Xstrata Zinc

Operations

Earnings from the Xstrata Zinc operations escalated rapidly in 2006, with EBIT rising to $1,673 million, more than seven-fold the previous year’s result, primarily due to significantly higher zinc and lead prices compared to the previous year. The acquisition of Falconbridge contributed $679 million to Xstrata Zinc EBIT.

While production of zinc metal increased slightly year-on-year, this was more than offset by lower volumes of zinc in concentrate, primarily due to lower production from the Australian zinc-lead operations. Stripping out the impact of CPI and mining sector inflation on input costs, the zinc business achieved real operating cost savings of $57 million, mainly due to a reduction in mining costs at the Australian operations, due to underground mining being replaced by open cut operations at Mount Isa and McArthur River, and improved efficiencies in recovering by-products in the European smelters. These cost savings outweighed the negative impact of mining sector and CPI inflation, resulting in a net contribution of $1.4 million to EBIT. On a C1 pro forma basis, consolidated cash costs increased from 38.7¢ per pound of zinc produced in 2005 to 62.4¢ per pound in 2006, mainly due to the impact of significantly higher zinc prices on realised TCs.

Zinc Lead Australia

Profitability at the Australian operations was significantly boosted by higher zinc and lead prices in 2006. EBIT rose strongly to $480 million in 2006, almost five times higher than EBIT of $97 million in 2005. The full impact of higher prices was tempered by lower volumes and the effect of inflation in the cost of mining inputs in Australia, in common with the rest of the sector.

Production of zinc concentrate from the Mount Isa operations declined by 9% in 2006, despite a 5% increase in ore throughput. Decreased production was due to lower recoveries at the zinc lead concentrator as volumes of transitional ore feed from the Black Star mine increased to replace ore from the Mount Isa Lead Mine following its closure at the end of 2005. Recoveries were also negatively impacted by delays associated with the commissioning of the first stage of the concentrator capacity expansion project. Batch feeding of ore commenced in the final quarter of the year to increase metallurgical control and improve recoveries. Lead in concentrate production was 28% lower at 108,600 tonnes, also due to the reduced feed grade and recoveries.

Following completion of the first stage of the concentrator capacity expansion project in 2006, capacity has improved substantially to 6.5 million tonnes per annum. Low cost ore supply from the Black Star mine will increase accordingly, to ensure full utilisation of the concentrator in 2007.

Aerial view of the Brunswick Mine zinc-lead mine, New Brunswick, Canada

George Fisher achieved ore production of 2.6 million tonnes for the full year, a marginal improvement on 2005. Ongoing efficiency gains and a substantial improvement in shaft hoisting capacity during the year partly compensated for hoist downtime in the first quarter caused by persistent wet weather, and a reduction in accessible ore due to the unstable ground conditions experienced in sections of the mine in the second half.

Black Star produced a total of 2.1 million tonnes of ore during its first full year of production following commissioning in February 2005, a 50% improvement on the prior year. Lead in bullion reduced by 26% to 118,300 tonnes as the Mount Isa lead smelter was impacted by lower than expected concentrate production.

Underground mining operations ceased at McArthur River Mine in 2006. The volume of material mined increased by 3% over the previous year to 1.9 million tonnes, the vast majority of which was produced from the test open pit. Production of zinc and lead in concentrate was 12% and 13% lower than in 2005 respectively. This was due to lower average zinc and lead head grades of 11% and 4% respectively compared to 12% and 5% in 2005, following the depletion of the number 2 ore body, the mining of bulk stopes and the conversion to lower grade open pit mining from the test pits, and to lower recoveries in the first half. Recoveries were impacted by highly oxidised transitional ore feed to the concentrator but improved in the second half, following the installation of a new circuit cleaner.

Zinc Lead Europe

The European operations also benefited from the strong zinc and lead prices, with the plants operating at full capacity to maximise output in a robust price environment. EBIT rose to $515 million, up by 263% on 2005 and EBITDA improved to $552 million, 210% higher then the previous year.

In 2006, San Juan de Nieva smelter produced over 500,000 tonnes of melted zinc and sales rose to 472,000 tonnes, confirming its position as the largest zinc producing operation globally. Over one-fifth of the zinc concentrate treated at San Juan in 2006 came from Xstrata’s Mount Isa and Brunswick mines in Australia and Canada respectively, with the proportion of concentrate sourced internally expected to increase further in 2007 to around one-third. Further improvements in energy efficiency to 25 kilowatt hours per tonne, partly compensated a 12% increase in electricity prices.

