Chairman’s statement

 

“Against a more encouraging macro-economic backdrop, Xstrata delivered its second best financial performance since its IPO”

Willy Strothotte
Chairman

Commodity markets

Throughout the financial crisis and ensuing global downturn, Xstrata’s Board and management continued to hold the view that the secular trends underpinning the positive prospects for commodities remained intact and would, in time, reassert themselves. Demand growth fuelled by urbanisation and industrialisation in highly populated developing markets and the structural issues that restrict new supply of many major commodities continued to provide support for commodity prices, notwithstanding events that weighed on global confidence during the year and had a short-term impact on commodity markets.

The conviction that the financial crisis was a severe but temporary interruption of a positive secular trend underpinned Xstrata’s executive management’s decision, supported by the Board, to continue to invest in Xstrata’s major organic growth projects during 2009, thereby ensuring Xstrata was quickly able to position itself for growth in anticipation of the global economy recovering. I am pleased to report that the decision to do so has enabled the Group to maintain its ambitious growth trajectory, and Xstrata’s major growth projects remain set to deliver a substantial 50% increase in overall volumes on a copper-equivalent basis over 2009 levels by the end of 2014, providing robust returns at conservative commodity prices and, importantly, an average reduction in unit costs of 20%.

The volatility in prices evident in 2010 will, in the Board’s view, persist over the medium term as a result of more prudent supply chain management by customers leading to lower inventories and greater spot market activity, an increase in shorter term, quarterly pricing agreements for many commodities, the impact of commodity markets becoming an investment class in their own right, and high levels of capacity utilisation on the supply side. The impact of financial flows on exchange traded metals is clearly visible in the almost immediate response of the commodities market to changes in market sentiment. Financial investment in commodities now represents a semi-permanent, but highly volatile, source of demand.

Xstrata’s diversified portfolio is geared towards early and mid-stage LME-traded commodities such as copper, nickel and zinc, and bulk negotiated commodities of thermal coal, coking coal and ferrochrome. With end-user construction, infrastructure and electricity generation sectors accounting for some 50% of Xstrata’s revenues, the Group remains in a strong position to continue to benefit from demand from the industrialising economies of China, India, Brazil and others.

Strategy

In 2010, the Board focused its attention on the substantial capital investment programme underway across our business, examining the management processes in place to identify and manage the risks inherent in such an extensive expansion programme, and scrutinising the 10 projects brought to the Board for approval to commence construction. The Board continues to assess each project brought for approval against stringent criteria in terms of the anticipated return on investment at conservative long-run prices, reduction in operating costs compared to current production, and in the light of anticipated market conditions, in addition to evaluating the business’s ability to manage the associated risks.

The accelerating pace of delivery of organic growth created a strong sense of momentum in 2010 and into early 2011. It is encouraging to see Xstrata already delivering volume growth and cost savings from the three major projects completed during the year, and demonstrable progress on projects at every stage of development.

The combination of low gearing, over $8 billion in undrawn bank facilities, high-quality access to the debt markets and strong cash flow generation means Xstrata is well-placed to fund the $18 billion of expansionary capital expenditure that has been committed for currently approved and soon-to-be approved projects over the next three years of its ambitious expansion, as well as retaining the agility to opportunistically take advantage of value accretive acquisitions.

Dividends†

¢ per share

With a robust balance sheet that continues to provide the flexibility to withstand short-term price pressures and maintain our ambitious capital expenditure programme, and the Board’s confidence in the medium-term outlook, I am pleased that we have been able to return Xstrata’s final dividend to pre-financial crisis levels. This substantial increase, which underlines the Board’s commitment to a progressive dividend policy, will form the level from which the dividend policy will grow in the future.

During the year, members of the Board’s Health, Safety, Environment and Community Committee were able to see the impressive progress of the Koniambo nickel project at first hand during a visit to the module yard in Qingdao in China, where components of Koniambo’s metallurgical plant were constructed, followed by a visit to the Koniambo site itself in New Caledonia. The project’s disciplined approach to safety, its integration into and close collaboration with the local community and its systematic approach to project management give the Board great confidence in the successful execution of this substantial project.

