Nickel

Operations

Financial and operating data
$m	Year ended 31.12.08	Year ended 31.12.07
Revenue	3,105	5,252
INO†	2,622	4,128
Dominican Republic	483	1,124
EBITDA	816	2,577
INO†	697	1,859
Dominican Republic	119	718
Depreciation and amortisation	(475)	(405)
INO†	(432)	(342)
Dominican Republic	(43)	(63)
EBIT (before exceptional items)	341	2,172
INO†	265	1,517
Dominican Republic	76	655
Share of Group EBIT (before exceptional items)	4.7%	24.7%
INO†	3.7%	17.3%
Dominican Republic	1.0%	7.4%
Capital employed	9,102	6,738
ROCE*	4.8%	40.8%
Capital expenditure	1,912	705
INO†	907	460
Dominican Republic	63	35
South America	24	23
Africa	52	54
New Caledonia	866	133
Sustaining	267	281
Expansionary	1,645	424

EBIT variances
	$m
EBIT 31.12.07*	1,967
Sales price**	(1,272)
Volumes	(68)
Unit cost – real	(12)
Unit cost – CPI inflation	(23)
Unit cost – mining industry inflation	(148)
Foreign exchange	(10)
Other income and expenses	(53)
Depreciation and amortisation (excluding foreign exchange)	(4)
XNA acquisition	(36)
EBIT 31.12.08*	341

The decline in Xstrata Nickel’s EBIT (before exceptional items) of approximately 83% to $341 million in 2008 from $1,967 million in 2007 predominantly resulted from the significant collapse in nickel price in the latter half of the year, following record price levels in 2007. Average nickel prices fell by 43% in 2008 compared to 2007, impacting earnings by $1.27 billion. As a result, revenues for the period decreased by 41% to $3.1 billion. Weaker metal prices and the increase in the price of oil led to the mothballing of the Falcondo operation in the Dominican Republic in the second half of the year.

Xstrata Nickel’s total mined nickel production increased by 5% compared to 2007, as the inclusion of Xstrata Nickel Australasia, formed following the acquisition of Jubilee Mines NL in January 2008, more than offset lower production from the existing mines in Canada. Excluding the impact of the acquisition of XNA, overall mined nickel production was 10% lower in 2008 primarily due to the planned lower nickel ore grades as the existing mines in Sudbury and Montcalm approach the end of their lives, the logistics and transportation challenges encountered during extreme weather conditions in the Canadian mines in the first half of 2008 and production difficulties at the Sudbury Strathcona Mill in the second half of the year. Mined ferronickel production in 2008 reduced by 36% from 2007 due to the mothballing of the Falcondo operation in the second half of the year. Lower production resulted in a slight increase in overall real unit costs. Mining inflation continued to impact earnings, as cost decreases lagged materially in 2008 despite the deteriorating economic situation. The primary contributor to mining inflation during 2008 was the oil price variance of $91 million. At Falcondo, the cost of oil soared from $64/bbl in 2007 to $105/bbl in 2008. While sales volume (excluding the one-off impact of nickel inventory sale to Glencore in 2007) increased slightly in 2008, on the back of record production in the Nikkelverk refinery, the increase in the sale of the third-party feed and the decline in sale of own mined feed led to a negative volume variance, as the margin on processing own feed on average was higher than that of third-party materials.

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INO

In 2008, EBIT fell to $265 million, compared to $1,517 million in the previous year, when record prices generated strong financial results.

Refined nickel sales volumes from Xstrata Nickel’s Integrated Nickel Operations (INO), which comprise the Sudbury mines and smelter, Montcalm and Raglan mines in Canada, together with the Nikkelverk refinery in Norway and Xstrata Nickel Australasia (XNA which was formed following the acquisition of Jubilee Mines NL), decreased by 3% compared to 2007. This decrease is mainly due to the impact in 2007 of a one-off inventory sale of approximately 5,300 tonnes of nickel and 400 tonnes of cobalt to Glencore. Excluding this impact, volumes increased by 3% driven by record production at the Nikkelverk refinery of 88,741 tonnes in 2008.

