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10/26/09
Briefing for the Portfolio Committee on Mineral Resources
21 October 2009
Agenda
1. Introduction to Xstrata
2. Xstrata’s position on transformation
2. State Owned Mining Company
2. Electricity considerations
2. Displacement of Ferrochrome market share to China
2
Introduction to Xstrata
Xstrata plc head office Zug, Switzerland
(Corporate office in London)
Xstrata Nickel head office Toronto, Canada
Xstrata Copper head office
Brisbane, Australia
Xstrata Zinc head office Madrid, Spain
Xstrata Alloys head office Rustenberg, South Africa Xstrata Coal head office
Sydney, Australia
Xstrata plc head office Zug, Switzerland
(Corporate office in London)
Xstrata Nickel head office Toronto, Canada
Xstrata Copper head office
Brisbane, Australia
Xstrata Zinc head office Madrid, Spain
Xstrata Alloys head office Rustenberg, South Africa Xstrata Coal head office
Sydney, Australia
4
Rapidly growing into a major global diversified
Listed on the London Stock Exchange since 2002
Over 68,000 employees in 19
countries
Included in FTSE-100 and S&P
Global 100 indices
Market capitalisation of US$48bn
Major producer of
- Base metals: copper, lead,
nickel and zinc
- Bulks: coking coal, thermal
coal, ferrochrome and
vanadium
- Precious metals: silver and gold
(by-products) and growing
platinum business
Significant and long-standing
presence in South Africa for over a
decade
Corporate Social Responsibility
Annual profits*, US$ million
Note: *Earnings before income tax and depreciation
5
Annual profits* by geography
Annual profits* by commodity
Global industry positions
Note: *Earnings before income tax
#1
#1
#1
#4 #
5
#3
Leading positions in attractive commodities
Award-winning sustainability performance
Dow Jones Sustainability Index (DJSI) awarded Xstrata plc as Global Super Sector Leader for Basic Resources for the second consecutive year
Business in the Community Corporate
Social Responsibility Index – Sector Leader
Business Excellence Award by the Global
Business Coalition on HIV/AIDS, TB and
Malaria
PWC Building Public Trust Awards 2008
Sustainability Reporting Category – Highly
Commended
Shortlisted for 2008 Association of
Chartered Certified Accountants (ACCA)
Annual UK Sustainability Reporting Awards
COMPANY OVERVIEW
Xstrata Alloys (South Africa)
Xstrata Coal South AfricaXstrata South African operations total
Xstrata plc
0
5
10
15
20
25
30
35
40
2002
2003
2004
2005
2006
2007
2008
2009(MAY)
Xstrata plcXstrata South African operations
Xstrata safety performance Total Recordable Injury Frequency Rate (TRIFR)
(per million hours worked)
7
Long-standing and ongoing commitment to South Africa
- Ferrochrome, vanadium, platinum and coal
25,000 South African employees with Chrome head
quarters in Rustenburg and coal office in
Johannesburg
Over R45bn invested in SA since 2002, including:
- R8.7bn in coal
- R1.67bn in ferrochrome
- R21.6bn in platinum
4,400 new permanent jobs created since 2002
Over R300m invested in skills, training and
development programmes since 2002
R32m invested in employee, community health and
wellness in 2008 alone
World-class safety record in local operations
Leading HIV/AIDS programme
Xstrata’s South African operations
Xstrata in South Africa
8
Growing commitment to South Africa
Xstrata continues to increase its exposure and investment in South Africa
- Significant investments coming on stream – R3.1bn Goedgevonden Mine
- New investments recently announced – R3.2bn ATCOM East operation
- Possible Project Lion Phase II with additional 360kt of ferrochrome per annum
(expected to cost more than Phase I - c.R1.67bn)
- Eland Platinum Mine underground expansion (expected to cost more than R2bn)
- The proposed merger with Anglo American would have increased Xstrata’s presence in
South Africa
Xstrata owns 24.9% of Lonmin plc, which is a significant investor in the South African
platinum industry
Continuing investments in employee and community health and wellness
Xstrata’s position on transformation
Xstrata’s commitment to transformation
10
Xstrata views the Mining Charter review as an opportunity to participate in shaping the next chapter of transformation
Xstrata understands the importance of transformation in South Africa and is committed to embracing the spirit of empowerment
- Good progress made against the Mining Charter, with all measurable targets
achieved
- Ownership targets achieved across all operations
- Employment Equity in line with targets, however recognising that further progress
can be achieved
Recent promulgation of legislation has necessitated Xstrata to clarify and communicate
its position on transformation to key stakeholders
- The Codes of Good Practice for the Minerals Industry were recently gazetted and the
Mining Charter review process has commenced
Furthermore, government has outlined its key strategic priorities, the basis of which can