Xstrata also made further progress on its medium-term goal to build a substantial iron ore business in 2010. The fundamentals for iron ore are attractive and provide additional diversification of Xstrata’s portfolio. Xstrata’s proven expertise in bulk commodities, together with its track record in infrastructure and project development, means the Group is well positioned to successfully develop its iron ore projects. Following the acquisition of controlling interests in junior mining companies with assets in Mauritania and Republic of Congo (Brazzaville), Xstrata now has a firm foothold in the market, with projects that offer both near and long-term development potential.

Sustainability

Xstrata’s Sustainable Development Policy, Business Principles, supporting suite of standards and assurance process, ensure a rigorous approach is taken at every site and project. As Xstrata moves further into an intensive phase of developing large-scale mining projects and exploring the potential of longer-term projects that lie in new and more complex geographies, it is imperative that we continue to work in this way and apply our best-in-class environmental management and community relations if we are to successfully deliver our organic growth strategy.

Mining involves a capital-intensive, long-term investment commitment. We have a recognised obligation to ensure our activities have a positive impact in terms of jobs, training, education and social and financial benefits that endure over the long term. To do so, we must work in partnership with host governments and communities within a stable regulatory environment that facilitates the substantial investment required to develop and sustain mining operations and that recognises the full contribution of mining activities to the socio-economic well-being of a region or nation. Striking the right balance between the legitimate desire of government to extract financial benefit for their countries from mining companies and the equally legitimate requirement of shareholders to be compensated for the risks borne in developing and operating mines is complex and requires open consultation and a spirit of genuine partnership.

Xstrata continues to support the communities associated with its operations and 2010 was no exception, with more than $84 million invested in projects in the areas of health, education, community development, art and culture, job creation and enterprise development. Several countries in which we operate faced severe weather-related catastrophes. In January, the Group donated $500,000 to the International Red Cross Haiti Appeal, established to provide emergency aid and relief to those affected by the devastating earthquake, as Xstrata Nickel’s Falcondo operation is situated in the Dominican Republic bordering Haiti. In March, Xstrata donated $1 million following a major earthquake in Chile, comprising $500,000 to the Chilean Red Cross and a further $500,000 to support relief efforts being undertaken by an Antofagasta-based industry body. Xstrata Copper provided a variety of in-kind support, including food parcels for impacted employees, supporting a rescue and reconstruction team and facilitating helicopters for the rescue effort. Xstrata Copper also provided support for the rescue of the Chilean miners who were recovered safely on 13 October after 69 days trapped underground at a mine operated by San Esteban.

During late 2010, the Australian state of Queensland suffered some of the worst flooding in decades, leaving many homeless and infrastructure paralysed. As a significant Queensland employer and a major contributor to the affected region’s economic growth via its coal, copper and zinc operations, it was fitting that Xstrata supported and assisted these communities through a AUD2 million contribution to the Queensland Premier’s Disaster Relief Appeal to help the state’s recovery.

The safety and wellbeing of our workforce remains paramount. Whilst in 2010 the businesses saw an overall strong improvement in the reduction of total recordable injuries, I am very saddened to report that three people lost their lives while working at Xstrata’s managed operations or projects. Improvement in safety performance and the prevention of fatalities remains the utmost priority for Xstrata’s Board and management, and we continue to work to ensure we implement the learnings from every actual and potential critical incident, as well as from best practices within our own and other industries.

Sustainability information is integrated within this report, including a range of non-financial key performance indicators in the Strategy section. A comprehensive Sustainability Report is also published separately from the Annual Report each year laying out key sustainability risks, strategy and performance against set targets, which is available from Xstrata’s website.

