continuing operations) | 179 | 44 |
| Total assets | ||
| Africa | 3,765 | 3,418 |
| Americas North | 12,792 | - |
| Americas South | 17,632 | 1,460 |
| Australasia | 7,714 | 6,237 |
| Europe | 1,932 | 1,329 |
| Unallocated* | 3,381 | 2,375 |
| Total (continuing operations) | 47,216 | 14,819 |
| *2005 includes available-for-sale financial assets not directly attributable to geographical segments. 2006 amounts include corporate assets and goodwill not directly attributable to geographical segments. | ||
| US$m | at 31 December 2006 | at 31 December 2005 |
|---|---|---|
| Total liabilities | ||
| Before tax liabilities, interest bearing loans and borrowings: | ||
| Africa | 385 | 321 |
| Americas North | 2,329 | - |
| Americas South | 883 | 83 |
| Australasia | 971 | 864 |
| Europe | 464 | 329 |
| Unallocated | 773 | 269 |
| Total segmental liabilities (continuing operations) | 5,805 | 1,866 |
| Tax liabilities, interest bearing loans and borrowings: | ||
| Africa | 756 | 777 |
| Americas North | 1,486 | - |
| Americas South | 3,665 | 369 |
| Australasia | 1,431 | 1,133 |
| Europe | 124 | 42 |
| Unallocated | 14,227 | 2,495 |
| Total (continuing operations) | 21,689 | 4,816 |
| Total liabilities | ||
| Africa | 1,141 | 1,098 |
| Americas North | 3,815 | - |
| Americas South | 4,548 | 452 |
| Australasia | 2,402 | 1,997 |
| Europe | 588 | 371 |
| Unallocated | 15,000 | 2,764 |
| Total (continuing operations) | 27,494 | 6,682 |
| US$m | at 31 December 2006 | at 31 December 2005 |
|---|---|---|
| Net assets | ||
| Before tax assets and liabilities, investment in associates, interest bearing loans and borrowings: | ||
| Africa | 3,376 | 3,094 |
| Americas North | 10,322 | - |
| Americas South | 16,749 | 1,377 |
| Australasia | 6,697 | 5,330 |
| Europe | 1,460 | 997 |
| Unallocated* | 2,606 | 2,104 |
| Total segmental net assets (continuing operations) | 41,210 | 12,902 |
| Tax assets and liabilities, interest bearing loans and borrowings: | ||
| Africa | (754) | (775) |
| Americas North | (1,476) | - |
| Americas South | (3,665) | (369) |
| Australasia | (1,431) | (1,133) |
| Europe | (116) | (39) |
| Unallocated | (14,225) | (2,493) |
| Total (continuing operations) | (21,667) | (4,809) |
| Investment in associates: | ||
| Africa | 2 | 1 |
| Americas North | 131 | - |
| Australasia | 46 | 43 |
| Total (continuing operations) | 179 | 44 |
| Net assets | ||
| Africa | 2,624 | 2,320 |
| Americas North | 8,977 | - |
| Americas South | 13,084 | 1,008 |
| Australasia | 5,312 | 4,240 |
| Europe | 1,344 | 958 |
| Unallocated* | (11,619) | (389) |
| Total (continuing operations) | 19,722 | 8,137 |
| *2005 includes available-for-sale financial assets not directly attributable to geographical segments. 2006 amounts include corporate assets and goodwill not directly attributable to geographical segments | ||
| US$m | 2006 | 2005 |
|---|---|---|
| Capital expenditure | ||
| Sustaining: | ||
| Africa | 99 | 94 |
| Americas North | 100 | - |
| Americas South | 105 | 21 |
| Australasia | 324 | 284 |
| Europe | 30 | 28 |
| Unallocated | 4 | 3 |
| Total sustaining (continuing operations) | 662 | 430 |
| Expansionary: | ||
| Africa | 326 | 175 |
| Americas North | 83 | - |
| Americas South | 80 | 14 |
| Australasia | 406 | 315 |
| Europe | 23 | 13 |
| Total expansionary (continuing operations) | 918 | 517 |
| Total: | ||
| Africa | 425 | 269 |
| Americas North | 183 | - |
| Americas South | 185 | 35 |
| Australasia | 730 | 599 |
| Europe | 53 | 42 |
| Unallocated | 4 | 2 |
| Total (continuing operations) | 1,580 | 947 |
The average number of employees, which includes Executive Directors and excludes contractors, during the year was as follows:
| 2006 | 2005 | |
|---|---|---|
| Africa | 11,494 | 8,936 |
| Americas North | 3,728 | - |
| Americas South | 4,311 | 1,192 |
| Australasia | 6,832 | 5,803 |
| Europe | 1,692 | 1,656 |
| Unallocated | 141 | 41 |
| Total (continuing operations) | 28,198 | 17,628 |
The average number of contractors during the year was as follows:
| 2006 | 2005 | |
|---|---|---|
| Africa | 7,621 | 2,676 |
| Americas North | 390 | - |
| Americas South | 3,795 | 328 |
| Australasia | 3,682 | 3,163 |
| Europe | 394 | 296 |
| Total | 15,882 | 6,463 |
10. Revenues and Expenses
Revenue and expenses
| US$m | 2006 | 2005 |
|---|---|---|
| Revenue - sales of goods | 17,632 | 8,050 |
| Less cost of sales - after depreciation and amortisation and impairment of assets | (10,098) | (4,434) |
| Gross profit | 7,534 | 3,616 |
| Administrative expenses - after depreciation and amortisation and impairment of assets | 1,912 | 209 |
| Inventory recognised as an expense | 10,098 | 4,368 |
| Operating lease rental expense - minimum lease payments | 34 | 21 |
| Royalties paid | 391 | 231 |
| Research and development | 4 | 1 |
Depreciation and amortisation
| US$m | 2006 | 2005 |
|---|---|---|
| Depreciation of owned assets | 1,207 | 561 |
| Depreciation of assets held under finance leases and hire purchase contracts | 14 | 10 |
| Total depreciation | 1,221 | 571 |
| Amortisation of intangible assets | 23 | 7 |
| Total depreciation and amortisation from continuing operations | 1,244 | 578 |
Employee costs including Directors’ emoluments (refer to the Remuneration report on pages 136 to 139 for details)
| US$m | 2006 | 2005 |
|---|---|---|
| Wages and salaries | 1,181 | 718 |
| Pension and other post-retirement benefit costs (refer to note 35) | 112 | 81 |
| Social security and other benefits | 51 | 47 |
| Share-based compensation plans (refer to note 35) | 91 | 31 |
| Employee costs from continuing operations | 1,435 | 877 |
Impairment of property, plant and equipment
| US$m | 2006 | 2005 |
|---|---|---|
| Chrome - Africa | - | 3 |
| Copper - Americas | - | 2 |
| - | 5 |
The impairment of assets in 2005 relates to the write down of uneconomic exploration costs and mineral resources (included in capital works in progress and mining properties and leases) following further geological studies in South America and South Africa indicated that such assets were not recoverable.
Auditor’s remuneration
| US$m | 2006 | 2005 |
|---|---|---|
| Auditor’s remuneration (a): | ||
| - Group auditors - UK | 1 | 1 |
| - Group auditors - overseas | 9 | 4 |
| 10 | 5 | |
| Amounts paid to auditors for other work: | ||
| Group auditors (b) | ||
| - Corporate finance transactions (c) | 12 | 5 |
| - Taxation (d) | 2 | 2 |
| - Other (e) | 1 | 1 |
| 15 | 8 | |
| Other audit firms | ||
| - Internal audit | 1 | 1 |
| - Other (f) | 4 | 3 |
| 5 | 4 | |
| (a) The Group audit fee includes US$40,000 (2005 US$50,000) in respect of the parent company. | ||
| (b) Included in other fees to auditors is US$1 million (2005 US$1 million) relating to the Company and its UK subsidiaries. | ||
| (c) 2006 includes amounts incurred on the acquisitions of Cerrejón, Tintaya and Falconbridge. Of this amount US$10 million has been capitalised as acquisition costs | ||
| (refer to note 7). 2005 includes amounts spent on the proposed acquisition of WMC, and other potential transactions. | ||
| (d) Includes corporate tax compliance and advisory services. | ||
| (e) Primarily relates to accounting advice and non-statutory assurance services. | ||
| (f) Includes tax advisory services, accounting assistance and acquisition due diligence. | ||
The Corporate Governance Report set out on pages 115 to 125 details the Group’s policy with regard to the independence and objectivity of the external and internal auditors and the provision and approval of non-audit services provided by the external auditors.
Finance income
| US$m | 2006 | 2005 |
|---|---|---|
| Bank interest | 93 | 20 |
| Dividends | 3 | 9 |
| Interest - other | 16 | 7 |
| Finance income before exceptional items | 112 | 36 |
| Foreign currency gains on bank loans | 120 | - |
| Recycled gains from the foreign currency translation reserve | 50 | 88 |
| Exceptional finance income | 170 | 88 |
| Total finance income | 282 | 124 |
Finance costs
| US$m | 2006 | 2005 |
|---|---|---|
| Amortisation of loan issue costs | 9 | 2 |
| Convertible borrowings amortised cost charge | 8 | 10 |
| Discount unwinding | 40 | 14 |
| Finance charges payable under finance leases and hire purchase contracts | 17 | 7 |
| Interest on bank loans and overdrafts | 398 | 43 |
| Interest on convertible borrowings and capital market notes | 142 | 38 |
| Interest on minority interest loans | 6 | 6 |
| Interest on preference shares | 12 | - |
| Unrealised loss on interest rate swap | - | 2 |
| Interest - other | 14 | 6 |
| Finance cost before exceptional items | 646 | 128 |
| Foreign currency losses on bank loans* | 129 | - |
| Recycled losses from the foreign currency translation reserve | 97 | 27 |
| Loan issue costs written-off on facility refinancing | 9 | 17 |
| Exceptional finance cost | 235 | 44 |
| Total finance cost | 881 | 172 |
| *These costs relate to foreign currency gains and losses on borrowings denominated in foreign currencies, predominantly CAD. | ||
Total interest income and expense (calculated using the effective interest method) for financial assets and liabilities not at fair value through the profit and loss are US$112 million (2005 US$36 million) and US$598 million (2005 US$122 million) respectively.
Exceptional Items
Restructuring and closure costs
Restructuring and redundancy costs of US$50 million (2005 US$nil) relate to the former Falconbridge Group following its acquisition.
Acquisition costs
The Group made a cash offer to purchase the entire share capital of WMC Resources Limited, an Australian listed diversified mining company in October 2004. In March 2005 BHP Billiton Limited announced a higher cash offer and the Group announced it would not increase its offer price. The Group incurred acquisition costs of US$10 million and US$17 million of financing costs in relation to the offer for WMC Resources Limited. The tax credit attributable to the costs incurred is US$8 million.
Impairment of Goodwill
The acquisition of Falconbridge was completed in two stages. The Group acquired 19.9% of Falconbridge at CAD28 per share in 2005, before acquiring the remaining 80.1% in 2006 at a price of CAD62.50 per share. The average price paid per share for the 100% interest was CAD56.44. The Group’s ability to average the purchase price paid for the second tranche of shares over the full purchase provided the Group with a compelling competitive advantage and was a significant factor in the success of the transaction.
Under IFRS, this advantage cannot be recognised, as goodwill is calculated separately for each transaction, regardless of the average price paid per share to acquire the 100% interest. This accounting treatment has resulted in the creation of additional goodwill of US$1.5 billion. The Group has completed a detailed fair value assessment of the assets acquired and, in accordance with IFRS, tested goodwill for impairment. As a consequence, the Company has determined that an impairment charge of US$1,378 million is appropriate (refer to note 15).
Profit on sale of available-for-sale financial assets
| US$m | 2006 | 2005 |
|---|---|---|
| Unallocated | 63 | - |
| 63 | - |
Listed shares were sold for a consideration of US$190 million in 2006.
Profit on sale of operations
| US$m | 2006 | 2005 |
|---|---|---|
| Coal - Australia | 16 | - |
| 16 | - |
On 19 October 2006, the Group disposed of its Cook coal operation in Australia to Caledon Resources Limited. A gain of US$16 million was recognised on the disposal (refer to note 8).
11. Income Taxes
Income tax charge
Significant components of income tax expense for the years ended:
| US$m | 2006 | 2005 |
|---|---|---|
| Consolidated income statement | ||
| Current tax: | ||
| Based on taxable income of the current year | 1,387 | 499 |
| Prior year over provision | (1) | (13) |
| Total current taxation charge for the year | 1,386 | 486 |
| Deferred taxation: | ||
| Origination and reversal of temporary differences | 144 | 81 |
| Change in tax rates | (6) | (21) |
| Benefit from previously unrecognised tax losses, tax credits or temporary differences of a prior year that are used to reduce deferred tax expense | (4) | (1) |
| Benefit from entry into the Australian tax consolidation regime | - | (2) |
| Prior year under provision | 43 | - |
| Total deferred taxation charge/(credit) for the year | 177 | 57 |
| Total taxation charge | 1,563 | 543 |
| Total taxation charge reported in consolidated income statement | 1,563 | 543 |
| Income tax attributable to discontinued operations | - | - |
| Total taxation charge | 1,563 | 543 |
| UK taxation included above: | ||
| Current tax | 2 | 1 |
| Deferred tax | (4) | - |
| Total taxation charge/(credit) | (2) | 1 |
| Recognised directly in equity | ||
| Deferred tax: | ||
| Available-for-sale financial assets | 75 | (83) |
| Cash flow hedges | (16) | 59 |
| Other equity classified items | (44) | 18 |
| Total taxation charge/(credit) reported in equity | 15 | (6) |
A reconciliation of income tax expense applicable to accounting profit before income tax at the weighted average statutory income tax rate to income tax expense at the Group average effective income tax rate for the years ended is as follows:
| US$m | 2006 | 2005 |
|---|---|---|
| Profit before taxation from continuing operations | 3,915 | 2,462 |
| Profit before taxation from discontinued operations | - | 4 |
| Profit before taxation | 3,915 | 2,466 |
| At average statutory income tax rate 24.3% (2005 24.2%) | 950 | 598 |
| Goodwill impairment | 455 | - |
| Additional mining taxes | 50 | - |
| Foreign currency gains and losses | 67 | 5 |
| Non-deductible expenses | 30 | 7 |
| Rebatable dividends received | (8) | (1) |
| Research and development allowances | (17) | (31) |
| Change in tax rates | (6) | (21) |
| Benefit from entry into the Australian tax consolidation regime | - | (2) |
| Prior year under/(over) provision | 43 | (13) |
| Other | (1) | 1 |
| At average effective income tax rate | 1,563 | 543 |
| Total taxation charge reported in consolidated income statement | 1,563 | 543 |
| Income tax attributable to discontinued operations | - | - |
| At average effective income tax rate | 1,563 | 543 |
The above reconciling items are disclosed at the tax rates that apply in the country where they have arisen.
The average statutory income tax rate is the average of the standard income tax rates applicable in the countries in which the Group operates, weighted by the profit/(loss) before tax of the subsidiaries in the respective countries as included in the consolidated accounts.
The change in the average statutory income tax rate is due to the variation in the weight of subsidiaries’ profits by various changes in the enacted standard income tax rates and due to the acquisition of subsidiaries in countries with different tax rates.
Deferred income taxes
Deferred tax assets are recognised for the carry-forward of unused tax losses and unused tax credits to the extent that it is probable that taxable profits will be available against which the unused tax losses/credits can be utilised.
Unrecognised tax losses
The Group has tax losses that are available indefinitely of US$8 million (2005 US$9 million) to carry forward against future taxable income of the companies in which the losses arose. Deferred tax assets have not been recognised in respect of these losses as they may not be used to offset taxable profits elsewhere in the Group and they have arisen in subsidiaries that have been loss-making for some time. There are no other deductible temporary differences that have not been not recognised at balance sheet date.
Temporary differences associated with Group investments
At 31 December 2006, there was no recognised deferred tax liability (2005 US$nil) for taxes that would be payable on the un-remitted earnings of certain of the Group’s subsidiaries, associates or joint ventures as:
- The Group has determined that undistributed profits of its subsidiaries will not be distributed in the foreseeable future;
- The profits of the associates will not be distributed until it obtains the consent of the Group; and
- The investments are not held for resale and are expected to be recouped by continued use of these operations by the subsidiaries.
The temporary differences associated with investments in subsidiaries, associates and joint ventures, for which deferred tax assets have not been recognised amount to US$2,608 million (2005 US$315 million).
There are no income tax consequences for the Group attaching to the payment of dividends by the Company to its shareholders.
The deferred tax assets/(liabilities) included in the balance sheet is as follows:
| US$m | 2006 | 2005 |
|---|---|---|
| Tax losses | 78 | 73 |
| Derivative financial instruments | 35 | 77 |
| Employee provisions | 65 | 49 |
| Other provisions | 65 | 15 |
| Rehabilitation and closure | 120 | 67 |
| Research and development pools | 209 | - |
| Accelerated depreciation | (5,289) | (1,200) |
| Coal export rights | (253) | (300) |
| Other intangibles | (31) | (10) |
| Government grants | (13) | (15) |
| Deferred stripping | (49) | (36) |
| Available-for-sale financial assets | (7) | (83) |
| Other equity related items | (3) | 18 |
| Other | (29) | 13 |
| (5,102) | (1,332) | |
| Represented on the face of the balance sheet as: | ||
| Deferred tax assets | 22 | 7 |
| Deferred tax liabilities | (5,124) | (1,339) |
| (5,102) | (1,332) |
The deferred tax included in the Group income statement is as follows:
| US$m | 2006 | 2005 |
|---|---|---|
| Tax losses | 118 | 106 |
| Accelerated depreciation | 95 | (11) |
| Deferred stripping | 17 | 26 |
| Rehabilitation and closure | (29) | (6) |
| Employee provisions | (5) | 4 |
| Other provisions | (2) | (6) |
| Other | (17) | (56) |
| From continuing operations | 177 | 57 |
| From discontinued operations | - | - |
| 177 | 57 |
Tax audits
The company periodically assesses its liabilities and contingencies for all tax years open to audit based upon the latest information available. For those matters where it is probable that an adjustment will be made, the company recorded its best estimate of the tax liability, including related interest charges, in the current tax liability. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax laws. Whilst management believes they have adequately provided for the probable outcome of these matters, future results may include favourable or unfavourable adjustments to these estimated tax liabilities in the period the assessments are made, or resolved, or when the status of limitation lapses. The final outcome of tax examinations may result in a materially different outcome than assumed in the tax liabilities.
12. Earnings Per Share
| US$m | 2006 | 2005 |
|---|---|---|
| Continuing operations: | ||
| Profit before exceptional items attributable to ordinary equity holders of the parent from continuing operations | 3,350 | 1,660 |
| Exceptional items from continuing operations | (1,403) | 42 |
| Profit attributable to ordinary equity holders of the parent from continuing operations | 1,947 | 1,702 |
| Interest in respect of convertible borrowings | 38 | 41 |
| Convertible borrowings interest rate swap fair value hedge movement | (1) | (19) |
| Profit attributable to ordinary equity holders of the parent for diluted earnings per share from continuing operations | 1,984 | 1,724 |
| Total operations: | ||
| Profit before exceptional items attributable to ordinary equity holders of the parent from continuing operations | 3,350 | 1,660 |
| Exceptional items from continuing operations | (1,403) | 42 |
| Profit attributable to ordinary equity holders of the parent from continuing operations | 1,947 | 1,702 |
| Profit/(loss) attributable to ordinary equity holders of the parent from discontinued operations | - | 4 |
| Profit attributable to ordinary equity holders of the parent | 1,947 | 1,706 |
| Interest in respect of convertible borrowings | 38 | 41 |
| Convertible borrowings interest rate swap fair value hedge movement | (1) | (19) |
| Profit attributable to ordinary equity holders of the parent for diluted earnings per share | 1,984 | 1,728 |
| Weighted average number of shares (000) excluding own shares: | ||
| For basic earnings per share | 771,820 | 684,196 |
| Effect of dilution: | ||
| - Free shares and share options (000) | 9,441 | 5,394 |
| - Convertible borrowings | 50,294 | 73,695 |
| For diluted earnings per share | 831,555 | 763,285 |
| Basic earnings per share (US$) | ||
| Continuing operations: | ||
| - before exceptional items | 4.34 | 2.42 |
| - exceptional items | (1.82) | 0.06 |
| 2.52 | 2.48 | |
| Discontinued operations: | ||
| - before exceptional items | - | - |
| - exceptional items | - | 0.01 |
| - | 0.01 | |
| Total: | ||
| - before exceptional items | 4.34 | 2.42 |
| - exceptional items | (1.82) | 0.07 |
| 2.52 | 2.49 | |
| Diluted earnings per share (US$) | ||
| Continuing operations: | ||
| - before exceptional items | 4.07 | 2.20 |
| - exceptional items | (1.68) | 0.06 |
| 2.39 | 2.26 | |
| Discontinued operations: | ||
| - before exceptional items | - | - |
| - exceptional items | - | 0.01 |
| - | 0.01 | |
| Total: | ||
| - before exceptional items | 4.07 | 2.20 |
| - exceptional items | (1.68) | 0.07 |
| 2.39 | 2.27 |
Basic earnings per share is calculated by dividing the net profit for the year attributable to the equity holders of the parent company by the weighted average number of ordinary shares outstanding for the year, excluding own shares. Adjustments are made for continuing and discontinued operations and before exceptional items and after exceptional items as outlined above, to present a meaningful basis for analysis.
