Xstrata Alloys

Chrome | Operations

Revenue for 2006 was 6% lower than in 2005, predominantly driven by weaker market and pricing conditions in the first quarter. Market conditions resulted in the suspension of production at a total of seven furnaces for varying periods of time. Routine maintenance stoppages also occurred at a number of other furnaces during the South African winter months. Four furnaces remained suspended at the end of 2006, two of which have been returned to production in the first quarter of 2007.

Attributable saleable production of 958,600 tonnes of ferrochrome was 15% lower than in the previous year, although stockpiled material was used to supplement sales volumes, which were only marginally lower than in the previous year. Improved availability of quality ores resulted in improved metallurgical efficiencies in the furnaces, particularly in the Western operations.

EBIT decreased by 17% year on year, due to lower average prices and standing charges associated with idled capacity, together with the impact of ongoing mining sector inflation. From 1 July 2006, Merafe’s interest in the Xstrata-Merafe Chrome Venture increased to 20.5%. In real terms, excluding standing charges, operating costs were contained in 2006, with cost savings contributing $8 million to EBIT. Efficiencies were achieved through more stable reductant prices, improved metallurgical performance and sound energy management. The full commissioning of the Lion plant in 2007 is expected to have a significant positive impact on unit operating costs, primarily due to increased energy efficiency from Xstrata’s Premus technology.

Developments

The new Lion ferrochrome smelting complex was commissioned on schedule and within budget in the third quarter of 2006. The plant’s design criteria was met within the first three months of operation, and full commissioning remains on track for completion in the second quarter of 2007.

The Bokamoso pelletising project remains within budget and commissioning is due to begin in the second quarter of 2007. Construction started in May 2006 and good progress was made despite unfavourable ground conditions that necessitated significant additional blasting. Construction of the 6,000m2 covered sinter building is completed, assisting equipment installation during the wet summer season, and the civil works remain on schedule.

Marifaan primary school is one of several schools built by Xstrata in South Africa

Vanadium | Operations

Revenue decreased by 37% to $199 million while EBIT decreased by 40% to $105 million. While sales volumes of vanadium pentoxide and ferrovanadium increased by 177 and 206 tonnes respectively compared to 2005, profitability was impacted by lower sales prices for both vanadium pentoxide and ferrovanadium, 55% and 34% lower respectively than the record highs of 2005.

During 2006, a number of projects were successfully completed to increase production capacity by approximately 7% year-on-year, and to continue Rhovan’s programme of continuous environmental improvements. These included increased electrical supply and process flow optimization, and the commissioning of additional air pollution control equipment and dust suppression for the slimes dam.

Vanadium-rich spinel was successfully introduced into Rhovan’s production process during 2006. This increased production by approximately 40 tonnes per month. The associated increase in production costs was more than offset by the higher production volumes and premiums received. This strategy will continue in 2007, to maximise production and margins.

Developments

In January 2007, Xstrata Alloys and the Bakwena Ba Mogopa Traditional Community announced a ZAR575 million Black Economic Empowerment (BEE) transaction in respect of Xstrata’s Rhovan vanadium facility. The Bakwena community is the surface owner of the property on which Rhovan is located, and will have an effective 26% participation in the EBITDA generated by Xstrata’s vanadium business through a Pooling and Sharing Venture, similar to the Xstrata-Merafe Chrome Venture. The Bakwena community is also able to participate in any expansion of Rhovan on competitive terms. The transaction, which is expected to be completed in the first half of 2007, completes the facilitation of meaningful black participation in Xstrata’s South African operations, according to the ownership provisions of the Mineral and Petroleum Resources Development Act of 2002 (MPRDA).

Planning for a brownfield expansion at the Rhovan vanadium plant, which will increase plant capacity by an additional 8.5 million pounds of vanadium pentoxide per annum, is at an advanced stage. Regulatory requirements for any future expansion, including approvals under the MPRDA, will be obtained during this process. A capital application is expected to be made to the Xstrata Board during 2007.

Rehabilitation of the Vantech site, adjacent to Xstrata Alloys’ Lion operation, is progressing well and remains on track for completion in 2011.

Behavioural safety training at Xstrata Alloys

Platinum Group Metals | Operations

The commissioning of the Mototolo Concentrator during October 2006 as anticipated marked the formal entry by Xstrata into platinum group metals. The first concentrate was delivered to Anglo Platinum’s Polokwane smelter towards the end of October 2006. Steady state production for the concentrator is anticipated from February 2007 when design capacity of approximately 200,000 tonnes of run of mine material will be milled and processed. Both Borwa and Lebowa shafts will reach steady state production of approximately 100,000 run of mine tonnes per month during the third quarter of 2007. The early geological problems encountered last year have been fully addressed and the project remains on budget.

In February 2006, Xstrata announced the formation of a black economic empowerment partnership with Kagiso Trust Investments, through which Kagiso has taken a 26% share of Xstrata’s 50% interest in the Mototolo joint venture. This has resulted in Kagiso owning a fully participative 13% interest in the earnings from the Mototolo operation, in return for funding its proportionate share of the total capital expenditure required for the project.

Tapping the furnace at the Lion ferrochrome smelter