Consolidated Operational Results
Robust demand for commodities and stable economic conditions in the first half of the year were interrupted by the severe and sudden impact of the global financial crisis on the availability of liquidity and expectations for global economic growth.
While zinc and nickel prices were markedly lower in the first half compared to the record high levels of 2007, copper prices traded at or near historic highs in the early part of the year and very tight coking and thermal coal markets supported record spot and contract settlements. As the full scale of the global crisis became evident, ultimately culminating in the failure of several financial institutions and a complete paralysis of credit markets in the autumn, commodity prices declined dramatically.
Overall, revenue for the year declined marginally compared to 2007 to $28 billion. EBITDA decreased by 11% to $9.7 billion, with EBIT 17% lower at $7.3 billion. The impact of lower prices on Xstrata’s earnings was contained to $49 million, as the impact of lower base metal prices was largely offset by the benefit of record coal contracts in 2008 and strong prices for Xstrata Alloys’ products. The US dollar strengthened against most currencies, with particularly material increases against the currencies of commodity-based economies, adding $207 million to EBIT compared to the prior year. However, as with prior years, the headwinds of higher industry input costs together with CPI inflation continued to erode earnings by $1,257 million compared to 2007, as cost depreciation lagged the sharp declines in commodity prices and economic conditions.
| EBIT variances | |
|---|---|
| $m | |
| EBIT 31.12.07* | 8,587 |
| Sales price** | (49) |
| Volumes | (378) |
| Unit cost - real | 184 |
| Unit cost - CPI inflation | (464) |
| Unit cost - mining industry inflation | (793) |
| Unit cost - foreign exchange | 207 |
| Acquisitions | 211 |
| Other income and expenses | (68) |
| Depreciation and amortisation (excluding foreign exchange) | (176) |
| EBIT from operations 31.12.08 | 7,261 |
- * Excludes one-off impact of nickel inventory sale to Glencore in 2007 of $205 million
- ** Net of commodity price-linked costs, treatment and refining charges
Reduced production volumes impacted earnings by $378 million year-on-year, as record coal, zinc and lead concentrate, platinum and nickel production was offset by lower copper and ferronickel volumes, and, to a lesser extent, the impact of ferrochrome furnace suspensions in the fourth quarter.
The inclusion of the acquired Tahmoor, Ravensworth underground coal operations and an additional 50% interest in Narama, together with productivity improvements at Newlands Northern underground mine and the ramp up of Glendell and the Ulan Underground to full design capacity, delivered record volumes and cost efficiencies at Xstrata Coal.
Zinc production and sales volumes benefited from concentrator expansions in Australia and the commencement of production at the Perseverance mine in Canada on 1 July 2008.
Copper volumes for the year were impacted by operational difficulties and planned lower head grades at Mount Isa and Alumbrera mines. Ferronickel production was lower as a result of the suspension and subsequent mothballing of the Falcondo operation in the second half.
Real cost savings of $184 million were achieved in 2008, marking a seventh consecutive year of real cost savings. Savings were achieved through productivity improvements at the zinc and coal operations, and the ramp up and prioritisation of lower cost production at Xstrata Alloys’ Lion smelter which, together with the Bokamoso pelletising plant, has exceeded the expected reduction in overall unit costs. Xstrata Coal also benefited from the improved performance of the Newcastle Port and demonstrated the flexibility of the diverse portfolio of its operations through the opportunistic sale of stockpiles during the adverse weather in Queensland. While higher input costs continued to weigh on earnings in 2008, mining sector inflation is expected to moderate in the near term due to the poor macroeconomic environment, lower commodity price-linked costs including royalties and labour bonuses, and curtailments to mine production across the industry. In particular, lower oil prices will have a significant impact on fuel and energy costs.
Higher earnings from acquisitions include the acquired Resource Pacific coal assets following completion of the transaction in February 2008.