Diluted earnings per share is based on basic earnings per share adjusted for the potential dilution if Director and employee free shares and share options are exercised and the convertible bonds and debentures are converted into ordinary shares. An adjustment is also made to net profit for the interest in respect of the convertible borrowings and related hedging.
On 30 October 2006, 235,787,596 ordinary shares were issued under a rights issue which was structured as an issue of one new ordinary share at a price of GBP 12.65 per share for every three existing ordinary shares held. The theoretical ex-rights price for an ordinary share was GBP19.51. The 2005 comparative earnings per share have been restated after applying a factor of 0.9 in order to adjust for the bonus element of the rights issue and the 2006 figures have also been adjusted for this bonus element.
On 31 January 2007, a further 4 million ordinary shares were issued by the Company to the ESOP (refer to note 26). In February 2007, 22,832,325 ordinary shares were issued as a result of conversions by the holders of the Convertible Bonds (refer to note 29). The 2006 earnings per share figures would not be significantly different had these shares been issued during in 2006.
13. Dividends Paid and Proposed
| US$m | 2006 | 2005 |
|---|---|---|
| Declared and paid during the year: | ||
| Final dividend for 2005 - 22.4 cents per ordinary share (2004 - 14.3 cents per ordinary share) | 159 | 100 |
| Interim dividend for 2006 - 11.6 cents per ordinary share (2005 - 8.1 cents per ordinary share) | 92 | 54 |
| 251 | 154 | |
| Proposed for approval at the Annual General Meeting (not recognised as a liability as at 31 December): | ||
| Final dividend for 2006 - 30 cents per ordinary share (2005 - 22.4 cents per ordinary share) | 281 | 150 |
Dividends declared in respect of the year ended 31 December 2006 will be paid on 18 May 2007. As stated in note 26, own shares held in the ESOP and by the ECMP have waived the right to receive dividends.
The dividends per share declared and paid prior to 30 October 2006 have been adjusted by the rights issue bonus adjustment factor of 0.9 (refer to note 12).
14. Intangible Assets
| US$m | Export rights* | Goodwill* | Technology patents* | Computer software & development | Other | 2006 |
|---|---|---|---|---|---|---|
| At 1 January 2006 | 1,130 | 229 | 53 | 16 | 2 | 1,430 |
| Acquisitions | - | 7,557 | - | 7 | 260 | 7,824 |
| Additions | - | - | - | 16 | - | 16 |
| Amortisation charge | - | - | (3) | (6) | (14) | (23) |
| Disposals | (26) | - | - | - | - | (26) |
| Impairment charge | - | (1,378) | - | - | - | (1,378) |
| Translation adjustments | (96) | 14 | 3 | 1 | 2 | (76) |
| At 31 December 2006 | 1,008 | 6,422 | 53 | 34 | 250 | 7,767 |
| At 1 January 2006: | ||||||
| Cost | 1,130 | 229 | 60 | 25 | 2 | 1,446 |
| Accumulated amortisation | - | - | (7) | (9) | - | (16) |
| Net carrying amount | 1,130 | 229 | 53 | 16 | 2 | 1,430 |
| At 31 December 2006: | ||||||
| Cost | 1,008 | 7,801 | 64 | 47 | 264 | 9,184 |
| Accumulated amortisation | - | (1,379) | (11) | (13) | (14) | (1,417) |
| Net carrying amount | 1,008 | 6,422 | 53 | 34 | 250 | 7,767 |
| *Purchased as part of business combinations | ||||||
| US$m | Export rights* | Goodwill* | Technology patents* | Computer software & development | Other | 2005 |
|---|---|---|---|---|---|---|
| At 1 January 2005 | 1,245 | 211 | 59 | 7 | 2 | 1,524 |
| Acquisitions | - | 51 | - | - | - | 51 |
| Additions | - | - | - | 13 | - | 13 |
| Amortisation charge | - | - | (3) | (4) | - | (7) |
| Translation adjustments | (115) | (33) | (3) | - | - | (151) |
| At 31 December 2005 | 1,130 | 229 | 53 | 16 | 2 | 1,430 |
| At 1 January 2005: | ||||||
| Cost | 1,245 | 211 | 64 | 12 | 12 | 1,544 |
| Accumulated amortisation | - | - | (5) | (5) | (10) | (20) |
| Net carrying amount | 1,245 | 211 | 59 | 7 | 2 | 1,524 |
| At 31 December 2005: | ||||||
| Cost | 1,130 | 229 | 60 | 25 | 2 | 1,446 |
| Accumulated amortisation | - | - | (7) | (9) | - | (16) |
| Net carrying amount | 1,130 | 229 | 53 | 16 | 2 | 1,430 |
| *Purchased as part of business combinations | ||||||
The Group has a 20.91% interest in the service organisation, Richards Bay Coal Terminal Company Limited, acquired in a business combination, through which the shareholders gain access to export markets enabling them to realise higher coal sales prices than in the domestic market. Previously, the Directors regarded the right to export coal afforded by the interest in the terminal to have an indefinite life, as the operations utilising the terminal had appropriate reserves (including undeveloped reserves) to allow the use of the terminal for an indefinite period.
Further, the land on which the terminal operates is leased on a long term basis from the state owned ports authority. There has been a history of lease renewal and extension by Richards Bay Coal Terminal Company Limited and it is the intention to continually renew the long term lease. Accordingly, these coal export rights have not been amortised but have been subject to an annual impairment review. In light of the approval of the Goedgevonden project subsequent to year end, the Directors reassessed whether it is still appropriate to treat this as an indefinite life asset and has concluded that it would be appropriate to begin amortisation prospectively in 2007 based on an updated estimate of its useful lives.
The Group acquired the right to market to third parties various leading technologies for the mining, mineral processing and metals extraction industries, in a business combination. The technology patents are amortised over their useful economic lives of 20 years to June 2023.
Computer software and software development is being amortised over their useful economic lives of three years.
Other intangible assets is mainly comprised of a long-term feed contract held by the Group’s nickel business unit. This contract is being amortised over its remaining six year contract term.
The disposal of a portion of the export rights which occurred during 2006 was the result of the transaction with ARM (refer to note 7).
15. Impairment Testing - Goodwill and Indefinite Life Intangibles
Export rights
| US$m | 2006 | 2005 |
|---|---|---|
| Coal export rights carrying value: | ||
| Coal Africa | 1,008 | 1,130 |
As outlined in note 14 during 2006, the Group’s export right asset was deemed to have an indefinite life. For the purpose of impairment testing, this asset has been allocated to the Coal - Africa Cash-generating unit. Impairment testing is undertaken annually, and whenever there are indicators of impairment. The most recent test was undertaken at 31 December 2006 and in assessing the asset for impairment, the carrying amount of the cash-generating unit has been compared with its recoverable amount.
The recoverable amount of the coal export rights in Africa has been determined based on a value-in-use calculation. Value-in-use is based on cash flows expected to be generated by the mines that rely on the coal export right. Such cash flows are projected for a period up to the date that mining ceases, based on management’s current expectation. This date depends on a number of variables, including the recoverable reserves and the forecast selling price for such production. Cash flows have been projected for a maximum of 36 years (2005: 40 years).
Goodwill
Goodwill has been allocated to the following reportable segments, or when appropriate to a lower level of cash-generating unit, which are expected to benefit from the asset. The carrying values of goodwill by cash generating unit are as follows:
| US$m | 2006 | 2005 |
|---|---|---|
| Coal - Colombia | 464 | - |
| Chrome - Africa | 46 | 51 |
| Copper - Americas* | 1,185 | - |
| Copper - Americas North | 257 | - |
| Copper - Americas South | 1,252 | - |
| Nickel - Americas North | 589 | - |
| Nickel - Americas South | 213 | - |
| Nickel - Africa | 45 | - |
| Nickel - Australasia | 46 | - |
| Zinc Lead* | 1,546 | - |
| Zinc Lead - Americas North | 194 | - |
| Zinc Lead - Americas South | 160 | - |
| Zinc Lead - Australasia | 9 | - |
| Zinc Lead - Europe | 198 | 178 |
| Aluminium - Americas North | 218 | - |
| 6,422 | 229 | |
| *Net of the impairment loss discussed below. | ||
The goodwill recognised in 2006 arose on the Cerrejón, Tintaya and Falconbridge acquisitions (refer to note 7).
As outlined in note 7, the US$464 million goodwill recognised on the Cerrejón acquisition and the US$125 recognised Tintaya acquisition, relate to the requirement to recognise a deferred tax liability, calculated as the difference between the tax effect of the fair value of assets and liabilities acquired and their tax bases.
US$6,968 million goodwill was recognised on the Falconbridge acquisition (refer to note 7). Of this amount US$2,859 million relates to the requirement to create a deferred tax liability, whilst US$4,109 million relates to goodwill recognised on the acquisition of 80.1% of the company in 2006.
The Group performs goodwill impairment testing on an annual basis and when there are indicators of impairment. The most recent test was undertaken at 31 December 2006.
In assessing whether goodwill has been impaired, the carrying amount of the cash-generating unit or reportable segment is compared with its recoverable amount.
For the purpose of goodwill impairment testing, recoverable amounts have been determined based on value in use calculations. Value in use is based on the cash flows expected to be generated from mines, smelting and refining operations included within the cash-generating units or reportable segments. Cash flows are projected for periods up to the date mining and refining ceases based on management’s current expectations. This date depends on a number of variables, including recoverable reserves and resources, the forecast selling prices for such production and the treatment charges received from the refining operations. Cash flows have been projected for a maximum of 21 years (2005: 20 years).
Key assumptions
The key assumptions used in the value in use calculations for goodwill and the export right asset are:
- recoverable reserves and resources;
- commodity prices;
- treatment charges receivable by smelting and refining operations; and
- discount rates.
As outlined above, economically recoverable reserves and resources are based on management’s current expectation, based on the availability of reserves at mine sites and exploration and evaluation work undertaken by appropriately qualified persons.
Long-term commodity prices and treatment charges are based on external market consensus forecasts. Specific prices are determined from information available in the market after considering the nature of the commodity produced and long term market expectations.
Discount rates utilised are outlined below, and represent the nominal pre-tax rates that reflect the current market assessments of the time value of money and the risks specific to the cash-generating unit or reportable segment for which cash flows have not been adjusted. These rates are based on the weighted average cost of capital specific to each cash-generating unit or reportable segment and the currency of the cash flows generated. These rates have been calculated with reference to information from third party advisors.
| 2006 | 2005 | |
|---|---|---|
| Coal - South Africa | 10.2% | 11.3% |
| Chrome - Africa | 11.1% | 13.2% |
| Copper - Americas | 17.2% | - |
| Zinc Lead | 13.3% | - |
| Zinc Lead - Europe | 13.6% | 8.7% |
Impairment losses
The impairment losses recognised as an exceptional item in the income statement relates to the following:
| US$m | 2006 | 2005 |
|---|---|---|
| Goodwill: | ||
| Copper - Americas | 598 | - |
| Zinc Lead | 780 | - |
| 1,378 | - |
The acquisition of Falconbridge was completed in two stages. Xstrata acquired 19.9% of Falconbridge at CAD28 per share in 2005, before acquiring the remaining 80.1% in 2006 at a price of CAD62.50 per share. The average price paid per share for the 100% interest was CAD56.44. Xstrata’s ability to average the purchase price paid for the second tranche of shares over the full purchase provided Xstrata with a compelling competitive advantage and was a significant factor in the success of the transaction.
Under IFRS, this advantage cannot be recognised, as goodwill is calculated separately for each transaction. This accounting treatment has resulted in the creation of additional goodwill of US$1.5 billion. Xstrata has completed a detailed fair value assessment of the assets acquired and, in accordance with IFRS, tested goodwill for impairment. As a consequence, the company has determined that an impairment charge of US$1,378 million is appropriate.
Sensitivity to changes in assumptions
Management is of the opinion that no reasonably possible change in the key assumptions above, would result in an impairment expense being recognised, except in relation to goodwill Copper - Americas and goodwill - Zinc Lead.
As a result of the impairment expense above, the goodwill allocated to Copper Americas and Zinc Lead, is now recorded at its recoverable amount and therefore any adverse changes in key assumptions would cause a further impairment loss to be recognised.
These key assumptions are discussed below:
Recoverable reserves and resources - The total recoverable reserve is 1,680 million tonnes of ore and resource is 1,279 million tonnes of ore for Copper Americas. The total recoverable reserves is 180 tonnes of ore and resource is 563 tonnes of ore for Zinc Lead. As outlined above this is based on management’s current estimate, using appropriate exploration and evaluation techniques.
Commodity prices - In performing the value in use calculation for Copper Americas commodity prices have been based on external market consensus forecasts. The copper prices range from US$1.00 per pound to US$3.28 per pound, varying in accordance with the year the sale is expected to occur.
Treatment charges received from smelting and refining - In performing the value in use calculation for Zinc Lead treatment charges have been estimated to be in the range of US$150 to US$250 per tonne for zinc and US$110 per tonne for lead refining fees, based on the year of processing. As outlined above, these prices are based on external market consensus forecasts.
Commodity prices - In performing the value in use calculation for Zinc Lead commodity prices have been based on external market consensus forecasts. The prices range from US$1,124 to US$3,241 per tonne for zinc and US$639 to US$1,146 per tonne for lead, varying in accordance with the year the sale is expected to occur.
16. Property, Plant and Equipment
| US$m | Land and buildings | Mining properties and leases | Plant and equipment | Capital works in progress | 2006 |
|---|---|---|---|---|---|
| At 1 January 2006, net of accumulated depreciation | 689 | 3,722 | 3,124 | 551 | 8,086 |
| Acquisitions | 2,013 | 15,625 | 3,061 | 498 | 21,197 |
| Additions | 103 | 212 | 636 | 702 | 1,653 |
| Disposals | (8) | (27) | (22) | - | (57) |
| Rehabilitation provision adjustments | - | 88 | - | - | 88 |
| Reclassifications | 20 | 56 | 118 | (194) | - |
| Depreciation charge | (120) | (575) | (526) | - | (1,221) |
| Translation adjustments | 52 | 144 | 134 | 11 | 341 |
| At 31 December 2006, net of accumulated depreciation | 2,749 | 19,245 | 6,525 | 1,568 | 30,087 |
| At 1 January 2006: | |||||
| Cost | 855 | 4,378 | 4,132 | 553 | 9,918 |
| Accumulated depreciation | (166) | (656) | (1,008) | (2) | (1,832) |
| Net carrying amount | 689 | 3,722 | 3,124 | 551 | 8,086 |
| At 31 December 2006: | |||||
| Cost | 3,028 | 20,504 | 8,048 | 1,569 | 33,149 |
| Accumulated depreciation | (279) | (1,259) | (1,523) | (1) | (3,062) |
| Net carrying amount | 2,749 | 19,245 | 6,525 | 1,568 | 30,087 |
| US$m | Land and buildings | Mining properties and leases | Plant and equipment | Capital works in progress | 2005 |
|---|---|---|---|---|---|
| At 1 January 2005, net of accumulated depreciation | 667 | 4,006 | 3,149 | 379 | 8,201 |
| Acquisitions | 5 | - | 20 | - | 25 |
| Additions | 26 | 188 | 463 | 329 | 1,006 |
| Disposals | (17) | (1) | (4) | (6) | (28) |
| Rehabilitation provision adjustments | - | 5 | - | - | 5 |
| Reclassifications | 125 | (40) | 40 | (125) | - |
| Depreciation charge | (35) | (190) | (346) | - | (571) |
| Impairments recognised (refer to note 11) | (4) | - | (1) | (5) | |
| Translation adjustments | (82) | (242) | (198) | (25) | (547) |
| At 31 December 2005, net of accumulated depreciation | 689 | 3,722 | 3,124 | 551 | 8,086 |
| At 1 January 2005: | |||||
| Cost | 770 | 4,451 | 3,997 | 383 | 9,601 |
| Accumulated depreciation | (103) | (445) | (848) | (4) | (1,400) |
| Net carrying amount | 667 | 4,006 | 3,149 | 379 | 8,201 |
| At 31 December 2005: | |||||
| Cost | 855 | 4,378 | 4,132 | 553 | 9,918 |
| Accumulated depreciation | (166) | (656) | (1,008) | (2) | (1,832) |
| Net carrying amount | 689 | 3,722 | 3,124 | 551 | 8,086 |
Land and buildings include non-depreciating freehold land amounting to US$214 million (2005 US$163 million).
Mining properties and leases at 31 December 2006 include capitalised exploration costs of US$245 million (2005 US$19 million) and capitalised deferred stripping costs of US$304 million (2005 US$141 million). US$nil (2005 US$11 million) of interest and US$89 million (2005 US$72 million) of deferred stripping costs were capitalised during the year.
The carrying value of plant and equipment held under finance leases and hire purchase contracts at 31 December 2006 is US$236 million (2005 US$237 million). Leased assets and assets under hire purchase contracts are pledged as security for the related finance leases and hire purchase liabilities. The carrying value of other property, plant and equipment pledged as security is US$nil (2005 US$nil).
No interest was capitalised during 2006 or 2005 and there is no capitalised interest within property, plant and equipment at 31 December 2006 and 2005.
The carrying value of property, plant and equipment at 31 December 2006 that is temporarily idle is US$36 million (2005 US$3 million), retired from active use and held for resale is US$nil (2005 US$nil).
The Group has made commitments to acquire property, plant and equipment totalling US$227 million at 31 December 2006 (2005 US$107 million).
17. Biological Assets
| US$m | Cattle | 2006 |
|---|---|---|
| At 1 January 2006 | 13 | 13 |
| Net gain/(loss) from fair value less estimated selling cost adjustments | 1 | 1 |
| Translation adjustments | 1 | 1 |
| At 31 December 2006 | 15 | 15 |
| US$m | Cattle | Plantations | 2005 |
|---|---|---|---|
| At 1 January 2005 | 13 | 19 | 32 |
| Additions | 2 | - | 2 |
| Disposal of subsidiaries | - | (19) | (19) |
| Disposals | (3) | - | (3) |
| Net gain/(loss) from fair value less estimated selling cost adjustments | 1 | - | 1 |
| At 31 December 2005 | 13 | - | 13 |
Biological assets are stated at fair value less estimated selling costs, which has been determined based on independent valuations as at 31 December 2006 and 2005, on the basis of open market value, supported by market evidence. As at 31 December 2006, the Group owned 45 thousand (2005: 46 thousand) cattle. The plantation was disposed in January 2005 and had previously been pledged as security against a US$12 million loan that was included as part of the assets and liabilities disposed (refer to note 8).
18. Inventories
| US$m | 2006 | 2005 |
|---|---|---|
| Current: | ||
| Raw materials and consumables | 1,294 | 282 |
| Work in progress | 1,377 | 268 |
| Finished goods | 869 | 341 |
| 3,540 | 891 | |
| Non-current: | ||
| Work in progress | 75 | 71 |
| 75 | 71 |
Non-current inventories comprises long term ore stockpiles that are not planned to be processed within one year.
