Operating Review | Zinc

Xstrata Zinc’s EBIT declined by 9% to $1,529 million in 2007 compared to pro forma EBIT in 2006, largely due to the impact of the weaker US dollar against local currencies, which trimmed EBIT by $89 million, and continued cost inflation which impacted earnings by a total of $66 million. These factors were partly offset by stronger lead prices and increased production in Australia.

Despite continued inflationary pressures on costs, Xstrata Zinc achieved real unit cost savings of $45 million in 2007 due to improved productivity and volumes at the Australian operations and higher by-product revenues including as a consequence of improved efficiencies in recoveries. Average C1 cash costs fell from 62.37¢ per pound to 51.69¢ per pound including by-product credits.

Zinc Lead Australia

EBIT for the Australian operations rose by 7% to $515 million in 2007. Stronger lead and silver prices and higher production and sales helped to increase profitability and to offset slightly lower zinc prices, unfavourable exchange rates and inflationary impacts.

Record production was achieved at the George Fisher and Black Star zinc-lead mines, helping to minimise the impact of lost production following the fire in the zinc lead concentrator in September 2007.

Despite geotechnical problems encountered at both George Fisher South and George Fisher North in the first quarter of 2007, production steadily increased to reach record production levels in the final quarter with total ore production of 2.8 million tonnes up by 8% compared to 2006.

During 2007, the Black Star Open Cut mine produced 2.3 million tonnes of ore, a 12% increase on 2006, ensuring the concentrator was fully utilised in the first three quarters of the year. In the fourth quarter, ore production was impacted by a fire in the concentrator feed system.

Ore throughput in the Mount Isa zinc-lead concentrator rose by 9% compared to 2006 to 5 million tonnes, despite the fire incident. Zinc in concentrate production rose by 8% to 227,000 tonnes, with lead in concentrate production of 104,000 tonnes, a 4% decrease from 2006 due to lower head grades and recoveries. The fire impacted production by approximately 13,000 tonnes of zinc and 7,000 tonnes of lead in total. An insurance claim has been prepared for this business interruption. Ore production levels are expected to improve in 2008 as the capacity of the concentrator is increased to 8 million tonnes per annum.

Zinc and lead feed grades were 2% and 15% lower respectively compared to 2006 due to the inclusion of lower grade ore from the open pit Black Star mine. Zinc recoveries were slightly higher while lead recoveries were lower compared to 2006. Further improvements are expected in mechanical availability to maintain rod and SAG mill throughput and in finer grinding to improve mineral liberation in the ball mills in 2008.

Performance at the Mount Isa lead smelter improved in 2007, as a direct result of increased volumes of third-party lead concentrate feed, which partially offset lower volumes of concentrate and lower grade lead feed from the concentrator. Lead in bullion production increased by 6% to 125,600 tonnes.

McArthur River Mine continued its open pit development, mining from Stages B, C and transitional ore from Stage D during the year. Stripping began from Stage E in late 2007 to provide a further mining area to support increased production in 2008. A fall in average head grade from 11% in 2006 to 10% in 2007 was due to the mining of transitional ore from the open pit Stages C and D. Mining production increased by 4% year-on-year.

Zinc metal production increased by 2%, reflecting a 6% increase in throughput tonnage, partially offset by the treatment of transitional ore stockpiles.

At Lennard Shelf, 855,600 tonnes were mined and 912,100 tonnes were milled. Although the tonnage of ore mined and milled in the first year of operation was broadly in line with expectations, lower zinc grades in the ore mined resulted in lower zinc concentrate production. Feed grades were lower than expected due to stope sequencing changes associated with groundwater inflows encountered in the mine. Following the restart of the mill at Lennard Shelf in February 2007, 42,100 tonnes of zinc metal and 12,400 tonnes of lead metal were produced during the year. Concentrate grades and recoveries continue to improve.

Zinc Lead Europe

EBIT at the European operations decreased to $446 million, 13% lower than the prior year due to lower volumes, unfavourable exchange rates, slightly lower zinc prices and inflationary cost impacts.