The Hinojedo roaster produced 41,600 tonnes of calcine, of which 14,300 tonnes were supplied to Nordenham smelter, together with 12,400 tonnes of zinc cathode and slab. The Arnao plant produced 16,800 tonnes of zinc oxide, 4% higher than the previous year, using residues from the San Juan plant and scrap as raw material. Annualised synergies from these initiatives amounted to ?8.7 million ($10.9 million).

Morning crew communications meeting at George Fisher lead mine, Mount Isa

Saleable zinc production at the Nordenham plant increased by 9% or 13,000 tonnes, including 4,000 tonnes from own production and 9,000 tonnes from cathode zinc, slabs from San Juan and other external sources, which was remelted and cast in added-value products. Increased production at Nordenham was achieved using 14,300 tonnes of calcine from the Hinojedo operations in Spain and 4,000 tonnes of calcine from other suppliers. The replacement of two belt fitters with one filter press to increase filtration capacity and decrease moisture content boosted lead and silver production by 20%, adding more than ?1 million ($1.3 million) to revenues.

Lead production at Northfleet in 2006 remained at a similar level to 2005 at 163,000 tonnes. This production included a substantial amount of purchased lead to cover production shortfalls at Mount Isa. End of year refined stock was 12,500 tonnes. Silver production decreased by 31% compared to 2005 to 8.2 million ounces, due to lower levels of feed from Mount Isa.

Loading zinc at the dock, San Juan de Nieva zinc smelter, Spain

Zinc Lead Americas

Zinc Americas reported a strong increase in EBIT to $678 million in 2006, $731 million higher than the prior year. EBITDA increased by $786 million, from $95 million in 2005 to $881 million in 2006. Strong commodity prices were the main contributor to this result, coupled with a slight increase in production and sales and a positive contribution from the Kidd Creek smelter, following losses in the previous year.

At the Brunswick Mine, ore processed in 2006 increased by 1% compared to 2005 to 3.6 million tonnes. A lightning strike in July that destroyed one of the main mine electrical transformers resulted in two weeks of reduced mine production. Strong metallurgical recoveries and underground operational improvements to minimise waste and improve productivity increased production by 2% year-on-year to 271,800 tonnes of zinc in concentrate. A focus on by-product metals metallurgy also resulted in significant gains in contained lead, copper and silver in concentrate.

A 5-year life of mine labour agreement was successfully negotiated with the United Steelworkers union with no lost time to industrial action. The agreement, signed in June, includes provisions for mine closure, now scheduled for 2010.

Refined lead and silver doré production at the Brunswick Smelter was slightly lower than in 2005 at 69,700 tonnes and 200 tonnes respectively due to lower volumes of feed material. Progress continued to improve feed consumption rates, sinter-acid plant availability, and to increase the proportion of higher-margin recycled and residue feed, which comprised 35% of feed material in 2006, up from 30% in 2005.

The CEZinc refinery in Quebec produced 266,400 tonnes of cast zinc, 292,800 tonnes of cathode zinc and 477,400 tonnes of sulphuric acid. Although a record 527,300 tonnes of zinc concentrate was treated in 2006, zinc production was 2% lower than in 2005, due to higher iron and lower zinc content in the concentrate feed mix, and a breakdown of one of the electrolyte circulation pipes in the refinery during the first quarter.

The Kidd zinc hydrometallurgical plant produced 145,000 tonnes of zinc metal, a 21% improvement over 2005. Improved utilisation, and the absence of a major shutdown and the strike in 2005 were the principal contributors to the positive variance. De-bottlenecking activities successfully resulted in record leach plant throughput 57% higher than in 2005.

At the Antamina copper-zinc mine in Peru, ore production in 2006 fell by 8% due to longer haulage distances than planned. Although throughput at the concentrator remained at a constant level to the previous year, zinc concentrate production fell by 15% to 293,100 tonnes, due to lower zinc grade treated in the concentrator.

Mine operators Kel Ward and John Ivers prepared for the day shift at George Fisher lead mine, Australia

Developments

Zinc Lead Australia

At George Fisher, further improvements are planned for the second half of 2007 at a total capital cost of approximately AUD26 million in 2007, to increase shaft hoisting capacity to its maximum infrastructure capacity of 3.1 million tonnes per annum. Additional ground support, development and backfill will be undertaken throughout 2007 to enable an increase on current production levels to be achieved.

