Business Review | Sustainable development
We are committed to the goal of sustainable development and balance social, environmental and economic considerations in how we manage our business. We believe that operating to leading standards of health, safety and environmental management, contributing to the development of sustainable communities and engaging with our stakeholders in two-way, open dialogue, regardless of our location, enhances our corporate reputation and is a source of competitive advantage. This enables us to gain access to new resources, maintain a licence to operate, attract and retain the best people, access diverse and low-cost sources of capital, identify and act upon business opportunities and optimise our management of risks.
We comply in full with the laws and regulations in each country where we operate. In addition, we operate in accordance with Xstrata’s sustainable development framework, aspiring to achieve the highest international standards regardless of location and without exception. We conduct regular internal and external audits of our businesses and operations to assure compliance with our Business Principles, policies and standards. A comprehensive, separate Group Sustainability Report is published annually and is available from the Xstrata website.
Governance and assurance
Xstrata’s independent Sustainable Development Assurance Programme is the key mechanism through which the Xstrata Board and management gain assurance that the Group’s policies and standards are being met or exceeded by each operation and commodity business. In 2007, 33 operations were independently audited under this programme with two achieving the ’optimum‘ level. The Board HSEC Committee plays an important role in the oversight of the Group’s policies and performance in this area. Further information is provided in the Corporate Governance Report on pages 110 to 120.
During 2007, a wide-ranging and in-depth external and internal review of Xstrata’s HSEC governance framework was undertaken. The review was initiated in response to the significantly changed risk profile of Xstrata’s operations, the continued evolution of the scope and profile of sustainability issues and extensive feedback from internal and external stakeholders since the framework was implemented in 2004. The revised Sustainable Development Framework comprises Xstrata’s Statement of Business Principles, Sustainable Development Policy, Sustainable Development Standards and Assurance Programme and was approved by Xstrata’s Executive Committee and Board at the end of 2007. The revised framework is being rolled out across the Group, supported by a comprehensive internal communications programme including regional workshops, led by the Group GM Sustainable Development.
Employees
We maintain a safe workplace that is based on mutual respect, fairness and integrity. We provide industry-leading career development opportunities, competitive remuneration and fair and non-discriminatory workplaces. Xstrata’s operations aim to maximise the number of local people employed wherever possible, to share the economic benefits of our presence with neighbouring communities and families. We respect our employees’ right to collective representation, just compensation, job security and opportunities for development. We value diversity and treat all employees and contractors fairly, providing equal opportunity at all levels of the organisation without bias according to race, nationality, religion, gender, age, sexual orientation, disability, political or other opinion or any other basis.
Improving the diversity of our workforce and extending our extensive education, training, apprenticeship and bursary schemes offer potential solutions to the current global shortage of skills in the mining industry. For example, the “women in mining” initiative in Australia and South America has helped our businesses fill vacant positions by recruiting, training and retaining more female employees through the introduction of “family friendly” working hours and practices. In 2007, women represented 13% of all managers and 9% of the total workforce. While no formal diversity targets are in place, with the exception of South Africa, where our businesses are complying with requirements under the Mining Charter, our businesses are implementing a number of initiatives to further improve the recruitment, promotion and retention of women, local and indigenous people.
Health and safety
We aim to operate a safe workplace that is injury- and fatality-free, and to enhance the well-being of employees, contractors and communities.Safety remains a priority for Xstrata management. Regrettably, five employees and four contractors were fatally injured at Xstrata’s managed operations in 2007. Fatality prevention programmes and ongoing improvements in identifying and managing major hazards continue, in particular at Xstrata’s South African operations, and have been integrated into commodity business safety management systems.
All operations are required to implement robust major hazard management processes, supported by the reporting and investigation of all high potential risk incidents, including near-miss incidents. To identify opportunities for improvement and ensure these processes are robust and effective, every operation has committed to implement a formal review process of major health, safety, environmental and community hazards by the end of 2008. With the increased demand for skilled labour globally, the effective management of contractors has been identified as a high-risk area and is a focus for all commodity businesses, particularly in the development of large-scale capital projects.