Zinc production at the European smelters decreased by 4%, primarily due to a failure in one of the two transformers in cellhouse D at San Juan de Nieva smelter in Spain, which led to the smelter running at 90% of capacity for the final seven months of the year. Despite lower zinc production, the roasters ran at full capacity and excess calcine was shipped to Xstrata Zinc’s Nordenham smelter in Germany, realising operational synergies.

In 2007, production at Nordenham smelter was marginally lower than in 2006, comprising saleable zinc from Nordenham’s own production in addition to 7,750 tonnes of slabs from San Juan de Nieva and other external sources. The main reason for slightly reduced output was a shortage in the supply of calcine and an unforeseen shutdown of the roaster. Nordenham smelter improved energy efficiency per tonne of cathode zinc by 2% compared to the previous year.

At Britannia Refined Metals (BRM) Northfleet lead refinery in the UK, lead production during the year was 27% lower than in 2006 at 119,400 tonnes as a result of lower Mount Isa sourced lead, combined with lower levels of third-party lead metal supply compared to 2006.

As a result, force majeure restrictions were imposed on customers for four months and trimmed sales by 29% compared to 2006. Silver production and sales were correspondingly 29% lower than in 2006.

Zinc Lead Americas

Xstrata Zinc Lead Americas operations reported EBIT of $568 million compared to $678 million in 2006. Lower average zinc prices together with slightly lower sales volumes contributed to lower earnings than in the previous year on a pro forma basis.

At the Brunswick mine, ore processed in 2007 decreased by 3% to 3.4 million tonnes. Mine head grades decreased to 8.4% zinc, from 8.7% in 2006, as lower grade resource material was processed. Despite lower head grades, zinc metallurgical recoveries improved to 88% and in 2007 produced 251,800 tonnes of zinc in concentrate, a 7% reduction from 2006. The mine was negatively impacted by a major compressed air line failure in the third quarter, which resulted in the equivalent of 17 days of lost production.

In March, the Brunswick mine was awarded the J.T. Ryan trophy by the Canadian Institute of Mining in recognition of having the best safety record of metal mines in eastern Canada. Brunswick mine has also made improvements in energy management and reduced energy intensity by 6% over the past two years, further reducing costs.

The Brunswick smelter processed a total of 212,000 tonnes of new feed materials, a 12% increase over 2006. A record amount of recycled and secondary feed was processed in 2007, representing 39% of the feed processed and contributing to higher operating margins. Refined lead production at 70,800 tonnes was 1% higher than 2006. In November, the Brunswick smelter was recognised by the New Brunswick Mining Association for the most improved safety performance in the province’s mining industry.

The CEZinc refinery in Quebec produced 291,700 tonnes of zinc metal, a 1% reduction from 2006. Sulphuric acid production of 458,400 tonnes was 4% lower than 2006. A total of 514,900 tonnes of concentrate was processed, a 2% reduction from 2006. Lower zinc concentrate grades and higher internal zinc dust consumption following process changes implemented in late 2006 to improve copper cake production impacted saleable zinc production.

The Kidd zinc hydrometallurgical plant produced 142,500 tonnes of zinc metal a 5% decrease from 2006, due to the absence of a major maintenance shutdown in 2006. In June 2007 a 21-day maintenance shutdown was successfully completed after 19 months of operation.

A project to increase roaster entitlement yielded a 3% improvement and continued advances in reliability have increased roaster on-line time to above historical levels. A lean manufacturing project to reduce unit costs in the cellhouse/casting area was initiated in the fourth quarter.

At Antamina, ore production in 2007 rose by 9% to 12.3 million tonnes (Xstrata’s 33.75% attributable share), boosted by higher zinc head grades of 1.2% compared to 0.7%. The concentrator produced 186,450 tonnes of zinc concentrates (Xstrata’s 33.75% attributable share), an increase of 47% compared to the previous year as a greater proportion of copper-zinc ore was mined compared to copper-only ore, leading to higher zinc head grades and better specific zinc recovery. Zinc metal contained, attributable to Xstrata, rose to 98,450 tonnes, 85% higher than in 2006. The concentrator SAG mill in Antamina was shut down twice during 2007 (for ten days in October and for four days in December) due to problems in the mill’s electrical motor.