At the Black Star open cut mine at Mount Isa, the Stage 2 ore horizon will continue to be developed throughout 2007 and together with Stage 3 North, which commenced development in June 2006, will provide the bulk of ore production. Ore production from these stages is scheduled to be accelerated in early 2007 to coincide with planned increases in concentrator throughput. The Mount Isa Zinc Lead Concentrator Re-Vamp project was approved during the first half of 2006 and the first stage of this project was commissioned in the fourth quarter, increasing throughput capacity from 5 million to 6.5 million tonnes per annum. The second stage of the $120 million project involves the commissioning of a new milling and flotation circuit to increase capacity to eight million tonnes per annum. Orders for long lead time items have been placed and the project is on schedule for completion in the first half of 2008.

Three significant diamond drilling programmes continued to assess the growth and expansion of Black Star Open Cut, Handle Bar Hill Open Cut (George Fisher South) and George Fisher North Deep Underground. Success in these areas will realise further extensions to the life of mine for the Mount Isa zinc-lead operations.

In October 2006, the final approvals required to convert the former underground mine at McArthur River to an open cut operation were received from the Northern Territory and Federal Australian governments. The development will include expanding the mine’s footprint and diverting 5.5 kilometres of the seasonal McArthur River around the open pit, to enable production to continue for a mine life of an additional 25 years. MRM conducted a comprehensive environmental assessment of the proposed open pit development which commenced in March 2003.

Preliminary civil works have commenced on site to expand the existing test pit operations in order to maintain current production levels while work on the full open pit development proceeds under a two year programme. The majority of the total capital cost of AUD110 million ($82 million) is expected to be incurred in 2007, with the open pit currently expected to be fully operational from 2009.

The capacity of the concentrator at McArthur River Mine will be increased from annual throughput of 1.8 million tonnes of ore to 2.5 million tonnes of ore, at a low capital cost of $37 million. The expansion will enable annual production of zinc-lead concentrate to increase from approximately 320,000 tonnes to approximately 430,000 tonnes of zinc-lead concentrate, including the potential to produce a bulk concentrate with lower lead content, which can be processed in conventional smelters.

Additional production will be achieved with no increase to the mine’s overall footprint, through the installation of two newly-developed Xstrata Technology M10,000 IsaMILLs to improve energy efficiency and enable additional production from existing power generation facilities. The expansion is expected to commission in mid 2008 and will be fully operational by the end of the third quarter of 2008.

In April 2006 the restart of the Pilara mine and mill at Lennard Shelf was announced, owned through a 50/50 joint venture with Teck Cominco. The estimated capital cost of the restart is AUD23 million and the mine is expected to produce 70,000 to 80,000 tonnes of zinc metal contained in concentrate annually. The first concentrate is scheduled to be produced in February 2007 with a mine life of approximately four years. Lennard Shelf is located in the Kimberley region of Western Australia.

Zinc Lead Europe

The construction of a silver flotation plant in San Juan de Nieva smelter was completed, on time and on budget, in July 2006 at a cost of ?12 million ($15 million). In 2006, the plant produced 3,000 tonnes of silver concentrate.

In 2006, efficiency was improved at Nordenham through the installation of a gypsum removal stage which has decreased anode consumption by 40%. A pre-feasibility study into optimizing the Northfleet site plant configuration is currently under way and is expected to be finalised in early 2007.

Aerial view of the Antamina copper-zinc mine, Peru

Zinc Lead Americas

Construction commenced on the Perseverance deposit in Northern Quebec with an expected capital cost of C$130 million. The mine is scheduled to be in production in late 2008 and will have an annual production of 228,000 tonnes of zinc concentrate and 35,000 tonnes of copper concentrate. Mine life is expected to be five years.

Efforts are ongoing at the Brunswick mine to continue energy-related cost savings in 2007, following a reduction in overall energy requirements of 4% in 2006. In light of strong metal prices, a concerted effort to add resources to the mine reserve base will continue throughout the year.

At CEZ, a strategic plan to increase plant throughput was initiated with productivity improvement in the roaster area. The purification residue treatment was completely changed to eliminate arsenic and improve copper cake quality. Capital investments of C$22 million ($19.5 million) will be made in 2007, including investments to increase plant capacity to 280,000 tonnes per annum.

As set out in the Xstrata Copper section, an incremental expansion to the Antamina concentrator was approved in November 2006 to increase concentrator throughput capacity by 10% and is scheduled for commissioning in January 2008. A two year ore resource enhancement drilling programme and a three year regional exploration programme will commence at Antamina in 2007.