Xstrata Nickel

Operations

Xstrata Nickel achieved a record financial performance in 2006. Revenue rose by 56% to $3,364 million compared to the prior year, primarily due to very strong nickel prices. A 3% year-on-year reduction in the output of refined nickel was mostly offset by a 4% increase in ferronickel output at Falcondo. On a pro forma basis, EBIT rose by 180% to $931 million, compared to $333 million for 2005. The full benefit of higher sales prices and higher volumes was tempered by the strengthening of the Canadian dollar, higher oil prices, rising labour costs and increased royalties payments linked to higher metal prices.

On a consolidated basis, post by-product credits, nickel cash costs fell by 7% to 2.77¢ per pound, bolstered by stronger copper and precious metal production and robust copper and precious metal prices. Ferronickel cash costs increased by 18% to 5.18¢ per pound, primarily due to higher oil prices.

INO

Xstrata Nickel’s Integrated Nickel Operations (INO) comprise the Sudbury mines and smelter, Montcalm, and Raglan mine in Canada, together with the Nikkelverk refinery in Norway. Lower levels of ore feed from Sudbury, combined with custom matte feed shortfalls in the second and third quarters, resulted in lower overall sales volumes for the year, down by almost 4% to 82,300 tonnes. This was more than offset by the impact of record sales prices. EBIT was also impacted by increased unit costs from the strengthening of the Canadian dollar, which impacted EBIT by $40 million in 2006, and inflation-related input costs, such as labour compensation and royalties.

Sudbury and Montcalm

Mined nickel production at Sudbury operations was impacted by lower nickel ore grade which fell to 1.11% compared to 1.16% in 2005, and poor ground conditions at the Thayer Lindsley mine. As a result, the amount of mined ore processed through Sudbury’s Strathcona mill declined by 13% to 1.89 million tonnes. This decline was largely offset by a significant increase in custom ores milled, which rose more than four-fold to 365,800 tonnes compared to 73,300 tonnes in 2005.

The Montcalm mine set a production record in 2006 for net metal nickel produced at 10,600 tonnes, surpassing the 2005 level by 17%. Production of matte at the Sudbury smelter decreased by 2% to 112,400 tonnes, primarily due to lower mine concentrate tonnages, lower feed grades in the first half of the year, and a three-week vacation shutdown in July. The decrease was partially offset by a higher volume of custom feed concentrate.

A new three-year labour agreement was signed with production and maintenance employees at Sudbury in early February 2007, with no labour disruptions.

Raglan

The Raglan mine in the Canadian Arctic increased milled production by 14% to 1,062,400 tonnes. Higher mill throughput was achieved as a result of a mill optimization project, the first phase of which was commissioned in October 2005. The second phase is expected to be completed in early 2008. The benefits of this programme were partially offset by the impact of lower ore grade which fell from 2.84% in 2005, to 2.56% in 2006.

Nikkelverk

Production at the Nikkelverk refinery was unfavourably impacted by the shortfall in matte feed from the Sudbury mines and lower refinery custom matte feed between May and August. Refined nickel production decreased to 82,000 tonnes from 85,000 tonnes in 2005. However, an annualized production capacity rate of 86,000 tonnes of nickel was achieved during the earlier and later months of the year. Copper production at the refinery reached a new record of 39,700 tonnes, up 3% from 2005. Cobalt production remained at a similar level to the previous year at 4,900 tonnes, while new records for refined platinum production and rhodium production were achieved during 2006.

View of the Nikkelverk refinery, Norway

Falcondo

Falcondo, a fully-integrated ferronickel operation in the Dominican Republic, increased sales volumes by 18% to 31,100 tonnes of ferronickel, compared to 26,300 tonnes in 2005. This increase is attributable largely to a drawdown of inventory during the first quarter of 2006, which had been built from late 2005. Increased sales volumes and high nickel prices were partially offset by increases in production costs. Fuel accounts for nearly 70% of Falcondo’s costs, and in 2006, oil prices rose by 20% to around $59 per barrel, compared to $49 per barrel in 2005. The higher oil prices resulted in an EBIT impact of $39 million.

Production increased by 4% to 29,700 tonnes, as a result of increased process plant throughput and extra nickel from a new revert recovery plant commissioned in 2006. New records for mining and reclaimed ore tonnages and calcine throughput were also achieved in 2006, delivering 5 million wet metric tonnes and 2.1 million dry metric tonnes, respectively.

Developments

Koniambo Project

Development of the 60,000 tonnes per annum Koniambo ferronickel project in New Caledonia’s North Province continued in 2006, following receipt of the project’s primary operating and construction permits in December 2005. Detailed engineering and procurement activities progressed well. All major technology packages for the nickel smelter were awarded, and major contracts for the power plant and primary infrastructure were tendered.

In September, Xstrata Nickel (49%) and its partner SMSP (51%) announced that due to resource and cost pressures in the global construction market, the project would enter a renewal phase with an emphasis on cost containment and execution planning. The project has made notable progress toward fiscal, legal and regulatory stability agreements with the relevant levels of government in New Caledonia. It is anticipated that formal agreements will be in place by the second quarter of 2007.

In February 2007, Koniambo Nickel announced the commencement of early construction activity on site, including site access, construction facilities (including construction offices and the starter camp), construction services and utilities (water and power).

Kabanga Nickel

The Kabanga Nickel project is a 50/50 joint venture with Barrick Gold Corporation in Tanzania. In February 2007, Xstrata Nickel announced a tranche of $95 million funding, satisfying the initial joint venture funding obligation of $145 million in total. The initial $50 million funding was committed in May 2005. An extended scoping study phase was concluded in November, resulting in a substantial increase to the Kabanga mineral resource, currently estimated at 46 million tonnes (inferred and indicated), grading 2.7% nickel, with a 1% Ni-Eq cut off grade.