be traced to the ANC Polokwane conference in December 2007
- Strategic priorities will guide policy decision (e.g. empowerment legislation)
Xstrata’s approach to the next chapter in transformation
Constructively engage government and other stakeholders in respect of current and proposed mining empowerment legislation
- A recommended integrated approach to the Mining Charter review process and the
assessment of the Codes of Good Practice for the Minerals Industry
Propose that current and future mining empowerment legislation is broad based and
takes cognisance of
- Current national imperatives
- Increased focus on job creation, training, skills development, development of
black enterprises, social-economic development and poverty alleviation
- Increased emphasis on broad based and community beneficiaries across all
pillars
- The industry’s progress to date against the Mining Charter
- Current and proposed mining empowerment legislation and the Codes of Good
Practice issued by the Department of Trade and Industry
11
Industry and government to collaborate in driving sustainable transformation as a strategic national imperative
Xstrata’s key overarching principles
Substance should take precedence over legal form
- Moving beyond a tick-box exercise
Transformation legislation to be aligned to national imperatives
- Bias towards broad based and community beneficiaries across all pillars
- Propose the introduction of Enterprise Development as a new pillar
A transparent, fair and measureable balanced scorecard to be adopted
- Weighting of key elements to be in line with national imperatives
- Targets need to be stretched but achievable
Appropriate measures to ensure enforceability of existing and proposed legislation in a
transparent and fair manner
- Provide a reasonable opportunity to remedy non-compliance
- Ensure entrenchment of desired behaviour
12
A balanced scorecard approach, with stretched but achievable targets, aligned to the national imperatives
Xstrata’s key principles
Ownership requirements
- Ownership target to be a minimum requirement for all participants in the mining
industry
- 26% Ownership target by 2014 is agreed and accepted
- Therefore, Ownership should be a prerequisite, over and above a Balanced
Scorecard
- Measurement methodology to be applicable to the mining industry
- Units of Production to be retained
- Leveraged transactions to be recognised
- Historical Ownership transactions and pending mining right applications should be
recognised under applicable legislation at the time they were completed / submitted
- New legislation should be applied prospectively
- No obligation on mining houses to re-empower operations when empowerment
partners divest with the approval of the DMR in terms of section 11 of the MPRDA
13
A Balanced Scorecard
14
Skills Development
Greater weighting in a Balanced Scorecard Viewed as an important enabler to improve Employment Equity and
Management and Control Measured as a percentage of payroll Specific measures for women beneficiaries, particularly black women to be
included
Mine Community and Rural Development
Greater weighting in a Balanced Scorecard Limited meaningful and sustainable benefits have flowed to
communities impacted by mining operations Measured as a percentage of profit after tax, recognising contributions
towards Enterprise Development and Royalties Design a Housing Standard that is practical and feasible
Preferential Procurement
Realistic and pragmatic measures given mining industry requirements
Define “local” for capital, services and consumables procurement Broad based beneficiaries, with a focus on surrounding communities
Xstrata’s key principles
A Balanced Scorecard
15
Beneficiation
Baseline for Beneficiation to be adopted under government’s Beneficiation Strategy
- Targets set to grow the levels of Beneficiation beyond the baseline Beneficiation should be seen as a contributor to Enterprise
Development, a national imperative Offsetting of excess Beneficiation against commitments of the other pillars
Enterprise Development
New pillar in line with national imperative Measured as a percentage of profit after tax, recognising contributions
towards Mine Community and Rural Development and Royalties Expenditure to broaden beneficiaries and lessen dependence on the
mining industry
Management and Control
Appropriate / stretched targets that are achievable Specific measures for gender representation, particularly black women
Employment Equity Appropriate / stretched targets that are achievable Specific measures for gender representation, particularly black women
Xstrata’s key principles
State Owned Mining Company
Government’s involvement in the mining industry
Xstrata acknowledges government’s intention to be more actively involved in the mining industry
- State Owned Mining Company (SOMC) to focus primarily on creating jobs and
