Principal Risks and Uncertainties

Xstrata’s revenue and earnings are dependent on prevailing commodity prices which are determined by the supply of, and demand for, raw materials and are closely linked to global economic growth. The recent rapid deterioration of the global macroeconomic environment has led to reduced demand and the majority of commodities trading at dramaticallylower levels. Commodity prices for all products, and particularly for exchange-traded commodities, may fluctuate widely and may have a material impact on financial results. The impact on Group earnings (EBIT) of movements in the price of each of Xstrata’s commodities is set out in the Financial Review. Commodity price trends and commentary on the outlook for each of Xstrata’s commodity markets is provided in the Operating Review sections of this report.

Xstrata’s products are generally sold in US dollars, while our operations and operating costs are spread across several different countries and currencies. Fluctuations in exchange rates, in particular movements in the Australian dollar, Canadian dollar and South African Rand against the US dollar, may have a material impact on our financial results. The impacts of currency exchange rate fluctuations on Group EBIT, together with average exchange rates in 2008 compared to 2007, are set out in the Financial Review.

Some of Xstrata’s operations and facilities are intensive users of natural gas, electricity, oil and other fuels. Factors beyond the control of Xstrata, such as strong demand from the Asia-Pacific region, political, regulatory and economic uncertainties and the costs associated with emissions from fossil fuels, as well as problems related to local generation and transmission of power, for example, electricity constraints in South Africa and natural gas shortages in Chile, can reduce the reliability of energy supply and increase energy prices. In some regions, Xstrata’s energy supply is dependent on one major or national power generation company, for example, Eskom in South Africa.

Xstrata operates in a number of jurisdictions in which regulations or laws have been introduced or are being considered to limit or reduce greenhouse gas emissions. While the precise future impact of the Kyoto Protocol and related legislation or regulation is impossible to quantify at this time, the likely effect will be to increase costs for fossil fuels, electricity and transportation, restrict industrial emissions, impose added costs for emissions in excess of permitted levels and increase costs for monitoring, reporting and accounting. Climate change legislation may lead to higher energy costs or restricted energy supply, which may have a material adverse impact on our ability to maintain production and/or contain operating costs. Xstrata is the world’s largest producer of export thermal coal. Any material decline in the use of coal as a power source as a result of carbon taxes, emissions trading or similar legislation may have a material adverse impact on Xstrata’s financial position. Climate change may also result in weather-related events or other physical threats that may hamper production or damage assets.

Xstrata’s operations are affected by a number of factors which are, to a large extent, outside management’s control, including the availability of raw materials, water and power. In addition, Xstrata’s businesses are subject to numerous other operating risks which include: unusual or unexpected geological features, ground conditions or seismic activity; climatic conditions (including as a result of climate change) such as flooding, drought or a reduction in permafrost; interruptions to power supplies; congestion at commodities transport terminals; industrial action or disputes; environmental hazards; and technical failures, fires, explosions and other incidents at a mine, processing plant, cargo terminal or related facilities.

Mine reserves decline as commodities are extracted and not all reserves may be mined as profitably as anticipated. Successful exploration and development activities and acquiring properties containing economically recoverable reserves are necessary for Xstrata’s future success. In order to develop reserves, various governmental permits must be obtained.

Xstrata benefits from a significant pipeline of organic growth projects in a number of countries. Ineffective project development, including lack of coordination with infrastructure constraints, cost overruns and unexpected delays due to problems obtaining, renewing or extending relevant operating, social or environmental permits or other legislative requirements may constrain the Group’s ability to replace older operations with new, lower cost supply, impacting future revenues, costs and management’s reputation for successful project development. In addition, as part of the Group’s near-term strategy to conserve cash, Xstrata’s businesses have deferred or cancelled a substantial portion of expansionary capital expenditure in 2009. The slowing of the development of project pipelines may impact the Group’s ability to continue production at cost-effective levels. When the global economy recovers, projects may not be sufficiently advanced to enable the Group to benefit fully from increased commodity prices

During the current environment of depressed commodity prices, Xstrata and other mining companies are curtailing production by closing or suspending higher cost mines and production facilities. These actions are being taken to ensure Xstrata’s businesses remain cash positive, reduce average operating costs and avoid over-supplying markets or building up unsold inventory. However, they may also incur costs in the form of redundancy payments; equipment removal; security; stabilisation; reclamation and site rehabilitation costs, the cost of resuming production or indirect costs in the form of foregone revenue, deterioration of assets or increased unit costs. The closure or suspension of operations equally negatively impacts employees and local communities and may impact the Group’s reputation as an industry-leading employer and corporate citizen.

