Opportunistic acquisitions and an ongoing focus on NPV enhancement and operational excellence will continue to play a significant role in Xstrata’s strategy. Indeed, during the year, we gained an entry into the early stage Zanaga iron ore project in the Republic of Congo. Under the agreement, Xstrata will fund at least $50 million towards ongoing exploration and a pre-feasibility study in return for an option to acquire a majority (50% plus one share) interest in the owner of the project, including a pathway to acquire 100% of the project following completion of the feasibility study.
However, this next stage of our growth and transformation is secured and will be delivered from the development of the projects within our portfolio. Many of the brownfield and greenfield growth projects that have been guided through conceptual and feasibility studies by Xstrata’s operational management in recent years are now reaching the approval and construction stage. Each of these projects will deliver robust returns with average returns in the mid 20% range at conservative long-run prices. In the past six months, five projects have been approved with a total capital spend of $2 billion and construction decisions are expected on a further ten projects in 2010 with a total capital spend of over $10 billion, the majority of which are low cost, low risk brownfield expansions. Capital expenditure will rise accordingly with expected expansionary capital spending of approximately $14 billion over the next three years, including $4.9 billion in 2010. This expenditure will realise the next phase of transformation of Xstrata, both in terms of volume growth, delivering a 50% increase in volumes, but importantly also delivering substantial reductions in the operating cost profile of our businesses.
The proposed substantial investments in organic growth and expansion of mineral resources by Xstrata and our industry peers can only be made in stable regulatory and fiscal environments. Mining investments involve significant capital expenditure over a number of years to construct operations that generate economic benefits for shareholders, governments, employees and communities for two or more decades. In this regard, we remain supportive of an eventual global regulatory framework for carbon emissions that is equitable, effective and that incentivises government and industry investment in new technologies to address climate change, without irreparably damaging national export industries. Similarly, it is imperative that royalty and taxation regimes imposed on the minerals industry are transparent and stable, to enable our industry to develop the basic resources required to satisfy the world’s growing demands for social and economic development.
Alloys
Xstrata Alloys benefits from low capital cost, brownfield expansion options in its chrome and platinum operations. The Lion project, which uses proprietary Premus technology to reduce energy consumption and operating costs compared to conventional smelting technology, was designed to support two further phases of expansion to a total capacity of one million tonnes per annum. Phase two would increase capacity by 360,000 tonnes but is dependent on appropriate market conditions for ferrochrome and greater certainty on electricity supply and pricing in South Africa, where lack of generation capacity remains a concern for industry and households alike.
Platinum production from Eland is expected to double to 300,000 ounces of platinum in 2014 through its expansion into a major underground mine with the sinking of the Western Decline commencing this year. In addition, Xstrata Alloys continues to assess its medium- to long-term PGM growth options through the development of its exploration portfolio with emerging junior BEE companies.
Coal
Xstrata Coal’s management team has transformed its portfolio consolidating a range of diverse, smaller operations into tier one large-scale complexes with world-class operating costs, regional scale and the ability to leverage shared infrastructure in New South Wales, Queensland and South Africa. In New South Wales, 20 separate operations have developed into four main complexes providing asset-level synergies, economies of scale and a range of high-return brownfield expansion possibilities. In South Africa, the commissioning of Goedgevonden open cut operation (a joint venture with ARM Coal) and the ongoing development of ATCOM East are continuing the transformation of the South African division into three major complexes comprising mainly open cut operations to deliver further productivity and cost savings.
Xstrata Coal has an impressive track record in successful project delivery including the construction of seven major mines since 2005. Three major projects are currently in construction (Mangoola, Blakefield South, ATCOM East) and will deliver over 15 million tonnes of annual production. A further six projects are planned to deliver double digit growth in output over the next five years. Looking further ahead, a feasibility study is examining the potential to build a 30 million tonne per annum thermal coal mine at Wandoan in the Surat Basin, Queensland with significant additional upside potential from the project’s substantial resource base and drilling programmes under way in the region. The development of our pipeline of organic growth in coal will deliver a significant reduction in operating costs, cementing Xstrata Coal’s position as the world’s premier producer of export thermal coal.