While significant challenges still remain to achieve our aim of an injury-free workplace, excellent progress has been made during 2007 to reduce the frequency of all recordable injuries sustained, in particular in improving the safety performance of the former Falconbridge operations. The frequency of all recordable injuries has reduced by 33% at the former Falconbridge operations and by 26% for all managed operations, including contractors.
HIV and AIDS continue to present a major health challenge for the Group’s workforce and communities, particularly in South Africa. Xstrata Coal South Africa continues to set new benchmarks in continuous testing, counselling and treatment programmes. In 2007 over 95% of employees and contractors had voluntarily tested for HIV and AIDS and over 65% of HIV positive employees were enrolled in treatment programmes. Xstrata Alloys has implemented a similar workplace programme with strong initial take-up rates of approximately 70%. A first of its kind public-private partnership between Xstrata and the Mpumulanga provincial health authorities was signed in March 2007 and is assisting regional government to substantially extend access to voluntary HIV and AIDS testing, counselling and treatment. Workplace programmes are also in place at Xstrata Nickel’s Falcondo operation in the Dominican Republic and are being implemented, together with malaria prevention initiatives, at the Kabanga exploration project in Tanzania. Xstrata Copper is designing a HIV and AIDS programme for the Frieda River project in Papua New Guinea, leveraging off Xstrata Coal South Africa’s leading practices.
Noise-induced hearing loss continued to represent the largest single cause of new occupational illnesses reported by the Group in 2007 and is a key focus for all operations. The number of new illnesses reported continues to decline falling by 36% in 2007, despite the Group’s increased scale, number of operations and workforce. Our long-term target is to achieve no new cases of occupational illnesses.
Environment
We aim to preserve the long-term health, function and viability of the natural environments affected by our operations. We seek to drive sustainable improvements in efficiency across the Group, in particular in the use of water and energy. The Group’s key environmental impacts are in greenhouse gas emissions, primarily from methane emitted during coal mining and indirect emissions from energy use; water use; potential impacts on biodiversity and landscape functions; product responsibility (for example the carbon liability of the Group’s thermal coal production); waste and tailings management; and emissions to water and air (for example sulphur dioxide emissions from metallurgical smelting operations).
Environmental incidents
We eliminate, mitigate or remediate the environmental impacts of our activities and aim to prevent or mitigate the impact of adverse environmental incidents. All environmental incidents are reported according to severity on a scale of 1 (negligible) to 5 (disastrous). Category 3, 4 or 5 incidents are reported to the Executive Committee on a monthly basis. In 2007, the number of category 3 incidents reduced by over 52%. No category 4 (major) or 5 (disastrous) environmental incidents have ever occurred at Xstrata’s operations. Category 3 incidents are defined as incidents causing moderate, reversible environmental impact with short-term effect, requiring moderate remediation.
Climate change
Climate change is one of the Group’s principal risks (see page 24). Our initiatives to respond to climate change include installing methane-fired power stations which capture fugitive methane from coal seams to generate energy, engaging with government and industry participants to contribute to the development of “clean coal” technologies and improving the energy efficiency of our operations. In 2007 an independent study was commissioned into the potential physical impacts of climate change on our operations, such as increased storm activity, reduction in the availability of glacial water and reductions in permafrost. The study identified a number of potential higher-risk operations and its findings are being assessed through our strategy and business planning process to develop appropriate responses.
In 2007, greenhouse gas emissions increased by 39% year-on-year, primarily driven by the inclusion of data from the acquired Falconbridge and Tintaya operations in 2007 (excluded in 2006). On a like-for-like basis, emissions rose by 18% due to increased ferrochrome and coal production, which offset lower greenhouse gas emissions from the copper operations. Carbon intensity per tonne of product declined year-on-year in 2007 towards our target of a 5% reduction in intensity by 2010.
Energy
We aim to continually improve the efficiency with which we use natural resources, in particular energy and water. Access to a secure and cost effective supply of energy represents a principal risk (see page 27). Programmes are in place across Xstrata’s operations to reduce energy intensity (particularly at high-intensity metallurgical operations) and achieve cost savings. Energy efficiency audits are routinely carried out at our operations. Key energy efficiency initiatives in 2007 included the commissioning of the Bokamoso pelletising plant which will reduce energy consumption by approximately 30% at our ferrochrome operations; the commissioning of a gas-fired power station at Mount Isa that led to a saving of approximately 50,400 GJ (gigajoules); a range of initiatives at Xstrata Nickel operations that collectively resulted in a saving of 293,700 GJ compared to the previous year including the use of heat from the main power plant to heat accommodation at the Raglan arctic operation and process improvements at the oil-powered Falcondo operation; and energy efficiencies of 91,000 GJ at Xstrata Zinc’s Canadian operations through battery recycling and a range of process improvements.
