Chief executive report
Mining, by its very nature, presents significant and often complex sustainability challenges. Our operations involve the extraction and processing of non-renewable natural resources and can impact on the environment in a number of ways. By way of example, mining and refining processes are energyintensive, with many varied and serious potential safety hazards. Operations are often large-scale and located in remote regions, with major implications for local communities. The majority of our coal customers generate electricity from the coal we produce using processes that lead to significant greenhouse gas emissions.
Nonetheless, despite its complexities, mining can be conducted in a way that is economically, socially and environmentally sustainable over the long run. Our products provide society with the basic materials required for economic development, many of which can be recycled and reused. We aim to use the resources we mine and that our operations require efficiently and responsibly. And our activities and investments create lasting social and economic benefits for the communities and countries in which we operate that extend beyond jobs and taxes to include skills and enterprise development, improved infrastructure and enhanced access to education and health services, amongst others.
Xstrata’s mission is to grow and manage a diversified portfolio of metals and mining businesses with the single aim of delivering industry-leading returns for our shareholders. This can only be achieved in a consistent manner over the long run if we deliver shared value for our stakeholders, operating our business in a responsible, ethical manner. Sustainability is a core part of our approach to operational excellence and is, I believe, an important indicator of the overall quality of our operational management. As a member of the International Council on Metals and Mining, we are committed to superior business practices and collaborate with our industry peers to address our industry’s sustainability challenges.
The strong reputation we have built for operating responsibly, openly, ethically and in partnership with our stakeholders enables us to gain access to new resources, manage risks and opportunities associated with our projects and moving into new geographies, improve efficiency and attract the best candidates to work with us.
Our underlying sustainability strategy is simple – to integrate sustainability leading practices into our policies and standards, risk management, strategy and business planning and auditing and assurance processes. In 2010, we further integrated sustainability risks into our overall enterprise risk management systems and brought together in-depth audits of financial and sustainability risks under our internal audit function.
Organic growth strategy to create shared value
Xstrata’s strategy is now predominantly focused on delivering growth from our industry-leading portfolio of near-term and earlier stage organic growth projects. We successfully commissioned three major new mines in 2010, including the underground Nickel Rim South operation in Canada, which achieved a world-class safety performance throughout its development, including over five years without a single lost time injury. The Xstrata Board approved a further ten expansion projects during the year and we are currently implementing some 20 expansion projects in six countries. Our growth strategy has led us into new countries and new commodities, for example our acquisition in 2011 of controlling stakes in iron ore projects in Mauritania and the Republic of Congo.
Our investments in major new operations or expansions will have a profound impact on Xstrata as a business, substantially increasing volumes, decreasing costs and providing robust returns for our shareholders. These investments also have the potential to deliver significant benefits for the communities and countries in which we operate. Sustainability is core to delivering our organic growth strategy. If we fail to demonstrate the benefits of our presence, we will equally fail to deliver the full potential of our growth projects and risk encountering delays, difficulties recruiting and retaining skilled personnel, permitting issues, lack of support for our activities and potential security issues, amongst other problems.
Performance in 2010
Xstrata achieved a number of successes in 2010. Our business delivered its second strongest financial performance with pre-exceptional net earnings of some $5.2 billion. Xstrata was named Mining Sector Leader for the fourth consecutive year in the Dow Jones Sustainability Index, ‘Super-Sector’ Basic Resources Leader for the second time and our 2009 Sustainability Report was awarded PWC’s Building Public Trust award.
Our businesses reviewed and further strengthened the major hazard and operational integrity plans that are a vital component of our efforts to eradicate the causes of critical incidents and our injury performance improved by 20% year-on-year. We recorded no moderate or more serious environmental incidents for the first time. We continue to improve and refine our engagement with and support for local communities and we developed a global Code of Conduct to provide additional guidance on working ethically. Our operations contributed over $3 billion in taxes and royalties to national and local governments and a further $3 billion in salaries and benefits to employees. We prioritise local suppliers as far as possible and to maximise community participation in our supply chain spending of over $15 billion.
However, we continue to face a number of challenges. Most importantly of all, I am deeply saddened to report that three people lost their lives at our managed operations. A further seven people were fatally injured in two incidents at non-managed joint venture operations during the year. Already in 2011, four people have been fatally injured at our operations. Each of these incidents is a devastating blow to all of us at Xstrata and improving our safety performance remains our main priority.
Other priorities include the operational and commercial challenges associated with climate change, water management, ensuring we employ leading practice community engagement processes and attracting and retaining skilled and competent employees – especially for our major project developments – in an increasingly tight labour market.
Ongoing focus on safety
Every safety incident is preventable and Xstrata’s Board and management firmly believe that our aim of operating a fatality-free business, while challenging, is realistic and achievable. We have a number of specific initiatives underway to achieve this objective. Initiatives such as Xstrata Coal’s SafeCoal programme, Xstrata Copper’s focus on improving already low injury rates or Xstrata Nickel’s renewed commitment to Zero Harm are led by the Chief Executive of each commodity business and emphasise visible safety leadership, supported by effective communications campaigns (see page 44 for details of Xstrata Coal’s SafeCoal initiative).
Our organic growth strategy requires a particular focus on the risks associated with large construction projects, including a rapidly changing work environment and large but temporary contractor workforces on site. Remote regions in emerging economies represent another focus for safety programmes, where cultural and educational issues can influence our employees’ perceptions of safety, and require us to find innovative ways of addressing underlying causes and inculcating a safety culture.
