Xstrata Copper

Operations

The highlight of the 2006 financial year has been the acquisition and integration of the Tintaya and Falconbridge copper assets within the Xstrata Copper business unit, contributing 74% or $2.7 billion to the business unit’s EBIT growth of $3.6 billion for the year.

Copper cathode production at CCR refinery in Canada

Pro forma average cash costs (C1) for the combined copper businesses were particularly impressive, showing a reduction from 57.6¢ per pound to 57.2¢ per pound over the corresponding period. The benefits of a favourable mix of by-product credits and lower realisation costs helped to offset an increase in costs related to mining industry inflation. This mining sector inflation continued to exceed CPI inflation during the year, with significant pressures being experienced in the areas of labour, contractors, fuel and energy. Real unit cost performance for the pre-existing Xstrata Copper assets was affected by planned lower head grades at Ernest Henry, as well as a planned smelter re-brick in North Queensland.

Asset capacity utilisation rates have been high, with improved operating efficiencies resulting in increased productivities in key assets. Of particular note were record ore production from the Mount Isa underground operations, record plant throughputs at Tintaya and strong asset utilisations across the Canadian assets.

Xstrata Copper’s mined copper production profile more than doubled in 2006 to a pro forma total of over one million tonnes of contained metal, owing to the addition of the Falconbridge copper assets and the acquisition of the Tintaya operation in Peru. On a pro forma basis, total copper production of 1.01 million tonnes in 2006 was slightly lower than 1.02 million tonnes in 2005, as strong performances at Mount Isa, Kidd, Collahuasi, Lomas Bayas, Antamina and Tintaya were offset by grade-influenced lower output at Ernest Henry and Alumbrera more than offset a lower production year from Ernest Henry.

Xstrata Copper’s mined gold production increased to 786,800 ounces of contained metal, in which a strong gold production performance at Alumbrera more than offset a lower production year from Ernest Henry.

During the Falconbridge integration planning process, Xstrata Copper identified approximately $60 million of annual synergy benefits from the integration of the former Falconbridge copper assets. The progressive implementation of integration plans will see these benefits fully realised during 2007. In addition, a once-off finance re-structuring benefit of $58 million was achieved as a result of the copper asset integration. The synergies identified through the integration of the Tintaya operation into Xstrata Copper Peru, of $110 million of additional value, have been confirmed and are being progressively realised. A further $50 million of value uplift has already been realised through ongoing operational management initiatives, with a range of other significant initiatives being actively pursued in 2007.

Underground miner, David Beattie, prepares for his shift at Mount Isa Mines, Australia

Underground mining at Kidd Creek copper mine, Canada

Argentina

Alumbrera

Higher commodity prices and strong gold production increased revenues at Alumbrera by 72% compared to the previous year to $1.5 billion. EBIT rose by 114% to $915 million.

Copper-in-concentrate production at Alumbrera was 4% lower than in the corresponding period, at 180,100 tonnes, due to lower head grades and metallurgical recoveries. This was compensated by a stronger gold production performance, which was 11% higher at 641,160 ounces, reflecting higher gold grades and improved metallurgical performance. Total material mined from the Alumbrera pit was slightly lower than the corresponding period at 112 million tonnes, in line with the plan.

Copper concentrate sales decreased by 8% over 2005 to 170,200 tonnes, mainly due to a carry-over of sales into 2007. Total gold sales were 10% higher than 2005.

Australia

The North Queensland division achieved strong EBIT of $970 million in 2006, a significant increase of 92% over 2005. The stronger copper price was the main contributor to improved profitability, offset slightly by lower sales volumes, inflationary impacts and scheduled lower grade ore from the Ernest Henry operation.

Overall, the North Queensland operations produced 278,100 tonnes of copper in concentrate in 2006, a decrease of 9% over 2005 production, as increased production from Mount Isa was offset by lower head grades and production levels at Ernest Henry.