In 2007, energy use increased by over 82%, primarily due to the inclusion of the Falconbridge and Tintaya operations. The inclusion of energy intensive operations including the Nikkelverk refinery and the oil-fuelled Falcondo operation and the restart of several ferrochrome furnaces during 2007 led energy intensity to increase marginally over 2006 levels.
Water
Xstrata operates in a number of water scarce areas including Australia and the Andean region in South America. Every operation is required to implement a water management plan to minimise fresh water use and maximise recycling. Initiatives to share water between water scarce operations and those in neighbouring regions with excess water have helped to reduce fresh water consumption at a number of sites in Australia. Water is recycled and used within our operations, for example as process water and for dust suppression. Water management studies have identified a number of further initiatives that will be assessed and implemented in 2008. In 2007, fresh water use almost doubled due to the inclusion of Falconbridge and Tintaya. On a like-for-like basis fresh water consumption declined by 6% at the former Xstrata operations due to higher rainfall in Australia and improved water efficiency. Water intensity per tonne of product increased slightly due to higher water use at the acquired nickel operations. Use of recycled water increased almost fourfold, primarily due to reuse of process water at Falcondo’s power plant.
Community
Every managed operation develops an annual social involvement plan in close co-operation with communities and other relevant stakeholders, including government, NGOs and unions. Xstrata sets aside a minimum of 1% of Group profit before tax to invest in community initiatives that deliver long-term benefits, with the ultimate aim of leaving behind stronger, sustainable communities once operations cease.
Indicators used at the operational level to measure the success of community initiatives and support for our activities include third-party perception studies, progress against indicators identified through baseline socio-economic studies, responsiveness to community complaints, implementation of grievance procedures and management of risks relating to human rights. In 2007, Xstrata’s businesses contributed $102 million for corporate social involvement, equating to 1.2% of Group profit before tax, ahead of our target. Xstrata’s financial support for community initiatives is augmented through in-kind donations and employee volunteering. Perception studies indicate that community support for Xstrata’s activities is, in general, strong and broad-based.
Principal risks and uncertainties
The risks set out below represent some of the principal uncertainties and trends which exist in Xstrata’s business and which may have an impact on our ability to execute our strategy effectively in future. Further information about Xstrata’s risk management processes and controls is provided in the Corporate Governance Report on pages 110 to 120 of this report.
Commodity price volatility
Xstrata’s revenue and earnings are dependent on prevailing prices for the commodities it produces. Commodity prices are determined by the supply of and demand for raw materials and are closely linked to global economic growth. Demand for commodities is increasingly driven by the industrialisation of developing economies in Asia, in addition to demand from OECD countries. Xstrata produces and sells both exchange-traded commodities and commodities where prices are negotiated on longer-term contracts. Commodity prices for all products, and particularly for exchange-traded commodities, may fluctuate widely and may have a material impact on financial results. The impact on Group earnings (EBIT) of movements in the price of each of Xstrata’s commodities is set out in the EBIT Sensitivities table in the Financial Review. Commodity price trends and commentary on the outlook for each of Xstrata’s commodity markets is provided in the Markets section of this report.
We manage the risk of commodity price fluctuations through maintaining a diversified portfolio of commodities and typically do not implement large-scale strategic hedging or price management initiatives. We aim to reduce costs on a continuous basis and maintain low-cost, efficient operations, optimising our portfolio and returns throughout the commodity price cycle. Xstrata maintains a robust financial position and a solid investment grade balance sheet. In 2007, the maturity of Xstrata’s debt was further extended through three major bond issues, further mitigating any short-term financial risk.
