Business Review | Resources and relationships

Xstrata benefits from a number of key resources and relationships considered to be material to the successful execution of its strategic aims.

Diversified portfolio with significant industry positions

Xstrata’s portfolio is diversified both by commodity and by geography, balancing the risks associated with specific commodity price cycles and operating locations and providing investors with more reliable and stable cash flows. Diversification also engenders healthy competition for capital between Xstrata’s commodity businesses, ensuring only the most attractive projects or acquisitions are approved.

The Group maintains industry-leading positions amongst the top five producers globally in each of its key commodity markets.

Based on 2007/2008 production estimates on a consolidated basis.

Extensive organic growth pipeline

Xstrata benefits from a very significant growth pipeline across a number of commodities, allowing the strategic sequencing of projects and deployment of capital from which significant volume growth and superior returns can be achieved.

This pipeline represents over $30 billion of capital projects, including $12 billion of approved projects, representing more than 15% of Xstrata’s enterprise value. The realisation of these projects will deliver in excess of 12% per annum compound volume growth over the next five years. Around half of the projects in Xstrata’s pipeline represent lower risk brownfield expansions to existing operations. A number of the brownfield expansions and major new greenfield projects within Xstrata’s pipeline will deliver a series of Tier I operations across the commodity businesses, further transforming the average cost profile and resource base of the Group’s portfolio.

Significant acquisition and post-acquisition integration capability

Xstrata has developed and demonstrated a significant capability in the opportunistic identification of acquisitions; the ability to execute transactions where the value proposition is compelling; and in the rapid integration of acquired operations into the Group’s structure. This capability has been replicated at the commodity business level, enabling several smaller bolt-on acquisitions to be completed simultaneously across the Group’s commodity businesses.

Devolved management structure

Xstrata’s management model is highly devolved and comprises a very lean corporate centre of some 50 people and fully resourced, standalone global commodity businesses. The role of the corporate centre is well defined to minimise bureaucracy and avoid overlaps with the business unit activities. Rational risk-taking is sponsored to stimulate innovation and an entrepreneurial spirit at every level. We believe this model is a significant competitive advantage and enables Xstrata to be more opportunistic, entrepreneurial, nimble and less bureaucratic than other companies of a similar scale and geographic reach.

The devolution of authority to the commodity business level is accompanied by stringent accountability and transparency requirements. A key role of the corporate centre is to ensure effective governance, through open and regular communication with the commodity businesses, by setting the Group governance framework in which our activities take place and by measuring performance against these principles, policies and standards.

Financial strength and discipline

We are committed to maintaining a robust balance sheet and solid investment grade credit rating, ensuring access to a diverse range of funding sources. Xstrata’s efficient financial structure, our focus on disciplined capital expenditure, strong cash management and cost control enable us to fund ongoing capital requirements, as well as pursuing rational organic and acquisition-led growth opportunities. The ability to fund growth in a cost effective and timely manner is essential to enabling the Group to achieve its strategic aims.

Resource and reserve base

Xstrata benefits from a significant resource and reserve base across each of its major commodities. The Group’s focus on value creation and our success in near-mine exploration has enabled us to extend or replace the resource base of a significant number of our assets over the past several years. Xstrata’s resource base compares favourably with mining industry peers, particularly in coking and thermal coal, copper and zinc. The Group reserve and resource statement is published annually and is available from the Xstrata website.

Technological expertise

Xstrata benefits from a significant depth of technological and technical expertise, an important resource for efficiency and environmental improvements at our operations and for the development of major growth projects. Xstrata’s standalone Technology Services business comprises Xstrata Technology and the former Falconbridge Metallurgical Technology Group, renamed Xstrata Process Support. In addition, Xstrata’s commodity businesses develop and implement proprietary technologies and innovative solutions to improve efficiency at the operational level.

Exploration capability

Exploration is an integral part of each commodity business’s responsibilities and as such, Xstrata does not maintain a central or standalone exploration function. Xstrata’s commodity businesses are responsible for undertaking “near-mine” exploration around existing operations or in nearby regions, leveraging existing assets, and conducting targeted greenfield exploration at known deposits with the objective of adding to the Group’s resource base. This strategy has been highly successful to date, providing significant additional value to shareholders. Xstrata is pursuing a successful strategy of partnering with junior exploration companies who undertake greenfield exploration in new territories where existing Xstrata assets cannot be leveraged effectively.

Relationships with stakeholders

Xstrata maintains a transparent and open relationship with its key stakeholders who include: the investment market, employees and unions, governments and regulators, communities associated with our operations, customers, suppliers, business partners, non-governmental and development organisations. The Group is committed to the maximum transparency that is commercially possible and to engaging openly, honestly and in a culturally appropriate manner with its stakeholders. Partnerships with key stakeholders that are based on mutual benefit, trust and respect are essential for the effective execution of the Group’s strategy.

Glencore International AG is Xstrata’s major shareholder and holds 34.4% of Xstrata’s issued share capital. A Relationship Agreement is in place to regulate the relationship between Xstrata and Glencore and the key points of the agreement are outlined in the Directors’ Report on page 107. Details of commercial arrangements and transactions with Glencore are provided in the Related Parties notes to the financial statements on pages 236 to 239.

Miner at the main belt access at the Mototolo platinum joint venture, South Africa

Stephane Moreau, mechanic at Xstrata Nickel’s Craig Mine, Sudbury, Canada