19. Trade and Other Receivables
| US$m | 2006 | 2005 |
|---|---|---|
| Current: | ||
| Trade debtors | 2,380 | 1,033 |
| Advances | 115 | 13 |
| Employee entitlement receivables (refer to note 31) | - | |
| Recoverable sales tax | 282 | 80 |
| Other debtors | 44 | 12 |
| 2,826 | 1,138 | |
| Non-current: | ||
| Employee entitlement receivables (refer to note 31) | 25 | 22 |
| Recoverable sales tax | 25 | 20 |
| Other debtors | 34 | 15 |
| 84 | 57 |
20. Investment in Associates
As outlined in note 7, the Group obtained control of Falconbridge on 15 August 2006. For a portion of 2005, the Group’s investment in Falconbridge was accounted for as an associate. Specifically from 14 August 2005 until the announcement of Inco Limited’s proposed friendly takeover offer to acquire Falconbridge for CAD34.00 per share on 11 October 2005, equity accounting was applied. After the announcement, equity accounting was ceased as the Group no longer had significant influence over the investment and the investment was classified as an available-for-sale financial asset (refer to note 22).
The following is a summary of the financial results for Falconbridge during the period it was treated as an associate:
| US$m | 2006 | 2005 |
|---|---|---|
| Share of associate’s revenue and profit during the period classified as an associate: | ||
| Revenue | - | 250 |
| EBITDA | - | 68 |
| EBIT | - | 45 |
| Profit for the year | - | 21 |
The reporting date of Falconbridge was the same as the Group, being 31 December.
The Group has interests in coal terminals, through which the shareholders gain access to export markets and a 25% interest in the Noranda Income Fund which owns a zinc refinery in Salaberry-de-Valleyfield, Quebec. The Noranda Income Fund is listed on the Toronto stock exchange and the fair value of the Group’s investment was US$106 million at 31 December 2006 (2005 US$nil). The companies which own the coal terminals are not listed so there is no published quoted price for the fair value of these investments. The reporting dates for all associates is the same as for the Group, being 31 December.
The following is a summary of the financial information of the above associates:
| US$m | 2006 | 2005 |
|---|---|---|
| Share of associates’ balance sheet: | ||
| Non-current assets | 230 | 48 |
| Current assets | 93 | 16 |
| Total assets | 323 | 64 |
| Non-current liabilities | (88) | (19) |
| Current liabilities | (56) | (1) |
| Total liabilities | (144) | (20) |
| Net assets | 179 | 44 |
| Carrying amount of the investment | 179 | 44 |
| Share of associates’ revenue and profit: | ||
| Revenue | 116 | 13 |
| EBITDA | 6 | 5 |
| EBIT | 2 | 4 |
| Net interest paid | 2 | (1) |
| Income tax expense | - | (1) |
| Profit for the year | 4 | 2 |
21. Interests in Joint Venture Entities
The Group has various interests in jointly controlled entities, operations and assets as outlined in note 36. These interests are accounted for in the manner outlined in note 6.
The following is a summary of the financial information of the Group’s jointly controlled entities in South Africa, South America and New Caledonia:
| US$m | 2006 | 2005 |
|---|---|---|
| Share of joint venture’s balance sheets: | ||
| Non-current assets | 9,592 | - |
| Current assets | 621 | - |
| Total assets | 10,213 | - |
| Non-current liabilities | (2,064) | - |
| Current liabilities | (678) | - |
| Total liabilities | (2,742) | - |
| Net assets | 7,471 | - |
| Net assets consolidated | 7,471 | - |
| Share of joint ventures’ revenue and profit: | ||
| Revenue | 1,063 | - |
| Cost of sales (before depreciation and amortisation) | (273) | - |
| Distribution costs | (62) | - |
| Administration expenses (before depreciation and amortisation) | (21) | - |
| EBITDA | 707 | - |
| Depreciation and amortisation | (175) | - |
| EBIT | 532 | - |
| Finance income | 9 | - |
| Finance costs | (14) | - |
| Profit before tax | 527 | - |
| Income tax expense | (164) | - |
| Profit for the year | 363 | - |
In 2005, the Group held no interests in jointly controlled entities.
22. Available-for-sale Financial Assets
| US$m | 2006 | 2005 |
|---|---|---|
| Shares - listed | 58 | 2,321 |
| Shares - unlisted | 12 | 4 |
| Royalty contract | 90 | - |
| 160 | 2,325 |
Available-for-sale financial assets consist of a long-term royalty income contract and investments in listed and unlisted ordinary shares that have no fixed maturity date or coupon rate. These investments are held for strategic purposes.
In 2005, the listed shares mainly related to the Group’s 19.9% interest in Falconbridge (refer to note 7 and note 20). In 2006, the listed shares relate to companies in the mining industry. The listed shares are carried at fair value.
Unlisted shares mainly comprise interests in ports in Australia used to export coal and are carried at fair value.
23. Derivative Financial Assets
| US$m | 2006 | 2005 |
|---|---|---|
| Current: | ||
| Commodity cash flow hedges | - | 16 |
| Foreign currency cash flow hedges | 9 | - |
| Other commodity derivatives | 2 | 1 |
| 11 | 17 | |
| Non-current: | ||
| Commodity cash flow hedges | - | 8 |
| Foreign currency cash flow hedges | 1 | - |
| Fair value interest rate swap hedge | 8 | - |
| Other commodity derivatives | - | 1 |
| Other foreign currency derivatives | 48 | - |
| 57 | 9 | |
| Total | 68 | 26 |
24. Other Financial Assets
| US$m | 2006 | 2005 |
|---|---|---|
| Current: | ||
| Loans to joint venture partners | - | 34 |
| Security deposits | 2 | - |
| 2 | 34 | |
| Non-current: | ||
| Energy contracts at fair value through profit and loss | 8 | - |
| Fair value hedge (refer to note 28 and note 37) | - | 15 |
| Loans to joint venture partners | 214 | - |
| Rehabilitation trust fund | 36 | 35 |
| Other | 41 | 6 |
| 299 | 56 | |
| Total | 301 | 90 |
Loans to joint venture partners
A loan to Merafe was made on establishment of the Chrome PSV. At 31 December 2006, US$nil (2005 US$3 million) was interest free and US$21 million (2005 US$31 million) was subject to a floating interest rate based on South African prime rates. This loan is secured by the Group’s ability to acquire Merafe’s PSV assets at fair value in the event of default.
A loan was made to African Rainbow Minerals Limited (ARM) on establishment of ARM Coal. At 31 December 2006, US$56 million (2005 US$nil) was subject to a floating interest rate based on South African prime rates. This loan is secured by the Group’s ability to acquire ARM Coal assets at fair value in the event of default.
A loan has been made to the Koniambo joint venture partner. At 31 December 2006, US$116 million (2005 US$nil) was subject to a fixed interest rate of 9% per annum and is repayable by 31 March 2008. This loan is secured by the Group’s ability to acquire Koniambo’s assets at fair value in the event of default.
A loan has been made to Barrick Gold Corporation for the Kabanga joint venture. At 31 December 2006, US$21 million (2005 US$nil) was interest free. This loan is secured by the Group’s ability to acquire Kabanga’s assets at fair value in the event of default.
Rehabilitation trust fund
The rehabilitation trust fund in South Africa receives cash contributions to accumulate funds for the Group’s rehabilitation liability relating to the eventual closure of the Group’s coal operations. Amounts are paid out from the trust fund following completion and approval of the rehabilitation work by the South African Department of Minerals and Energy. The contributions to the trust fund are placed with investment banks who are responsible for making investments in equity and money market instruments. The trust fund is to be used according to the terms of the trust deed and the assets are not available for the general purpose of the Group. The trust fund is carried at fair value.
Other
Other includes receivables from financial institutions for self insurance and employee benefits.
25. Cash and Cash Equivalents
| US$m | 2006 | 2005 |
|---|---|---|
| Cash at bank and in hand | 622 | 154 |
| Short term deposits | 1,238 | 370 |
| 1,860 | 524 |
The majority of cash at bank and in hand earns interest at floating rates of interest with a limited amount at fixed rates of interest and interest free. Short term deposits are made at call and for less than one week, dependent on the short term cash requirements of the Group and earn interest based on the respective short term deposit rates. The fair value of cash and cash equivalents at 31 December 2006 and 31 December 2005 approximates carrying value.
For the purposes of the Consolidated Cash Flow Statement, cash and cash equivalents comprise the following at 31 December:
| US$m | 2006 | 2005 |
|---|---|---|
| Cash at bank and in hand | 622 | 154 |
| Short term deposits | 1,238 | 370 |
| Bank overdrafts (refer to note 30) | (143) | (3) |
| 1,717 | 521 |
During the year, the Group entered into new finance leases and hire purchase contracts to purchase various items of plant and equipment for US$nil (2005 US$62 million), issued shares from the conversion of the convertible borrowings and issued shares to the ESOP for a market value of US$136 million (2005 US$19 million) which did not require the use of cash and cash equivalents and are not included in the net cash flow used in investing and financing activities in the Consolidated Cash Flow Statement.
26. Capital and Reserves
| US$m | |
|---|---|
| Authorised: | |
| 875,000,000 ordinary shares of US$0.50 each as at 1 January and 31 December 2005 and as at 1 January 2006 | 438 |
| 14,234,948,397 ordinary shares of US$0.50 each increase on 30 June 2006 | 7,117 |
| 15,109,948,397 ordinary shares of US$0.50 each as at 31 December 2006 | 7,555 |
| 50,000 deferred shares of GBP1.00 each as at 1 January and 31 December 2005 and as at 1 January and 31 December 2006 | - |
| 1 special voting share of US$0.50 as at 1 January and 31 December 2005 and as at 1 January and 31 December 2006 | - |
| 7,555 | |
| Issued, called up and fully paid: | |
| 631,502,416 ordinary shares of US$0.50 each as at 1 January 2005 | 315 |
| 1,000,000 ordinary shares issued on 24 March 2005 to the ESOP | 1 |
| 632,502,416 ordinary shares of US$0.50 each as at 31 December 2005 and 1 January 2006 | 316 |
| 3,000,000 ordinary shares issued on 28 March 2006 to the ESOP | 1 |
| 32,543,344 ordinary shares issued on 22 May 2006 to institutional investors | 16 |
| 235,787,596 ordinary shares issued on 30 October 2006 from a shareholder rights issue | 118 |
| 39,317,027 ordinary shares issued on the exercise of convertible bonds during 2006 | 20 |
| 943,150,383 ordinary shares as at 31 December 2006 | 471 |
| 50,000 deferred shares of GBP1.00 each paid to GBP0.25 as at 1 January and 31 December 2005 and as at 1 January and 31 December 2006 | - |
| 1 special voting share of US$0.50 as at 1 January and 31 December 2005 and as at 1 January and 31 December 2006 | - |
| Share Premium: | |
| As at 1 January 2005 | 2,482 |
| 1,000,000 ordinary shares issued on 24 March 2005 to the ESOP | 18 |
| As at 31 December 2005 | 2,500 |
| 3,000,000 ordinary shares issued on 28 March 2006 to the ESOP | 97 |
| 32,543,344 ordinary shares issued on 22 May 2006 to institutional investors | 1,236 |
| 235,787,596 ordinary shares issued on 30 October 2006 from a shareholder rights issue | 5,314 |
| 39,317,027 ordinary shares issued on the exercise of convertible bonds during 2006 | 375 |
| As at 31 December 2006 | 9,522 |
| Own shares: | |
| 7,481,271 ordinary shares of US$0.50 each as at 1 January 2005 | (91) |
| 26,079,250 ordinary shares purchased in the ECMP during the year | (522) |
| 1,000,000 ordinary shares issued on 24 March to the ESOP | (19) |
| 3,925 ordinary shares purchased in the ESOP during the year | - |
| 1,509,582 ordinary shares disposed by the ESOP during the year | 16 |
| 33,054,864 ordinary shares of US$0.50 each as at 31 December 2005 | |
| 29,450,976 ordinary shares disposed by the ECMP on 19 May 2006 | 572 |
| 3,000,000 ordinary shares issued on 28 March to the ESOP | (98) |
| 428,053 ordinary shares purchased in the ESOP during the year | (11) |
| 1,611,519 ordinary shares purchased from shareholder rights issue on 30 October 2006 | |
| 2,469,713 ordinary shares disposed by the ESOP during the year | 37 |
| 6,173,747 ordinary shares of US$0.50 each as at 31 December 2006 | (154) |
Issue of ordinary shares
During March 2005, 1,000,000 shares were issued to the ESOP at a market price of GBP 10.20 per share.
During March 2006, 3,000,000 shares were issued to the ESOP at a market price of GBP 18.72 per share.
On 22 May 2006, 32,543,344 shares were issued to institutional investors at a market price of GBP 21.00 per share.
During 2006, 64.3% of the US$600 million of convertible bonds were converted by the holders (refer to note 29).
On 30 October 2006, 235,787,596 ordinary shares were issued under a rights issue which was structured as an issue of one new ordinary share at a price of GBP 12.65 per share for every three existing ordinary shares held. The net proceeds from the rights issue was US$5,432 million (after US$186 million of capital raising costs) and the number of shares in issue of Xstrata plc following the completion of the rights issue is 943,150,383.
Deferred shares
The holders of deferred shares do not have the right to receive notice of any general meeting of the Company nor the right to attend, speak or vote at any such general meeting. The deferred shares have no rights to dividends and, on a winding-up or other return of capital, entitle the holder only to the repayment of the amounts paid upon such shares after repayment of the nominal amount paid up on the ordinary shares, the nominal amount paid up on the special voting share plus the payment of GBP100,000 per ordinary share. The Company may, at its option, redeem all of the deferred shares in issue at any time (but subject to the minimum capital requirement of the Companies Act 1985) at a price not exceeding GBP1.00 for each share redeemed to be paid to the relevant registered holders of the shares.
Special voting share
Certain rights, that are inalienable under Swiss law, have been preserved in the Xstrata plc Articles of Association by creating a special voting share that carries weighted voting rights sufficient to defeat any resolution which could amend or remove these entrenched rights. The holder of the special voting share is the Law Debenture Trust Corporation plc which has entered into a voting agreement with the Company, specifying the conditions upon which it is entitled to exercise its right to vote. The special voting share does not carry a right to receive dividends and is entitled to no more than the amount of capital paid up in the event of liquidation.
Own shares
Own shares comprise shares of Xstrata plc held in the Employee Share Option Plan (ESOP) and held by Batiss Investments (Batiss) for the Equity Capital Management Program (ECMP).
The shares acquired by the ESOP are either stock market purchases or share issues from the Company. The ESOP is used to co-ordinate the funding and manage the delivery of ordinary shares for options and free share awards under the Group’s employee award schemes (refer to note 35). The trustee of the ESOP is permitted to place the shares back into the market and may hold up to 5% of the issued share capital of the Company at any one time. At 31 December 2006, 6,173,747 (2005: 3,603,888) shares, equivalent to 0.7% (2005: 0.6%) of the total issued share capital, were held by the trust with a cost of US$154 million (2005 US$44 million) and market value of US$308 million (2005 US$84 million). The trust has waived the right to receive dividends from the shares that it holds. Costs relating to the administration of the trust are expensed in the period in which they are incurred.
The shares acquired from the stock market by Batiss and held for the ECMP are used by the Group as a source of financing for future acquisitions, or placed back into the market. The decision as to 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, is considered in light of the Group’s funding requirements and capital structure.
Batiss is not permitted to hold more than 10% of the issued share capital of the Company at any one time. Batiss has entered into an option agreement with Xstrata Capital Corporation A.V.V. (Xstrata Capital), a wholly owned subsidiary within the Xstrata Group, whereby Batiss has granted to Xstrata Capital a right to require Batiss to sell the purchased Xstrata shares to a third party (other than a subsidiary of Xstrata plc), as nominated by Xstrata Capital, at an exercise price of 1p per share. Under the option agreement, Xstrata Capital pays Batiss a premium for this right, the premium being the equivalent of the market price paid by Batiss for the shares plus associated costs less the 1p exercise price. This premium payment, together with funds from a subscription by Xstrata Capital for non-voting redeemable preference shares in Batiss, provides the funding for Batiss to acquire the shares in the market. These payments are sourced from the existing and future cash resources of Xstrata Capital. Xstrata Capital is able to exercise its right under the option agreement for a period of six years from the date of each purchase, but has not chosen to do so in either 2005 or 2006.
Batiss has waived its right to receive dividends on the shares which it holds. At 31 December 2006, nil (2005: 29,450,976) shares, equivalent to nil% (2005: 4.7%) of the total issued share capital, were held by the trust with a cost of US$nil (2005 US$572 million) and market value of US$nil (2005 US$690 million). Costs relating to the administration of the trust are expensed in the period in which they are incurred. In 2006, the shares held at 31 December 2005 were used as a source of funding for the Cerrejón acquisition (refer to note 7).
Consolidated changes in equity
| Attributable to equity holders of the parent | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| US$m | Issued capital | Share premium | Own shares | Convertible borrowings - equity component | Other reserves | Retained earnings | Total | Minority interests | Total equity |
| At 1 January 2006 | 316 | 2,500 | (616) | 119 | 3,054 | 2,192 | 7,565 | 572 | 8,137 |
| Recognised income and expenses | - | - | - | - | 1,528 | 1,995 | 3,523 | 405 | 3,928 |
| Issue of share capital | 155 | 7,022 | (136) | (41) | - | - | 7,000 | - | 7,000 |
| Own share purchases | - | - | (11) | - | - | - | (11) | - | (11) |
| Own share disposals | - | - | 609 | - | - | 525 | 1,134 | - | 1,134 |
| Cost of IFRS 2 equity settled share-based | |||||||||
| compensation plans | - | - | - | - | - | 42 | 42 | - | 42 |
| Acquisition of subsidiaries | - | - | - | - | - | - | - | 45 | 45 |
| Redemption of minority interests | - | - | - | - | - | - | - | (95) | (95) |
| Dividends paid | - | - | - | - | - | (251) | (251) | (207) | (458) |
| At 31 December 2006 | 471 | 9,522 | (154) | 78 | 4,582 | 4,503 | 19,002 | 720 | 19,722 |
| Attributable to equity holders of the parent | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| US$m | Issued capital | Share premium | Own shares | Convertible borrowings - equity component | Other reserves* | Retained earnings | Total | Minority interests | Total equity |
| At 1 January 2005 | 315 | 2,482 | (91) | 63 | 3,493 | 614 | 6,876 | 506 | 7,382 |
| Recognised income and expenses | - | - | - | - | (439) | 1,707 | 1,268 | 214 | 1,482 |
| Issue of share capital | 1 | 18 | (19) | - | - | - | - | - | - |
| New borrowings issued | - | - | - | 56 | - | - | 56 | - | 56 |
| Own share purchases | - | - | (522) | - | - | - | (522) | - | (522) |
| Own share disposals | - | - | 16 | - | - | 9 | 25 | - | 25 |
| Cost of IFRS 2 equity settled | |||||||||
| share-based compensation plans | - | - | - | - | - | 20 | 20 | - | 20 |
| Exercise of pre-IFRS 2 option awards | - | - | - | - | - | (4) | (4) | - | (4) |
| Dividends paid | - | - | - | - | - | (154) | (154) | (148) | (302) |
| At 31 December 2005 | 316 | 2,500 | (616) | 119 | 3,054 | 2,192 | 7,565 | 572 | 8,137 |
*Other reserves
| US$m | Revaluation reserves | Other reserves | Net unrealised gains | Foreign currency translation | Total |
|---|---|---|---|---|---|
| At 1 January 2005 | - | 1,241 | 2 | 2,250 | 3,493 |
| Available-for-sale financial assets | - | - | 398 | - | 398 |
| Losses on cash flow hedges | - | - | (314) | - | (314) |
| Realised losses on cash flow hedges | - | - | 128 | - | 128 |
| Recycled foreign currency translation net gains | - | - | (67) | (67) | |
| Foreign currency translation differences | - | - | 4 | (582) | (578) |
| Deferred tax | - | - | (24) | 18 | (6) |
| - | - | 192 | (631) | (439) | |
| At 31 December 2005 | - | 1,241 | 194 | 1,619 | 3,054 |
| Revaluation of property, plant and equipment | 1,528 | - | - | - | 1,528 |
| Available-for-sale financial assets | - | - | 1,892 | - | 1,892 |
| Losses on cash flow hedges | - | - | (78) | - | (78) |
| Realised gains on disposal of available-for-sale financial assets | - | (63) | - | (63) | |
| Reversal of revaluation surplus on available-for-sale financial assets* | - | (2,205) | - | (2,205) | |
| Realised losses on cash flow hedges | - | - | 125 | - | 125 |
| Recycled foreign currency translation net losses | - | - | 47 | 47 | |
| Foreign currency translation differences | - | - | (5) | 249 | 244 |
| Deferred tax | - | - | 59 | (21) | 38 |
| 1,528 | - | (275) | 275 | 1,528 | |
| At 31 December 2006 | 1,528 | 1,241 | (81) | 1,894 | 4,582 |
| * Relates to gains made on the Group’s investment in Falconbridge whilst the investment was treated as an available-for-sale financial asset (refer to note 22). In accordance with the Group’s accounting policy, on obtaining control of Falconbridge, the unrealised gains have been reversed and the acquisition accounting in note 7 was adopted. | |||||
Revaluation reserves
This reserve principally records the re-measurement from cost of the 19.9% interest held in Falconbridge at 31 December 2005, to the fair value of 19.9% of the identifiable net assets of Falconbridge on 15 August 2006, the date the Group obtained control of Falconbridge (refer to note 7).