Fluctuations in currency exchange rates
Xstrata’s products are generally sold in US dollars, while our operations and operating costs are spread across several different countries and currencies. Fluctuations in exchange rates, in particular, movements in the Australian dollar, Canadian dollar and South African Rand against the US dollar, may have a material impact on Xstrata’s financial results. The impacts of currency exchange rate fluctuations on Group EBIT, together with average exchange rates in 2007 compared to 2006, are set out in the Financial Review.
We manage this risk through maintaining a diversified portfolio of assets across several different geographies and operating currencies. From time to time we may also hedge a portion of our currency exposures to fix costs in US dollars to US dollar revenues in relation to contracted terms. Foreign currency hedging information is provided in the Financial Review. Xstrata’s financial structure, including exposure to interest payments, interest rate changes and amendments to taxation regulations, is regularly reviewed with the assistance of external advisers, to ensure compliance with relevant regulations and to maximise financial efficiency. The Group maintains a robust investment grade credit rating and Group Treasury policy is actively monitored and regularly reviewed.
Climate change
Xstrata operates in a number of jurisdictions in which regulations or laws have been introduced to limit or reduce greenhouse gas emissions. While the precise future impact of the Kyoto Protocol and related legislation and regulation is impossible to quantify at this time, the likely effect will be to increase costs for fossil fuels, electricity and transportation, restrict industrial emissions, impose added costs for emissions in excess of permitted levels and increase costs for monitoring, reporting and accounting. Xstrata is the world’s largest producer of export thermal coal and a number of Xstrata’s operations are intensive users of natural gas, electricity, oil and other energy sources. Significant increases in energy costs or restricted supplies of energy sources due to climate change legislation or other reasons may have a material adverse impact on the Group’s ability to maintain production and/or contain operating costs. Any material decline in the use of coal as a power source as a result of carbon taxes, emissions trading or similar legislation may have a material adverse impact on Xstrata’s financial position. Climate change may also result in weather-related events or other physical threats that may hamper production or damage assets.
Climate change issues are given a high priority by management and initiatives are undertaken to continually improve understanding of the Group’s carbon footprint and to implement initiatives to reduce the carbon intensity of operations and activities. Xstrata’s commodity businesses actively participate in industry and regulatory initiatives to address climate change and associated issues. Xstrata Coal is playing a leading role in actively investing in and advocating government support for research and development projects to reduce greenhouse gas emissions from the use of coal in power generation (“clean coal technology”), together with other coal producers, governments, scientific and academic organisations. Demand for coal is expected to be supported by forecast significant increases in global demand for energy, particularly in developing countries, and by coal’s relative cost position, availability and security of supply. Contingency plans are in place to restore operations quickly in the event of a severe weather event and to address significant risks. Energy efficiency is a high priority for operational management as a significant proportion of the Group’s costs relate to energy consumption (see below and Sustainable Development section, pages 20 to 23).
Project development
Continued robust demand for mining products has resulted in significant inflation in the cost of labour, fuel, raw materials and other key mining industry inputs, together with increased lead order times for key items and equipment, skills shortages and infrastructure constraints. As a result, the delivery of major capital projects on time and within budget is increasingly challenging and may result in capital cost overruns, delays to expected commissioning of new production or the inability to replace existing production or meet market expectations of volume growth. Xstrata has a significant pipeline representing over $30 billion of capital investment in major organic growth projects across a number of countries and commodities.
We manage this risk through ensuring rigorous planning and risk management processes are in place both leading up to project approval and through the development process. For example, before approving the significant $3.8 billion Koniambo nickel project in New Caledonia, Xstrata Nickel entered into a one-year renewal phase to identify and manage all risks and costs associated with the project. Xstrata’s commodity businesses have an excellent track record of delivering major capital growth projects on time and on budget, including the successful commissioning of several major growth projects in the past two years in a very challenging cost environment. In addition, Xstrata’s existing capabilities have been complemented and broadened through the retention of a significant pool of project management expertise from the former Falconbridge business acquired in late 2006. Cost control remains a key consideration for any project development. Detailed progress reports are provided on a regular basis for all major projects to the Group Executive Committee and effective project management procedures are a key focus for Xstrata’s Internal Audit function.
