Operating Review | Nickel

Xstrata Nickel achieved record financial results and production in 2007. Revenues for the period rose to $5,252 million, 56% or approximately $1.9 billion higher than the comparative period in 2006, on a pro forma basis. The significant increase was primarily due to the robust performance of nickel commodity prices during the period and record nickel sales, leading to a 133% increase in EBIT from $931 million to $2,172 million in 2007. Volumes were boosted by higher production and sales, together with the once-off contribution to EBIT of $205 million realised through the distribution agreement with Glencore International AG entered into in March 2007.

The full impact of prices and volumes was partly offset by the significantly weaker US dollar and the hyperinflationary cost pressures confronting the mining sector. Despite these cost pressures, which included the $26 million impact of higher oil prices at Falcondo, real cost savings of $19 million were achieved due to improved operational efficiencies at Nikkelverk and the positive effect of production increases in the Canadian mines and smelter.

Integrated Nickel Operations (INO)

Sales volumes at the Integrated Nickel Operations, which comprises the Sudbury mines and smelter, Montcalm and Raglan mines in Canada, together with the Nikkelverk refinery in Norway, increased by 13% compared to 2006. The increase was mainly attributable to one-off inventory sales of approximately 5,300 tonnes of nickel and 400 tonnes of cobalt as a result of the distribution agreement entered into with Glencore International in March 2007. The distribution agreement also reduced working capital requirements by approximately $400 million. Volumes were also boosted by record production from the Nikkelverk refinery of 87,600 tonnes.

Sudbury and Montcalm

Mined nickel production at the Sudbury operations was impacted by planned lower nickel ore grades, which fell to 1.04% compared to 1.11% in 2006 as existing mines approached the end of their lives. Sudbury will be transformed by the introduction of the Nickel Rim South and Fraser Morgan growth projects, which will add 16,000 tonnes and 7,500 tonnes of nickel per year respectively, at full production capacity and significantly reduce unit costs. The amount of mined ore processed in 2007 through Sudbury’s Strathcona mill declined by 1% to 1.9 million tonnes and custom ores milled also decreased by 15% to 311,100 tonnes.

At the Sudbury smelter, production of nickel in matte increased by 11% to 67,600 tonnes, primarily due to higher levels of concentrate received from the Raglan mine and record nickel content of custom feed concentrates, which more than offset lower volumes of nickel concentrate from Montcalm. Production of copper and cobalt in matte increased by 5% to 22,000 tonnes and 6% to 2,500 tonnes respectively. Enhanced operational flexibility and profitability was boosted at the Sudbury operations through separating and sending copper concentrates to be processed by Xstrata Copper, unlocking nickel smelter capacity and creating significant value-enhancing custom feed capacity and capability. The Sudbury smelter achieved record production rates while operating within sulphur dioxide ground level concentration limits.

Milled tonnage at Montcalm increased by 6% to 940,900 tonnes compared to 2006 due to higher throughput rates at Kidd metallurgical site and extra tonnage processed at Strathcona mill. This was achieved despite declining ore grade from the mine as it approaches the end of its mine life. The lower ore grade caused nickel in concentrate production to decrease by 7% to 10,100 tonnes while copper in concentrate was 4% lower.

A number of Sudbury operations achieved significant safety milestones, including two years without a lost time injury at the Strathcona mill, one year without a lost time incident at Craig mine and one year without a lost time injury at the Thayer Lindsley mine and Sudbury smelter.

Raglan

The Raglan mine in the Canadian Arctic increased total mine production by 13% to 1.13 million tonnes, achieving its 2007 target and is on track to achieve an expanded production rate of 1.3 million tonnes per annum by the end of 2008. Record mill throughput was 9% higher than 2006 and was achieved as a result of increased production from the mine, better ore grades, which increased from 2.56% in 2006 to 2.58%, and greater nickel recovery from the mill. Additionally, the total recordable injury frequency rate was reduced by 50%.

Nikkelverk

Nickel production at the Nikkelverk refinery in Norway – a low-cost, high recovery producer – increased to a record 87,600 tonnes for 2007 from 82,000 tonnes during the same period last year. The production increase is largely due to increased volumes of nickel in matte from the Sudbury smelter and improved operational efficiency.Production of copper was unfavourably impacted by a power failure in May 2007 together with shortfalls in third party matte that affected volume and quality into the final quarter. Copper production for 2007 declined to 34,200 tonnes from the record 39,700 tonnes during 2006. Production of cobalt was impacted by reduced supply of cobalt-containing custom feed materials and fell to 3,900 tonnes from 4,900 tonnes in 2006. However, total production of precious metals increased by 20% compared to 2006, setting production records for platinum, palladium, gold and rhodium.

In 2007, Nikkelverk achieved an outstanding safety record, reaching one million hours without a lost time injury for the first time in its 97-year operational history.