Other reserves
This reserve principally originated during 2002 from the merger of Xstrata AG into Xstrata plc (US$279 million) and the issue of shares from the acquisition of the Duiker and Enex Group’s of US$935 million.
Net unrealised gains/(losses) reserve
This reserve records the re-measurement of available-for-sale financial assets to fair value (refer to note 22) and the effective portion of the gain or loss on cash flow hedging contracts (refer to note 23, 30 and 37). Deferred tax is provided on the re-measurement at tax rates enacted or substantively enacted.
Foreign currency translation reserve
This is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. It is also used to record the exchange differences from the translation of quasi equity inter-company loans in foreign operations. On disposal or partial disposal of a foreign entity or repayment of a quasi equity loan, the deferred accumulated amount recognised in this reserve is transferred to the income statement.
27. Trade and Other Payables
| US$m | 2006 | 2005 |
|---|---|---|
| Current: | ||
| Trade payables | 2,290 | 598 |
| Sundry payables | 326 | 108 |
| Interest payable | 23 | 17 |
| Accruals and other payables | 471 | 223 |
| 3,110 | 946 | |
| Non-current: | ||
| Accruals and other payables | 69 | 10 |
| 69 | 10 | |
| Total | 3,179 | 956 |
All current payables are expected to be settled in the next 12 months and non-current payables are expected to be settled within 13 years (2005: 6 years).
28. Interest-bearing Loans and Borrowings
| US$m | 2006 | 2005 |
|---|---|---|
| Current: | ||
| Bank overdrafts | 143 | 3 |
| Syndicated bank loans - unsecured | 1,677 | 106 |
| Term bank loan - unsecured | - | 600 |
| Bank loans - other unsecured | 39 | 7 |
| Capital market notes | 5 | 14 |
| Obligations under finance leases and hire purchase contracts (i) | 147 | 15 |
| Bank loan issue costs | (21) | (1) |
| 1,990 | 744 | |
| Non-current: | ||
| Syndicated bank loans - unsecured | 7,416 | 971 |
| Bank loans - other unsecured | 345 | 6 |
| Capital market notes | 4,627 | 262 |
| Minority interest loans | 81 | 81 |
| Obligations under finance leases and hire purchase contracts (i) | 95 | 214 |
| Preference shares | 304 | - |
| Other loans | 139 | 1 |
| Bank loan issue costs | (61) | (2) |
| 12,946 | 1,533 | |
| Non-current: | ||
| Convertible borrowings (refer note 29) | 527 | 866 |
| Convertible borrowings issue costs | (2) | (8) |
| 525 | 858 | |
| Total | 15,461 | 3,135 |
| Less cash and cash equivalents (refer note 25) | (1,860) | (524) |
| Net debt* | 13,601 | 2,611 |
| *Net debt is defined as loans and borrowings net of cash and cash equivalents. | ||
i. Secured over specific items of plant and equipment (refer to note 16).
Syndicated Loan Facility
On 28 May 2004 Xstrata plc and certain subsidiary undertakings of the Group, entered into a US$1,400 million committed multi-currency syndicated loan. The loan was comprised of two tranches, a US$1,000 million five year facility and a US$400 million 364-day facility, with a 364-day term out option. During the period the 364-day facility was extended for a further 364-day period to 26 May 2006. The interest payable on the syndicated loan facility was at a rate based on the London inter-bank offered rate (LIBOR) plus 50 basis points for the five-year element and 40 basis points for the 364-day tranche with a utilisation fee of five basis points if usage exceeds 66.6% of the facility. The Company was liable to pay a commitment fee on the un-drawn portion of the syndicated facility at a rate per annum equal to 20 basis points and 10 basis points on the five-year and 364-day elements respectively, payable quarterly in arrears. This facility was re-financed during 2006.
On 8 August 2006 Xstrata plc and certain subsidiary undertakings of the Group, entered into a US$9,500 million committed multi-currency syndicated loan to fund a portion of the Falconbridge acquisition. The loan is comprised of four tranches, a US$3,353 million three year facility, a US$1,117 million five year facility, a US$3,353 million five year revolving facility and a US$1,677 million 364-day facility, with a 364-day term out option.
The syndicated loan facility bears interest at a rate based on the London inter-bank offered rate (LIBOR) plus 60 basis points for the three year element, 70 basis points for the five year elements and 50 basis points for the 364-day tranche. The Group is liable to pay a commitment fee on the un-drawn portion of the syndicated facility at a rate per annum equal to 35% of the applicable margin payable on the three and five year tranches and 30% of the applicable margin on the 364-day tranche, payable quarterly in arrears.
Term Bank Loan
On 18 August 2005 Xstrata plc and certain subsidiary undertakings of the Group, entered into a US$600 million 364-day fully drawn advance loan facility. The interest payable on the term loan was at a rate based on LIBOR plus 40 basis points per annum. This facility was re-financed during 2006.
Bridge Facility
On 8 May 2006, the Group entered into a US$2,500 million committed multi-currency 364-day loan facility to partly finance the Cerrejón and Tintaya acquisitions (refer to note 7). The interest payable on the loan was based on LIBOR plus 40 basis points per annum. The Group was liable to pay a commitment fee on the un-drawn portion of the facility at a rate per annum equal to 25 per cent on the applicable margin, payable quarterly in arrears. This facility was re-financed prior to 31 December 2006.
Equity and Debt bridge Facilities
The acquisition of Falconbridge in August 2006 (refer to note 7) was initially partly financed with equity and debt bridge facilities of US$7,000 million and US$2,500 million respectively. The equity and debt bridge facilities bears interest at rates based on LIBOR plus 40 basis points.
The equity and debt bridge facilities were repaid following the Rights Issue in October 2006 (refer to note 26) and a global capital market notes issue in November 2006 (refer below).
Capital Market Notes
As at 31 December 2006, other unsecured private placements included:
| Facility | Denomination | At 31 Dec 06 US$m | Fixed or floating interest rate | Effective interest Rate % in 2006 | Maturity | At 31 Dec 05 US$m | Effective interest Rate % in 2005 |
|---|---|---|---|---|---|---|---|
| Series A senior unsecured notes (a) | US$ | 150 | Fixed | 5.90 | Jun 08 | 159 | 5.90 |
| Series B senior unsecured notes (a) | US$ | - | - | - | Dec 06 | 9 | 3.22 |
| Series B senior unsecured notes (a) | US$ | 50 | Fixed | 6.75 | Jun 11 | 54 | 6.75 |
| Series B senior unsecured notes (a) | US$ | 50 | Fixed | 7.00 | Jun 11 | 54 | 7.00 |
| Unsecured notes (b) | US$ | 500 | Floating | 5.72 | Nov 09 | - | - |
| Unsecured notes (b) | US$ | 750 | Fixed | 5.50 | Nov 11 | - | - |
| Unsecured notes (b) | US$ | 1,000 | Fixed | 5.80 | Nov 16 | - | - |
| Senior debentures (c) | CAD | 155 | Fixed | 4.89 | Dec 08 | - | - |
| Senior debentures (c) | US$ | 328 | Fixed | 6.03 | Feb 11 | - | - |
| Senior debentures (c) | US$ | 266 | Fixed | 5.88 | Jun 12 | - | - |
| Senior debentures (c) | US$ | 317 | Fixed | 6.06 | Jul 12 | - | - |
| Senior debentures (c) | US$ | 354 | Fixed | 6.34 | Oct 15 | - | - |
| Senior debentures (c) | US$ | 246 | Fixed | 6.16 | Jun 15 | - | - |
| Senior debentures (c) | US$ | 234 | Fixed | 6.39 | Jun 17 | - | - |
| Senior debentures (c) | US$ | 232 | Fixed | 6.77 | Jun 35 | - | - |
| 4,632 | 276 | ||||||
| (a) An Australian subsidiary has designated the series A and B senior unsecured notes as a fair value hedge of an investment in South America (refer to note 28 and note 37). The hedge is being used to reduce exposure to foreign currency risk. | |||||||
| (b) In November 2006, the Group issued US$2,250 million of capital market notes to refinance existing debt facilities. The notes are comprised of three tranches, a US$1,000 million ten year note at a fixed interest rate of 5.8%, a US$750 million five year note at a fixed interest rate of 5.5% and a US$500 million three year note that bears interest at a rate based on LIBOR plus 35 basis points. The fixed interest notes were issued by Xstrata Finance (Canada) Limited and the floating rate note was issued by Xstrata Finance (Dubai) Limited. The Xstrata Finance (Dubai) Limited issue was guaranteed by Xstrata plc, Xstrata (Schweiz) AG and Xstrata Finance (Canada) Limited. The Xstrata Finance (Canada) Limited issues were guaranteed by Xstrata plc, Xstrata (Schweiz) AG and Xstrata Finance (Dubai) Limited. | |||||||
| (c) The senior debentures were assumed by the Group through the acquisition of Falconbridge (refer to note 7). Pursuant to the terms of the note indentures as amended by supplemental indentures, Xstrata plc has fully and unconditionally guaranteed in favour of the holders of the senior debentures the payment, within 15 days of when due, of all financial liabilities and obligations of Falconbridge limited to such holders under the terms of the senior debentures. | |||||||
Preference shares
As at 31 December 2006, unsecured preference shares included:
| Facility | Denomination | At 31 Dec 06 US$m | Fixed or floating interest rate | Effective interest Rate % in 2006 | Maturity | At 31 Dec 05 US$m | Effective interest Rate % in 2005 |
|---|---|---|---|---|---|---|---|
| Preference shares series 2 | CAD | 103 | Floating | 5.10 | - | - | - |
| Preference shares series 3 | CAD | 67 | Fixed | 4.58 | Mar 09 | - | - |
| Preference shares series H | CAD | 134 | Fixed | 6.50 | Mar 08 | - | - |
| 304 |
The preference shares were assumed by the Group through the acquisition of Falconbridge (refer to note 7). At the acquisition date, Falconbridge had additional preference shares outstanding. The Group completed the redemption of all of the outstanding preferred shares, series F and series G and preferred shares series 1 for an aggregate cash consideration of CAD306 million (US$270 million) on 1 November 2006. Following the completion of the preferred share redemption, the Toronto Stock Exchange halted trading in and de-listed the series F shares and the series G shares from the TSX. Pursuant to the terms of a guarantee indenture, Xstrata plc has fully and unconditionally guaranteed in favour of the holders of the preference shares the payment, within 15 days of when due, of all financial liabilities and obligations of Falconbridge limited to such holders under the terms of the preference shares.
Bank Loans - other unsecured
Other bank loans includes:
- Debts of proportionally consolidated joint ventures of US$139 million (2005 US$nil) which bear interest at a rate based on LIBOR plus 175 basis points, repayable in August 2011 and US$201 million (2005 US$nil) which bear interest at a rate based on LIBOR plus 31 basis points, repayable by December 2011;
- US$40 million (2005 US$nil) which bear interest at a rate based on LIBOR plus 85 basis points, repayable in January 2008; and
- ZAR denominated borrowings of US$4 million (2005 US$13 million) that are subject to floating interest rates based on Johannesburg inter bank acceptance rate (JIBAR) with an average floating interest rate of 9.0% per annum during 2006 (2005: 8.7% per annum), repayable by January 2010.
Bank overdrafts - unsecured
Bank overdrafts are subject to local and US$ prime floating interest rates in which they have been drawn down. The majority of the bank overdrafts are denominated in CAD.
Minority Interest Loans
Minority interest loans include US$81 million (2005 US$81 million) advanced to Minera Alumbrera Limited to fund operations that is subject to a fixed rate of 7.2% per annum (2005: 7.2% per annum). It has no fixed repayment date, but is not callable within 12 months.
Other Loans
Other loans include ZAR denominated loans at 31 December 2006 of US$135 million (2005 US$nil) payable to ARM Coal (refer to note 7). The loan is subject to a floating rate of interest based on a dividend calculation with no fixed repayment date and is not callable within 12 months.
As at 31 December 2006, other loans included US$4 million (2005 US$1 million), received from the Ministry of Industry & Energy and Cantabria Government in Spain for San Juan de Nieva zinc smelter expansion projects. US$3 million (2005 US$1 million) is interest free, repayable by 2014 and US$1 million is subject to a fixed rate of 5.0% per annum, repayable by 2013.
29. Convertible Borrowings
| US$m | 2006 | 2005 |
|---|---|---|
| Convertible bonds | 201 | 555 |
| Effect of fair value hedge | 2 | (9) |
| Bond issue costs | (2) | (8) |
| 201 | 538 | |
| Convertible debenture | 324 | 320 |
| 525 | 858 |
Convertible Bonds
On 15 August 2003, Xstrata Capital Corporation AVV issued US$600 million of Convertible Bonds due 15 August 2010 convertible at the option of the holder into fully paid Xstrata plc ordinary shares. The Convertible Bonds are guaranteed by the Company and were issued at par and bear a coupon of 3.95% per annum. On issue, they were convertible at any time after 26 September 2003 at the option of the holder into 61,180,977 ordinary shares in Xstrata plc based on a conversion price of GBP6.10 (US$9.81 converted into GBP at a fixed exchange rate) per ordinary share, a 39.6% premium to the closing price of Xstrata plc’s ordinary shares on August 1, 2003. On the giving of not less than 30 days notice, the Convertible Bond may be called by the Group at par plus accrued interest if the share price is 30% higher than the conversion price for 20 dealing days within a 30-day period, at any time on or after 6 September 2007. If 85% or more of the bonds originally issued have been converted and/or redeemed, then the remainder of the bonds can be redeemed by the Group. If not converted or previously redeemed, the Convertible Bonds will be redeemed at par on 15 August 2010. The liability component of the Convertible Bonds is carried at amortised cost based on an effective interest rate of 5.85% per annum. During 2006, 64.3% of the US$600 million of convertible bonds were converted by the holders (refer note 26). Following the conversions that occurred during 2006 and rights issue in October 2006 (refer to note 26), the remaining number of ordinary shares that can be issued under the bond at 31 December 2006 is 24,516,545 and as a result of the rights issue the conversion price was adjusted to GBP5.44 (US$8.75 converted into GBP at a fixed exchange rate).
In February 2007, 22,832,325 ordinary shares were issued as a result of conversions by the holders of the Convertible Bonds (refer to note 38). On 15 March 2007, the Group announced that its subsidiary, Xstrata Capital Corporation AVV exercised its right to call for the redemption of all of the outstanding Convertible Bonds. The terms and conditions of the Bonds permit the Issuer to redeem all of the Bonds at their principal amount plus accrued and unpaid interest up to and including the date fixed for redemption, following the satisfaction of certain conditions. One of the conditions is that conversion rights have been exercised in respect of 85% or more in principal amount of the Convertible Bonds originally issued. As at 14 March 2007, US$14,730,000 or 2.455% of the principal amount of the Convertible Bonds originally issued was outstanding. The date fixed for redemption by the Xstrata Capital Corporation AVV is 16 April 2007. The last day on which conversion rights may be exercised by bondholders is 2 April 2007.
The fixed interest rate on the bonds has been swapped to a floating rate (refer to note 28). The swap has been accounted for as a fair value hedge (refer to note 37).
Convertible Debenture
On 6 September 2005, Xstrata Capital Corporation AVV issued a US$375 million Convertible Debenture to Brookfield, due 14 August 2017, convertible at the option of the holder into fully paid Xstrata plc ordinary shares. The Convertible Debenture is guaranteed by the Company and was issued at par, with a coupon of 4.0% per annum. On issue it was convertible at any time on or after 14 August 2006 at the option of the holder into 12,100,332 ordinary shares in Xstrata plc based on a conversion price of GBP17.13 (US$30.99 converted into GBP at a fixed exchange rate) per ordinary share, representing a 35% premium to the closing price of Xstrata plc’s ordinary shares on 11 August 2005. Following the rights issue in October 2006 (refer to note 26), the total number of ordinary shares that can be converted was increased to 13,575,432 and the conversion price was adjusted to GBP15.27 (US$27.62 converted into GBP at a fixed exchange rate). On the giving of not less than 30 days’ notice, the Convertible Debenture may be called by the Group at par plus accrued interest, at any time after 14 August 2010. If not converted or previously redeemed, the Guaranteed Convertible Debenture will be redeemed at par on 14 August 2017. The liability component of the Convertible Bonds is carried at amortised cost based on an effective interest rate of 5.74% per annum. There were no conversions during 2006.
30. Derivative Financial Liabilities
| US$m | 2006 | 2005 |
|---|---|---|
| Current: | ||
| Commodity cash flow hedges | 54 | 101 |
| Foreign currency cash flow hedges | 1 | 14 |
| Other commodity derivatives | 6 | 118 |
| Other foreign currency derivatives | 17 | - |
| 78 | 233 | |
| Non-current: | ||
| Commodity cash flow hedges | 50 | 51 |
| Foreign currency cash flow hedges | 1 | - |
| Fair value interest rate swap hedge | 24 | 10 |
| Other commodity derivatives | 1 | - |
| Other foreign currency derivatives | 96 | - |
| 172 | 61 | |
| Total | 250 | 294 |
31. Provisions
| US$ m | Employee entitlements | Share-based compensationplans | Post retirement medical plans | Rehabilitation costs | Onerous contracts | Other | 2006 |
|---|---|---|---|---|---|---|---|
| At 1 January | 174 | 12 | 11 | 318 | 23 | 33 | 571 |
| Acquisition of subsidiaries | 100 | - | 407 | 656 | 16 | 146 | 1,325 |
| Arising during the year | 138 | 49 | 20 | 28 | - | 121 | 356 |
| Discount unwinding | - | - | - | 32 | 2 | 6 | 40 |
| PPE asset adjustment | - | - | - | 88 | - | - | 88 |
| Utilised | (74) | (3) | (4) | (49) | (2) | (67) | (199) |
| Unused amounts reversed | (8) | - | - | (12) | - | (5) | (25) |
| Translation adjustments | 22 | - | (21) | 19 | 3 | - | 23 |
| At 31 December | 352 | 58 | 413 | 1,080 | 42 | 234 | 2,179 |
| Current | 193 | - | - | 4 | - | 92 | 289 |
| Non-current | 159 | 58 | 413 | 1,076 | 42 | 142 | 1,890 |
| 352 | 58 | 413 | 1,080 | 42 | 234 | 2,179 |
| US$ m | Employee entitlements | Share-based compensationplans | Post retirement medical plans | Rehabilitation costs | Onerous contracts | Other | 2005 |
|---|---|---|---|---|---|---|---|
| At 1 January | 154 | 9 | 13 | 339 | 27 | 33 | 575 |
| Arising during the year | 96 | 11 | - | 26 | 24 | 72 | 229 |
| Discount unwinding | - | - | - | 14 | - | - | 14 |
| PPE asset adjustment | - | - | - | 5 | - | - | 5 |
| Utilised | (63) | (8) | - | (38) | (25) | (70) | (204) |
| Unused amounts reversed | (2) | - | (1) | (1) | - | (1) | (5) |
| Translation adjustments | (11) | - | (1) | (27) | (3) | (1) | (43) |
| At 31 December | 174 | 12 | 11 | 318 | 23 | 33 | 571 |
| Current | 80 | - | - | 4 | 1 | 29 | 114 |
| Non-current | 94 | 12 | 11 | 314 | 22 | 4 | 457 |
| 174 | 12 | 11 | 318 | 23 | 33 | 571 |
Employee entitlements
The employee entitlement provisions mainly represent the value of excess leave entitlements allocated over the leave taken by the employees of the Group. These amounts are expected to be utilised as the employees either take their accrued leave or receive equivalent benefits upon ceasing employment. Current employee entitlements include excess short term leave entitlements and the portion of non-current employee entitlements that are expected to be incurred within 12 months. Non-current entitlements include long service leave entitlements which are payable upon an employee attaining a certain period of service and workers compensation provisions. For some entitlements, amounts will also be recovered from an independent fund (refer to note 19). These costs are expected to be incurred over the next 9 years (2005: 8 years).