Cost pressures due to high inflation in the mining industry
Following an extended period of historically elevated commodity prices and increased activity in the sector, inflation in the price of key inputs into the mining and metals industry is considerably higher than consumer price index inflation in most mining regions, with supply shortages in some cases. In particular the price of consumables including tyres and explosives, contractor labour, fuel and energy has risen steeply, with increased competition for resources and consequent operating cost increases. The inability to source appropriate equipment or very significant increases in the cost of key inputs may impact production and negatively affect operating costs and profitability.
Xstrata recognises the importance of cost reduction as a driver of value creation and as a measure of the quality of our operational management and our stewardship of the assets of our owners. Cost performance is regularly reported to the Group Executive Committee and is an important management performance measure. Real net cost savings are used to determine 50% of the potential award under the Group’s long-term incentive plan; the remaining 50% is determined according to total shareholder returns. Improvements to the operating cost base are achieved through a focus on improving productivity, identifying potential efficiencies and replacing higher-cost assets with new, low-cost production. Xstrata’s dedicated technology business, Xstrata Technology Services, is a world leader in the development of minerals processing and metals extraction technologies to improve efficiency and reduce operating costs. Many of Xstrata’s operations use Xstrata Technology products and these are also marketed commercially to other industry participants. Xstrata’s commodity businesses also invest in the development of lower cost proprietary technologies. In each of the last six years, Xstrata has achieved real cost savings from its operational cost base, outperforming its FTSE100 mining industry peers. In 2007, $253 million of real cost savings were achieved in a very challenging environment.
Shortage of skills and retention of key personnel
The mining industry is currently facing a global shortage of skilled employees across a range of disciplines. The ability to attract, retain or train people with the appropriate skills is critical to Xstrata’s continued success and ability to grow and operate effectively. In addition, Xstrata’s lean management structure places reliance on a number of key people both at the executive and operational level, requiring appropriate retention measures and succession planning.
We aim to attract and retain the best people at every level of our businesses and to provide them with the resources they require to achieve and maintain our operational excellence. We provide industry-leading career development opportunities, well structured employment contracts, competitive remuneration and fair and non-discriminatory workplaces. We believe our devolved management structure and supportive environment for rational risk-taking is an important retention measure, offering unparalleled opportunities for development and entrepreneurial leadership, minimising bureaucracy and allowing every employee to play an active part in our success. Fast track and executive development programmes are in place across the Group and formal succession planning is regularly reviewed.
Health, safety and environment
Xstrata’s operations are subject to extensive health, safety and environmental regulations and legislation, community expectations and to the leading practice standards set out in our Sustainable Development Framework of policies and standards. New or amended environmental, health and safety legislation or regulations may result in increased operating costs or, in the event of non-compliance, the possibility of fines, penalties or other actions which may adversely affect Xstrata’s financial position. Rehabilitation costs, which are generally estimated and provided for over the life of operations and based on the best information available, may subsequently increase, impacting on Group earnings. Any breach of regulations or non-compliance with Xstrata’s own best practice standards in health, safety and environmental performance and community relations may damage our reputation and, as a result, our licence to operate. Performance standards at acquired operations may not meet Xstrata’s expected performance standards.
Our commitment to the principles of sustainable development, which incorporates environmental, economic and social performance, is an integral part of our operating philosophy. Every managed operation is independently audited through Xstrata’s independent Sustainable Development Assurance Programme on a regular basis, to provide assurance to the Board that Group policy and standards are being met or exceeded. Health, safety, environmental and social performance indicators are reported on a monthly basis to the Group Executive Committee and quarterly to the Board. Closure planning, including rehabilitation and ongoing environmental costs, is undertaken prior to investment in new operations and closure plans are routinely reviewed. Acquired operations are assessed for HSE risks and opportunities as part of the integration process and action plans are implemented to address any areas of underperformance. Major improvements have been achieved at the former Falconbridge operations as a result of the programmes initiated to respond to underperformance compared to Xstrata’s leading practice standards.
Political and community
Xstrata’s operations and projects span 18 countries, some of which have more complex, less stable political or social climates and consequently higher country risk. Political risks include changes in laws, taxes or royalties, expropriation of assets, currency restrictions or renegotiation of or changes to mining leases and permits. Similarly, communities in certain regions may oppose mining activities for various reasons. Any of these factors could have an adverse impact on the Group’s profitability in a certain geographic region or at certain operations. In South Africa, these risks include the ability to convert existing mining licences to “new order” mining rights under the Mineral and Petroleum Resources Development Act and Empowerment Charter.
