Business Overview & Strategy

Xstrata’s primary strategic aim is to create superior shareholder value by growing and managing a diversified portfolio of mining and metals businesses. Our Mission recognises that, to continue to grow and create value over the long term, we must operate in an ethical and transparent way, through mutually beneficial partnerships with our stakeholders. Our Statement of Business Principles sets out the ethical framework for our activities.

In the five years since Xstrata plc was created through an initial public offering on the London Stock Exchange in 2002, the scale, scope, geographic spread and commodity diversification of the Group has been transformed through a combination of incremental acquisitions, organic growth projects, operational improvements and, most profoundly, through value accretive, company-transforming acquisitions.

As a result of the acquisitions in 2006, the enlarged Xstrata is now the fifth largest public mining company in the world, with a meaningful position in seven major commodity markets and operations and projects in 19 countries.

Growth through a combination of bolt-on and company-transforming acquisitions remains core to Xstrata’s strategy.

In addition, Xstrata benefits from an exceptionally strong suite of organic growth projects, from which significant volume growth and superior returns can be achieved, as market conditions allow.

Strategy

Xstrata’s strategic objectives are:

To manage an attractive portfolio of assets diversified by commodity, geography and currency

When we enter new commodity markets, we generally seek to gain a significant market position and currently maintain top four industry positions in each of our principal commodity markets. In some instances we establish a foothold into a new sector from which we seek to grow a meaningful position – such as the newly acquired nickel operations.

A diversified portfolio balances the risks associated with specific commodity price cycles and operating locations, providing investors with more reliable and stable cash flows. Diversification also engenders healthy competition for capital between Xstrata’s commodity businesses, ensuring only the most attractive projects or acquisitions are approved and allocated capital. Today, Xstrata benefits from a very significant growth pipeline across a number of commodities, allowing the strategic sequencing of projects and deployment of capital to achieve growth while maximising value creation, in line with projected market conditions.

Following the acquisition of Falconbridge, we have gained exposure to nickel, a new commodity for Xstrata, a smaller aluminium business and entry into North America, diversifying further the Group’s commodity, currency and geographic exposure. The portfolio of commodities produced includes both exchange-traded commodities such as copper, nickel, zinc, aluminium and lead, and commodities sold through negotiated customer-supplier contracts, such as ferrochrome, thermal coal and coking coal. The balance of Xstrata’s earnings has also changed as a result of these acquisitions. Over 50% of EBIT in 2006 (on a pro forma basis) was generated by Xstrata Copper alone. While increased exposure to any one commodity is an inevitable consequence of rapid acquisition-led growth (and very strong base metals prices in 2006), we expect the balance of our earnings growth to diversify further in time, either through growth from other commodity businesses, or through diversification into new commodities.

To uphold a rigorous and unwavering focus on value and growth, identifying and securing opportunities for value creation

Our imperative to grow the business is underpinned by an unwavering focus on value creation that applies equally to growth initiatives and operational improvements from our portfolio as it does to the acquisitions of projects or other assets.

Our strategy recognises that opportunities for value creation are not limited to the pursuit of quality and we have demonstrated that enhanced operational management, judicious capital investment, and the proper identification and management of risk can create significant value.

We continue to pursue an acquisition-led strategy; however, following the acquisitions made in 2006, Xstrata’s range of brownfield and greenfield organic growth projects has been significantly expanded across its commodity businesses. Any future funding decisions will continue to be based, as those to date have been, on a dispassionate view of each project’s potential to create value in its own right on a net present value basis, using conservative long-run commodity prices.

We believe that greenfield exploration in new territories is most efficiently and successfully undertaken by junior mining companies. Xstrata is pursuing a successful strategy of partnering with junior exploration companies, allowing us to leverage each partner’s strengths for mutual benefit. In addition to existing partnerships, an extensive portfolio of exploration projects was acquired from Falconbridge, which is being simplified through disposals of some projects and the retention of options to invest or direct interests in others.

To maintain and enhance our financial strength and discipline

We are committed to maintaining a robust balance sheet and investment grade credit rating, ensuring access to a diverse range of funding sources. Xstrata’s efficient financial structure, our focus on disciplined capital expenditure, strong cash management and cost control enable us to fund ongoing capital requirements, as well as pursuing rational organic and acquisition-led growth opportunities.

In 2006, Xstrata launched its inaugural US bond offering, and successfully completed two equity raisings, protecting our investment grade credit rating and enhancing our financial flexibility and debt maturity profile.

In addition to our focus on growth, we maintain a progressive dividend policy, in line with Xstrata’s profitability, and make appropriate returns of capital to shareholders, where cash generated exceeds our requirements for investment or further growth opportunities.

To create further value through ongoing portfolio optimisation, delivery of capital and operational efficiencies and real cost reductions

In 2006, Xstrata completed three major acquisitions, including the identification of over $545 million in annual synergies, and commissioned five new operations, bringing on lower-cost production on time and on budget.