Share-based compensation plans
The Group has various share-based compensation plans under which options to subscribe for the Company’s shares have been granted to certain executives and senior employees that will be cash-settled (refer to note 35). The intrinsic value of the options that had vested at 31 December 2006 was US$17 million (2005 US$1 million).
Post retirement medical plans
The Group operates unfunded post-retirement medical benefits plans in Canada, Dominican Republic, United States and South Africa for a number of current and former employees. Independent qualified actuaries using the projected unit credit method assess the accumulated benefit obligation and annual cost of accrued benefits. These costs are expected to be incurred over the next 13 years (2005: 18 years) (refer to note 35).
Rehabilitation costs
Rehabilitation provision represents the estimated costs required to provide adequate restoration and rehabilitation upon the completion of mining activities. These amounts will reverse when such rehabilitation has been performed. These costs are expected to be incurred over the next 24 years (2005: 16 years) (refer to note 24).
Onerous contracts
Onerous contract provisions represent the restatement of various long term contracts to their current market value at the acquisition date of subsidiaries. These contracts will expire within 12 years (2005: 13 years).
Other
Other includes provisions for litigation of US$83 million (2005 US$18 million) and restructuring of US$32 million (2005 US$nil) that are expected to be utilised within 17 years (2005: 2 years).
32. Other Liabilities
| US$m | 2006 | 2005 |
|---|---|---|
| Current: | ||
| Deferred income | 41 | 11 |
| 41 | 11 | |
| Non-current: | ||
| Deferred income | 16 | 9 |
| Other | - | 1 |
| 16 | 10 |
33. Litigation settlements
On 1 December 2006, the Group agreed to purchase the remaining 50% interest in the Tavistock TESA joint venture in South Africa from its joint venture partner, Total Coal South Africa (Pty) Ltd (TCSA) for US$49 million (refer to note 7) and confirmed the settlement of the long-term arrangements of TCSA’s 50% interest in Arthur Taylor Colliery (ATC) and Arthur Taylor Colliery Open-cast Mine (ATCOM) operations. The settlement follows the termination of a joint venture between the Group and TCSA in 2004.
34. Commitments and Contingencies
Operating lease commitments - Group as Lessee
The Group has entered into leases for buildings, motor vehicles and sundry plant and equipment. These leases have an average life of 5 years (2005: 12 years) with renewal terms at the option of the lessee at lease payments based on market prices at the time of renewal. There are no restrictions placed upon the lessee by entering into these leases. Future minimum lease payments under non-cancellable operating leases as at 31 December are as follows:
| US$m | 2006 | 2005 |
|---|---|---|
| Within one year | 50 | 17 |
| After one year but not more than five years | 101 | 23 |
| More than five years | 20 | 11 |
| 171 | 51 |
Finance lease and hire purchase commitments
The Group has entered into finance leases and hire purchase contracts for various items of plant and machinery. The majority of these leases include a residual balloon payment at the end of the lease term and title passing to the Group. Future minimum lease payments under finance leases and hire purchase contracts together with the future finance charges as at 31 December are as follows:
| US$m | Un-discounted minimum payments 2006 | Present value of minimum payments 2006 | Un-discounted minimum payments 2005 | Present value of minimum payments 2005 |
|---|---|---|---|---|
| Within one year | 159 | 147 | 31 | 15 |
| After one year but not more than five years | 84 | 68 | 188 | 172 |
| More than five years | 43 | 27 | 48 | 42 |
| Total minimum lease payments | 286 | 242 | 267 | 229 |
| Less amounts representing finance lease charges | (44) | - | (38) | - |
| Present value of minimum lease payments | 242 | 242 | 229 | 229 |
Capital commitments
Amounts contracted for but not provided in the financial statements amounted to US$795 million (2005 US$489 million), including:
- Xstrata Coal US$62 million for a coal handling preparation plant upgrade at Mt Owen and US$58 million of earth moving equipment at Cerrejón;
- Xstrata Alloys US$17 million (2005 US$99 million) for Project Lion, US$32 million (2005 US$96 million) for the Mototolo joint venture and the construction of a ferrochrome smelter, US$nil (2005 US$29 million) for a mega pelletizer at the Wonderkop plant; and
- Xstrata Nickel US$104 million (2005 US$nil) for the Nickel Rim South project, US$159 million (2005 US$nil) for the Koniambo project and US$47 million (2005 US$nil) for the Kabanga project.
The balance of the other amounts contracted for but not provided relates to various minor commitments around the Group, mainly for the purchase of new property, plant and equipment.
Included in the above is US$371 million (2005 US$140 million) representing the Group’s share of the capital commitments that have been incurred jointly with other venturers.
Finance leases entered into after 31 December 2006 amounted to US$nil (2005 US$nil).
Guarantees
Xstrata Coal Australia has contracted US$697 million (2005 US$440 million) for rail take or pay commitments, US$494 million (2005 US$243 million) for port take or pay commitments, performance guarantees to customers under contracts for supply of coal for US$25 million (2005 US$21 million) and guarantees to the NSW and Queensland Departments for Mineral Resources in respect of various mining leases and the performance thereof US$78 million (2005 US$59 million).
Xstrata Coal as a party to the Newlands and Collinsville joint ventures is responsible for costs incurred with workforce termination and equipment demobilisation at the conclusion of the open cut mining contracts. Indemnities have been provided by the joint venture partners to government agencies including guarantees relating to mining tenements of US$34 million (2005 US$5 million).
Xstrata Coal South Africa has issued guarantees to the Department of Mineral and Energy to obtain certain prospecting permits of US$68 million (2005 US$nil).
Xstrata Coal’s share of the Cerrejón coal mine’s performance guarantees totals US$343 million (2005 US$nil). These guarantees have been provided to various government agencies to enable the coal mine to freely export coal, receive tax exemptions, and to access a special imports system.
Xstrata Alloys has issued guarantees to Eskom for power usage and early termination of power usage of US$13 million (2005 US$16 million) and to the Department of Mineral and Energy Mineral Resources, municipalities and governmental boards in respect of various mining leases and the performance thereof for US$19 million (2005 US$6 million).
Xstrata Alloys has issued a guarantee in respect of the obligations of Merafe under a US$43 million (2005 US$47 million) facility in connection with the acquisition of certain assets and resources relating to the PSV and the Project Lion ferrochrome expansion project to be undertaken by the PSV. Any payments to be made under the guarantee are secured by the Group’s ability to acquire Merafe’s PSV assets for fair value and the security Merafe has provided to the lender.
Xstrata Copper, Xstrata Zinc and Xstrata Technology Australia have issued performance guarantees to customers for US$27 million (2005 US$22 million) and guarantees to the Queensland Departments for Mineral Resources and other government agencies in respect of various mining leases and the performance thereof, environmental bonds and self insurance licences US$174 million (2005 US$126 million).
Xstrata Nickel has issued guarantees for energy contracts of US$96 million (2005 US$nil), US$25 million (2005 US$nil) for oil supplies and a letter of credit to Japanese Custom and Tariff Bureau in respect of customs duty and consumption tax on imports of nickel, cobalt and other raw materials for $3 million.
Xstrata Zinc has issued performance guarantees to the Northern Territory government for an electricity supply and pipeline agreements of US$29 million (2005 US$32 million) and has provided bank guarantees to the Northern Territory government for rehabilitation costs of US$41 million (2005 US$nil).
Xstrata Zinc has issued bank guarantees in Spain of US$55 million (2005 US$76 million).
A letter of credit of US$172 million (2005 US$nil) has been given for the pension liabilities of the Group’s Canadian operations.
Letters of credit have been issued to the Canadian government for rehabilitation costs of US$33 million (2005 US$nil).
A letter of credit has been issued to non-government Canadian electricity suppliers for power usage for US$10 million (2005 US$nil).
Included in the above is US$1,609 million (2005 US$712 million) representing the Group’s share of guarantees that have been incurred jointly with other venturers.
Other contingencies
The purchase agreement of the Las Bambas copper project in Peru includes contingent amounts payable to a community trust fund of US$2 million (2005 US$21 million) following a decision to develop the project. This will be payable over the development and construction phases of the project. No decision to development the project has been made.
There have been no other contingencies included above incurred jointly with other venturers.
35. Employee Benefits
Share-based Payments
The expense recognised for share based payments during the year is shown in the following table:
| US$m | 2006 | 2005 |
|---|---|---|
| Expense arising from equity settled transactions | 42 | 20 |
| Expense arising from cash settled transactions | 49 | 11 |
| Total Expense arising from share-based payment transactions | 91 | 31 |
The Group operates a number of share option plans which are outlined below. There have been no cancellations or modifications to any of the plans during 2006 or 2005.
Xstrata plc Long Term Incentive Plan (LTIP)
The LTIP has two elements:
- A contingent award of free ordinary shares that vests after three years, subject to, and to the extent that, performance criteria determined at the time of grant have been satisfied; and
- A share option to acquire ordinary shares at a specified exercise price after the third anniversary of grant, subject to, and to the extent that, performance criteria determined at the time of grant have been satisfied.
All LTIP awards that vest are subject to the satisfaction of certain performance criteria being met over a three-year performance period.
Half of the options and free share awards issued in 2004 and 2005 and one-third issued in 2006 are conditional on Total Shareholder Return (TSR) relative to a peer group, with the remainder conditional on the Group’s real cost savings relative to targets set on a stretching scale over the three-year period. The 2003 LTIP awards are only subject to the TSR performance criteria.
For the awards conditional on TSR, one-half of the combined award will vest if TSR growth is at the median of the specified peer group, the full combined award will vest for performance at or above the second decile with straight line vesting between these points. No vesting will occur for below median performance. For the remaining award, vesting is conditional on the Group’s real cost savings relative to targets set on a stretching scale: 10% of the combined award will vest for 1% cost savings, 70% for 2% cost savings and all awards for 3% or more cost savings, with straight line vesting between these points. No vesting will occur if cost savings are less than 1%. Real cost savings will be measured in relation to operating costs after adjusting for the effects of inflation, excluding depreciation, commodity price linked costs, effects of currencies on translation of local currency costs and planned life of mine adjustments. No other features of the LTIP awards were incorporated into the measurement of fair value.
No consideration will be payable on the vesting of an LTIP award of free ordinary shares. On exercise of an option, a participant will be required to pay an exercise price which will not be less than the market value of an ordinary share on the date of grant.
Of the below options, 1.9 million (2005: 1.6 million) are accounted for as cash-settled share-based awards whilst the remainder of the LTIP awards are equity-settled.
The movement in the number of free ordinary shares and share options is as follows:
Free Shares
| 2006 No | 2006 WAEP | 2005 No | 2005 WAEP | |
|---|---|---|---|---|
| Outstanding as at 1 January | 3,675,6671 | NA | 2,462,3621 | NA |
| Granted during the year | 852,536 | NA | 1,325,723 | NA |
| Granted through rights issue | 436,8382 | NA | - | NA |
| Forfeited during the year | (121,974) | NA | (26,901) | NA |
| Exercised during the year | (675,586)3 | NA | (78,676)4 | NA |
| Expired during the year | (38,116) | NA | (6,841) | NA |
| Outstanding as at 31 December | 4,129,365 | NA | 3,675,667 | NA |
| Exercisable at 31 December | - | NA | - | NA |
| 1 All shares included in this balance have been recognised in accordance with IFRS 2 Share-based Payments. | ||||
| 2 These awards were issued as a result of the rights issue in October 2006 (refer to note 26) | ||||
| 3 The weighted average share price at the date of exercise of these awards was GBP17.56 | ||||
| 4 The weighted average share price at the date of exercise of these awards was GBP9.97 | ||||
The weighted average remaining contractual life for the free shares outstanding as at 31 December 2006 is 8.0 years (2005: 8.4 years).
The weighted average fair value of free shares granted during the year was US$22.25 (2005: US$14.76).
Share Options
| 2006 No | 2006 WAEP | 2005 No | 2005 WAEP | |
|---|---|---|---|---|
| Outstanding as at 1 January | 12,191,1181 | GBP7.82 | 8,442,932 | GBP6.27 |
| Granted during the year | 2,812,204 | GBP16.15 | 4,419,089 | GBP10.60 |
| Granted through rights issue | 1,531,0632 | GBP9.25 | - | - |
| Forfeited during the year | (406,582) | GBP9.99 | (91,221) | GBP7.94 |
| Exercised during the year | (1,559,147)3 | GBP3.57 | (524,792)4 | GBP6.25 |
| Expired during the year | (117,926) | GBP3.53 | (54,890) | GBP7.94 |
| Outstanding as at 31 December | 14,450,7305 | GBP9.26 | 12,191,118 | GBP7.82 |
| Exercisable at 31 December | 637,630 | GBP3.22 | 106,444 | GBP6.27 |
| 1 All share options included in this balance have been recognised in accordance with IFRS 2 Share-based Payments, except for 106,444 options issued in 2002 | ||||
| 2 These awards were issued as a result of the rights issue in October 2006 (refer to note 26) | ||||
| 3 The weighted average share price at the date of exercise of these options was GBP17.75 | ||||
| 4 The weighted average share price at the date of exercise of these options was GBP11.49 | ||||
| 5 All the share options included in this balance have been recognised in accordance with IFRS 2 Share-based Payments, except for 81,013 options issued in 2002 | ||||
The weighted average remaining contractual life for the share options outstanding as at 31 December 2006 7.9 years (2005: 8.4 years).
The weighted average fair value of options granted during the year was US$7.72 (2005: US$5.31).
The range of exercise prices for options outstanding at the end of the year was GBP3.22 - GBP15.37 (2005: GBP3.60 - GBP10.60).
These exercise prices were adjusted by a factor of 0.9 due to the rights issue in October 2006.
The following table lists the inputs to the models used to measure the fair value of equity settled awards granted:
| Date of grant 2006 | Date of grant 2005 | |
|---|---|---|
| Dividend yield (%) | 1.3 | 3.14 |
| Expected volatility (%) | 31 | 31 |
| Risk-free interest rate (%) | 4.4 | 4.9 |
| Earliest exercise date | 10 Mar 2009 | 11 Mar 2008 |
| Latest exercise date | 9 Mar 2016 | 10 Mar 2015 |
| Expected exercise date | 17 Nov 2009 | 10 Sep 2011 |
| Share price at date of grant (GBP) | 17.03 | 10.48 |
| Exercise price (GBP) | 17.17 | 10.60 |
| Free share fair value at date of grant (GBP) | 9.54 | |
| Option fair value at date of grant (GBP) | 4.49 | 3.05 |
The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historic volatility is indicative of future trends, which may also not necessarily be the actual outcome.
Both the free shares and the equity settled options are equity settled plans and the fair value is measured at the date of grant.
The fair value of the cash settled options is measured at the date of grant and at each reporting date until the liability is settled, using the Black Scholes option pricing model, taking into account the terms and conditions of the award.
Xstrata AG incentive plan
With the merger of Xstrata AG into Xstrata plc, Xstrata plc assumed the obligations of Xstrata AG under the scheme with the number of options and exercise price adjusted accordingly. The share options have a two year vesting period followed by a three year exercise period.
The exercise price was the share price at the date of granting of the share options. There are no other conditions attaching to these options and they can be cash-settled by the holder. No further options will be granted under this incentive plan. All of the options below are accounted for as cash-settled share-based awards. The movement in the number of share options are as follows:
| 2006 No | 2006 WAEP | 2005 No | 2005 WAEP | |
|---|---|---|---|---|
| Outstanding as at 1 January | 173,3311 | CHF27.63 | 1,873,730 | CHF21.40 |
| Granted through rights issue | 1,5022 | CHF13.41 | - | - |
| Exercised during the year | (147,846)3 | CHF25.64 | (1,010,112)4 | CHF19.73 |
| Expired during the year | (12,667) | CHF25.64 | (690,287) | CHF22.28 |
| Outstanding as at 31 December | 14,320 | CHF13.41 | 173,331 | CHF27.63 |
| Exercisable at 31 December | 14,320 | CHF13.41 | 173,331 | CHF27.63 |
| 1 There are no shares included in this balance that have not been recognised in accordance with IFRS 2 Share-based Payments. | ||||
| 2 These awards were issued as a result of the rights issue in October 2006 (refer to note 26) | ||||
| 3 The weighted average share price at the date of exercise of these options was CHF35.89. | ||||
| 4 The weighted average share price at the date of exercise of these options was CHF26.99. | ||||
The weighted average remaining contractual life for the share options outstanding as at 31 December 2006 is 0.1 years (2005: 0.2 years).
No new shares were granted during the year.
The exercise price for options outstanding at the end of the year is CHF 13.41 (2005 range: CHF14.98 - CHF28.64). These exercise prices were adjusted by a factor of 0.9 due to the rights issue in October 2006.
Directors’ Service contracts
Options were granted to two executive Directors’ pursuant to the terms of on which they were recruited. The options are to be equity-settled.
The exercise price was the share price at the date of granting of the share options. The final scheme vests in January 2007 and each scheme has an exercise period of seven years. If the holder ceases to be employed by the Group for any reason, they may exercise any vested options within six months of such cessation, after which the options lapse. Any unvested options will lapse if the holder is dismissed lawfully under the terms of their contract or if they voluntarily resign except where they have a valid reason to terminate their employment as defined in their employment contract, in which case all unvested options shall immediately vest and become exercisable for a period of six months.
In all other cases, they will remain exercisable for a period of six months.
The movement in the number of share options are as follows:
| 2006 No | 2006 WAEP | 2005 No | 2005 WAEP | |
|---|---|---|---|---|
| Outstanding as at 1 January | 1,334,580 | GBP4.75 | 1,779,440 | |
| Granted through rights issue | 156,4131 | GBP3.69 | - | |
| Exercised during the year | (248,501)2 | GBP3.69 | (444,860)3 | |
| Outstanding as at 31 December | 1,242,492 | GBP4.36 | 1,334,580 | |
| Exercisable at 31 December | 993,994 | US$4.03 | 444,860 | |
| 1 These awards were issued as a result of the rights issue in October 2006 (refer to note 26) | ||||
| 2 The weighted average share price at the date of exercise of these options was US$48.32 | ||||
| 3 The weighted average share price at the date of exercise of these options was CHF23.45 | ||||
The above share options have not been accounted for in accordance with IFRS 2 Share-based Payments as the options were granted on or before 7 November 2002 and have not been subsequently modified.
The weighted average remaining contractual life for the share options outstanding as at 31 December 2006 is 6.4 years (2005: 7.4 years).
No new shares were granted during the year.
The range of exercise prices for options outstanding at the end of the year was £3.84 - £5.68 (2005: £4.12 - £6.35 and CHF 12.53).
These exercise prices were adjusted by a factor of 0.9 due to the rights issue in October 2006.
Xstrata AG Directors’ Incentive Scheme
With the merger of Xstrata AG into Xstrata plc, Xstrata plc assumed the obligations of Xstrata AG under the scheme with the number of options and exercise price adjusted accordingly. The share options have a two year vesting period followed by a three year exercise period.
The exercise price was the share price at the date of granting of the share options. There are no other conditions attaching to these options and they can be cash-settled by the holder. All of the options below are accounted for as cash-settled share-based awards. No further options will be granted under this incentive plan. The movement in the number of share options are as follows:
| 2006 No | 2006 WAEP | 2005 No | 2005 WAEP | |
|---|---|---|---|---|
| Outstanding as at 1 January | 15,231 | CHF28.64 | 91,310 | CHF23.34 |
| Expired during the year | (15,231) | CHF28.64 | (76,079) | CHF22.28 |
| Outstanding as at 31 December | - | - | 15,231 | CHF28.64 |
| Exercisable at 31 December | - | - | 15,231 | CHF28.64 |
The weighted average remaining contractual life for the share options outstanding as at 31 December 2005 was 0.1 years.
The range of exercise prices for options outstanding at the end of the 2005 was CHF28.64 - CHF28.64.
No new shares were granted during the year, and there are no outstanding shares under this scheme at 31 December 2006.