Dominican Republic

Revenue from the Falcondo operation in the Dominican Republic rose by 59% to $1.1 billion in 2007. Higher average nickel prices and slightly higher sales volumes were the main drivers of increased revenues. Production declined slightly by 2% to 29,100 tonnes. The distribution agreement with Glencore International led to the incremental sale of 1,300 tonnes of inventory pipeline from Falcondo during the first half of 2007. Strong sales volumes were only 1% or 300 tonnes higher than in the comparative period, which was boosted by 2,500 tonnes of accumulated inventory due to weak demand in 2005.

Higher oil prices impacted unit costs by $26 million, but were offset by higher average ferronickel prices, boosting 2007 EBIT to $655 million. In October 2007, the Falcondo operation was battered by Tropical Storm Noel and related flooding, interrupting operations for three days and causing the facility to run at half capacity for an additional five days. The resultant impact on production was more than offset by delaying a scheduled maintenance shutdown from November 2007 to the second quarter of 2008.

Xstrata Nickel is actively engaged in rebuilding affected communities and has offered assistance by way of a $1 million donation and in-kind support to the people and local governments of the Dominican Republic.

Falcondo had the lowest injury frequency rates in Xstrata Nickel, including reaching more than two million hours without a lost time injury.

The Falcondo Foundation supports local schools in the Dominican Republic

Slag tapping at the Sudbury Smelter, Canada

Developments

Koniambo Project

The 60,000 tonnes per annum Koniambo Nickel project in New Caledonia received Board approval in October 2007. Project development will entail investment of $3.8 billion. The current financing plan envisages Xstrata’s partner SMSP contributing around $500 million toward the project, with the remainder to be funded by Xstrata in return for a proportionate share of the project’s cash flows (c.81%) over the first 25 years of operation.

The early construction programme commenced in February 2007 and is well under way with construction of the Stage 1 construction camp completed in December. Approximately 330 people are currently employed by the project in New Caledonia, 60% of who are from local communities in the North Province. The project’s primary engineering and procurement centre has been established in Kuala Lumpur, Malaysia, and several large construction contracts will be awarded during the early part of 2008, marking the commencement of major construction activities. First ore is expected to be processed during the first half of 2011, with ramp up to full production forecast to be complete in 2013.

Kabanga

The Kabanga project in Tanzania is a 50:50 joint venture between Xstrata Nickel and Barrick Gold Corporation. Indicated resources at Kabanga are estimated at 9.3 million tonnes at 2.35% nickel and an additional 38.8 million tonnes of inferred resources at 2.8% nickel with a 1% nickel equivalent cut off grade. The main Kabanga prospecting licence has been successfully extended to 30 June 2009, securing tenure beyond the anticipated mining licence application in early 2009.

During the three-year feasibility work plan, Xstrata Nickel is expected to fund the first $145 million to maintain its 50% share in the project. Approximately $105 million has been incurred to date. The pre-feasibility study for the project is due to be completed at the end of 2008 with the execution phase of the project expected to commence in 2009.

Araguaia

The Araguaia project, located in the north-western Brazilian state of Para, is currently in a scoping stage, with pre-feasibility scheduled to commence in 2008. Araguaia benefits from substantial existing resources, a highly prospective land position and well developed regional infrastructure including rail, road, power generation and power transmission.

Continued exploration success in 2007 led to substantial additional mineralisation being added to the Araguaia resource base. During the year, 46,300 metres of diamond drilling were completed resulting in revised mineral resource estimates at Serra do Tapa, Vale dos Sonhos and Pau Preto. The inferred resource base now stands at 101.5 million tonnes at 1.45% nickel at a 1% nickel cut off grade or 69.4 million tonnes at 1.6% at a 1.2% cut off. Drilling has now been completed to delineate the Pau Preto and Escalada deposits and revised mineral resource estimates incorporating the data from the drilling at all four deposit areas are expected to be complete by mid-2008.

Sudbury

In Sudbury, the Strathcona concentrator is preparing to reactivate 1 million tonnes per year of milling capacity to be used for treating own sourced and custom ores. Work is also now under way to increase the Sudbury smelter capacity incrementally to at least 80,000 tonnes of nickel contained in matte to meet the needs of current mine plans and available custom feeds.

Vale Inco synergies

The commercial relationship between Xstrata Nickel and Vale Inco in the Sudbury area has resulted in Xstrata Nickel processing a record level of intermediate nickel feed from Vale Inco in 2007. Technical and commercial teams continue to work closely to unlock a number of value propositions from the two companies’ operations in the region. Initial evaluations have been completed of four potential synergy opportunities in the Sudbury basin, including the Thayer Lindsley/Blezard operations, North Range mining complex, mini pit processing and smelting of intermediate feeds. Discussions are now focused on exploring implementation arrangements to take advantage of the current robust pricing environment and to extend asset lives.

