key challenges

Envirogen power plant which uses fugitive methane emissions from the non-operational Teralba coal mine in NSW

As the world's largest exporter of thermal coal and a significant metals and mining group, Xstrata's operations use and produce fossil fuels which, when converted into energy, release greenhouse gases. Climate change, therefore, presents a key challenge for the Group. The conservation of biodiversity is another key challenge because of pressure on ecosystems globally. Effective conservation of biological diversity at and around our sites allows Xstrata to ensure we can maintain our licence to operate, gain access to additional reserves and that we meet or exceed the expectations of our employees, local communities and regulators. The efficient and effective use of water at our operations, together with the management of liquid waste, are also significant challenges for Xstrata.

In addition, we are working towards the sustainable closure of a number of sites, in conjunction with our key stakeholders and the communities in which we operate.

Climate change

Climate change is a significant global issue and, in February 2005, the Kyoto Protocol took effect, limiting the emissions of 35 industrialised nations. The Protocol has been ratified by more than 140 nations. As the world's largest producer of export thermal coal, used to generate electricity, and a significant producer of coking or metallurgical coal, Xstrata Coal is leading the Group's climate change initiatives and has developed a comprehensive climate change strategy, outlined below.

More than half of the Group's greenhouse gas emissions are derived from the use of predominantly coal-fired electricity and fossil fuels. In Australia, methane is emitted during the coal mining process and our Australian coal operations strive to reduce their emissions wherever possible. A number of initiatives are also underway at our other Commodity Businesses and some of these are highlighted below.

Xstrata Coal has developed a comprehensive climate change strategy aimed at reducing greenhouse gas emissions per unit of production by 10% on 2003 data over five years. This will be achieved by:

• investing $9 million in clean coal technology, methane utilisation and carbon sequestration research and implementation over five years;
• joining the Greenhouse Challenge Plus - a voluntary programme between industry and the Australian Government to reduce greenhouse gas emissions; and
• addressing power, fuels and fleet efficiency.

In 2004, we commissioned the 8MW Envirogen Power Station to utilise fugitive methane emissions from old workings at Teralba underground mine in New South Wales. This plant will generate enough electricity for 16,000 homes and will prevent around 250,000 tonnes of CO2-equivalents from being emitted to the atmosphere each year. We are exploring similar opportunities in Queensland and elsewhere in New South Wales. Last year, we conducted a risk assessment on establishing a methane-fired power station at Oaky Creek in Queensland. Our South African coal mines do not have significant amounts of methane.

In Queensland, we are exploring the opportunities of converting coal seam methane into electricity at one of our sites.

In February 2005, Xstrata's Australian businesses signed up to the Minerals Council of Australia's 'Enduring Value' programme, which commits all Xstrata's operations in New South Wales, Queensland, South America and South Africa to excellence in sustainable development performance through the implementation of the ICMM's 10 principles of sustainable development.

We have also contributed funds and expertise to significant research programmes, including:

The CRC for Greenhouse Gas Technologies (CO2CRC), Australia: We will contribute AUD250,000 each year over the life of the CO2CRC's carbon capture and storage programme. We will be directly involved in a pilot project on CO2 storage (site yet to be announced) and will donate an additional AUD250,000 for this work.

The pilot will be the world's leading demonstration facility of its size, involving the injection and storage of 100,000 tonnes of CO2 over two years, which will then be monitored for further three years. CO2CRC will match emission nodes with potential sinks around Australia and conduct CO2 capture and separation research in 10 different locations.

In addition, CO2CRC is collaborating with the CRC for Coal in Sustainable Development on a feasibility study into oxy-firing.

The CRC for Coal in Sustainable Development (CCSD), Australia: We will contribute AUD50,000 each year over the life of this CRC, which is conducting research on clean coal technologies, such as integrated coal gasification combined cycle (IGCC) power plant and oxy-firing of coal-fired power stations, and the utilisation of waste streams, such as fly ash.

Xstrata Coal has contributed an additional AUD250,000 towards a two-year, AUD2 million feasibility study into oxy-firing (oxy-pf) - one of the near-zero-emission technologies identified in a roadmap developed through COAL21. COAL21 is a programme initiated by the Australian coal industry aimed at fully realising the potential of advanced technologies to reduce or eliminate greenhouse gas emissions associated with the use of coal. It is a collaborative partnership between federal and state governments, the coal and electricity generation industries and the research community.

Oxy-pf uses oxygen for combustion and delivers carbon dioxide-rich combustion gases ready for capture and storage. The study is investigating the feasibility of retrofitting one of the units at CS Energy's Callide A power station in Queensland. If proven viable, Australia's first near-zero-emission electricity generation plant could be up and running as a demonstration plant within five years.

Australian Coal Association Research Program (ACARP): ACARP's mission is to research, develop and demonstrate technologies that lead to the safe, sustainable production and utilisation of coal. The programme supports projects on greenhouse gas mitigation. Australian coal producers contribute five cents per tonne of coal.

CoalTech 2020, South Africa: Xstrata Coal in South Africa is a member of the CoalTech 2020 initiative which allocates funds to research topics relevant to the coal industry. Some current research projects include the identification and quantification of greenhouse gas emissions and water treatment processes.

Other Xstrata Commodity Businesses are also addressing climate change. Northfleet lead smelter has been operating a Climate Change Levy Agreement since 2002 and will be following a challenging reduction in energy consumption during 2005, following increases in the price of gas and electricity in the UK in 2004. Improvement goals include the standardisation of operating practices and studies associated with capacity and time cycle reduction for process stages, a reduction in gas consumption of 20% and a 10% reduction in electricity consumption.

In early 2005, Xstrata Copper signed a AUD12 million energy deal with Enertrade to supply coal seam gas to the Townsville copper refinery in Queensland for the next 10 years. Enertrade is the owner and operator of the Moranbah to Townsville pipeline which supplies coal seam gas to the Townsville Power Station. This initiative continues a trend of using gas to power Xstrata's operations in northern Australia, including CS Energy's Mica Creek power station which supplies gas-fired power to Mount Isa Mines, Ernest Henry mine and McArthur River mine's on-site gas-fired power station. The Townsville copper refinery has been nominated to participate in the Australian Federal Government's Energy Efficiency Opportunity Assessments programme to assist in the development of procedures for use in mandatory energy efficiency assessments.

Energy efficiency is a key driver for all Xstrata operations. Not only is it an environmental consideration, but it makes good business sense and this approach is producing impressive results - San Juan de Nieva in Spain is one of the most energy efficient, lowest-cost zinc smelters in the world.

In addition, Xstrata Technology plays a valuable role in transferring environmental best practice technologies across Xstrata's and other company's operations, including:

• emission reduction in the Group's smelters;
• increasing metal and coal recoveries at existing operations;
• improving process intensity and current efficiency in copper refining; and
• improving energy efficiency in grinding, which is by far the most energy-intensive step in the metal production cycle.

Greenhouse gas emissions

In 2004 Xstrata's total greenhouse gas emissions rose by 12% to 18.6 million tonnes of carbon dioxide equivalent (CO2-e). Although greenhouse mitigating strategies such as electricity generation at Teralba, New South Wales are in place, improved measurement of methane emissions and the increased use of char reductants by Xstrata Alloys to support the Chartech operation led to the increase in CO2-e tonnes. The generation of energy produced 9.0 million tonnes of carbon dioxide equivalent of which 7.5 million tonnes, or 83%, were from offsite electricity generation.

The increase in CO2 equivalents in 2003 is due to Xstrata's acquisition of MIM Holdings Limited, a mining and metals group that doubled the Group's size.