Deferred Bonus
As detailed within the Remuneration Report on pages 126 to 139, the maximum bonus payable under the Bonus Plan for Executive Directors and the members of the Executive Committee is 300% of salary. Bonuses are payable in three tranches as follows:
- the maximum bonus, which any one participant is eligible to receive in cash, will be limited to 100% of the individual’s base salary;
- any additional bonus up to a further 100% of base salary will be deferred for a period of one year; and
- any remaining bonus will be deferred for a period of two years.
The deferred elements will take the form of awards of Xstrata shares conditional on the participant remaining in employment throughout the deferral period. The number of shares awarded will be determined by reference to the market value of the shares at the date the bonus payment is determined. The deferred elements have been treated as an equity-settled share-based payment in accordance with IFRS 2.
In 2005 the Xstrata Remuneration Committee resolved that during the bonus deferral period dividend equivalents would accrue in relation to the deferral, to be delivered at the end of the deferral period and subject to the deferral award vesting.
As dividend equivalents are receivable on the deferred amounts, the fair value of the deferral is technically equal to the value of the bonuses deferred. The total value of 2006 bonuses deferred was US$13 million (2005 US$7 million). The number of deferred shares for the 2006 deferred bonus is 291,585 (2005: 258,242).
Directors’ Added Value Plan (AVP)
The first cycle of the AVP began on 9 May 2005, and the second began on 10 March 2006. A description of the performance requirements and the vesting schedule of the plan are detailed within the Remuneration Report on pages 126 to 139.
The fair value of the 2005 equity-settled share-based payment under IFRS 2 was US$7 million, estimated at the 9 May 2005, using a Monte Carlo simulation model to incorporate the market based features of the plan. The equivalent valuation of the 2006 award was US$7 million, estimated at 10 March 2006 using a Monte Carlo simulation model.
For the 2005 plan cycle, the market capitalisation on the 9 May 2005 was US$11.4 billion, the Participation Percentage was equal to 0.5% and the share price at the measurement date was US$18.00.
For the 2006 plan cycle, the market capitalisation on the 10 March 2006 was US$18.6 billion, the Participation Percentage was equal to 0.3% and the share price at the measurement date was US$29.39.
| 2006 | 2005 | |||
|---|---|---|---|---|
| Xstrata plc | Xstrata share Indices1 | Xstrata plc | Xstrata share Indices1 | |
| Dividend yield (%) | N/A | N/A2 | N/A | N/A2 |
| Expected volatility (%) | 30% | 21% | 32% | 21% |
| Risk-free interest rate (%) | 4.45% | 4.45% | 4.51% | 4.51% |
| Third anniversary of start of cycle | 10 March 2009 | 10 March 2009 | 9 May 2008 | 9 May 2008 |
| Fourth anniversary of start of cycle | 10 March 2010 | 10 March 2010 | 9 May 2009 | 9 May 2009 |
| Fifth anniversary of start of cycle | 10 March 2011 | 10 March 2011 | 9 May 2010 | 9 May 2010 |
| 1 There are two Xstrata Share Indices used within the valuation model; one is a market capitalisation weighted TSR index comprising 19 global mining firms who are considered to be Xstrata’s key competitors for both financial and human capital. The other is a market capitalisation price index comprising the same 19 constituents. | ||||
| 2 When simulating the Xstrata Price Index, a dividend yield is included to account for the suppressing impact that a dividend payment has on the constituent share prices. A yield of 3.00% has been used. For the simulation of Xstrata's TSR and the Index TSR a dividend yield is not required. | ||||
The expected volatility reflects the assumption that the historic volatility is indicative of future trends, which may also not necessarily be the actual outcome. There is no disclosure of the number of equity instruments granted as the AVP is not an award over a fixed number of shares.
Directors’ Glencore Option
As part of a package to attract him to take the position of chief executive of Xstrata AG in October 2001, Glencore International AG (Glencore) awarded Mick Davis an option over shares in Xstrata owned by Glencore, at an exercise price 46% higher than the share price on the day he joined and exercisable after three years from 19 September 2005 until 19 September 2011. Following the creation of the Company, the merger with Xstrata AG and the rights issue in 2003 associated with the acquisition of MIM Holdings Limited, the option was over 1,334,669 shares in the Company, owned by Glencore, at an exercise price of CHF13.60 per share.
On 20 September 2005, these options were exercised and Mick Davis received from Glencore a cash consideration equating to the current value of the option (CHF26 million, representing 1.334 million shares at CHF19.70 per share, being the difference between Xstrata plc's closing price of CHF33.30 per share on Monday 19 September 2005 and the exercise price of CHF13.60 per share). The Group did not incur any costs in respect of this exercise.
Pensions and Other Post-employment Benefit Plans
Net expense recognised in the income statement for the year ended 31 December:
| US$m | 2006 | 2005 |
|---|---|---|
| Defined benefit pension plans | 14 | 3 |
| Defined contribution pension plans | 81 | 78 |
| Post-retirement medical plans | 17 | - |
| 112 | 81 |
Defined Contribution Pension Plans
The Group participates in a number of defined contribution pension plans and industry-wide schemes covering the majority of its employees. The assets are held separately from those of the Group, being generally invested with insurance companies and regulated by local legislation.
Post-retirement Medical Plans
The Group participates in a number of post-retirement medical benefits. All material post-retirement medical benefit liabilities are in either North America or South Africa. Independent qualified actuaries using the projected unit credit method assess the accumulated benefit obligation and annual cost of accrued benefits. The actuaries have updated the valuations to 31 December 2006.
Defined Benefit Pension Plans
The Group contributes to defined benefit pension plans for a number of its employees. Independent professionally qualified actuaries assess the pension costs and funding of these plans using the projected unit method. The actuaries have updated the valuations to 31 December 2006.
All material pension assets and liabilities in 2006 are in either North America or the United Kingdom. All assumptions in both jurisdictions are similar and as a result no further breakdown has been provided in this note. The 2005 amounts were principally in the United Kingdom.
The following tables summarises the components of the net expense recognised in cost of sales in the income statement and the funded status and amounts recognised in the balance sheet for the defined benefit pension plans and post-retirement medical plans.
The weighted average principal economic assumptions used to determine the actuarial values are as follows:
| Pension plans 2006 | Post- retirement medical plans 2006 | Pension plans 2005 | Post- retirement medical plans 2005 | |
|---|---|---|---|---|
| Rate of salary increases | 3.8% | - | 4.2% | - |
| Rate of pension increases | 2.9% | - | 2.7% | - |
| Expected rate of return on plan assets: | ||||
| Equities | 9.0% | - | 7.8% | - |
| Property | - | - | 7.0% | - |
| Bonds | 4.6% | - | 4.7% | - |
| Cash | - | - | 3.5% | - |
| Total | 6.9% | - | 6.3% | - |
| Discount rate | 5.2% | 5.3%* | 4.8% | 8.9%** |
| Inflation rate | 2.9% | 2.5%* | 2.8% | 4.4%** |
| Rate of medical cost increases | - | 9.0%* | - | 9.2%** |
| * These percentages are the weighted average assumptions for the Group’s post-retirement medical plans. | ||||
| ** Assumptions in 2005 relate to South African plans. | ||||
The significant plans are based in North America where the assumptions were:
| Discount rate | 5.3% |
| Inflation rate | 2.5% |
| Rate of medical cost increases | 9.0% |
The remainder are in South Africa where the assumptions were:
| Discount rate | 8.9% |
| Inflation rate | 4.3% |
| Rate of medical cost increases | 9.1% |
A one percentage point change in the assumed rate of increase in healthcare costs would have the following impact:
| US$m | Increase 2006 | Decrease 2006 | Increase 2005 | Decrease 2005 |
|---|---|---|---|---|
| Effect on the current service cost and interest cost | 2 | (2) | - | - |
| Effect on the defined benefit obligation | 40 | (39) | 1 | (1) |
The pension plan mortality rate used at 31 December 2006 and 31 December 2005 was PA92C06 less 0.25% pa for both pensioners and non-pensioners for the UK plans and UP-94 for North American pension and post-retirement medical plans. These rates refer to published projected mortality tables by actuarial bodies in the UK and North America and take into account the assumed increases in the life expectancy and are calculated for both current and future pensioners. There are no significant differences in these rates between schemes. The average life expectancy in the medical plans was 82 years as at 31 December 2006 (2005: 71 years).
Funded status (before allowance of deferred tax) at 31 December are as follows:
| Pension plans 2006 | Post- retirement medical plans 2006 | Pension plans 2005 | Post- retirement medical plans 2005 | |
|---|---|---|---|---|
| Present value of benefit obligations | 2,528 | 413 | 106 | 11 |
| Assets at fair value | (2,393) | - | (85) | - |
| Net liability | 135 | 413 | 21 | 11 |
| Net liability as at 31 December represented by: | ||||
| Pension deficits | 140 | 413 | 24 | 11 |
| Pension assets | (5) | - | (3) | - |
| Net liability | 135 | 413 | 21 | 11 |
Historical adjustments are as follows:
| US$m | 2006 | 2005 | 2004 |
|---|---|---|---|
| Defined benefit obligation | 2,528 | 106 | 110 |
| Plan assets | (2,393) | (85) | (85) |
| Net deficit | 135 | 21 | 25 |
| Experience gain adjustments on plan liabilities | (4) | (8) | (1) |
| Experience (gain)/loss adjustments on plan assets | (96) | (4) | 1 |
The reconciliation of the net liability movement during the year in the net pension and post-retirement medical plan liability (before allowance of deferred tax) are as follows:
| Pension plans 2006 | Post- retirement medical plans 2006 | Pension plans 2005 | Post- retirement medical plans 2005 | |
|---|---|---|---|---|
| Net liability as at 1 January | 21 | 11 | 25 | 13 |
| Acquisition accounting adjustment* | 235 | 407 | - | - |
| Total benefit expense | 14 | 17 | 3 | - |
| Actuarial (gains)/losses | (74) | 3 | - | (1) |
| Employer contributions | (61) | (4) | (5) | - |
| Translation adjustments | - | (21) | (2) | (1) |
| Net liability as at 31 December | 135 | 413 | 21 | 11 |
| *Relates to adjustments made in respect of the acquisition of Falconbridge Limited in August 2006. | ||||
Further contributions of GBP2 million per annum to 5 April 2015 are being made in order to eliminate the deficiency in the United Kingdom plan. Further contributions of US$76 million in 2007, US$33 million in 2008, US$30 million in 2009, US$25 million in 2010, US$2 million per annum from 2011 to 2014 and US$1 million per annum from 2015 to 2018 are being made in order to eliminate the deficiency in the North America plans. The total contributions to the defined benefit pension plans in 2007 including these further contributions are expected to be US$118 million.
The components of benefit (income)/expense recognised in the income statement during the year are as follows:
| Pension plans 2006 | Post- retirement medical plans 2006 | Pension plans 2005 | Post- retirement medical plans 2005 | |
|---|---|---|---|---|
| Service cost | 22 | 5 | 2 | (1) |
| Interest cost | 48 | 9 | 6 | 1 |
| Expected return on plan assets (net of expected expenses) | (56) | (1) | (5) | - |
| Gains/(losses) on settlements and curtailments | 4 | - | - | |
| 14 | 17 | 3 | - |
The components of actuarial (gains)/losses recognised in the Consolidated Statement of Recognised Income and Expenses during the year are as follows:
| Pension plans 2006 | Post- retirement medical plans 2006 | Pension plans 2005 | Post- retirement medical plans 2005 | |
|---|---|---|---|---|
| Expected return on plan assets (net of expected expenses) | 56 | 1 | 5 | - |
| Actual return on plan assets | (152) | (3) | (9) | - |
| Actual return less expected return on plan assets | (96) | (2) | (4) | - |
| Actuarial gain on pension obligations | (4) | - | (8) | (1) |
| Change of assumptions | 26 | 5 | 12 | - |
| (74) | 3 | - | (1) |
The cumulative amount of net actuarial gains recognised in the statement of recognised income and expenses is US$60 million (2005 loss US$11 million).
The reconciliation of the present value of benefit obligations and fair value of plan asset movements during the year are as follows:
| Pension plans 2006 | Post- retirement medical plans 2006 | Pension plans 2005 | Post- retirement medical plans 2005 | |
|---|---|---|---|---|
| Benefit obligation present value as at 1 January | 106 | 11 | 110 | 13 |
| Acquisition accounting adjustment | 2,489 | 439 | - | - |
| Current service cost | 22 | 5 | 2 | (1) |
| Interest cost | 48 | 9 | 6 | 1 |
| Employee contributions | 1 | - | 1 | - |
| Actuarial (gains)/losses | (4) | - | (8) | (1) |
| Actual benefit payments | (59) | (10) | (5) | - |
| Settlements and curtailments | - | (28) | - | - |
| Loss on settlements and curtailments | - | 4 | - | - |
| Change of assumptions | 26 | 5 | 12 | - |
| Translation adjustments | (101) | (22) | (12) | (1) |
| Benefit obligation present value as at 31 December | 2,528 | 413 | 106 | 11 |
| Plan assets fair value as at 1 January | 85 | - | 85 | - |
| Acquisition accounting adjustment | 2,254 | 32 | - | - |
| Actual return on plan assets | 152 | 3 | 9 | - |
| Company contributions | 61 | 4 | 5 | - |
| Employee contributions | 1 | - | 1 | - |
| Benefits paid from fund | (59) | (10) | (5) | - |
| Settlements and curtailments | - | (28) | - | - |
| Translation adjustments | (101) | (1) | (10) | - |
| Plan assets fair value as at 31 December | 2,393 | - | 85 | - |
| Net liability as at 31 December | 135 | 413 | 21 | 11 |
| Net liability as at 1 January | 21 | 11 | 25 | 13 |
The defined benefit obligation present value included above for unfunded pension plans at 31 December 2006 was US$5 million (2005 US$5 million).
The major categories of plan assets as a percentage of the fair value of total plan assets are as follows:
| Pension plans 2006 | Pension plans 2005 | |
|---|---|---|
| Equities | 52% | 53% |
| Property | -% | 1% |
| Bonds | 48% | 40% |
| Cash | -% | 5% |
| Other | -% | 1% |
Included in equities is US$1 million (2005 US$nil) of Xstrata plc shares.
The overall expected rate of return on assets is determined based on the market value weighted expected return applicable to the underlying asset category.
36. Related Parties
| Name | Country of incorporation | Principal activities | % of ordinary shares held & voting rights |
|---|---|---|---|
Principal Subsidiaries | |||
| Xstrata Coal | |||
| Abelshore Pty Limited | Australia | Coal operations | 100% |
| AZSA Holdings Pty Limited | Australia | Coal operations | 100% |
| Cook Resources Mining Pty Limited | Australia | Coal operations | 100% |
| Cumnock Coal Limited | Australia | Coal operations | 84% |
| Enex Foydell Limited | Australia | Coal operations | 100% |
| Enex Liddell Pty Limited | Australia | Coal operations | 100% |
| Enex Oakbridge Pty Limited | Australia | Coal operations | 100% |
| Xstrata Mt Owen Pty Limited | Australia | Coal operations | 100% |
| Jonsha Pty Limited | Australia | Coal operations | 100% |
| Oakbridge Pty Limited | Australia | Coal operations | 78% |
| Oceanic Coal Australia Limited | Australia | Coal operations | 100% |
| Ravensworth Operations Pty Limited | Australia | Coal operations | 100% |
| Saxonvale Coal Pty Limited | Australia | Coal operations | 100% |
| The Wallerawang Collieries Limited | Australia | Coal operations | 95% |
| Ulan Coal Mines Limited | Australia | Coal operations | 90% |
| Ulan Power Company Pty Limited | Australia | Feasibility projects | 100% |
| Xstrata Coal Pty Limited | Australia | Holding company | 100% |
| Xstrata Coal Holdings Pty Limited | Australia | Holding company | 100% |
| Xstrata Coal Investments Australia Pty Limited | Australia | Holding company | 100% |
| Xstrata Coal Queensland Pty Limited | Australia | Coal operations | 100% |
| Xstrata Energy Pty Limited | Australia | Holding company | 100% |
| Xstrata Newpac Pty Limited | Australia | Investment company | 100% |
| Xstrata Coal Canada Limited | Canada | Investment company | 100% |
| Xstrata Coal South America Limited | Bermuda | Holding company | 100% |
| Tironimus AG | Switzerland | Holding company | 100% |
| Tavistock Collieries (Pty) Ltd | South Africa | Coal operations | 100% |
| Xstrata Coal Marketing AG | Switzerland | Marketing & trading | 100% |
| Xstrata Alloys | |||
| Xstrata South Africa (Pty) Ltd | South Africa | Holding company, Coal, Chrome & Vanadium operations | 100% |
| Char Technology (Pty) Ltd | South Africa | Char operation | 100% |
| African Fine Carbon (Pty) Limited | South Africa | Char operation | 100% |
| African Carbon Producers (Pty) Limited | South Africa | Char operation | 100% |
| Xstrata Copper | |||
| Ernest Henry Mining Pty Ltd | Australia | Copper operation | 100% |
| Minera Alumbrera Limited | Antigua | Copper operation | 50%* |
| Mount Isa Mines Limited | Australia | Copper, Lead and Zinc operations | 100% |
| Xstrata South America Limited | Cayman | Holding company | 100% |
| Xstrata Tintaya S.A. | Peru | Holding company | 100% |
| Compania Minera Xstrata Lomas Bayas | Chile | Copper operations | 100% |
| Xstrata Chile Inversiones Limitada | Chile | Holding company | 100% |
| Xstrata Copper Chile S.A. | Chile | Copper smelter | 100% |
| Xstrata Commodities Middle East DMCC† | UAE | Marketing | 100% |
| Noranda Recycling Inc | USA | Copper recycling | 100% |
| Xstrata Nickel | |||
| Falconbridge International (Investments) Limited | Bermuda | Holding company | 100% |
| Falconbridge International Limited | Barbados | Nickel feeds acquisition | 100% |
| Falconbridge Dominicana C por A | Dom. Republic | Ferronickel operation | 85% |
| Falconbridge U.S. Inc. | U.S.A. | Nickel marketing | 100% |
| Falconbridge (Japan) Ltd. | Japan | Nickel marketing | 100% |
| Falconbridge Europe S.A. | Belgium | Nickel marketing | 100% |
| Falconbridge Nikkelverk Aktieselskap | Norway | Nickel refinery | 100% |
| Falconbridge International S.A. | Belgium | Nickel procurement agent | 100% |
| Falconbridge Brasil Ltda | Brazil | Exploration | 100% |
| Xstrata Zinc | |||
| Asturiana de Zinc SA | Spain | Zinc smelter | 100% |
| Britannia Refined Metals Limited | UK | Lead smelter | 100% |
| McArthur River Mining Pty Ltd | Australia | Zinc operations | 100% |
| Xstrata Zinc GmbH | Germany | Zinc smelter | 100% |
| Xstrata Aluminium | |||
| Noranda Aluminum, Inc. | USA | Aluminium operations | 100% |
| Xstrata Technology | |||
| Xstrata Technology Pty Ltd | Australia | Technology operations | 100% |
| MIM Process Technology South Africa (Pty) Ltd | South Africa | Technology operations | 100% |
| Other | |||
| Xstrata (Schweiz) AG** | Switzerland | Holding company | 100% |
| Xstrata Capital Corporation AVV*** | Aruba | Finance company | 100% |
| Xstrata Finance (Dubai) Limited† | UAE | Finance company | 100% |
| Xstrata Holdings Pty Ltd | Australia | Holding company | 100% |
| Xstrata Queensland Limited | Australia | Holding company | 100% |
| Falconbridge Limited | Canada | Copper, nickel and Zinc operations | 100% |
| Xstrata Finance (Canada) Limited | Canada | Finance company | 100% |
| Noranda Finance Inc. | USA | Finance company | 100% |
| Xstrata Canada Inc | Canada | Holding company | 100% |
| Alberta Limited | Canada | Holding Company | 100% |
| Name | Principal place of operations/ country of incorporation | Principal activities | |
|---|---|---|---|
Principal Joint Ventures | |||
| Xstrata Coal | |||
| Bulga Joint Venture | Australia | Coal operations | |
| Douglas Tavistock Joint Venture | South Africa | Coal operations | |
| Goedgevonden Joint Venture | South Africa | Coal operations | |
| Foybrook Joint Venture | Australia | Coal operations | |
| Liddell Joint Venture | Australia | Coal operations | |
| Macquarie Coal Joint Venture | Australia | Coal operations | |
| Narama Joint Venture | Australia | Coal operations | |
| Newlands, Collinsville, Abbot Point Joint Venture | Australia | Coal operations | |
| Oaky Creek Coal Joint Venture | Australia | Coal operations | |
| Rolleston Pentland Wandoan Joint Venture | Australia | Coal operations | |
| Ulan Coal Mines Joint Venture | Australia | Coal operations | |
| United Joint Venture | Australia | Coal operations | |
| ARM Coal (Pty) Limited | South Africa | Coal operations | |
| CMC Coal Marketing Company Ltd | Ireland | Marketing & trading | |
| Carbones De Cerrejón LLC | Anguilla | Coal operations | |
| Cerrejón Zona Norte SA | Colombia | Coal operations | |
| Xstrata Alloys | |||
| Samancor Joint Venture | South Africa | Chrome operations | |
| Merafe Pooling and Sharing Venture | South Africa | Chrome operations | |
| Mototolo Joint Venture | South Africa | Platinum operations | |
| Xstrata Copper | |||
| Antamina Joint Venture | Peru | Copper & Zinc operations | |
| Collahuasi Joint Venture | Chile | Copper operations | |
| Xstrata Nickel | |||
| Kabanga Joint Venture | Africa | Nickel project | |
| Koniambo Joint Venture | New Caledonia | Ferronickel project | |
| Xstrata Zinc | |||
| Lady Loretta | Australia | Zinc project | |
| Lennard Shelf | Australia | Zinc project | |
| Xstrata Aluminium | |||
| Gramercy Alumina LLC | USA | Aluminium refinery | |
| St. Ann Bauxite Limited | Jamaica | Bauxite operation | |
| Principal Associates | |||
| Xstrata Coal | |||
| Newcastle Coal Shippers Pty Ltd | Australia | Coal terminal | |
| Port Kembla Coal Terminal Limited | Australia | Coal terminal | |
| Richards Bay Coal Terminal Company Ltd | South Africa | Coal terminal | |
| Xstrata Zinc | |||
| Noranda Income Fund | Canada | Zinc refinery | |
| * This investment is treated as a subsidiary as the Group is entitled to 2 of the 4 Board positions of Minera Alumbrera Limited, including the Chairman as it is the manager of the copper operation. The Chairman has the casting vote where any vote is split equally between the 4 board positions however in a limited number situations the vote must be unanimous, including transactions with related parties. | |||
| ** Directly held by the parent company. | |||
| *** 40% held by the parent company. | |||
| † 90% held by the parent company. | |||
The Group comprises a large number of companies and it is not practical to include all of these in the above list. All entities operate mainly in the country of incorporation and these interests are held indirectly by the parent company unless otherwise indicated.