A pre-feasibility study was initiated in December 2006 and will include continued exploration work, delineation of the current resources to upgrade the mineral resource classification to the indicated and measured categories, geotechnical, hydrological and project engineering to support final design criteria, a comprehensive Social and Environmental Impact Assessment study, and further definition of the capital and operating costs for development of the project.

Araguaia Exploration

During the year, 26,000 metres of diamond drilling were completed on the Araguaia project in Brazil, focused on the two known zones of nickel laterite mineralization at Serra do Tapa and Vale dos Sonhos. The resource base continued to expand during the year and now stands at 61.8 million tonnes at 1.63% nickel at a 1.2% nickel cut off grade; including 43.9 million tonnes at 1.62% nickel in Serro do Tapa, and 17.9 million tonnes at 1.64% nickel in Vale dos Sonhos.

These encouraging results have given sufficient confidence to increase the drilling programme by 50%, primarily focused on additional drilling at Serro do Tapa and Vale dos Sonhos to provide the necessary geological information to begin the scoping study in 2007. Additional exploration drilling is also planned on nearby targets with known nickel mineralization identified in wide-spaced scout drilling using remote sensing methodologies proprietary to Xstrata.

Sudbury

Nickel Rim South Project

The Nickel Rim South Project is situated in the East Range of the Sudbury Basin, which is home to existing Xstrata Nickel mines and metallurgical processing facilities. The project is currently in the early stage of development and entails the construction of surface and underground works to facilitate an extensive underground definition drilling programme and rapid ramp-up to 60% of the ultimate 1.25 million tonne per annum production rate in 2009.

Construction work at the Nickel Rim South project, Sudbury, Canada

The Deposit Definition Phase of the project remains on schedule to be completed in the fourth quarter of 2008 within the initial budget of C$627 million ($538 million). Most of the surface infrastructure has been constructed and is operational. Shaft sinking is more than 80% complete. Preliminary underground drilling results have shown mineral location, thicknesses and grades to be consistent with expectations. Underground lateral development will commence in 2007 and most of the definition drilling will be undertaken in 2008. To date, environmental and safety performance at the project has exceeded industry benchmarks with zero critical or significant environmental incidents, a lost time injury frequency rate of 0.89 per million work hours, and a total recordable injury frequency rate of 16.46 per million work hours.

Fraser Morgan Project

In November 2006, capital expenditure of C$18 million ($16 million) was approved for the first phase of the Fraser Morgan nickel project, located adjacent to the existing Fraser Mine in Sudbury, Canada. This first phase is scheduled to be completed by the second quarter of 2007 and will include the completion of a pre-feasibility study, definition drilling, equipment procurement, and infrastructure upgrades on the 3400-foot level of the current Fraser mine to allow for project development and for potential future ore handling. Subsequent development phases will be subject to approvals in the second and third quarters of 2007 and mine production could start as soon as 2009. When brought into production, Fraser Morgan will contribute an estimated 7,200 tonnes of refined nickel per year over its seven-year expected mine life.

Recycling plant

Following detailed engineering and pilot testing, completed at the end of the first half, construction work commenced to build a new recycling plant at the Sudbury smelter in September. The total investment for the project is C$21.4 million ($19 million) and commissioning is scheduled in July 2007. The new plant will allow increased custom feed capacity for materials such as nickel-cobalt catalysts, nickel plating sludges and lithium ion/nickel metal hydride batteries by eliminating restrictions on moisture and oil content.

High purity nickel crowns, produced at the Nikkelverk refinery, Norway

Falcondo

Falcondo commissioned several significant projects during the year, with an aggregate investment of $26 million.

Exploration was initiated at the Loma Ortega 3 area, an extension of the operating Loma Ortega mine. This exploration programme will be completed during 2007.

A project to assess the potential to switch Falcondo’s primary source of energy from naphtha produced at site to coal is currently under way. The project is examining the potential to decrease operating costs, using simple rotary kiln technology to reduce the furnace feed. The project will also permit the evaluation of various expansion scenarios.

The Loma Miranda area, 25 kilometres from the Falcondo plant site, was drilled in the 1980s and has 12.4 million tonnes of resources at 1.58% nickel. During 2007, the potential for increased ore reserves at the area will be assessed.

Raglan

Exploration activities at Raglan in 2006 added 2.67 million tonnes of resources grading 3.0% nickel and 0.8% copper. Raglan now contains a total resource of 25.7 million tonnes grading 3.0% nickel and 0.9% copper.

In November 2006, capital expenditure of $45 million was approved to refurbish the existing Deception Bay wharf installations. The current wharfs are 35 years old and are used during nine months of the year to bring supplies to the Raglan site and to send nickel-copper concentrate to Quebec City. The project has now entered the engineering, procurement, and construction management stage, and construction will start in June 2007.

Raglan’s permanent accommodation facility will be expanded during 2007 at a total capital cost of C$50 million ($44 million). The project will add 60 temporary rooms and 210 permanent rooms to the existing complex. This will allow the dismantling of some of the older temporary camps and add flexibility to the Raglan site operations. Construction is expected to start during the first quarter of 2007, to allow transportation to site during the northern hemisphere summer months, with an anticipated completion date during the first quarter of 2008. Once completed, the additional accommodation will provide extra capacity required for short- and long-term expansion plans at Raglan.