Climate change
Climate change continues to represent both a significant challenge and risk for our business. Xstrata’s greenhouse gas emissions rose by 12% in 2010, as we increased production volumes in response to improved market conditions. Our programmes at existing operations continue to identify incremental improvements as set out in this report, but the reality is that these programmes must first offset increasing energy and fuel intensity at ageing operations as mines become deeper, grades decline and haulage distances increase. Opportunities to yield substantial improvements at ageing operations are scarce and not always feasible, meaning we must look to our new operations and expansion projects to achieve a step change in energy and carbon intensity.As our operational footprint grows, we are seeking opportunities to employ more efficient technologies, equipment and plant design to improve energy and water efficiency at new or expanded operations .
As the world’s largest producer of export thermal coal, Xstrata has a significant interest in the successful outcome of technologies to reduce the carbon impact from burning coal as an energy source. We are investing almost $200 million in low emissions technologies, both through industry initiatives and independent investment. Progress to prove technologies at a commercial scale has been hampered by the lack of a clear carbon price signal and uncertain government support. Initial capital costs for these technologies are undoubtedly high, but we believe that safe, cost-competitive solutions can be realised. Their successful development will depend on supportive government policy, stakeholder collaboration and ongoing investment in research and development.
The mining industry has an important role to play in the global debate about climate change and I am pleased that in 2010 the members of ICMM committed to collaborate and engage fully on this issue. Work is continuing in 2011 to define a leadership position and will be followed by engagement with others to enhance the constructive role leading mining companies can play in addressing this important issue. Clearly, governments also play a significant role. It is hoped that, over time, a consistent set of principles will emerge for their intervention. It is important that despite constrained government finances, climate change is not used as an opportunity to raise taxes but rather, that governments engage in partnership with industry to address this great challenge.
Water as an emerging issue
As we expand our footprint at a number of operations and in new locations, water management is growing in importance for Xstrata, particularly in water-scarce locations. It also continues to be an important topic for engagement with our stakeholders.
Water issues vary widely from one site to another, depending on the nature and quantity of water available and the intensity of water usage by industry, agriculture and communities. All Xstrata operations are required to implement water management plans, monitor water quality and improve the intensity with which we use water at our operations. In 2010, we increased the amount of recycled water we use in place of fresh water by 11% compared to 2009.
In water-scarce areas, our sites are increasingly collaborating at the local level with government, communities, farmers, universities, other companies and customers to improve the quality and availability of water. Recent examples include initiatives at our coal operations in the Hunter Valley, Australia and in South Africa and at copper sites in north Chile and southern Peru. At an international level, Xstrata has endorsed the UN Global Compact’s CEO Water Mandate, a public-private initiative between the UN, governments, civil society organisations and business to share best practices and forge multi-stakeholder partnerships to address problems relating to access to water and sanitation.
Creating shared value for communities
Over and above the direct socio-economic benefits of our activities for local people, we seek additional opportunities to create mutual benefits, for example by investing in training, primary and secondary education, environmental, health and community or enterprise development initiatives, in partnership with communities and government, that address the most pressing needs of those communities. The most successful initiatives become sustainable over time and provide our operations with clear benefits, for example by developing a local, well-educated, skilled future workforce and by securing broad-based support for our activities. In 2010, we invested around $84 million in community initiatives over and above expenditure to mitigate specific impacts or to engage with communities in the normal course of our operations.
Early and comprehensive stakeholder engagement processes are critical at the planning stage of our projects. In areas with elevated risks for human rights and security, we use the Voluntary Principles on Security and Human Rights to conduct human rights training for our own and contractor security personnel and to engage with public security forces. In 2010 this included assisting with the roll-out of training for police and army personnel deployed in the Tampakan project area in the Philippines, in partnership with the Philippine Government’s Commission on Human Rights.
Securing access to skills
Multi-billion dollar capital expenditure programmes have recently been unveiled across the mining industry in response to improved economic conditions. This significant step-up in activity has exacerbated the challenges of recruiting and retaining workers with the skills to develop major infrastructure and mining operations. Our commodity businesses are tackling this challenge in a number of ways. We have sequenced our activities to the greatest extent possible in each region to facilitate a smooth transition of contractors from one mining project to the next, as in the development of Antapaccay and Las Bambas in southern Peru where skilled workers will transfer from Antapaccay as construction completes to the nearby Las Bambas project. Xstrata Copper has entered into strategic partnerships to secure the equipment and skilled workers required for its extensive range of growth projects. Across the business we are also developing effective incentive and retention measures for the successful completion of on-time, on budget projects in the face of steep competition for skills.
This report sets out a balanced and comprehensive account of our activities and approach to these and the many other sustainability challenges we encounter as a major, multi-national mining group.
The culture we seek to create at Xstrata is one of continuous improvement. To this end, we have implemented a requirement for annual reviews of climate change strategies and plans, biodiversity conservation and land management plans, waste and water management plans amongst others. These reviews and the specific SD improvement plans developed for each managed operation in 2010 have identified a number of areas in which we can do better. I look forward to reporting on the results of those and other initiatives set out in this report next year. As ever, I welcome your feedback on this report or any aspect of Xstrata’s sustainability performance.
ML Davis Chief Executive Officer
