Operating Review | Alloys

Xstrata Alloys EBIT rose by 66% in 2007, boosted by higher volumes and sales prices for ferrochrome and platinum, partly offset by vanadium prices, which were down from record levels in 2006. Real unit cost savings of $44 million were achieved, largely due to improved productivity at the ferrochrome operations as production was ramped up to respond to higher demand. Improved efficiencies partially offset the impact of CPI and mining sector inflation.

Chrome

Revenue for 2007 was 42% higher than in 2006, predominantly driven by robust global demand for ferrochrome and consequent higher average prices. Attributable saleable production of 1.2 million tonnes of ferrochrome was 27% higher than in the previous year as all previously idled furnaces were brought back into production.

EBIT more than doubled to $266 million, due to higher average prices and good cost control, in an environment of high mining sector inflation. Increased production volumes positively impacted fixed costs and offset increases in higher variable costs resulting from higher energy and coke costs as well as ore purchased from third parties.

To meet increased demand from the smelters in 2007, chromite ore production was increased at the Thorncliffe, Helena and Waterval mines with the opencast reserves at Boshoek being developed toward the end of the year. UG2 chrome ore recovery plants at Eastern Platinum Mines and Mototolo Platinum were commissioned in 2007, providing a source of low cost UG2 chrome ore.

The commissioning of the Bokamoso pelletising plant, the largest chrome ore pelletising and sintering operation in the world, was successfully completed within budget in the second half of the year.

The plant provides additional agglomeration capacity to enable all ore fines from the chrome mining operations, including UG2 chrome ore recovered from PGM mining, to be agglomerated and consumed by the smelters on the Western Limb. The Bokamoso plant is expected to reduce operating costs whilst improving environmental performance and operational flexibility.

All submissions to the Department of Mineral and Energy for New Order Prospecting Rights, New Order Mining Rights and conversions have been completed. To date, all applications for New Order Mining and Prospecting Rights including 50% of Mining Right conversion applications have been granted by the Minister of Minerals and Energy.

Vanadium

Revenue decreased by 20% to $159 million while EBIT decreased by 39% to $64 million as volumes came under pressure due to production problems and a shortage of vanadium-rich spinel during the second half of the year. Vanadium pentoxide and ferrovanadium production volumes declined by approximately 13% compared to 2006.

Platinum Group Metals

Revenue for 2007 rose significantly, driven by higher prices resulting from continued robust global demand for platinum group metals and reflecting the first full year of production from the Mototolo joint venture which commenced production in the final quarter of 2006.

Consequently, attributable production levels increased to 83,180 ounces in 2007 from 9,680 ounces in 2006. Development of the on-reef decline clusters has progressed with sufficient mine face-length exposed to sustain steady state production of 200,000 tonnes per month. Production is continuing to ramp up and is expected to reach steady state production in the first quarter of 2008. The 200,000 tonnes per month MF2 concentrator is performing according to design.

Xstrata’s acquisition of Eland Platinum was completed on 14 November 2007 and has provided immediate access to the operational Elandsfontein concentrator and open cast mine, in addition to access to significant further growth opportunities. Milling commenced in December with the commissioning of the concentrator. First concentrate was delivered during the same month.

Developments

Chrome

The Lion smelter experienced a slower than expected production ramp up in 2007, largely due to equipment failure and the lack of readily available critical skills. Furnace components are currently on order to improve furnace availability and additional engineering and operational staff have been allocated to the operation.

Furnace shutdowns required to implement improvements will take place during the second quarter of 2008, after which the plant is expected to produce at design capacity on a sustainable basis.

The Bokamoso pelletising plant was commissioned on schedule and within budget. By December, production at this plant had already achieved 80% of design capacity at production costs well below budget. Improvements to the raw material loading and final product handling systems are being installed and should be completed by the end of the first quarter of 2008. The plant is on track to attain full operating capacity of some 1.2 million tonnes per annum by the end of the first quarter of 2008.

Vanadium

Agreements are in the process of being finalised to give effect to the commercial terms of the Black Economic Empowerment (BEE) transaction agreed with the Bakwena Ba Mogopa Traditional Community during 2006, following changes in the Bakwena Ba Mogopa chieftainship. It is anticipated that the outstanding conditions precedent will be satisfied within the next few months, including South African Revenue Service taxation rulings, regulatory and statutory consents from the Minister of Land Affairs and the Minister of Minerals and Energy.

Platinum

Eland Platinum was successfully integrated into Xstrata Alloys by the end of 2007. The opencast operation is producing approximately 200,000 tonnes or ore per month from two box cuts with a mine life of three years for these two pits.

The sinking of two decline systems will commence during the first half of 2008 in order to enable underground mining to commence, thereby sustaining production levels once ore from the opencast operation is depleted.

The Elandsfontein operation has the potential to increase production levels to around 450,000 tonnes of ore per month, which at full production equates to output of around 600,000 ounces of PGMs. Project work to install the required capacity will commence early in 2008, as well as an extensive exploration programme. Mine life at current production levels is projected to be 50 years.

In early 2008, Xstrata Alloys agreed to acquire New Order Prospecting rights from Nkwe Platinum Limited for $12 million in respect of three properties situated adjacent to Xstrata’s Elandsfontein mine in the Western Limb of the Bushveld Complex and lie up-dip from a further property acquired through Xstrata’s acquisition of Eland Platinum. These properties constitute a natural extension to existing opencast mining at Elandsfontein.

Eric Sekatsi, spiral attendant at Xstrata Alloys’ Kroondal mine, South Africa

Sizo primary school in Lydenburg is supported by Xstrata Alloys