Chairman’s Statement

Willy R Strothotte

I am very pleased to report that Xstrata’s businesses delivered another strong year in 2007, achieving record volumes and profitability, efficiency gains, the successful completion of a series of bolt-on additions and increased investment to advance the Group’s significant portfolio of organic growth projects.

Successful acquisitions and the efficient integration of acquired operations are now a hallmark of Xstrata’s success and it is pleasing to note that this capability has been successfully replicated at the commodity business level, with several bolt-on transactions executed and integrated in 2007 and the early part of this year.

Our organic growth pipeline of over $30 billion of projects is now very substantial and provides further optionality in achieving growth. Over $12 billion of capital projects have been approved and are currently under way. Over the next five years, the realisation of these major new operations will see Xstrata boosting production volumes in each of our major commodities during a period in which we expect continued strong growth in demand driven by China and other developing economies in Asia, and, following a period of short-term weakness, by a return to growth of western economies.

While the commodity price environment remains very strong, our industry also faces considerable headwinds in the form of rising costs due to higher input prices and increased labour and energy costs, pressure from royalties and minerals taxation and a weak US dollar against most operating currencies. Cost control is therefore a key focus across the Group and our performance in this area provides an important “shop window” for our shareholders to gauge the quality of Xstrata’s stewardship of their assets. Our businesses have built up a track record of operational excellence and it is a tribute to Xstrata’s management and employees that in 2007, real net cost savings representing some 1.3% of the operating cost base were achieved.

Above all, Xstrata’s success in each of these areas has been guided by a disciplined and dispassionate approach to maximising value.

We have withdrawn from competitive acquisitions once the price no longer made sense, as with the LionOre transaction in June, focused on productivity enhancements rather than cutting capital investment to achieve cost savings, divested assets that fit more naturally with an alternative owner, as in our disposal of the former Noranda aluminium business to a private equity firm in April and acquired existing production at opportune times, such as the recent acquisition of the Tahmoor coking coal operation. This value-led approach has again translated into superior returns to our shareholders and in the 12 months to 31 December 2007, Xstrata provided a total return of 42%, compared to 7% for the FTSE100 index of companies.

Governance

Following Xstrata Alloys’ offer for Eland Platinum and in view of the potential conflict of interest posed by his position as Chairman of Impala Platinum Holdings Limited, independent non-executive director Dr Frederik Roux stepped down from the Xstrata Board in August. Fred made an important contribution to Xstrata’s success during his tenure from appointment in February 2002. On behalf of the entire Board and management team, I thank him for his wisdom and insight and wish him well for the future.

Claude Lamoureux has accepted the Board’s invitation to stand for election as an independent non-executive director at the next shareholders’ meeting. Claude is the former President and CEO of the Ontario Teachers’ Pension Plan and was a co-founder and Board member of the Canadian Coalition for Good Governance. I have no doubt that Claude’s wealth of experience as an active investor and as a staunch advocate of corporate governance will bring enormous value to Xstrata’s Board.

Ramón López García inspects the roasting stack at San Juan de Nieva zinc smelter, Spain

Brian Millar conducts repairs at the Sudbury smelter, Canada

Sustainable development

Xstrata’s commodity businesses again made excellent progress in reducing the frequency of injuries sustained, improving the environmental performance of our operations and in contributing to the socio-economic development of the communities associated with our operations, as set out in the key performance indicators included in this report. It is particularly pleasing that such marked improvements have been achieved in these areas within the former Falconbridge businesses in their first full year of ownership by Xstrata. It is also gratifying – and a tribute to the achievements of Xstrata’s commodity businesses – that in 2007, Xstrata’s performance in addressing key sustainability challenges was recognised by the Dow Jones Sustainability Index 2007/08, which named Xstrata as the leading company in the mining sector. A summary of key information regarding Xstrata’s sustainability performance and key performance indicators have been provided in this report, while our annual Sustainability Report provides a more comprehensive overview of Xstrata’s performance in this critical area of our business. This year, we have supplemented the report with an enhanced sustainability section on the Xstrata website.

During 2007, the commitments and performance expectations set out by Xstrata’s Group-wide sustainable development framework and assurance programme were reviewed and revised to drive further improvement and to maintain our industry-leading position in the management of sustainable development challenges. The revised framework was approved by the Board in December 2007 and its ongoing roll-out in early 2008 will provide further impetus to our commitment to continuous improvement.

While we have made enormous progress in this area and I am very proud of our achievements to date, we recognise that there is no room for complacency. Perhaps the most important of the many challenging targets we have set for ourselves in our business is that of achieving our aim of zero fatalities amongst our employees and contractors. It deeply saddens me to report that we did not achieve this target and nine people lost their lives at Xstrata’s managed operations during 2007. It is not acceptable that employees or contractors are harmed while performing their duties at work. Xstrata’s Board and management continue to prioritise safety across the business and we are dedicating further resources to identifying and addressing the causes of critical incidents in 2008.

Outlook and prospects

Our confidence in the emergence of a secular shift towards higher commodity prices led Xstrata’s management to pursue an aggressive growth strategy from 2002. That early confidence has been borne out in recent years and has positioned Xstrata as one of the world’s largest diversified mining groups in the short space of six years, with strong market positions in bulk commodities such as ferrochrome, thermal and coking coal and a very robust base metals portfolio of copper, nickel, zinc and lead production.

Xstrata has secured its position in the industry as a responsible, profitable and growing mining major. The Board remains very confident in the outlook and prospects for the Group in the short and medium term, and this is reflected in the 20% increase in dividends for 2007 to 50¢ per share.

In 2007, Xstrata’s management and employees have succeeded in delivering another very strong year of performance across the broad range of indicators we use to measure our progress. I thank each of them for their continued dedication, unrelenting pursuit of value and entrepreneurial drive as we enter into an exciting year for the mining industry and one in which I have every confidence Xstrata shareholders will continue to prosper.

Willy R Strothotte
Chairman