During the year, the Group entered into the following transactions, in the ordinary course of business, with related parties:
| US$m | Sales** | Purchases | Treatment & refining charges | Treatment & refining revenue | Agency & marketing charges | Interest & other revenue | Amounts payable | Amounts receivable |
|---|---|---|---|---|---|---|---|---|
| Glencore International AG* | ||||||||
| 2006 | 3,703 | 940 | 258 | 8 | 63 | - | 37 | 317 |
| 2005 | 2,248 | 348 | 155 | 64 | 71 | 1 | 62 | 212 |
| Joint venture entities | ||||||||
| 2006 | - | 100 | - | - | - | 4 | 224 | 586 |
| 2005 | - | - | - | - | - | - | - | - |
| Associates | ||||||||
| 2006 | 362 | - | 58 | - | 14 | - | 1 | 166 |
| 2005 | - | - | - | - | 15 | - | 2 | - |
| * Includes share of joint ventures | ||||||||
| * No provision for doubtful debts has been raised in respect of transactions with related parties | ||||||||
Included in the transactions with Glencore are US$651 million (2005 US$761 million) of back-to-back sales whereby the title to the goods has passed to Glencore but they are then on-sold to customers at the same sales price that the Group received.
Amounts payable and receivable, are included in Trade and other receivables (refer to note 19) and in Trade and other payables (refer to note 27), are unsecured and will be settled in cash.
Glencore International AG - Substantial shareholder On 29 May 2003 Glencore International AG (Glencore), Credit Suisse First Boston Equities Limited and Credit Suisse First Boston (Europe) Limited entered into a capital management programme. Under the terms of this agreement in connection with the Group’s acquisition of the MIM Group and the associated rights issue, Glencore, Credit Suisse First Boston Equities Limited and Credit Suisse First Boston (Europe) Limited had joint ownership over 253,699,767 ordinary shares representing 40.1% of the issued share capital of the Company at 31 December 2005. On 20 December 2006, the Capital Management Arrangement between Glencore and Credit Suisse Group was terminated. As at 31 December 2006, Glencore owned 35.7% of the issued share capital of the Company representing 336,801,333 ordinary shares.
On 30 October 2006, 235,787,596 ordinary shares were issued under a rights issue which was structured as an issue of one new ordinary share at a price of GBP 12.65 per share for every three existing ordinary shares held. Glencore was paid an underwriting fee of US$35 million for the ordinary shares they subscribed to (refer to note 26).
Chrome
Xstrata Alloys entered into a ferrochrome marketing agreement with Glencore on 21 April 1995, appointing Glencore as its exclusive world-wide marketing agent for the sale of Xstrata Alloys entire production of ferrochrome other than ferrochrome sold into the US, Canada and certain Asian countries. The agreement continues for as long as Xstrata Alloys produces ferrochrome. Glencore is obliged to use its best endeavours to arrange sales at prevailing market rates subject to initial agreement and approval by Xstrata Alloys prior to effecting the sale. Glencore assists Xstrata Alloys in negotiating sales contracts with third parties. Glencore is entitled to receive an agency fee of 3.5% on FOB sales revenues and an additional fee of 0.75% on FOB sales revenues for assuming the risk of non-payment by customers on this material. Glencore assumes 60% of the risk of non-payment by customers in relation to ferrochrome sales.
If at any time Xstrata Alloys notifies Glencore that it is able to find purchasers for its production at prices higher than those generally obtainable by Glencore, Xstrata Alloys may, unless Glencore is able to obtain similar prices, sell its products in the market. Glencore is nevertheless entitled to an agency fee of 3.5% of FOB sales revenue in respect of such sales. Glencore is also entitled to receive a US$50,000 monthly fee in connection with market analysis and certain administrative tasks it performs for Xstrata Alloys.
Ferrochrome sold into the US and Canada is distributed by Glencore Ltd and Glencore Canada Inc respectively, under two distribution agreements. These agreements continue indefinitely, with both parties having the right to terminate the agreement at 12 month’s notice. The percentage of distribution fees payable by the Group in respect of ferrochrome sold under the distribution agreement is substantially the same as the commission paid in respect of ferrochrome sold under the marketing agreement.
Mitsui & Co. Ltd is the appointed distributing agent for ferrochrome sales into China, Japan and South Korea up to a maximum of 105,000 tonnes per annum. A change in distributing agent for sales into these countries must be done with the consent of Glencore.
Vanadium
In December 1997, the Group, entered into a 20-year marketing agreement with Glencore in respect of Rhovan’s and Vantech’s (closed in 2004) entire production of vanadium other than vanadium sold into the US and Canada.
Glencore is obliged to use its best endeavours to arrange sales of vanadium pentoxide and ferrovanadium to customers at prevailing market rates subject to initial agreement and approval by Xstrata Alloys prior to effecting the sale. Xstrata Alloys is obliged to pay to Glencore an agency fee of 3.5% on FOB sales revenues and an additional fee of 1.5% on FOB sales revenues for assuming the risk of non-payment by customers on this material. Glencore assumes 100% of the risk of non-payment by customers in relation to vanadium sales.
If at any time Xstrata Alloys notifies Glencore that it is able to find purchasers for its production at prices higher than those generally obtainable by Glencore, Xstrata Alloys may, unless Glencore is able to obtain similar prices, sell its products in the market. Glencore is nevertheless entitled to the 3.5% agency fees described above in respect of such sales.
Vanadium pentoxide and ferrovanadium sold into the US and Canada is distributed by Glencore Ltd and Glencore Canada Inc respectively, under two distribution agreements. The distribution agreements have the same term as the marketing agreement and consequently, the percentage of distribution fees payable by the Group in respect of vanadium pentoxide and ferrovanadium is substantially the same as the commission paid in respect of vanadium pentoxide and ferrovanadium sold under the marketing agreement.
Coal
In 2002, the Group entered into a 20-year market advisory agreement with Glencore with fee reviews at the end of every fifth year of the agreement. Pursuant to this agreement, Glencore acts as the Group’s market advisor with respect to its export production of coal (other than for Cumnock No. 1 Colliery Pty Limited while it is not a wholly owned subsidiary and Xstrata Coal’s share of production from the Cerrejón thermal coal operation in Colombia). The fee payable to Glencore is US$0.50 per attributable tonne of coal exported by the Group from Australia or South Africa. In January 1995, Cumnock entered into a sales and marketing agreement with Glencore, for a commission of US$0.75 per tonne for all coal sold by Cumnock. Pursuant to this agreement, Glencore provides sales and marketing services to Cumnock and Cumnock appoints Glencore as its agent to market coal.
The Group entered into market standard forward commodity price derivatives with Glencore as counter-party. During the year ended 31 December 2006, 1,065,000 tonnes (2005: 945,000 tonnes) were delivered at an average FOB price of US$56.31 per tonne (2005 US$57.80 per tonne). At 31 December 2006, nil tonnes (2005: 765,000 tonnes) were contracted with Glencore for delivery. These derivatives are on arm’s length terms and conditions and are included within derivative financial assets and liabilities (refer to notes 23, 30 and 37).
During the year ended 31 December 2006, 452,489 tonnes were borrowed from Glencore and 507,970 tonnes were transferred back to Glencore with 85,089 tonnes owed to Glencore at 31 December 2006 (31 December 2005: 140,570 tonnes) on arm’s length terms and conditions.
In 2006 the Group entered into a 3-year fuel supply agreement with Glencore to supply diesel fuels to coal mines in New South Wales and Queensland. The supply agreement started in April 2006 and US$47 million were delivered to 31 December 2006. The supply agreement is on arm’s length terms and prices change monthly according to the world market price per barrel (US$/BBL).
In 2005 Cerrejón entered into a 4-year fuel supply agreement with Glencore to supply diesel fuels. Since Xstrata acquired an interest in Cerrejón, Xstrata’s share of the fuel purchases totalled US$43 million to 31 December 2006. The supply agreement is on arms length terms and prices change for each shipment according to the world market price per barrel (US$/BBL).
All coal purchases and sales with Glencore are on arm’s length terms and conditions.
On 20 April 2006, the Group acquired a 331?3% interest in the Cerrejón thermal coal operation in Colombia for a cash consideration of US$1,719 million from Glencore (refer to note 7).
Zinc
During 2006, Xstrata Zinc renewed a service agreement for a period of 2 years with Glencore (the Asturiana Service Agreement), under the terms of which Glencore provides advice and assistance with respect to the acquisition of mining and/or metallurgical interests and advice in connection with Asturiana’s hedging policy and improvement of its position in the zinc market. The fees to be paid by Asturiana under the Asturiana Service Agreement are US$2 million per annum.
Xstrata Zinc entered into an ‘evergreen’ agreement with Glencore in 2004 to purchase 380,000 dmt (2005: 380,000 dmt) per annum of zinc concentrate. Treatment charges in respect of such purchases are negotiated annually on arm’s length terms and conditions.
In 2006, Xstrata Zinc (San Juan de Nieva and Nordenham) agreed to supply Glencore with 220,000 tonnes (2005: 250,000 tonnes) of SHG zinc slabs or CGG ingots during 2006 based on market FOB/CPT prices plus the respective market premium.
In 2006 Xstrata Zinc (McArthur River) supplied Glencore with 262,400 wmt of zinc concentrate and has an agreement to supply this amount each year until 31 December 2009, after which it will become ‘evergreen’ in nature. Treatment charges are negotiated annually on arm’s length terms and conditions.
Xstrata Zinc (Mt Isa) has two agreements with Glencore for the supply of zinc concentrate from 2006 to 31 December 2008 after which they will become ‘evergreen’ in nature. The first agreement is to supply 90,000 wmt per annum. The second agreement is to supply 80,000 wmt to 100,000 wmt per annum for the purpose of swapping Mt Isa concentrate in exchange for the same volume to be delivered to Xstrata’s European smelters at equivalent terms. Treatment charges are negotiated annually on arm’s length terms and conditions.
Xstrata Zinc Canada had an agreement to supply Glencore with 1,000 tonnes per month, during 2006 of SHG zinc slabs and Jumbos based on market delivery duty paid plus the respective market premium.
All purchase and sales transactions with Glencore are on arm’s length terms and conditions.
Copper
Xstrata Copper has entered into sales agreements with Glencore in respect of the total available export allocation of copper cathode and surplus North Queensland copper concentrate not processed through its Mount Isa copper smelter for an initial 3-year period effective from 1 January 2004, and ‘evergreen’ thereafter unless the agreement is terminated by either party with a minimum 12 month notice period. The sales terms for the copper cathode are the LME price plus a range of premiums that is based on Codelco North Asian CIF Liner Terms less freight discounts by destination. The sales terms for the copper concentrate are based on market prices less agreed metal content deductions, treatment and refining charges. The treatment and refining charges for the benchmark portion (25%) are fixed annually in line with annual benchmark terms. The treatment and refining charges for the spot portion (75%) are negotiated quarterly based on the prevailing spot market terms.
Xstrata Copper (Minera Alumbrera Limited) has entered into a frame contract with Glencore in respect of 20,000 to 40,000 dmt copper concentrate per annum expiring on 31 December 2004, thereafter ‘evergreen’ with a 12-month termination period. The sales terms for the copper concentrate are negotiated annually on arm’s length terms and conditions. Minera Alumbrera Limited also has a fixed term contract for the sale of copper concentrate to Glencore for 40,000 dmt per annum in 2004, 2006 and 2007 as well as 60,000 dmt in 2005, expiring 31 December 2007. The treatment charges are US$25 per tonne in 2004, US$30 per tonne in 2005, US$50 per tonne in 2006 and US$52 per tonne in 2007. The refining charges are US2.5 cents per pound in 2004, US3.0 cents per pound in 2005, US5.0 cents per pound in 2006 and US5.2 cents per pound in 2007. Minera Alumbrera Limited on occasions sells concentrate to Glencore at spot terms at prevailing spot market prices. Minera Alumbrera Limited on occasions also sells concentrate to Glencore under swap arrangements at prevailing market prices.
All terms and conditions are set on an arm’s length basis.
Copper cathode sales agreements were entered into between Xstrata Copper Canada and Glencore in the second half of 2006. All sales were at spot term according to the prevailing market conditions.
Copper cathode and concentrate sales agreements were also entered into between Xstrata Commodities Middle East and Glencore in the second half of 2006. All sales were at spot terms according to the prevailing market conditions.
Xstrata Copper (North Queensland) agreed to a copper concentrate purchase agreement with Glencore during 2006. The purchase was at spot terms in accordance with the prevailing market conditions.
All sales transactions with Glencore are on arm’s length terms and conditions.
Nickel
In 2004 Xstrata Nickel entered into two agreements with Glencore for the treatment of approximately 2,000 tonnes per annum of white alloy raw material feed to the Nikkelverk refinery in Norway and the Sudbury smelter in Canada. The contracts include both a metal purchase and a metal return component. The term of the contracts is to the end of 2009, continuing indefinitely thereafter unless terminated by either party with six months’ notice given not earlier than 1 July 2009. Treatment and refining charges to Glencore are subject to price participation adjustments based on prevailing market prices.
Xstrata Nickel sells refined nickel and cobalt to Glencore on arm’s length terms and conditions, under annual contracts or spot arrangements, which are based on prevailing market rates.
Associates
Coal
Xstrata Coal has a number of investments in export coal terminals allowing it to export coal into overseas markets.
Xstrata Coal South Africa holds a 20.9% (2005: 20.9%) interest in Richards Bay Coal Terminal Company Ltd (RBCT), a company that operates the coal terminal in Richards Bay, South Africa. RBCT is governed by a consolidated agreement between the seven shareholders which deals with all aspects of the operation of the terminal. All matters are decided by the board, membership of which is determined by shareholding.
All decisions must have an 80% majority. Veto rights are held by BHP Billiton (Ingwe), Anglo American and Xstrata Coal. Xstrata Coal South Africa reimburses RBCT for its share of operating and capital expenditure.
Xstrata Coal Australia has a 20% (2005: 20%) interest in Port Kembla Coal Terminal Limited and a 37.1% (2005: 37.1%) interest in Newcastle Coal Shippers Pty Limited. Xstrata Coal Australia reimburses these coal terminals for its share of coal loading and handling charges.
Zinc
The Group has an effective 25% economic and voting interest in the Noranda Income Fund (NIF), which owns a zinc refinery in Salaberry-de-Valleyfield, Quebec. The Group’s 's interest in the NIF are held as ordinary units of the partnership, which are subordinate to the priority units in respect of cash distributions in any month until May 3, 2017. In addition, the Group has entered into a supply and processing agreement that continues until May 2, 2017 and is obligated to sell to the NIF up to 550,000 tonnes of zinc concentrate per year. The NIF pays the Group a concentrate price, based on the price of zinc metal on the London Metal Exchange, for the payable zinc metal contained in the concentrate less a processing fee of US$31.31 per pound of such payable zinc metal at 31 December 2006.
Joint Venture Entities
Xstrata Coal has a 331?3% interest in the Cerrejón thermal coal operation in Colombia. Xstrata Copper has a 33.75% interest in the Antamina joint venture in Peru and a 44% interest in the Collahuasi joint venture in Chile. Xstrata Nickel has a 49% interest in the Koniambo ferronickel project in New Caledonia. The amounts receivable include amounts advanced for project funding.
Remuneration of Key Management Personnel of the Group
| US$m | 2006 | 2005 |
|---|---|---|
| Wages and salaries | 15 | 15 |
| Pension and other post-retirement benefit costs | 4 | 4 |
| Share-based compensation plans | 65 | 18 |
| 84 | 37 |
Includes amounts paid to Directors disclosed in the Remuneration report on pages 136 to 139.
37. Financial instruments
The Group’s significant financial instruments, other than derivatives, comprise bank loans and overdrafts, convertible borrowings, capital market notes, finance leases and hire purchase contracts, and cash and short term deposits. The main purpose of these financial instruments is to raise finance for the Group’s acquisitions and operations. The Group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations.
The Group is exposed to changes in currency exchange rates, commodity prices and interest rates in the normal course of business. Derivative transactions are generally entered into solely to hedge these risks although hedge accounting under IAS 39 is only applied when certain criteria have been met. Market fluctuations in derivative financial instruments designated as hedges are used to offset the fluctuations in the underlying exposure. The Group generally does not hold derivatives for trading purposes. Refer below and to the Financial Review on pages 51 to 52 for further discussion on the Group’s strategies in respect of holding financial instruments.
The main risks arising from the Group’s financial instruments are credit risk, interest rate risk, liquidity risk, foreign currency risk and commodity price risk. A treasury committee establishes the policies for managing each of these risks and the board reviews and agrees these policies.
The Group’s accounting policies in relation to derivatives are set out in note 6.
Credit risk
The Group is mainly exposed to credit risk in respect of trade receivables, however given the geographical industry spread of the Group’s customers, credit risk is believed to be limited. Where concentrations of credit risk exist, management closely monitors the receivable and ensures appropriate controls are in place to ensure recovery. Credit risk is minimal and not concentrated for other financial assets. Credit risk is limited to the carrying amount of financial assets at the balance sheet date. Details of guarantees given by the Group are outlined in note 34.
Interest rate risk
It is the Group’s preference to borrow and invest at floating rates of interest, notwithstanding that some borrowings are at fixed rates.