Developments

Zinc Lead Australia

Ore production at George Fisher mine is expected to increase in the first quarter of 2008 as hoisting capacity will be supplemented with ore trucked out through the George Fisher South decline. A major new development will link George Fisher North with the surface through a new decline, allowing further increases in ore production and its corresponding truck haulage from the fourth quarter of 2008. A new tailings filter plant and a paste-fill plant are under construction which will allow for increased backfill to match increased ore production. Both facilities are expected to be completed in the fourth quarter of 2008.

Significant improvements were made to equipment installed at the zinc-lead concentrator project during 2007. The expansion project was reviewed and altered in late 2007 and is scheduled to commence commissioning on schedule in the third quarter of 2008 with full production rates by the last quarter of 2008.

Xstrata Zinc’s Handlebar Hill open cut zinc-lead mine north of Mount Isa was approved in June at a capital cost of $61 million. Recent drilling, metallurgical testing and design work has confirmed an open pit reserve of 4.3 million tonnes in an area south of the George Fisher underground mine. Ore will be mined at a rate of up to 1.75 million tonnes per annum, trucked to the Mount Isa zinc-lead concentrator from mid 2008.

The open pit development at McArthur River is proceeding on schedule, with the Barney Creek diversion (99% completed) and the McArthur River Rechannelling (95% completed) to be finished in the second quarter of 2008 following the wet season. The Bund Wall is due to be completed in the third quarter of 2008.

In January 2007, approval was granted to increase the capacity of the concentrator at McArthur River Mine from annual throughput of 1.8 million tonnes of ore to 2.5 million tonnes of ore, for a capital cost of $37 million. It is anticipated that the expanded capacity will be commissioned in the third quarter of 2008. Potential locations for an Albion plant continue to be examined, including the potential for a greenfield smelter on the east coast of Australia or a brownfield expansion at an existing Xstrata Zinc smelter.

At Lennard Shelf a new zone, (Pillara West) was uncovered lying approximately 400 metres west of existing underground workings at Pillara between 180 and 260 metres in depth. It has been roughly delineated on approximately 50 metre centres with average grades in the 6% to 7% zinc range which are typical of the Pillara area. More work is required to better define the zone.

Lady Loretta is a lead-zinc-silver deposit located approximately 140 kilometres from Mount Isa. It is a joint venture between Noranda Pacific Ltd (75%), a wholly-owned subsidiary of Xstrata acquired from Falconbridge in 2006, and Buka Minerals (25%), a wholly owned company of Mineral Securities Limited. In 2007, a pre-feasibility study into a proposed one million tonnes per annum mine was completed and a final report issued. Xstrata has recently started a study investigating potential synergies between Lady Loretta and the Mount Isa Operations.

Zinc Lead Europe

Exploration efforts in Ireland with 23% JV partner Minco have identified significant zinc mineralisation at the Pallas Green property near Limerick. A EUR6 million exploration programme is planned in 2008 to define economic reserves and initiate baseline studies.

Zinc Lead Americas

The development of the Perseverance deposit in Northern Quebec, Canada has continued. It is expected to marginally exceed the original capital budget of $130 million due to the strengthening Canadian dollar. The development is ahead of schedule and the mine will start production by mid-2008. The mine will have an annual production of 228,000 tonnes of zinc concentrate and 35,000 tonnes of copper concentrate with a mine life of five years.

Manuel Félix Jorge Carrón removes skimmings at San Juan de Nieva smelter, Spain

Kelly Whitehurst, Jane Yelland and Jonathon Cowie plant seedlings at the rehabilitation of the river channel at McArthur River Mine, Northern Territory