increasing benefits to the economy from South Africa’s mineral wealth
Xstrata’s understanding of the role of the SOMC is that it will
- Compete with other companies in the industry fairly
- Not be given preferential treatment in applying for prospecting rights
- Consider acquisitive growth when it has sufficient capital, on a “willing buyer -
willing seller” principle
17
Matters which require clarity from government
Government’s strategy for state owned enterprises
- Unclear which department will be responsible for the functioning of the SOMC
- Currently housed within the Central Energy Fund, and hence the Department of
Energy
- Potential for conflict of interest if it were to be housed under the Department of
Mineral Resources, who will then have regulatory oversight and operational
involvement
Measures to alleviate concerns surrounding governance issues such as granting the
AEMFC exemptions from the MPRDA application criteria
- Transparent mineral rights application and granting process must be maintained
- Industry regulations should apply equally to the SOMC
18
Industry requires clarity on the role and function of the SOMC
Electricity considerations
Impact of power supply constraints
20
Eskom is both a key supplier and customer of Xstrata
- Xstrata Alloys is a top four key industrial customer with an instantaneous collective
demand of c. 1,000MW
- Xstrata Coal is a key supplier of coal to Eskom
The progressive deterioration of Eskom’s supply capabilities, combined with an increasing
tariff price path, has adversely impacted Xstrata’s operations and the growth options of
its empowerment JV partners
Xstrata’s growth plans in South Africa are dependent on an internationally competitive
supply of electricity in terms of quality, reliability and pricing
- New generation capacity development lead time far outweighs that of mining
expansion projects
- The cost of production of ferrochrome is highly geared towards tariffs
- Future tariff uncertainty is hampering the development of accurate growth plans
Key considerations
21
Xstrata accepts the need for tariff escalations to support a sustainable funding model subject to
- A transparent, cost reflective and progressive tariff plan
- Eskom maintaining its competitive edge over emerging mineral beneficiating
economies
Viability of non-Eskom generation is dependent on enabling legislation that ensures
transparent and fair treatment
- Lack of clarity regarding the implementation of recently gazetted non-Eskom
generation regulations
- Inherent conflict of interest with the Single Buyer Office currently housed within
Eskom
Displacement of Ferrochrome market share to China
Overview
South Africa enjoys a leading ferrochrome industry
- c. 65% of global chrome ore resources and
reserves and the number one supplier of
ferrochrome globally
- Capacity has grown by 7.5% p.a since 2004
- Local and offshore investments of c. R10bn in
local beneficiation capacity
- Employs c. 27,000 persons directly
- In 2008, South African ferrochrome total
revenue earned is c.US6.1bn
- Chrome is South Africa’s most beneficiated
mineral
- 2.3x higher margins on ore beneficiated into
ferrochrome than unbeneficiated ore exports
23
0.0
0.51.0
1.5
2.02.5
3.0
3.54.0
4.5
2004 2005 2006 2007 2008
SA Ferrochrome Capacity (Mt)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2004 2005 2006 2007 2008 2009
Xstrata-Merafe SamancorIFM Tata Steel
Hernic ASA
Capital Invested (Rbn)
`
Independent Ore Producers (Turkey, SA and India)
Independent Smelters (China, India) Stainless Steel
Producers (Over 90% of Ferrochrome Demand)
Integrated Stainless Steel Plants (Finland)
Source: CRU, XTA Analyses
SA Industry dominates Integrated ProducersBut sector fundamentals compromised as SA Industry market share is lost in favour of Chinese non-integrated production
86% 83%78% 76% 75%
51%44%
9%18%
0%
20%
40%
60%
80%
100%
2004 2005 2006 2007 2008
Inte grate d P roduc e rs N on-Inte grate d P roduc e rs S A m arke t S hare C hina m arke t s hare
Chrome Industry Structure
Share of Production for Integrated and Non-Integrated (Independent Smelter) Production, and Market share
24
Integrated Producers (dominated by SA Producers)
0
5
10
15
20
25
30
35
40
'75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09e '11e '13e
U S A W . E uro pe J apan O the r C hina
World Stainless Steel Melt Production 1975-2013, (Million tons)
Ferrochrome demand is driven by China stainless steelIn 2008 China produced 25% of global Stainless Steel and this is expected to increase to 38% by 2013
Source: CRU, XTA Analyses 25
Subsequently, China’s 2008 FeCr demand of 1.8 million tonnes is expected to increase to 4.3 million tonnes by 2013
China ferrochrome production has respondedReducing the opportunity for South African Producers of ferrochrome to supply into China
26
Chinese Ferrochrome Consumption and Production Volume, ‘000 Tons
Source: CRU, XTA Analyses