At the Mount Isa underground copper operations, important milestones were achieved during the period with full-year tonnages of ore hoisted and milled reaching 6.2 million tonnes and 6.1 million tonnes respectively, both representing new production records for Mount Isa. The increased ore production, 11% higher than in 2005, together with higher copper head grades of 3.42% compared to 3.36% in 2005, contributed to a record copper-in-concentrate production of 194,100 tonnes from Mount Isa, which was a 9% increase over 2005.

At Ernest Henry, operating performance was significantly influenced by planned lower copper head grades at the mine, 27% lower at 0.89%. Continued improvements in the maintenance and operations plan for the concentrator resulted in record annualised plant runtime of 94% of total time, although the harder ore treated reduced throughputs by 10%. Overall Ernest Henry production was 35% lower than the previous year at 84,000 tonnes of copper in concentrate.

Copper smelter production was 3% lower than in 2005, predominantly due to a planned month-long shutdown of the copper smelter in September 2006 to re-brick the IsaSmelt furnace and to enable the commissioning of the second Rotary Holding Furnace. The Townsville copper refinery produced 209,200 tonnes of saleable cathode, 5% lower than in 2005, due to the lower anode supply from the Isa smelter.

Canada

Xstrata Copper Canada comprises the former Falconbridge assets of Kidd mining and metallurgical divisions, the Horne Smelter, the Canadian Copper Refinery (CCR) and Noranda Recycling. Strong copper prices and higher sales volumes from increased production boosted revenue by 150% to $4.6 billion and led to a significant increase in EBIT to $431 million in 2006 on a pro forma basis.

At Kidd mine, ore production increased by 6% to 2.5 million tonnes as additional mining areas became available following the completion of the Mine D expansion project. Copper head grades rose slightly to 2.05% while zinc grades were 15% lower at 5.3%.

The Kidd mill processed 2.6 million tonnes of ore from Kidd mine and a record 0.9 million tonnes of Montcalm copper-nickel ore, up by 14% and 17% respectively compared to the prior year. Copper in concentrate production increased by 18% to 50,400 tonnes, while zinc in concentrate was 4% lower due to lower feed grades.

The Kidd smelter produced 129,000 tonnes of blister copper, an improvement of 8% over 2005, when output was impacted by a strike. The Kidd copper refinery produced 127,900 tonnes of cathode, an improvement of 15% over 2005 due to increased ore production and no industrial action in 2006.

The Horne smelter processed 843,200 tonnes of feed in 2006, an increase of 18% over 2005 and the highest volume processed since 1998. Anode production rose 26% to 185,000 tonnes compared to the previous year.

Sample analysis at CCR copper refinery, Canada

Cathode output at the CCR refinery set a new production record of 368,300 tonnes, 21% higher than in 2005. Higher production rates at the Horne smelter, coupled with a new anode supply agreement with CVRD/Inco from its Sudbury operations contributed to the higher production rates. The refinery successfully demonstrated its capacity to process anodes that are high in nickel content.

In the recycling operations, volumes of direct smelter feed increased by 43% to 84,000 tonnes.

Chile

Collahuasi

Xstrata acquired a 44% interest in the Collahuasi mine in northern Chile’s Region I through the Falconbridge acquisition. On a pro forma basis, Xstrata’s attributable share in Collahuasi realised revenues of $1.3 billion in 2006, an increase of 103% over 2005. Xstrata’s share of EBITDA more than doubled to $967 million and EBIT increased by 230% to $732 million in 2006 compared to the previous year on a pro forma basis.

Xstrata’s share of Collahuasi’s copper-in-concentrate production for 2006 increased 4% to 167,300 tonnes, and benefited from higher ore volumes treated in the second half of the year. Xstrata’s share of copper cathode production from the SX/EW plant was marginally lower at 26,300 tonnes.

North Chile

The North Chile division comprises the former Falconbridge assets of the Altonorte smelter and the Lomas Bayas mine. Financial performance in 2006 was positively influenced by the buoyant commodity price environment and a strong operating performance, particularly in the second half of the year. Revenue increased by 26% to $1.8 billion in 2006, while EBIT rose by 195% to $351 million.