Copper
Xstrata Copper’s portfolio comprises one of the premier suites of copper growth projects in the industry. Three expansion projects have been approved in the past four months, namely the second phase of expansion at Lomas Bayas, the conversion of Ernest Henry into an underground operation and the expansion of Antamina, approved by the joint venture partners at the beginning of 2010. A further three advanced projects are due to come to the Xstrata plc Board for approval during 2010, Antapaccay and Las Bambas in southern Peru and an expansion to the world-class Collahuasi operation in north Chile. Together, these six advanced projects will deliver a 60% increase in copper output by 2015.
A significant proportion of this growth will come from the development of a new major copper-producing region in Southern Peru, which will deliver over 600,000 tonnes of copper annually, from the development of Antapaccay, which will use Tintaya’s existing infrastructure, the greenfield Las Bambas project (which will also benefit from interacting with Tintaya infrastructure) and, in time, the development of resources from the Coroccohuayco deposit. In addition to the advanced projects now reaching the construction stage, three further greenfield projects have the possibility of delivering another 700,000 annual tonnes of attributable copper. This is in addition to the future stages of copper production growth that will emerge from the major brownfield expansion studies under way at Collahuasi, providing an exciting subsequent phase of growth in this highly attractive commodity.
Xstrata Copper’s approach to delivering its significant pipeline of growth includes the formation of alliances with Bechtel, FLSmidth and Siemens to ensure availability of the appropriate skills and capabilities. A standard concentrator design concept being applied across the various projects is achieving engineering and capital cost savings, while minimising long lead delivery times. The optimisation and prioritisation of our extensive copper pipeline saw the divestment of Xstrata’s 70% interest in the El Morro project for $463 million in 2009 and the transaction completed in February 2010.
Nickel
Growth pipeline
Koniambo project
The world-class Koniambo project remains on
budget and is targeting first production in early
2012 with full production of 60,000 tonnes by 2014.
The nickel business has retained a highly attractive suite of longer-term growth options despite the substantial restructuring of its operations in 2009 and has the potential to double 2008 production by 2013. The commissioning of Nickel Rim South is progressing well with nameplate capacity already proven and projected production of over 13,000 tonnes of contained nickel and 29,000 tonnes of copper in 2010, reaching full production in 2011. This accelerated project has been constructed in five years and remains on time and on budget with an exceptional safety and environmental performance, including achieving a continuous period of over five million hours without a lost time injury during 2009.
The world-class Koniambo project remains on budget and is targeting first production in early 2012 with full production of 60,000 tonnes by 2014. I recently visited the impressive engineering yard in Qingdao, China where the immense modules that will join together to form Koniambo’s metallurgical plant are being constructed. The modules are on track to be delivered to New Caledonia in mid-2010 and it is particularly pleasing to note that safety performance has been exemplary, following the full adoption by Chinese contractors of Xstrata’s Sustainable Development policy and standards and ongoing performance monitoring.
The Kabanga project in Tanzania is one of the world’s few undeveloped, large-scale, nickel sulphide projects and a retention licence is currently in place to allow the project to be developed when market conditions allow. Additional growth opportunities include the prospective Araguaia exploration project in Brazil and a suite of brownfield expansion options at Raglan, Sinclair in Western Australia, Falcondo in the Dominican Republic and the Fraser Morgan project in Sudbury.
Zinc
Xstrata Zinc continues to identify and execute low capital cost expansions to existing operations. Several feasibility studies are under way including a well advanced study into the construction of an Albion Process atmospheric pressure leaching plant, which is expected to be completed by the end of 2010. The plant would enable bulk lead-zinc concentrate from the McArthur River mine, currently processed predominantly by imperial (ISF) smelters, to be processed more efficiently, supporting the further expansion of McArthur River which benefits from a very extensive resource base.
Further projects are under way to examine the potential to expand the George Fisher and Black Star mines in Queensland, following an 80% increase in reserves at George Fisher over the last four years. The Bracemac-McLeod project in Canada which would use existing infrastructure at Perseverance has also been advanced to the feasibility study stage with a decision expected in 2010, and a $10 million exploration and delineation programme at the greenfield Pallas Green project in Ireland has recently been approved by Xstrata Zinc and joint venture partner Minco Plc.
