Zinc

Operations

Financial and operating data
$m	Year ended 31.12.08	Year ended 31.12.07
Revenue	3,202	4,726
Zinc lead Australia	360	519
Lead Europe	486	467
Zinc Europe	1,308	2,192
Zinc North America	971	1,414
Zinc Peru**	77	134
EBITDA	444	1,822
Zinc lead Australia	41	575
Lead Europe	16	10
Zinc Europe	195	479
Zinc North America	133	607
Zinc Peru**	59	151
Depreciation and amortisation	(331)	(293)
Zinc lead Australia	(95)	(60)
Lead Europe	(4)	(4)
Zinc Europe	(44)	(39)
Zinc North America	(155)	(157)
Zinc Peru**	(33)	(33)
EBIT	113	1,529
Zinc lead Australia	(54)	515
Lead Europe	12	6
Zinc Europe	151	440
Zinc North America	(22)	450
Zinc Peru**	26	118
Share of Group EBIT	1.6%	17.4%
Australia	(0.7)%	5.9%
Europe	2.2%	5.1%
North America	(0.3)%	5.1%
Zinc Peru**	0.4%	1.3%
Capital employed†	5,421	5,089
ROCE*	2.7%	45.1%
Capital expenditure	655	504
Australia	460	334
Europe	91	60
North America	104	110
Sustaining	278	219
Expansionary	377	285

EBIT variances
	$m
EBIT 31.12.07	1,529
Sales price*	(1,390)
Volumes	48
Unit cost – real	87
Unit cost – CPI inflation	(44)
Unit cost – mining industry inflation	(74)
Unit cost – foreign exchange	(32)
Other income and expenses	7
Depreciation and amortisation (excluding foreign exchange)	(18)
EBIT 31.12.08	113

Transporting ore from the George Fisher mine to the Mount Isa concentrator, Queensland, Australia. Production in 2008 increased by 10% at George Fisher

Xstrata Zinc’s EBIT declined to $113 million from $1,529 million in 2007, largely due to the impact of lower zinc and lead prices which reduced earnings by $1,390 million. Continued mining sector and CPI inflation impacted earnings by a total of $118 million as cost reductions, resulting from current economic conditions, lagged. Major items included higher electrical energy prices in Europe and increased contract labour costs across the operations. However, inflationary impacts were more than offset by real cost savings and improved volumes, which together contributed $135 million to earnings. Cost savings of $87 million were achieved primarily as a result of enhanced productivity from higher volumes and operating efficiencies. Consolidated C1 cash costs increased from 51.7¢ per pound in 2007 to 58.3¢ per pound in 2008, mainly due to higher mining industry inflation, partially offset by increased volumes and by-product credits.

Expansions at the Australian operations and the commencement in July of production at Perseverance mine increased zinc in concentrate production by 17% compared to 2007, despite the closure in August of the Xstrata Zinc-Teck Cominco joint venture Lennard Shelf mine in Western Australia. Zinc metal production was 6% lower in 2008 due to a transformer failure at the San Juan de Nieva smelter and a six- week strike at Kidd smelter.

Lead in concentrate production rose by 18% in 2008 due to expansions, higher grades and improved concentrator recoveries at the Australian operations. Lead metal production increased by 16% as higher volumes of Mount Isa lead concentrate were refined at Northfleet.

Zinc Lead Australia

Despite a strong operational performance and improved volumes, Xstrata Zinc’s Australian operations recorded an operating loss of $54 million, as declining prices, lower mined grades and higher input costs outweighed the positive impact of increased ore throughput and improved recoveries at the Mount Isa zinc-lead concentrator and higher mined production.

George Fisher mine increased production in 2008 by 10% to 3.1 million tonnes. The completion of the KG53 decline/incline project in September allowed for production from George Fisher North Upper Level to be trucked to the surface in the fourth quarter of 2008.

The Black Star Open Cut operation has maintained ore production, complementing feed from the George Fisher and Handlebar Hill open cut mines to ensure the concentrator was fully utilised. Handlebar Hill Open Cut mined first ore in June 2008 and produced 980,050 tonnes of ore during the year.

Performance at the Mount Isa zinc-lead concentrator improved significantly and throughput increased from 5.0 million tonnes in 2007 to 6.1 million tonnes in 2008 as the expansion project progressed. Zinc metal in concentrate rose by 25% to 283,100 tonnes. Real cost savings were achieved through optimising reagent usage and improvements in energy efficiency. These improvements were partially offset by inflationary increases in the price of many consumables.

In 2008, the Mount Isa lead smelter achieved a record year with production up by 33% to 167,303 tonnes of crude lead. This was the result of increased concentrate feed from the zinc-lead concentrator and increased volumes of third-party lead concentrate feed.

McArthur River Mine continued its open pit development, mining from Stage D and Stage E with stripping commencing on Stage F. Mining production increased marginally over 2007 levels to 2 million tonnes. Average head grades decreased from 10.2% in 2007 to 9.6% in 2008 in line with the mine plan.