The Lomas Bayas mine achieved a record full-year cathode production of 64,300 tonnes, 2% higher than the prior year. At the Altonorte smelter, copper anode production in 2006 of 282,000 tonnes was 5% lower than the corresponding period, with an improved operating performance in the second half. A new three year labour agreement was achieved with the workforce in December with minimal disruption to the operation.

Copper anodes ready to be removed from the casting wheel

Peru

Antamina

Xstrata has a 33.75% interest in the Antamina copper-zinc mine in Peru’s Ancash department. Xstrata’s attributable share of Antamina’s financial performance is divided between the Xstrata Copper and Xstrata Zinc business units on the basis of sales revenue. Sales volumes of both copper and molybdenum metal increased in 2006 at Antamina, reaping the benefit of the strong commodity price environment. In particular, molybdenum sales were 9% higher, benefiting from improved recoveries, 8% higher than the previous year, following improvements made to processing circuits late in 2005. On a pro forma basis, Xstrata Copper’s attributable share of revenue increased by 59% from $623 million to $989 million in 2006. The corresponding attributable EBIT increased by 70% from $404 million to $687 million.

The overall concentrator throughput in 2006 remained at a similar rate to 2005, as lower throughput for copper-zinc ores, due to harder rock, was offset by higher copper-only ore milling rates. Copper and molybdenum head grades and copper recovery improved marginally year on year, and as a result Xstrata’s share of copper-in-concentrate production increased by 3% to 129,700 tonnes.

Tintaya

Xstrata acquired the Tintaya operation from BHP Billiton in June 2006. Revenue increased 79% to $735 million and EBIT rose 195% to $410 million in 2006 compared with 2005, on a pro forma basis. The operating performance at Tintaya was characterised by record full-year mill and oxide plant throughputs and a range of efficiency initiatives implemented during the second half of the year. Total material mined of 71.6 million tonnes was 11% higher than 2005, due to haulage and pit phase optimisation. Mill throughput increased by 11% and concentrate production was 10% higher than in 2005. Oxide ore processed was 8% higher than the previous year. Copper-in-concentrate produced was 6% higher than the corresponding period, at 78,300 tonnes, and cathode copper from SX/EW was 3% higher at 36,700 tonnes. Gold in concentrate production of 40,100 ounces was 23% higher compared to 2005.

Developments

Sustaining capital expenditure for 2006 was slightly higher than 2005 at $257 million and is expected to increase in 2007 due to a number of key initiatives. These include further underground development work at Mount Isa to facilitate further planned production increases, environmental and plant refurbishment projects in Canada, the extension and improvements of the leach pads and plant at Lomas Bayas as well as further water borefield exploration at Collahuasi.

Major expansionary capital expenditure items for 2007 include the completion of the smelter capacity expansion project at Mount Isa and the construction and completion of the molybdenum plant at Alumbrera.

Xstrata Copper now holds the most attractive project development pipeline in the copper industry. Five major projects are currently at various stages of evaluation. The total project development budget expenditure for 2007 is approximately $90 million as work progresses on all of these projects.

The Canadian Copper Refinery (CCR) plant at dusk

Xstrata supports the dental health programme for schools in the Catamarca region, Argentina

Argentina

Alumbrera

The Alumbrera concentrator throughput expansion from 37 million tonnes per annum to 40 million tonnes per annum was successfully commissioned in November 2006. The project was delivered 35 days ahead of the scheduled start up date and completed within the original budget of $15.5 million.

A project to construct a molybdenum flotation plant adjacent to the existing Alumbrera concentrator was approved in July 2006. The new plant is expected to produce more than 2,000 tonnes of molybdenum in concentrate per annum. The project, with a budgeted cost of $15.5 million, is scheduled for commissioning in July 2007.

An ongoing ore delineation drilling programme in the Alumbrera pit, undertaken both within the existing ore envelope and for extensions at depth, confirmed 40 million tonnes of additional ore reserves and was announced in August 2006, as part of the mid-year reserve statement. The mine plan was re-optimised based on a new geological model with additional mineralisation, which, together with improved final pit slope angles, resulted in an increase in contained metal reserves of 8%.