We perform a thorough risk assessment on a country-by-country basis when considering our activities and investments and regularly review political, regulatory and social risk to ensure that these risks have been properly identified and are within acceptable levels. We aim to work closely in partnership with local communities for mutual benefits, earning and maintaining a social licence to operate. We further manage this risk through maintaining a broad geographic spread of assets, ensuring that political risk is spread across a number of territories. Investment terms and joint venture or other partnership agreements are reviewed to ensure fairness and reduce the risk of renegotiation. Xstrata maintains a transparent and open relationship with regulators and local, regional and national government bodies and closely monitors compliance with legislation and with the leading practice standards set out by the Group’s sustainable development framework. In South Africa, Xstrata is one of the only major mining companies to have satisfied black economic empowerment ownership requirements under the MPRDA and is on track to achieve employment equity, procurement, social development and other targets by 2009 as set out by the Charter.
Integration of acquisitions
Xstrata has grown primarily through the successful completion of a number of large-scale and smaller acquisitions and through the subsequent improvements made in the performance of businesses acquired. Acquisitions and investments in joint ventures will continue to be an important part of our strategy. Acquisitions and investments involve a number of risks, including the risk that businesses acquired are not integrated effectively or that anticipated cost savings or synergies are not realised.
Xstrata has developed and refined an effective and proven integration process over the past six years, which includes rapid risk assessments of acquired operations and the swift implementation of management and reporting structures. The Group has a strong track record in effectively integrating large-scale and smaller acquisitions and investments into Xstrata’s corporate structure. For each transaction, acquisitions have been quickly and effectively integrated, realising operational, financial and strategic improvements and greater than expected cost savings or synergy benefits, as with the major acquisition of Falconbridge in 2006 and again with a number of smaller, bolt-on acquisitions in 2007.
Energy and water supply
Access to a secure supply of electrical energy at a reasonable cost and sufficient water are critical considerations for the continued operation and future growth plans of Xstrata’s operations. Energy supply is subject to constraints in some regions and the cost of energy is, in general, rising. Fresh water supply may be restricted and limits imposed, particularly in arid regions with a significant number of domestic and industrial users.
We manage this risk through implementing energy efficiency plans across the Group and developing energy efficient technologies, for example Xstrata Alloys’ proprietary Premus technology which reduces the energy consumption of ferrochrome smelting by over 20% compared to conventional processes. Long-term energy contracts are negotiated to reduce dependence on spot markets and we seek to diversify power sources and identify alternatives. All operations are required to implement and regularly review a water management plan to reduce fresh water use and maximise on-site water storage and re-use. Storage facilities and usage is regularly monitored, particularly in high-risk areas and, where appropriate, water management strategies are determined to address potential shortfalls or water quality issues.
Operational risks and reserves and resources
Xstrata’s operations may be impacted by a number of circumstances including natural disasters, unexpected geological or technical difficulties, labour disruptions, environmental or safety incidents, causing increased costs, lower production or the suspension of operations. Similarly, the Group’s strategy of “near-mine” exploration, partnerships with junior exploration companies and the acquisition of new resources may not succeed and existing reserves may not be replaced or increased. Reserves and resources information also relies on a number of estimates and assumptions which, if materially inaccurate, could impact on our financial position and asset values.
Our strategy of leveraging existing operations for “near-mine” exploration and of partnering with junior exploration companies results in a more focused approach to exploration, reducing the risks inherent in large-scale greenfield exploration programmes. A number of extensions to resources and reserves were confirmed at Xstrata’s operations in 2007 through this approach. Xstrata’s operational management identifies and manages the risks inherent in mining operations through a comprehensive risk management programme. The Group Reserves and Resources Policy ensures business unit reporting is consistent and that reserves and resources information is compiled by appropriately qualified people and is externally reviewed before publication.
Christopher Mokoena, process operator at Lion ferrochrome smelter, South Africa
Truck maintenance engineer Hector Magna conducts a routine tyre inspection at Lomas Bayas copper mine, north Chile