Other income and expenses include the negative impact of the introduction of export retention taxes by the Argentine government, which reduced earnings at Alumbrera. In addition, higher standing charges for idled chrome furnaces, the impact of lower nickel ore grades and the absence of gains on disposal of nickel exploration properties in 2007 also resulted in a reduced EBIT compared to the prior year.
| Average commodity prices | ||||
|---|---|---|---|---|
| Unit | Average price 2008 |
Average price 2007 |
% change |
|
| Australian FOB export coking* | $/t | 232.5 | 98.1 | 137 |
| Australian FOB export semi-soft coking* | $/t | 157.5 | 62.5 | 152 |
| Australian FOB export thermal coal* | $/t | 95.6 | 51.2 | 87 |
| Americas FOB export thermal coal* | $/t | 80.9 | 52.3 | 55 |
| South African export thermal coal* | $/t | 78.4 | 51.7 | 52 |
| Copper (average LME cash price) | $/t | 6,956 | 7,139 | (3) |
| Nickel (average LME cash price) | $/t | 21,104 | 37,089 | (43) |
| Lead (average LME cash price) | $/t | 2,084 | 2,594 | (20) |
| Zinc (average LME cash price) | $/t | 1,870 | 3,257 | (43) |
| Ferrochrome (Metal Bulletin) | ¢/lb | 175.8 | 89.3 | 97 |
| Ferrovanadium (Metal Bulletin) | $/kg | 61.2 | 37.2 | 65 |
| Platinum (average LBM cash price) | $/oz | 1,564 | 1,337 | 17 |
- * Average received price
LME prices continued to exhibit dramatic volatility, with copper prices peaking at $8,730 per tonne in July, before falling to a low of $2,845 per tonne in late December. Average coal prices were significantly higher than in the prior year, reflecting record contract prices from April and robust spot prices which peaked at around $170 per tonne. At the end of 2008, spot coal prices had declined along with other fuels, to approximately $80 per tonne. The outlook for thermal coal demand remains robust into 2009 as coal retains its cost-competitive position compared to alternative fuels. The majority of LME metals are currently trading at unsustainable levels at or below industry marginal costs, resulting in a significant proportion of current production becoming cash negative. Rapid industry capacity cuts are starting to take effect as attempts are being made to mitigate cash losses and to align production with demand. Furthermore, significant existing and future capacity is being curtailed in the face of limited availability of liquidity and debt funding, particularly for junior companies.
| Currency table to $ (USD) | |||||
|---|---|---|---|---|---|
| Average 2008 |
Average 2007 |
% change |
At 31.12.08 |
At 31.12.07 |
|
| USD:ARS | 3.16 | 3.12 | 1 | 3.45 | 3.15 |
| AUD:USD | 0.85 | 0.84 | 1 | 0.70 | 0.88 |
| USD:CAD | 1.07 | 1.07 | – | 1.22 | 1.00 |
| USD:CHF | 1.08 | 1.20 | (10) | 1.07 | 1.13 |
| USD:CLP | 524 | 522 | – | 637 | 498 |
| USD:COP | 1,968 | 2,075 | (5) | 2,249 | 2,018 |
| USD:PEN | 2.92 | 3.13 | (7) | 3.13 | 3.00 |
| EUR:USD | 1.47 | 1.37 | 7 | 1.40 | 1.46 |
| GBP:USD | 1.85 | 2.00 | (8) | 1.46 | 1.98 |
| USD:ZAR | 8.27 | 7.05 | 17 | 9.32 | 6.86 |
Comparison of average 2008 to 2007 exchange rates, masks significant fluctuations during the year. The US dollar strengthened significantly against the Australian dollar and South African rand in the second half of 2008 as investors sought a safe haven currency in turbulent markets and local ‘commodity-based’ currencies weakened in line with prices. The ongoing relative strength of the US dollar provides a significant mitigant to the decline in commodity prices through its impact on unit costs.