Governance and risk management

As announced in early March, I will step down as Chairman of Xstrata plc at the Annual General Meeting (AGM) on 4 May 2011. Sir John Bond has been invited to join the Board and will stand for election as Chairman and independent non-executive director. At this juncture, it is timely for me to reflect on my nine-year tenure as Chairman of Xstrata plc. It has been an immense privilege to have served as Chairman through the Group’s evolution from a small mining company into a global diversified mining major that benefits from a prolific organic growth pipeline, top tier asset base, global reputation in sustainable development and an enviable track record in value-creating growth for its shareholders.

I commend Xstrata’s employees and management team for their passion, commitment, entrepreneurial spirit and expertise during my tenure and I am pleased to hand over the Chairman’s role to such a highly capable and well-respected successor as Sir John Bond.

The Board has always been mindful of ensuring a balance of relevant experience in its composition. During 2010, Paul Hazen retired from the Board, and Dr. Con Fauconnier was elected a director of the company. Con has held numerous executive and Board positions at international mining companies, including as former CEO of Kumba Resources Limited, a South African iron ore producer. During the year Peter Hooley assumed the role of Chairman of the Audit Committee. Whilst all members of the Board are financially literate, Peter, a former CFO of global healthcare product supplier Smith and Nephew plc, is considered to have the recent and relevant financial experience required by the 2010 UK Corporate Governance Code.

Xstrata’s devolved management structure is underpinned by a robust governance framework. The Group’s value-driven approach to risk management includes a comprehensive risk management structure and system that is embedded across its businesses. Each year, the Board approves business plans that include the results of annual risk reviews at an operational, commodity business and Group level. In 2010, the overall Board assumed direct responsibility for risk management from the Audit Committee, following feedback from the 2009 Board evaluation and the Board’s recognition of the evolving risk profile of Xstrata’s intensive phase of project development.

In line with our commitment to undertake an external evaluation of the Board every three years, an independent review was carried out in 2010, which concluded that the Board was effective and provided strategic challenge and evident leadership.

The financial crisis of 2008 and 2009 prompted extensive reappraisal of governance systems worldwide as regulators sought to assess the robustness of corporate governance regimes in the wake of the disaster. A new UK Corporate Governance Code was published in mid-2010 which recommended that in the interests of greater accountability, all directors of FTSE 350 companies should be subject to annual re-election by shareholders. In accordance with the Code, the remaining ten directors of the Board will stand for re-election at the AGM. Xstrata is committed to the highest standards of personal and professional ethical behaviour. We have a long-standing Statement of Business Principles and governance framework to help all Xstrata employees, contractors and associated partners manage the potential ethical risks in our business.

A global Code of Conduct has been developed to provide additional guidance on implementing Xstrata’s Business Principles and to encompass the revised requirements set out by the UK Bribery Act.

A global Bribery, Fraud and Corruption Policy that updates our existing Fraud Policy and procedures has been developed, along with Third Party Due Diligence Standards and training standards. Xstrata’s Business Principles are well embedded into the business. The steps taken in 2010 will provide further assurance to the Board and external stakeholders that the spirit and letter of our Business Principles are being implemented around the world.

A comprehensive corporate governance report is published in the chapter Governance of this report.

Conclusion

Xstrata emerged through 2010 to deliver an impressive performance that was underpinned by prudent cost control, operational excellence and undeterred development of its growth pipeline. The record real cost savings achieved by our commodity business units in 2010 were truly commendable and demonstrate the Group’s ongoing focus on improving the quality of our operations. The pipeline of significant growth projects which Xstrata has successfully nurtured through the financial crisis will, in addition to increasing volumes by 50% by 2014, also collectively reduce operating costs by over 20% on average, accelerating the transformation of the Group and cementing its position in the lower end of the cost curve relative to its peers in each major commodity.

The Group enters 2011 on a strong financial footing, well positioned to optimise its competitive position and market-leading position in key commodities. The Board remains confident of Xstrata’s ability to continue to deliver excellent shareholder returns.

Willy Strothotte
Chairman