Xstrata’s operations and projects span 19 countries, some of which have more complex, less stable political or social climates and consequently higher country risk. Political risks include changes in laws, taxes or royalties, expropriation of assets, currency restrictions or renegotiation of, or changes to, mining leases and permits. Similarly, communities in certain regions may oppose mining activities for various reasons. Any of these factors could have an adverse impact on Xstrata’s profitability in a certain geographic region or at certain operations. In South Africa, these risks include the ability to convert existing mining licences to ‘new order’ mining rights under the Mineral and Petroleum Resources Development Act (MPRDA) and Empowerment Charter.

Xstrata’s operations are subject to extensive health, safety and environmental regulations and legislation and community expectations. New or amended environmental, health and safety legislation or regulations may result in increased operating costs or, in the event of non-compliance, the possibility of fines, penalties or other actions which may adversely affect Xstrata’s financial position. Rehabilitation costs, which are generally estimated and provided for over the life of operations and based on the best information available, may subsequently increase, impacting on Group earnings. Any breach of regulations or non-compliance with Xstrata’s own best practice standards in health, safety and environmental performance and community relations may damage our reputation and, as a result, our licence to operate. Performance standards at acquired operations may not meet Xstrata’s expected performance standards.

In June 2007, a new European Union regulation for the Regulation, Evaluation and Authorisation of Chemicals (‘REACH’) came into force across the EU. REACH is intended to place the burden of ensuring the safety of chemical substances in terms of both occupational and environmental exposures onto industry instead of authorities. Many of the commodities produced by Xstrata and the chemicals used during its production processes fall within the scope of REACH. REACH legislation requires the producers of products classified as chemicals to identify, register and carry out toxicity testing. Failure to do so will result in these products being excluded from the EU. In particular, the EU 30th Adaptation to Technical Progress (ATP) to the Dangerous Substances Directive (which entered into force in October 2008) and the proposed 31st ATP, introduce new classifications for nickel-containing substances which result in additional labelling and packaging requirements and may result in significant increased costs. Non-compliance with REACH legislation would close the EU market to many of Xstrata’s commodities and potentially reduce revenues.

The majority of Xstrata’s workforce is unionised. We believe that all of our operations have, in general, good relations with employees and unions, but from time to time the Group’s operations have experienced limited work stoppages and other industrial action which interrupts production. The management of Xstrata’s operations depends on a relatively small number of key employees. The loss of certain key employees, particularly to competitors, could have a material adverse effect on the Group. In addition, as Xstrata develops and expands, we believe that our future success will depend on our ability to attract and retain highly skilled and qualified personnel, which is not guaranteed.

Recent events in the credit markets have significantly restricted the supply of credit, as financial institutions have applied more stringent lending criteria or exited the market entirely. The Group has a significant amount of indebtedness, which will not require significant refinancing until 2011. If current credit market conditions continue, however, it will be more costly for Xstrata to refinance its existing debt as it falls due. In addition, it has become and may continue to be more costly to raise new funds to take advantage of opportunities.

As Xstrata is unable to directly set the prices it receives for the commodities it produces, its competitiveness and long-term profitability depend, to a significant degree, on its ability to reduce costs and maintain low-cost, efficient operations. Important cost inputs generally include extraction and processing costs of raw materials and consumables, such as reductants, reagents, power, fuels, labour, transport and equipment, many of which are particularly susceptible to inflationary and supply and demand pressures. Increases in these costs have moderated in recent months and in some cases have actually declined. However, further increases in input costs may negatively impact Xstrata’s earnings.