Chief Executive’s Report

2006 marked a year of significant change for Xstrata. Three major acquisitions were completed, with a combined value of $19.6 billion, transforming Xstrata’s scale, commodity exposure and geographic spread of assets. Our operations achieved record financial results in a very strong commodity price environment and our financial support for community initiatives rose to over $49 million.

Xstrata has grown rapidly over the past five years to become a $50 billion company operating in 18 countries. This increased scale and geographic footprint bring additional sustainability challenges and responsibilities, which we have identified through the integration of the acquisitions completed in 2006 and are working to address.

The future of the mining industry depends on its ability to operate in an environmentally and socially responsible manner, creating value and sustainable benefits for our shareholders, workforce and the communities in which we operate. This approach, applied worldwide, is essential to ensuring that we maintain and strengthen Xstrata’s reputation as a responsible and desirable business partner, employer and corporate citizen.

At Xstrata, sustainability is fully integrated into our business strategy, risk management and planning processes. We operate with a lean and efficient devolved management structure, setting clear and demanding sustainability commitments and standards at the Group corporate level. We ensure these commitments and standards are respected by our global commodity businesses and at the operational level through a rigorous third party health, safety, environment and community (HSEC) assurance process.

The effective integration of acquired operations into our governance, risk management and sustainable development frameworks is crucial to our success and, after completing a number of acquisitions, is now one of our distinctive capabilities. By the end of 2006, some 100 days after assuming management control of Falconbridge, we had completed the integration of businesses acquired during the year, including rapid HSEC assessments of each operation.

The principal challenges identified at the acquired operations are: to embed risk management processes at the former Falconbridge operations, which primarily focused on legal compliance; address areas of underinvestment in operational integrity and site resources; implement systematic planning for community involvement; and improve financial and non-financial internal reporting. Every acquired operation will be independently audited through Xstrata’s HSEC Assurance Programme by the end of 2008, to provide the Board and executive management with assurance that our policies and standards are being met or exceeded.

Looking forward, the Group’s greatest challenges are greenhouse gas emissions and issues associated with climate change, employee and contractor safety and employee and community health issues in certain regions, for example, HIV and AIDS in Southern Africa, Tanzania and the Dominican Republic. Environmental performance, in particular the efficient use of resources such as water, minimising impacts such as emissions and conserving biodiversity, together with ongoing community support are also essential for our future success.

In common with our mining sector peers, we are increasingly entering more challenging geographies with complex operational, social and political issues. It is vital in these regions that we apply our sustainable development framework of policies and standards equitably regardless of location, while respecting local customs and addressing specific regional risks and opportunities, to protect our reputation and secure access to resources.

Climate change continues to be a significant topic for many different segments of society, including Xstrata, as the world’s largest producer of export thermal coal and a significant consumer of energy.

While coal will continue to play an essential role in meeting the world’s increasing energy demands and in fuelling social development and economic growth, we recognise that more needs to be done to accelerate the development and implementation of low emission technologies to reduce or virtually eliminate emissions from coal-fired power generation. These ‘clean coal’ technologies hold the promise of a technological solution to the global dilemma of how to satisfy growing global energy requirements, while reducing carbon emissions from burning fossil fuels. The exploitation of coal as a plentiful, inexpensive source of energy is especially critical in developing countries, where future prosperity depends on affordable energy.

As the largest export thermal coal producer, we are taking a leadership role in financially supporting initiatives in partnership with government, other industries, the scientific community, environmental groups and other stakeholders to develop these technological solutions and test their commercial viability.

Technology is also playing a vital role in improving the energy efficiency of mining and metals operations. Xstrata Technology’s products are leaders in their fields in this regard, and are used at our own operations as well as marketed worldwide. Another example is Xstrata Alloys’ proprietary Premus technology, which reduces the energy intensity of ferrochrome production by 20%, and is in place at two of our operations.

In 2006, we achieved or exceeded a number of the targets set in the previous year and HSEC Assurance programme scores improved across the 21 sites audited. Areas of good performance include the implementation of biodiversity conservation plans across all but three former Xstrata sites, a fifth consecutive year of reductions in the frequency of injuries sustained, achieving 95% workforce participation in Xstrata Coal South Africa’s voluntary HIV testing programme, providing anti-retroviral and other treatment to over 400 community members, implementing corporate social involvement plans to cover every managed operation and exceeding our target of setting aside a minimum of 1% of profit before tax to fund community projects.

However, in a number of areas, we did not attain our goals. Tragically, one employee lost his life in a workplace incident in 2006. A further four people were fatally injured at managed operations in the early part of 2007. These incidents are totally unacceptable and underline the sustained, intensive effort required to improve major hazard management and behavioural safety issues. Tragic events such as these remind us that we cannot pause in our relentless pursuit of the elimination of injuries, illnesses and fatalities from our business.

Our businesses reported 24 category 3 (significant) environmental incidents, principally due to water discharges at Mount Isa during tropical storms, and 58 new cases of occupational illnesses. I am confident that the programmes under way will continue to bring about improvements in each of these areas in 2007.

This year we have revised our approach to setting targets, focusing on the material issues facing each of our commodity businesses. These include specific greenhouse gas, water, emissions, health, safety and community targets at the commodity business level and include longer-term targets as well as annual milestones. We still have further work to do in this area to align our targets more closely with material issues, but I am pleased that challenging targets have been set for 2007 in a number of important areas.

We will also develop intensity measures in 2007, which relate greenhouse gases, other air and water emissions, energy use, raw water use, recycled water and waste to production and provide an indication of our efficiency in using natural resources and producing outputs. Calculating accurate intensity measures is particularly complex for the several operations within our portfolio which produce more than one commodity and encompass several different industrial processes.

It is an encouragement to us all that the improvements we have made in recent years have gained public recognition. In 2006, Xstrata was selected as a member of the Dow Jones Sustainability Indexes, our 2005 Sustainability Report was short listed for the ACCA Sustainability Awards and our innovative HIV and AIDS workplace voluntary counselling and testing programmes in South Africa were recognised with a Global Business Coalition Excellence Award. As we grow in size, it is also important that we engage actively in initiatives to drive best practice in sustainable development in our industry, and in 2006, we joined the UN Global Compact and the International Council on Mining and Metals (ICMM).

This report has been prepared in accordance with the Global Reporting Initiative (GRI) G3 guidelines, launched in late 2006, and provides a balanced and reasonable presentation of our economic, environmental and social performance in 2006. As ever, I welcome feedback on any aspect of Xstrata’s performance and reporting, which can be provided via our website or through the contact details listed on the inside back cover of this report.

I am confident that Xstrata’s employees and management will rise to the challenges and seize the opportunities presented by the transformational events of the past year, achieving real progress against our targets and driving continuous improvements across our business.

ML Davis