Mined nickel production from Xstrata Nickel’s Canadian mines decreased by 10% to 46,913 tonnes, reflecting lower production from Craig and Thayer-Lindsley mines as these operations approach the end of their productive lives. The impact of lower mined production was offset by a 5% increase in third-party feed, as well as the benefit of nickel concentrate received from Xstrata Nickel Australasia.

Sudbury and Montcalm

Mined nickel production from the Sudbury operations was impacted by planned lower nickel ore grades, which fell to 0.98% from 1.04% in 2007 as existing Sudbury mines approach the end of their productive life. In response to weak market conditions, the accelerated closure of Craig and Thayer-Lindsley nickel mines was announced in November 2008 with their production to be replenished by the new, low-cost Nickel Rim South mine. The Nickel Rim South growth project is due to begin production in 2009 and will transform the average operating cost of Sudbury to a low-cost, sustainable complex that will remain robust throughout the economic cycle. Total mined ore processed through Sudbury’s Strathcona mill declined by 20% to 1.5 million tonnes as head grade declined and the mill experienced production difficulties in the second half of the year. Lower grades at Montcalm and the logistics challenges caused by harsh winter weather in the first half of the year also impacted production of mined nickel, which was 12% lower than in 2007.

At the Sudbury smelter, production of nickel in matte declined by 4% to 64,906 tonnes in 2008 as a result of lower mine feed, partially offset by record third-party materials and the introduction of concentrate from Xstrata Nickel Australasia. Production of copper in matte decreased by 19% to 17,811 tonnes, while cobalt in matte increased by 6% to 2,648 tonnes.

Raglan

The Raglan mine’s expansion in the Canadian Arctic during 2008 increased annual mined ore by 17% to 1.3 million tonnes in 2008. Production of nickel-in-concentrate decreased slightly, primarily as a result of lower head grades in the first half of the year. Head grade improved in the second half of the year to 2.30% as mining transitioned into new ore zones.

Xstrata Nickel Australasia

Metal in concentrates produced for the period commencing 1 February 2008 (the date of the completion of the Jubilee acquisition) to 31 December 2008, totalled 7,610 tonnes of nickel, 303 tonnes of copper and 120 tonnes of cobalt. Total ore milled in the period was 262,857 tonnes. In October 2008, the Sinclair mine commenced operations on schedule and budget and continued the ramp up of the project towards the end of the year. In order to unlock the potential synergy from its formation, XNA began shipping its concentrates to the Sudbury smelter for processing in the fourth quarter of 2008.

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Nikkelverk

Nickel production at the Nikkelverk refinery set a new annual record of 88,741 tonnes nickel and 37,027 tonnes copper, 1% and 8% higher than in 2007 respectively. These production records were mainly achieved as a result of increased operational efficiency at the nickel and copper tankhouses.

Cobalt production was unfavourably impacted by lower cobalt-content feed and decreased by 6% compared to the previous year. Total production of precious metals increased by 4% from 2007 and production records for palladium, rhodium and gold were achieved. Overall production costs benefited from record precious metal prices in the first half of the year and increased production volumes.

Falcondo

In 2008, EBIT from the Dominican Republic decreased to $76 million, compared to $655 million in 2007, as a result of higher oil prices and the decline in nickel prices.

The Falcondo operation in the Dominican Republic was temporarily suspended in August, and subsequently went into care and maintenance in December due to continued weak market conditions. Falcondo is traditionally a swing producer and the combination of high oil prices, which make up the majority of Falcondo’s costs, and low nickel prices in 2008 meant that the operation was no longer economically viable. As a result of the shutdown, production from Falcondo fell by 36% to 18,782 tonnes compared to the prior year and sales volumes decreased by 37% to 19,847 tonnes.

Summary production data
	Year ended 31.12.08	Year ended 31.12.07
Total mined nickel production (t) (contained metal)	54,523	52,108
Total mined ferronickel production (t) (contained metal)	18,782	29,130
Total mined copper production (t) (contained metal)	27,703	31,425
Total mined cobalt production (t) (contained metal)	1,341	1,412
Total refined nickel production (t) (payable metal)	107,523	116,720
Consolidated nickel cash cost (C1)  – post by-product credits (US$/lb)	4.68	4.04
Consolidated ferronickel cash cost (C1)  – post by-product credits (US$/lb)	8.07	6.16