Concentrator throughput at McArthur River Mine increased by 12% to 2.1 million tonnes following the commissioning of increased concentrator capacity in the third quarter. Zinc metal in concentrate increased by 3% to 142,460 tonnes, due to increased throughput tonnage, but was partially offset by lower feed grade to the mill.

Zinc Lead Europe

EBIT at the European operations of $163 million declined in line with lower prices and slightly lower zinc metal volumes.

Consolidated zinc metal production in 2008 decreased by 4%, primarily due to the failure of a cellhouse transformer at the world-class San Juan de Nieva smelter that was partially offset by slightly higher production from the Nordenham smelter in Germany. Despite the failure, the San Juan de Nieva smelter ran at 90% capacity for 11 months and the roasters ran at full capacity, allowing 19,279 tonnes of calcine to be supplied to Nordenham smelter to realise further operational synergies between the European operations. San Juan de Nieva remains in the first quartile of the industry cost curve and is the world’s largest zinc smelter. The expansion of the silver recovery plant at San Juan de Nieva was completed in March 2008 allowing for the doubling of lead silver concentrate production to 20,922 tonnes, with a lead content of 30%.

Lead production at Britannia Refined Metals Northfleet lead refinery in the UK, rose to 139,062 tonnes, 16% higher than in 2007, as a result of improved lead output from Mount Isa. Disruptions to shipments mid-year caused variations in crude lead and finished product stock, constraining sales volumes to 134,445 tonnes, 8% higher than in 2007. Silver production was 36% higher than in 2007 due to higher tonnage and an increase in the average silver grade in crude lead.

Zinc Lead Americas

EBIT at the Zinc Lead Americas declined to a small operating loss of $22 million, more than offset by earnings of $26 million from Xstrata Zinc’s share of the Antamina copper-zinc operation in Peru. At the Brunswick mine, ore processed in 2008 decreased by 3% to 3.3 million tonnes. Mine head grades and zinc metallurgical recoveries remained flat at 8.4% and 87.4% respectively, producing 242,478 tonnes of zinc-in-concentrate, a 4% reduction from 2007. The mine experienced two large seismic events in January and September which restricted mining to around 90% of planned tonnage. As part of the mine’s energy management programme, energy consumption has been reduced by 10% and direct greenhouse gas emissions have decreased by 14% over the past two years.

The Brunswick smelter processed a total of 234,760 tonnes of new feed materials, an 11% increase over 2007. A record amount of recycled and secondary feed was processed during 2008 representing 46% of the total feed processed and contributing to higher operating margins. Refined lead production at 81,329 tonnes was 15% higher than 2007 while silver doré production declined significantly, reflecting lower feed grades.

The new Perseverance mine in Northern Quebec commenced production ahead of schedule on 1 July 2008 and within the original budget. In 2008, Perseverance produced 60,265 tonnes of zinc concentrate and 3,793 tonnes of copper concentrate. At full production, the mine will produce 228,000 tonnes of zinc concentrate and 35,000 tonnes of copper concentrate with a mine life of five and a half years.

The CEZinc refinery in Quebec produced 264,231 tonnes of cast zinc, a slight improvement on 2007 production. Sulphuric acid production of 456,556 tonnes declined slightly from the prior year. A total of 508,008 tonnes of concentrate was processed, a 1% reduction from 2007. In February 2008, a new four-year collective agreement was concluded with unionised employees.

The Kidd zinc hydrometallurgical plant produced 121,193 tonnes of zinc metal, representing a 15% decrease from 2007, due to a six-week strike in the fourth quarter of 2008. During the year, cost reduction initiatives were implemented in the cellhouse and casting to improve operational efficiencies. A maintenance shutdown is planned for the second quarter of 2009.

In 2008, zinc ore processed at Antamina mine rose by 14% to 3.8 million tonnes (Xstrata’s 33.75% attributable share). Higher zinc ore grades were partially offset by lower zinc recoveries of 85.3% compared to 87.3% in 2007. As a result, Xstrata Zinc’s share of Antamina zinc metal in concentrate produced was 117,381 tonnes, 19% higher than in 2007.

Summary production data
	Year ended 31.12.08	Year ended 31.12.07
Total zinc in concentrate production (t)	861,033	735,555
Total zinc in metal production (t)	795,565	843,726
Total lead in concentrate production (t)	251,496	213,735
Total lead in metal production (t)	220,391	190,168
Consolidated Zinc cash cost (C1) – post by-product credits (US¢/lb)	58.33	51.69

Brian Mutare, a mechanical fitter at the zinc-lead concentrator at Mount Isa, Queensland, Australia. Performance at the Mount Isa zinc-lead concentrator improved significantly during 2008 with throughput increasing from 5 million tonnes in 2007 to 6.1 million tonnes.