Nickel Rim South

The Nickel Rim South project in the Sudbury Basin remains on schedule to ramp up to 60% of its ultimate 1.25 million tonne per annum production capacity in 2009, with full production in 2010, and is within its current stage budget of C$627 million. Nickel Rim South is expected to provide a high value ore feed for more than 15 years, while significantly reducing Sudbury’s unit costs, and will play a key role in transforming Xstrata Nickel’s Sudbury operations.

During 2007, surface infrastructure was constructed and is operational, following the completion of the sinking of the production and ventilation shafts. Preliminary underground drilling results are consistent with expectations and more than 80,000 metres of definition drilling are scheduled for 2008 for the purposes of defining deposits. To date, environmental and safety performance have been exceptional with an industry-leading lost time injury frequency rate of 0.64 per million hours worked.

Fraser Morgan

The Fraser Morgan project is being accelerated to take advantage of current commodity price levels. The project enjoys the advantage of low capital costs due to the ability to share infrastructure with the current Fraser mine. The project moved into the feasibility phase in October 2007. Mine production is scheduled to start in 2009, ramping up to full production of an estimated 7,500 annual tonnes of refined nickel and a mine life of eight years in 2010.

Once complete in 2010, nickel production from Sudbury mines will increase to 34,000 tonnes of contained nickel from current level of 16,000 tonnes and will extend the life of the Sudbury operations by more than 20 years. In addition, work continues on the Onaping Depth project, which could potentially add another 10,000 tonnes of contained nickel for downstream processing.

Thayer-Lindsley

In July 2007, an investment of $8.7 million in the Thayer-Lindsley mine in Sudbury was announced to access additional ore, enhance productivity and extend the mine life by more than one year, to the end of 2012. The Thayer-Lindsley mine began production in 1991 and produces nickel, copper and precious metals.

Nikkelverk

Current expansion plans for the Nikkelverk refinery will enhance sustainable capacity to 88,400 tonnes during 2008, whilst further potential exists for low-cost incremental expansion to 105,000 tonnes of refined nickel metal by 2010. Precious metals capacity will also expand to 600,000 ounces in 2008, 18% higher than 2007 production.

Falcondo

A scoping study was initiated in 2007 to examine the potential to convert Falcondo’s primary fuel source from oil to coal, substantially reducing operating costs by approximately $1.50 per pound. The project also includes the conversion of Falcondo’s oil refinery to a commercial oil refinery, with the potential to generate significant additional returns.

The scoping study phase of the Loma Miranda Project, 25 kilometres from the Falcondo plant site, was completed in the final quarter of 2007, including the commencement of the Environmental Baseline Study which will be completed during the pre-feasibility phase. This area was drilled in the 1980s and has 15.2 million tonnes of resources at 1.56% nickel. The additional mining area would increase Falcondo’s production by improving grades and extending mine life.

In addition, an exploration programme at Loma Ortega 3 area, an extension of the operating Loma Ortega mine, identified 6.9 million tonnes of mineralisation not included in resources at a grade of 1.50% nickel. Falcondo has initiated surface rights and land purchase negotiations.

Raglan

Exploration results at Raglan in northern Quebec have confirmed Zone 5-8 as the largest mineralised zone in Raglan’s history, adding an estimated 4.5 million tonnes grading 2.80% nickel of inferred resources in 2007.

Mine production at Raglan is planned to increase to more than two million tonnes of ore per annum. Work is currently under way to increase production to 1.3 million tonnes per annum by the end of 2008 and additional infrastructure is expected to be implemented to allow a further expansion to reach 1.5 million tonnes by 2011 and potentially double current production by 2013.

Jubilee Acquisition

In October 2007, Xstrata made an all-cash, friendly AUD23 per share offer for Jubilee Mines NL in Western Australia, valuing it at AUD3.1 billion. Xstrata’s bid resulted from a competitive auction run by Jubilee and was wholly endorsed by Jubilee’s Board of Directors.

Xstrata assumed management control of Jubilee on 4 February 2008 and established Xstrata Nickel Australasia (XNA) as a new operating unit of Xstrata Nickel. The offer closed on 22 February, at which date Xstrata Nickel owned 97% of the issued share capital and commenced compulsory acquisition of the remaining minority stake.

XNA brings Xstrata Nickel immediate access to targeted production of 30,000 tonnes of nickel in concentrate by 2012, geographic diversification and introduces substantial near-term growth potential. XNA includes the exceptionally high grade Cosmos operation, the nearby Sinclair project, where construction is under way and first nickel concentrate production is expected in the latter part of the year, as well as the Anomaly 1 project. The combination of two of the most successful exploration teams in the nickel industry, together with XNA’s highly prospective regional land position, offer excellent prospects for significant growth in the region.

Mike Young starts up the rod mill at Strathcona mill, Sudbury

Core logging and storage at the Kabanga nickel project, Tanzania