Exploration drilling at the Xstrata-owned Filo Colorado copper porphyry prospect near the Alumbrera mine commenced in December 2006, following the completion of access road construction in November. Results from the drilling programme are expected in the first half of 2007.

El Pachón

A pre-feasibility study into the development of the large El Pachón copper deposit in San Juan province commenced in 2006. Completion of the study is expected by the end of 2007. Infrastructure support options in both Argentina and Chile are currently being investigated. Access to the site was achieved in late October after the 159 kilometre access road was cleared of snow. A total of 20,500 metres of drilling is planned around the resource area. Environmental baseline studies are also under way.

Australia

North Queensland

The ore definition programme at Mount Isa has yielded a further 7 million tonnes, equivalent to an additional year of underground ore reserves. An initial Mineral Resource of 72 million tonnes at 1.2% copper has also been defined in the low grade 500 ore body at Mount Isa. Pre-feasibility work on this resource and the surrounding “halo” mineralization surrounding the 1100 ore body will now commence in 2007. Exploration activity in the Mount Isa-Cloncurry region of north-west Queensland continues.

Access development to the Northern 3500 underground copper ore body at Mount Isa’s Enterprise copper mine was completed at the end of 2006, with the first stope extracted in December 2006 at a total capital cost of AUD38 million. Production from this ore body will now be progressively increased during 2007 to enable this additional high-grade mining zone to sustain the Enterprise mine’s rated capacity of 3.5 million tonnes per annum and improve the utilisation of the existing hoisting and concentrator capacity.

The copper smelter and refinery capacities will continue to be expanded to the planned production rate of 300,000 tonnes per annum during 2007 with the completion of a series of projects. This is designed to match the total copper in concentrate production from the Mount Isa and Ernest Henry copper mines.

Copper smelter at Mount Isa Mines

Canada

In 2006 the Mine D expansion project was completed at Kidd mine. The project added 14.6 million tonnes of reserves, extending the life of the mine to 2016, at a total capital cost of approximately C$664 million, C$10 million of which is budgeted for 2007. Developed ore reserves now extend to a depth of 8,800 feet.

CCR completed a number of installations during 2006 to permit the processing of nickel-rich anodes from CVRD/Inco. These included automated sampling equipment, nickel sulphate filtering equipment, new slimes leaching autoclaves and environmental control equipment. Subsequent to a successful commissioning period, CCR successfully processed 90,000 tonnes of CVRD/Inco anodes by the end of 2006.

Chile

North Chile

Xstrata Copper is completing feasibility studies into a further expansion to the Altonorte smelter that would increase capacity by 30% to process approximately 1.2 million tonnes of copper concentrate a year, producing 400,000 tonnes of copper anode per annum. If approved, expansion construction activities would commence in 2007 and reach full production in 2009. The expansion includes the construction of a new acid plant. Following completion, Altonorte would be the fourth largest copper smelter in the world.

At Lomas Bayas, Xstrata Copper is reviewing two key projects that are at the pre-feasibility stage. First, the Lomas expansion case has the potential to expand Lomas Bayas production by 15% to 75,000 tonnes per annum at an estimated cost of $65 million. Second, the Lomas II project has the potential to extend the life of the Lomas Bayas mine from 2012 at the expanded rate until 2020 by exploiting the Fortuna de Cobre deposit, three kilometres away. A decision on these projects is expected during 2007.

El Morro

In 2006, delineation drilling at the La Fortuna ore body was closed to a 50 metre grid to depths of over 600 metres below surface, totalling 68,800 metres of mostly core drilling in 170 boreholes. Drilling included 4,877 metres in 16 large diameter core holes that were used for laboratory scale metallurgical test work. An updated Mineral Resource estimate was published in November of 490 million tonnes at a grade of 0.59% copper and 0.52 grams per tonne gold using a 0.3% copper cut-off. Based on this and other support work, a pre-feasibility study was completed towards the end of the year. A feasibility study is planned to be undertaken on this project during 2007. Xstrata Copper holds 70% of El Morro. Metallica Resources owns the remaining 30%.