Sustainable cost reduction is an important driver of value creation and a measure of the quality of our operational management and our stewardship of the assets of our owners. In each of the last five years, Xstrata has achieved real cost savings from its operational cost base and has outperformed its FTSE100 mining industry peers. In 2006, $56 million of real cost savings were achieved in a very challenging environment.

Xstrata’s commodity businesses are responsible for undertaking ‘near-mine’ exploration around existing operations or in nearby regions, leveraging existing assets, and conducting targeted greenfield exploration at known deposits with the objective of adding to the Group’s resource base. We believe that this exploration is an integral part of our commodity businesses and as such, do not maintain a central or standalone exploration function. In 2006, this strategy resulted in increased resources and/or extensions to mine lives at nine separate projects and operations.

To achieve and maintain the highest standards of health, safety and environmental performance at our operations, and to work in partnership with local communities for mutual benefits, supporting the principles of sustainable development

We aim to operate a fatality, injury and illness-free business and believe that all work-related incidents, illnesses and injuries are preventable. Safety is an ongoing, major focus for the Group, as we strive to eliminate fatal and high potential risk incidents from every aspect of our operations. We have made significant investments in safety leadership, behavioural training and technological solutions to safety challenges in recent years and continue to prioritise safety as our primary operational consideration.

We seek to drive sustainable improvements in efficiency across the Group, in particular in the use of natural resources and energy. We aim to minimise the environmental impact of our operations, conserve biodiversity and operate to the highest international environmental standards.

Every managed operation develops an annual social involvement plan in close co-operation with local communities and other relevant stakeholders, including government, NGOs and unions. We set aside a minimum of 1% of Group profit before tax to invest in community initiatives that deliver long-term benefits, with the ultimate aim of leaving behind stronger, sustainable communities once the mine is depleted and operations cease. In 2006, the amount set aside for corporate social involvement was in excess of $49 million. Further details are provided in the Sustainable Development section on pages 96 to 100.

To foster a high performance and entrepreneurial culture through a highly devolved structure, empowering management teams and minimising overhead

Xstrata differentiates itself from its industry peers by devolving maximum responsibility and authority to its commodity business units. We believe this directly benefits our operations by creating a strong sense of local ownership, where entrepreneurial managers are empowered and incentivised to address site-specific challenges and seize opportunities.

Each commodity business is fully resourced to function as an independent business and is accountable for all aspects of its operations from exploration to post-closure remediation, within defined authority levels and within the Group’s governance framework.

Xstrata’s commodity businesses are supported by a small corporate centre, split between the head office in Zug, Switzerland and the registered office in London, United Kingdom. In total, the corporate centre comprises around 40 people. The role of the corporate centre is well defined, minimising the burden of overhead.

We aim to attract and retain the best people at every level of our businesses and to provide them with the resources they require to achieve and maintain our operational excellence. We provide industry-leading career development opportunities, competitive remuneration and fair and non-discriminatory workplaces. We believe our devolved management structure and supportive environment for rational risk-taking offers unparalleled opportunities for development and entrepreneurial leadership, minimising bureaucracy and allowing every employee to play an active part in our success.

As set out in further detail in the remuneration report on pages 126 to 139 of this report, remuneration for executive and senior management across our businesses is closely aligned with Xstrata’s strategy to grow and create long-term shareholder value in a sustainable manner. A high proportion of total remuneration is “at risk” and performance-related, incorporating financial and non-financial performance measures. These performance measures are determined on an individual basis and include absolute performance (e.g. return on capital employed), relative performance (e.g. performance in comparison to peers) and non-financial performance measures (e.g. safety performance), in line with international best practice.

To conduct our business activities ethically and with the maximum transparency commercially possible

A key role of the corporate centre is to ensure effective governance of our businesses, through open and regular communication, by setting the Group governance framework in which our activities take place and by measuring performance against these principles, policies and standards.

Xstrata is governed by a robust Board comprising eight non-executive directors and three executive directors. The Group Executive Committee determines and executes Group strategy and comprises the commodity business Chief Executives, together with the Group Chief Executive, Chief Financial Officer and Executive General Manager, Corporate Affairs.

Xstrata’s adherence to the principles and provisions of the UK Combined Code on Corporate Governance is set out in the corporate governance report, together with an explanation of key governance policies and procedures.

We prefer to own a significant stake in our operations and joint ventures and take management control of operations wherever possible. As a result of the acquisitions in 2006, Xstrata now also has an interest in several non-managed operations including Cerrejón coal, Collahuasi copper, Antamina copper-zinc, as well as the Douglas-Tavistock thermal coal joint venture. We take an active role as shareholders in these operations, through steering committees and other governance structures, to ensure that joint venture management teams align themselves with Xstrata’s global standards and business principles and to protect our shareholders’ interests.

Operators Les Dasley and Norman Finch skimming lead slabs at Northfleet refinery, UK

James Beams and Jim Young at Xstrata Coal’s Oaky Creek mine, Australia