Chairman’s Statement

Willy R Strothotte

2006 was a seminal year for Xstrata. Against a backdrop of another year of strong commodity prices, with exceptional rises in base metals prices, Xstrata’s management successfully completed one company-transforming and two incremental acquisitions, with all three fully integrated by the end of the year. The strong sales prices for our products, together with the contribution of acquisitions, led to another record year of profits.

Xstrata starts 2007 as the fifth largest public mining company in the world, with outstanding organic growth prospects, a strong balance sheet and a diversified suite of cash generative and efficient operations, in the hands of motivated and entrepreneurial management teams.

Xstrata’s growth and transformation has taken place during an exceptional time in the commodity markets. Five years ago Xstrata plc began its growth trajectory in very different markets to today with commodity prices near their all-time lows. Last year marked the third consecutive year of higher commodity prices for most products, as the industrialisation and urbanisation of China, and to a lesser extent India, continues to drive increased demand for metals and energy, at a time when Asian, European and even US economies remain resilient.

The acquisitions completed prior to 2006, together with the assets and growth projects added to the portfolio during the year, have enabled Xstrata to capture the benefits of these prevailing, strong commodity markets, generating significant returns for shareholders and providing an excellent basis for further organic and acquisition-led growth.

The operational performance of the assets was also commendable. One of the great strengths within the Group is the continual push for operational excellence, with our management teams again trimming the operating cost base this year, despite considerable cost pressures and high commodity prices that can often lead to a more permissive approach to cost control. We will also realise significant cost savings of over $545 million each year from the integration of the Falconbridge assets into our business and I have no doubt that, as with the acquisition of MIM Holdings Limited in 2003, Xstrata’s devolved business structure and entrepreneurial approach will enable further productivity improvements in the next several years, further strengthening the Group’s competitive position.

Governance, corporate responsibility and sustainable development

In May 2006, David Issroff, non-executive director, resigned from the Board. David had been a non-executive director of Xstrata since February 2002 and a director of the former Xstrata AG since May 2000. On behalf of the Board, I would like to recognise David’s significant contribution to the Group’s success and wish him well for the future.

I also pass on my thanks to my fellow Board members, whose work as part of the main Board and its active health, safety, environment and community (HSEC), Audit, Remuneration and Nomination committees continued to provide strategic direction and oversight of the Group’s activities. Further detail about the Board’s committees and activities in 2006 is provided in the corporate governance report included in this document.

Xstrata’s commodity businesses continued to make good progress towards our goals of zero harm in the workplace, continuous improvements in our environmental performance and enhanced dialogue with and support for the communities associated with our operations.

Year on year reductions were achieved in the frequency of total recordable injuries, which improved by 13% overall, excluding the Falconbridge business. As an important part of the integration of Falconbridge into the enlarged Xstrata Group, rapid assessments of each former Falconbridge site’s risk management, health, safety, environmental and community systems and performance were completed.

By the end of 2006, Xstrata's sustainable development framework had been rolled out across these operations and our teams are working to address areas of under-investment and improve performance. Responsibility for HSEC performance has been devolved to empowered commodity business management teams, and, as with the MIM acquisition, we are increasing dedicated HSEC resources at the operational level to achieve Xstrata’s best practice standards.

From the outset, we identified that one of the attractions of the Falconbridge business was the exceptional skill set of its operational employees and management. I am therefore particularly pleased to report that employee turnover improved from 10% to 5% in 2006, including the businesses acquired. This demonstrates our success in retaining a very significant proportion of the men and women from the former Falconbridge business within the Group. Their technical and project management skills, in particular, are already making a contribution to our existing operational teams.

We continue to maintain intensive behavioural safety and major hazard management programmes, in particular at our South African operations. Although we have consistently maintained that the behavioural and cultural changes we need to effect will require an intensive effort over a longer period of time, we are beginning to see marked improvements in the management of major hazards in South Africa. These include reductions in the types of incidents previously identified as the leading causes of fatal incidents, such as fall of ground and collisions between pedestrians and moving vehicles in underground mines. A key area we have identified for further improvement in 2007 is our influence on and monitoring of the safety performance of contractor personnel.

However, the very real progress Xstrata’s operations have achieved in safety performance since 2002 does not mean that the task we have set ourselves to eliminate injuries or fatalities is in any way complete. I regret to report that one fatality was sustained at a South African operation last year. Tragically, four fatalities have occurred in the early part of 2007, of which three were in South Africa, reinforcing the enormity of the challenge that faces us in effecting sustainable changes in the way employees and contractors think and behave across the Group. These incidents only increase our resolve to eliminate fatalities, illnesses and injuries from our business and we continue to dedicate significant resources, time and energy to achieving this aim.

In line with the rapidly evolving best practice and legislative standards for corporate reporting, this report includes a brief overview of Xstrata’s key sustainable development initiatives for the first time. We have also provided increased disclosure on the future trends, principal risks and uncertainties facing our business, and further expansion of the strategy and key performance indicators we reported for the first time last year. We have again published a comprehensive standalone Sustainability Report, available from our website or as a hard copy on request from mid-April 2007.

As ever, we welcome feedback or comments on this report or the Sustainability Report and have provided contact details on the inside back cover. Feedback can also be posted via our website at www.xstrata.com/feedback.

Outlook and prospects

The Board’s confidence in the outlook for Xstrata has led to a further increase to the final dividend, to 30¢ per share. Taking account of the discounted rights issue completed in October to refinance a portion of bridge financing for the Falconbridge acquisition, the interim dividend of 13¢ per share has been rebased to 11.6¢ per share. This brings the full year dividend, on an adjusted basis, to 41.6¢ per share, some 36% higher than the adjusted prior full year dividend.

Despite several challenges ahead, including increased volatility in the commodity and equity markets, concerns over the disappointing performance of the US economy, increased competition for skilled labour and rising prices for mining inputs, the outlook for the mining and metals sector remains very encouraging in 2007. Commodity prices look set to continue to exceed long-term averages, with no sign of an abrupt end to the favourable environment for Xstrata’s products.

Xstrata’s management team has again pursued a consistent strategy and demonstrated outstanding entrepreneurial vision in creating value for shareholders and positioning the Group for future growth. Xstrata’s prospects remain very robust, supported by a strengthened portfolio and improved competitive position, the operational excellence and continued efforts of our employees worldwide, and the support of our shareholders, for all of which I extend my thanks.

Willy R Strothotte
Chairman