A limited amount of fixed rate hedging can be undertaken during periods where the Group’s exposure to movements in short term interest rates is more significant. In keeping with the Group’s preference to borrow at floating rates of interest, the following interest rate swap contracts were outstanding at 31 December 2006:
| US$m | Principal amount 2006 | Average rate % 2006 | Fair value 2006 | Principal amount 2005 | Average rate % 2005 | Fair value 2005 |
|---|---|---|---|---|---|---|
| Fair value hedges: | ||||||
| Interest rate swap from US$ fixed rates: | ||||||
| Maturing between 1 to 2 years* | 111 | 8.48 | 6 | - | - | - |
| Maturing between 3 to 4 years** | 600 | 4.5 | (11) | - | - | - |
| Maturing between 4 to 5 years* | 1,050 | 5.69 | (1) | 600 | 4.5 | (10) |
| Maturing greater than 5 years* | 1,750 | 6.30 | (12) | - | - | - |
| Interest rate swap to US$ fixed rates: | ||||||
| Maturing between 1 to 2 years | 25 | 5.00 | - | - | - | - |
| Maturing greater than 5 years | 100 | 4.54 | 2 | - | - | - |
| 3,636 | 5.84 | (16) | 600 | 4.5 | (10) | |
| * Relates to the Senior debentures (refer to note 28) | ||||||
| ** Relates to the Convertible borrowings (refer to note 29) | ||||||
The interest rate risk profile of the Group as at 31 December 2006 was as follows:
| US$m | Falling due within 1 year | Falling due between 1-2 years | Falling due between 2-3 years | Falling due between 3-4 years | Falling due between 4-5 years | Falling due more than 5 years | 2006 |
|---|---|---|---|---|---|---|---|
| Fixed rate by balance sheet category: | |||||||
| Cash and cash equivalents | 467 | - | - | - | - | - | 467 |
| Other financial assets | - | 116 | - | - | - | - | 116 |
| Capital market notes* | (5) | (320) | (14) | (14) | (391) | (3,388) | (4,132) |
| Equity minority interest loans | - | - | - | - | - | (81) | (81) |
| Convertible borrowings* | - | - | - | (201) | - | (324) | (525) |
| Finance leases/hire purchase contracts | (147) | (14) | (16) | (10) | (27) | (28) | (242) |
| Preference shares | - | (134) | (67) | - | - | - | (201) |
| Other loans | - | - | - | - | - | (1) | (1) |
| 315 | (352) | (97) | (225) | (418) | (3,822) | (4,599) | |
| Fixed rate by currency: | |||||||
| AUD | (95) | (8) | (8) | (10) | (22) | (21) | (164) |
| CAD | - | (289) | (67) | - | (5) | (7) | (368) |
| EUR | - | - | - | - | - | (1) | (1) |
| GBP | 11 | - | - | - | - | - | 11 |
| US$ | 397 | (55) | (22) | (215) | (391) | (3,793) | (4,079) |
| Other | 2 | - | - | - | - | - | 2 |
| 315 | (352) | (97) | (225) | (418) | (3,822) | (4,599) | |
| Floating rate by balance sheet category: | |||||||
| Cash and cash equivalents | 1,181 | - | - | - | - | - | 1,181 |
| Other financial assets | - | - | - | - | - | 122 | 122 |
| Capital market notes | - | - | (500) | - | - | - | (500) |
| Syndicated bank loan | (1,677) | - | (3,353) | - | (4,063) | - | (9,093) |
| Bank loans - other | (39) | (64) | (41) | (41) | (199) | - | (384) |
| Bank overdrafts | (143) | - | - | - | - | - | (143) |
| Preference shares | - | - | - | - | - | (103) | (103) |
| Other loans | - | - | - | - | - | (135) | (135) |
| (678) | (64) | (3,894) | (41) | (4,262) | (116) | (9,055) | |
| Floating rate by currency: | |||||||
| AUD | 57 | - | - | - | - | - | 57 |
| CAD | (132) | - | - | - | - | (103) | (235) |
| EUR | 13 | - | - | - | - | - | 13 |
| GBP | 1 | - | - | - | - | - | 1 |
| US$ | (658) | (64) | (3,893) | (41) | (4,262) | 10 | (8,908) |
| ZAR | 32 | - | (1) | - | - | (23) | 8 |
| Other | 9 | - | - | - | - | - | 9 |
| (678) | (64) | (3,894) | (41) | (4,262) | (116) | (9,055) |
The interest rate risk profile of the Group as at 31 December 2005 was as follows:
| US$m | Falling due within 1 year | Falling due between 1-2 years | Falling due between 2-3 years | Falling due between 3-4 years | Falling due between 4-5 years | Falling due more than 5 years | 2005 |
|---|---|---|---|---|---|---|---|
| Fixed rate by balance sheet category: | |||||||
| Cash and cash equivalents | 197 | - | - | - | - | - | 197 |
| Capital market notes | (14) | (5) | (166) | (16) | (12) | (63) | (276) |
| Convertible borrowings* | - | - | - | - | (555) | (320) | (875) |
| Equity minority interest loans | - | - | - | - | - | (81) | (81) |
| Finance leases/hire purchase contracts | (15) | (138) | (11) | (13) | (9) | (43) | (229) |
| 168 | (143) | (177) | (29) | (576) | (507) | (1,264) | |
| Fixed rate by currency: | |||||||
| AUD | 174 | (132) | (6) | (7) | (9) | (24) | (4) |
| GBP | 9 | - | - | - | - | - | 9 |
| US$ | (14) | (8) | (171) | (22) | (567) | (483) | (1,265) |
| ZAR | (1) | (3) | - | - | - | - | (4) |
| 168 | (143) | (177) | (29) | (576) | (507) | (1,264) | |
| Floating rate by balance sheet category: | |||||||
| Cash and cash equivalents | 324 | - | - | - | - | - | 324 |
| Other financial assets | 31 | - | - | - | - | - | 31 |
| Syndicated bank loan | (106) | - | - | (971) | - | - | (1,077) |
| Term bank loan | (600) | - | - | - | - | - | (600) |
| Bank loans - other | (7) | (1) | (2) | (2) | (1) | - | (13) |
| Bank overdrafts | (3) | - | - | - | - | - | (3) |
| (361) | (1) | (2) | (973) | (1) | - | (1,338) | |
| Floating rate by currency: | |||||||
| AUD | 59 | - | - | - | - | - | 59 |
| EUR | 10 | - | - | - | - | - | 10 |
| GBP | 1 | - | - | - | - | - | 1 |
| US$ | (471) | - | - | (972) | - | - | (1,443) |
| ZAR | 37 | (1) | (2) | (1) | (1) | - | 32 |
| Other | 3 | - | - | - | - | - | 3 |
| (361) | (1) | (2) | (973) | (1) | - | (1,338) | |
| *The borrowings are subject to interest rate swaps | |||||||
The interest charged on floating rate financial liabilities is based on the relevant national inter-bank rates and re-priced at least annually.
Interest on financial instruments classified as fixed rate is fixed until maturity of the instrument. The other financial instruments of the Group that are not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk.
Borrowing facilities
The Group has various borrowing facilities available to it. The un-drawn committed facilities available at 31 December 2006 in respect of which all conditions precedent had been met at that date are as follows:
| US$m | 2006 | 2005 |
|---|---|---|
| Expiring in: | ||
| Less than 1 year | 793 | 447 |
| Between 3 to 4 years | 407 | 29 |
| 1,200 | 476 |
Foreign currency risk
Owing to the Group’s significant operations in Australia, North America, South America, South Africa and Europe, the balance sheet and results can be affected significantly by movements in exchange rates. The long term relationship between commodity prices and the currencies of most of the countries where the Group operates provides a degree of natural protection however in the short term it can be quite volatile. The reporting currency of the Group is the US$, as this is the underlying economic currency of the Group’s cash flows and the majority of borrowings are denominated in US$. However overseas operations have cash flows in local currencies.
Foreign currency hedges
The Australian operations have entered into AUD/US$ and CAD/US$ exchange contracts to hedge a portion of their US dollar denominated revenue and third party loans. The Group also enters into forward contracts to hedge specific one off foreign currency transactions.
The open foreign currency exchange contracts as at 31 December 2006 are as follows:
Classified as Cash flow hedges:
| US$m | Contract amount 2006 | Average forward rate 2006 | Fair value 2006 | Contract amount 2005 | Average forward rate 2005 | Fair value 2005 |
|---|---|---|---|---|---|---|
| Forward contracts - sell US$/buy AUD: | ||||||
| Maturing in less than 1 year | 143 | 0.7550 | 6 | 661 | 0.7468 | (14) |
| Maturing between 1 to 2 years | 11 | 0.7397 | 1 | 9 | 0.7329 | - |
| 154 | 0.7539 | 7 | 670 | 0.7466 | (14) | |
| Forward contracts - sell US$/buy EUR: | ||||||
| Maturing in less than 1 year | 19 | 1.3125 | - | 1 | 1.2630 | - |
| 19 | 1.3125 | - | 1 | 1.2630 | - | |
| Forward contracts - sell ZAR/buy EUR: | ||||||
| Maturing in less than 1 year | 3 | 7.9685 | - | 1 | 7.8290 | - |
| 3 | 7.9685 | - | 1 | 7.8290 | - | |
| Forward contracts - sell AUD/buy GBP: | ||||||
| Maturing in less than 1 year | 1 | 0.3884 | - | 5 | 0.3927 | - |
| 1 | 0.3884 | - | 5 | 0.3927 | - | |
| Forward contracts - sell US$/buy JPY: | ||||||
| Maturing in less than 1 year | 9 | 108.3762 | (1) | - | - | - |
| 9 | 108.3762 | (1) | - | - | - | |
| Forward contracts - sell US$/buy CAD: | ||||||
| Maturing in less than 1 year | 5 | 1.5290 | 2 | - | - | - |
| 5 | 1.5290 | 2 | - | - | - | |
| Forward contracts - sell CAD/buy US$: | ||||||
| Maturing in less than 1 year | 1 | 1.5290 | - | - | - | - |
| 1 | 1.5290 | - | - | - | - | |
| 8 | (14) |
An Australian subsidiary has designated its US$ denominated capital market notes as a fair value hedge of an investment in a US$ denominated South American operation (refer to notes 24 and 28). The hedge is being used to reduce exposure to foreign currency risk.
Classified as other derivatives:
| US$m | Contract amount 2006 | Average forward rate 2006 | Fair value 2006 | Contract amount 2005 | Average forward rate 2005 | Fair value 2005 |
|---|---|---|---|---|---|---|
| Forward contracts - sell US$/buy CAD: | ||||||
| Maturing in less than 1 year | 790 | 1.14 | (17) | - | - | - |
| Maturing between 1 to 2 years | 111 | 1.57 | 40 | - | - | - |
| 901 | 1.19 | 23 | - | - | - | |
| Forward contracts - sell CAD/buy US$: | ||||||
| Maturing between 4 to 5 years | 300 | 1.54 | (88) | - | - | - |
| 300 | 1.54 | (88) | - | - | - | |
| (65) | - | - | - |
Commodity price risk
The Group is exposed to fluctuations in commodity prices, with the commodity mix spread fairly evenly between those which are priced by reference to prevailing market prices on terminal markets and those that are set on a contract basis with customers, generally on an annual basis. Due to the volatile nature of commodity prices and the historical relationship between prices and the currencies of most of the countries where the Group operates, hedging may be entered into only in limited circumstances and subject to strict limits laid down by the Board. Where exposure to commodity price movements results from processing contracts for which the Group has no underlying production, market risk from fluctuations on the commodity price will from time to time be hedged by LME futures or the OTC swap market.
Commodity hedging
The Australian and Americas operations have gold forwards and collars to hedge prices of future sales. The Australian and South African operations have entered into coal forwards to hedge prices of future sales of coal. The open forwards and collars commodity contracts as at 31 December 2006 are as follows:
Classified as Cash flow hedges:
| Ounces 2006 | Average price US$ 2006 | Fair value US$m 2006 | Ounces 2005 | Average price US$ 2005 | Fair value US$m 2005 | |||
|---|---|---|---|---|---|---|---|---|
| Cash flow hedges: | ||||||||
| Gold forwards - AUD denominated contracts: | ||||||||
| Maturing in less than 1 year | 74,250 | 563.16 | (7) | 58,843 | 500.40 | (2) | ||
| Maturing between 1 to 2 years | 84,200 | 579.62 | (9) | 88,500 | 520.05 | (3) | ||
| Maturing between 2 to 3 years | 87,800 | 589.44 | (12) | 84,200 | 538.63 | (4) | ||
| Maturing between 3 to 4 years | - | - | - | 87,800 | 547.76 | (5) | ||
| 246,250 | 578.16 | (28) | 319,343 | 528.95 | (14) | |||
| Gold forwards - US$ denominated contracts: | ||||||||
| Maturing in less than 1 year | 104,166 | 386.30 | (27) | 102,668 | 373.06 | (16) | ||
| Maturing between 1 to 2 years | - | - | - | 125,000 | 386.30 | (19) | ||
| 104,166 | 386.30 | (27) | 227,668 | 380.33 | (35) | |||
| Gold options - US$ denominated contracts: | ||||||||
| Maturing in less than 1 year | 93,500 | 500-595 | (7) | 51,000 | 500-590 | - | ||
| Maturing between 1 to 2 years | 126,000 | 475-595 | (13) | 102,000 | 500-575 | (1) | ||
| Maturing between 2 to 3 years | 150,000 | 495-640 | (15) | 126,000 | 475-595 | (4) | ||
| Maturing between 3 to 4 years | - | - | - | 150,000 | 495-640 | (4) | ||
| 369,500 | 475-640 | (35) | 429,000 | 475-640 | (9) | |||
| Silver forwards - US$ denominated contracts: | ||||||||
| Maturing in less than 1 year | - | - | - | 4,900,000 | 7.68 | (6) | ||
| - | - | - | 4,900,000 | 7.68 | (6) |
| Tonnes 2006 | Average price US$ 2006 | Fair value US$m 2006 | Tonnes 2005 | Average price US$ 2005 | Fair value US$m 2005 | |
|---|---|---|---|---|---|---|
| Copper forwards - US$ denominated contracts: | ||||||
| Maturing in less than 1 year | - | - | - | 49,750 | 2,746.62 | (63) |
| - | - | - | 49,750 | 2,746.62 | (63) | |
| Zinc forwards - US$ denominated contracts: | ||||||
| Maturing in less than 1 year | - | - | - | 12,104 | 1,412.05 | (6) |
| - | - | - | 12,104 | 1,412.05 | (6) | |
| Lead forwards - US$ denominated contracts: | ||||||
| Maturing in less than 1 year | - | - | - | 58,375 | 956.68 | (6) |
| - | - | - | 58,375 | 956.68 | (6) | |
| Coal forwards - US$ denominated contracts: | ||||||
| South African FOB | ||||||
| Maturing in less than 1 year | 3,495,000 | 50.01 | (7) | 3,105,000 | 51.82 | 16 |
| Maturing between 1 to 2 years | 1,350,000 | 54.48 | (1) | 2,205,000 | 48.82 | (2) |
| 4,845,000 | 51.26 | (8) | 5,310,000 | 50.57 | 14 | |
| South African CIF | ||||||
| Maturing in less than 1 year | 1,140,000 | 65.46 | (4) | 975,000 | 56.80 | - |
| Maturing between 1 to 2 years | 600,000 | 68.72 | - | 420,000 | 60.95 | - |
| 1,740,000 | 66.58 | (4) | 1,395,000 | 58.05 | - | |
| Australian FOB | ||||||
| Maturing in less than 1 year | 350,000 | 50.51 | (1) | 545,000 | 38.32 | (2) |
| 350,000 | 50.51 | (1) | 545,000 | 38.32 | (2) | |
| Colombian FOB | ||||||
| Maturing in less than 1 year | 200,000 | 51.55 | - | - | - | - |
| 200,000 | 51.55 | - | - | - | - | |
| (104) | (128) |
Classified as other commodity derivatives:
| Ounces 2006 | Average price US$ 2006 | Fair value US$m 2006 | Ounces 2005 | Average price US$ 2005 | Fair value US$m 2005 | |
|---|---|---|---|---|---|---|
| Gold forwards - AUD denominated contracts: | ||||||
| Maturing in less than 1 year | 14,250 | 541.20 | (1) | 28,252 | 479.48 | (2) |
| 14,250 | 541.20 | (1) | 28,252 | 479.48 | (2) | |
| Gold forwards - US$ denominated contracts: | ||||||
| Maturing in less than 1 year | 20,834 | 386.30 | (5) | 36,332 | 378.08 | (5) |
| 20,834 | 386.30 | (5) | 36,332 | 378.08 | (5) | |
| Gold options - US$ denominated contracts: | ||||||
| Maturing in less than 1 year | 8,500 | 500-560 | (1) | - | - | - |
| 8,500 | 500-560 | (1) | - | - | - | |
| (7) | (7) |
| Ounces 2006 | Average price US$ 2006 | Fair value US$m 2006 | Ounces 2005 | Average price US$ 2005 | Fair value US$m 2005 | |
|---|---|---|---|---|---|---|
| Gold swaps - AUD denominated contracts: | ||||||
| Maturing in less than 1 year | 30,000 | 1.5 | 1 | 13,166 | 1.5 | 1 |
| Maturing between 1 to 2 years | 40,600 | 1.5 | - | 30,000 | 1.5 | 1 |
| Maturing between 2 to 3 years | 10,600 | 1.5 | - | 58,300 | 1.5 | - |
| Maturing between 3 to 4 years | - | - | - | 16,500 | 1.5 | - |
| 81,200 | 1.5 | 1 | 117,966 | 1.5 | 2 |
| Tonnes 2006 | Average price US$ 2006 | Fair value US$m 2006 | Tonnes 2005 | Average price US$ 2005 | Fair value US$m 2005 | |
|---|---|---|---|---|---|---|
| Copper forwards - US$ denominated contracts: | ||||||
| Maturing in less than 1 year | - | - | - | 56,050 | 3,056.54 | (76) |
| - | - | - | 56,050 | 3,056.54 | (76) | |
| Zinc forwards - US$ denominated contracts: | ||||||
| Maturing in less than 1 year | - | - | - | 41,321 | 1,412.05 | (20) |
| - | - | - | 41,321 | 1,412.05 | (20) | |
| - | (101) |
Other commodity derivatives in 2005 also includes zinc and lead forward contracts that were closed out from offsetting sales positions with settlement deferred into 2006 until the maturity dates of the sales forward contracts, with a loss of US$14 million.
Fair values
Set out below is a comparison by category of carrying value and fair values of the Group’s financial instruments that are not carried at fair value in the financial statements at 31 December:
| US$m | Carrying value 2006 | Fair value 2006 | Carrying value 2005 | Fair value 2005 |
|---|---|---|---|---|
| Financial Liabilities: | ||||
| Capital market notes | 4,132 | 4,200 | 276 | 271 |
| Convertible borrowings | 525 | 519 | 875 | 873 |
| Equity minority interest loans | 81 | 80 | 81 | 80 |
| Finance leases | 242 | 242 | 229 | 229 |
| Preference shares | 201 | 203 | - | - |
| Other loans | 1 | 1 | - | - |
Market rates at 31 December 2006 have been used to determine the fair value of fixed interest loans. The fair value of the liability portion of the convertible bonds are estimated using an equivalent market interest rate of a similar liability that does not have a conversion option as at the origination of the bond (refer to notes 26 and 29).
38. Events After Balance Sheet Date
Convertible Bonds
In February 2007, 22,832,325 ordinary shares were issued as a result of conversions by the holders of the Convertible Bonds (refer to note 29). On 15 March 2007, Xstrata Capital Corporation AVV exercised its right to call for the redemption of all of the outstanding convertible bonds. The terms and conditions of the bonds permit Xstrata Capital Corporation AVV to redeem all of the bonds at their principal amount plus accrued and unpaid interest up to and including the date fixed for redemption, following the exercise of 85% or more of the Convertible Bonds originally issued. As at 14 March 2007, US$14,730,000 or 2.455% of the principal amount of the Convertible Bonds originally issued was outstanding. The date fixed for redemption by the Xstrata Capital Corporation AVV is 16 April 2007. The last day on which conversion rights may be exercised by bondholders is 2 April 2007.
Issue of ordinary shares
On 31 January 2007, 4,000,000 shares were issued to the ESOP at a market price of GBP23.58 per share.
Bakwena Ba Mogopa Community Joint Venture
On 9 January 2007 the Group and the Bakwena Ba Mogopa Traditional Community (the Community) agreed terms for a US$82 million Black Economic Empowerment (BEE) transaction in respect of the Group’s South African Rhovan vanadium facility. The Community is the surface owner of the property on which the facility is located. Through the transaction, the Community will have an effective 26% participation in the Group’s vanadium business through a pooling and sharing venture. The transaction will also enable the Community to participate in any expansions on competitive terms. The transaction is subject to the standard regulatory approvals and is expected to be completed by 30 June 2007.