Collahuasi

Xstrata and its joint venture partners are undertaking a joint strategic business review of Collahuasi during the first half of 2007, with an objective of developing a revised strategic business plan to maximise the value of Collahuasi for its owners.

Peru

Tintaya

A project to purchase and install a replacement secondary crusher, together with related modifications to the crushing circuit, was approved in October 2006. This project, with a budgeted cost of $8 million, is expected to increase mill throughput by 11%, and is scheduled for completion in June 2007.

A near-pit exploration and reserve extension programme commenced during 2006 and will continue throughout 2007 with the objective of confirming and extending the ore reserve base at the mine. In addition, a Mineral Resource Statement has been published for the nearby Antapaccay deposit, which identifies a total current resource of 472 million tonnes at 0.74% copper. A $7 million in-fill drill programme and pre-feasibility study has now been approved for this significant deposit, which is located just nine kilometres from the Tintaya plant infrastructure. The drilling programme, involving 40,000 metres of drilling, will be completed by the end of 2007.

Antamina

An incremental expansion to the Antamina concentrator was approved in November 2006 to increase concentrator throughput capacity by 10%. The project, which includes the installation of a newly designed pulp lifter, a pebble crushing circuit and conveyance system upgrades, at a cost of $37 million, is scheduled for commissioning in January 2008.

Las Bambas

During the year, 100,000 metres of diamond drilling were completed at Las Bambas, focused on expanding the resources at Ferrobamba, Chalcobamba and Sulfobamba. In addition, initial drill testing of the Charcas and Azuljaja prospects was undertaken. To date, Xstrata has accumulated a total of 156,000 metres of drilling on the project. Based on 2006 drill results, an upgraded total Mineral Resource estimate has been established of 508 million tonnes at a grade of 1.14% copper, 220ppm molybdenum and 0.11 grams per tonne gold at a cut-off grade of 0.5% copper. This substantial increase in mineral resources continues to provide encouragement about the ultimate potential of this exciting mineral district. A project covering an additional programme of 85,000 metres of drilling for 2007, principally covering the currently known deposits of Ferrobamba, Chalcobamba and Sulfobamba, as well as a broader regional exploration programme, has been approved for 2007.

A two-year environmental baseline study was initiated in 2006 and conceptual studies will commence in 2007, slightly ahead of the original schedule.

Philippines

Tampakan

Xstrata gave notice of intent to exercise its option to acquire 62.5% of the Tampakan copper-gold deposit in the Philippines on 21 December 2006. Completion of the option exercise and the corresponding transfer of management control to Xstrata Copper is scheduled for 30 March 2007. In 2006, Indophil Resources sole-funded and managed a pre-feasibility study that was completed and delivered to Xstrata in September. Xstrata elected to sole-fund additional work during the period 30 September to 21 December 2006 prior to exercising its option. The Mineral Resource estimated for Tampakan currently stands at two billion tonnes at 0.59% copper and 0.23 grams per tonne gold at a cut-off grade of 0.3% copper. During 2007 the focus of Xstrata’s activities will be to conduct additional optimisation studies to identify a project development case, to be evaluated in a full feasibility study.

Papua New Guinea

Frieda River

Xstrata holds a 72% interest in the Frieda River copper-gold porphyry project. Its joint venture partners are Highlands Pacific Limited (17%) and Japan's OMRD (11%). Prior to 2012, Xstrata may elect to acquire a 72% interest in the adjacent high grade copper-gold Nena deposit for a cash payment of $10.8 million and the completion of a feasibility study within five years. The mineral resources on the property consist of 434 million tonnes at 0.60% copper and 0.38 grams per tonne of gold in the Horse-Ivaal-Trukai porphyry deposit and 42.7 million tonnes at a grade of 3.09% copper and 0.59 grams per tonne gold in the Nena epithermal deposit. Good potential exists to increase the mineral resource inventory. A scoping study is under way to examine infrastructure options and metallurgical test work has begun on mineralization from both deposits.