Only 1% of global chrome resources are in China, with ferrochrome production being reliant on imported ore
SA Production response to Chinese demand is reduced by the increase in Chinese domestic production
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
E quivale nt F e C r e xports to C hina (from S A C hrom e ore e xports )
S A F e C r E xports to C hina
South African ore exports outperform ferrochrome South African ore export (equivalent chrome) growth to China has outperformed ferrochrome export growth by 2.5x
Source: Chinese Customs, XTA Analyses
China Monthly Import Volumes of Chrome Ore (Equivalent Ferrochrome) and Ferrochrome (‘000 Tons)
27
CAGR = 93%
CAGR = 37%
C hina P roduction
S A Revenue Loss to Idle capacity
0
500
1,000
1,500
2,000
2,500
3,000
2004 2005 2006 2007 20080
500
1,000
1,500
2,000
2,500
3,000S A Idle capacity
Source: CRU, XTA Analyses
28% SA capacity idle and displaced to ChinaSA estimated to have lost some US$2.5bn in revenue from displaced capacity in 2008
Ferrochrome Production ‘000 Tons (LHS), Revenue Loss from SA Industry Idle Capacity, Million Dollars (RHS)
28
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2007 2009e
F e C r c ons um ption C hina produc tionR O W produc tion S A produc tion
0
250
500
750
1,000
1,250
1,500
1,750
2,000
2,250
2,500
2007 2009e
South African Ore Exports to China, ‘000 Tons FeCr Production & Consumption , ‘000 Tons
Source: Chinese Customs, XTA Analyses 29
FeCr Demand cut by 1.4 million tonsSA Industry cuts of 1.2 million tons FeCrChina growth in FeCr of 409kT
South Africa is now a ‘Swing Producer’Since 2007, South African industry has cut production to balance demand while
China ferrochrome has grown on the back of South African exports
Indian Govt policy guides industry proposalLevies introduced on ore exports has curbed ore exports and increased domestic ferrochrome production
0
250
500
750
1,000
2006 2007 2008
FeCr product ion
O re (equiva lent FeCr) Exports to China
Source: CRU, XTA Analyses
Indian Ferrochrome Production and Ore (equivalent ferrochrome) exports to China, ‘000 Tons
30
Levy set at $50/t
Levy at $75/t
Source: XTA Analyses
Return on capital (after tax) per ton of input ore, $/ton ore versus ROC (before tax)
31
IF M
0
25
50
75
100
125
150
175
200
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22%
IFM Smelting Capacity 265,000tIFM Capital Smelter ZAR3,000 millionIFM ROCE (15% after tax) $262/ ton alloy
$105/ ton ore
ROCE should inform quantum of levyA 15% ROCE on a typical smelting investment equates to some $105 per ton of ore beneficiated
32
South African industry proposal is 3-foldObjective is to curb ore exports and preserve value addition in South Africa
1. Only Integrated Producers permitted to export chrome
2. Quota on ore equivalent to 30% of Integrated Producers’ ‘ore-equivalent’ ferrochrome
production
3. Industry recommends Levy of $100 per ton of ore
Annexure A – Government’s national imperatives
Government’s national imperatives
34
Strategic priorities for government
1Speeding up growth and transforming the economy to create decent work and sustainable livelihoods
2 Massive programme to build economic and social infrastructure
3Comprehensive rural development strategy linked to land and agrarian reform and food security
4 Strengthen the skills and human resource base
5 Improve the health profile of all South Africans
6 Intensify the fight against crime and corruption
7 Build cohesive, caring and sustainable communities
8 Pursuing African advancement and enhanced international cooperation
9 Sustainable Resource Management and use
10Building a developmental state including improvement of public services and strengthening democratic institutions
Annexure B – Xstrata’s historical performance on transformation
Xstrata’s historical performance on transformation
First major diversified miner to achieve ownership compliance under the Mining Charter
- Transactions concluded at an operational asset level
- Proactive approach to empowerment
- Competitive funding arrangements (acquisition, working capital and guarantees)
- Active participation in management and at board level
- Immediate access to cash flows
- Benefit from future expansions and marketing arrangements
- Community and broad-based involvement
36
Operation Date Interest BEE partner (s)
Alloys
Merafe (Chrome) July 200451% of equity in Merafe, which holds a 20.5% of a PSV with Xstrata
Royal Bafokeng, IDC
Mototolo (Platinum) July 2006 26% of JV Kagiso
Eland (Platinum) December 2007 26% of JV Ngazana
Bakwena (Vanadium) July 2007 26% of JV Bakwena-Ba-Mogopa
Coal July 2006 30% of equity (51% Goedgevonden) ARM (incl. ARM Coal)
37
Employment Equity progress in line with the Mining Charter
- Management level
- c.41% HDSAs in Alloys (c.29% Black people)
- c.39% HDSAs in Coal (c.30% Black people)
- Women in mining
- c.14% HDSA women employees (c.9% Black women)
Alloys0%50%
2004 2005 2006 2007 2008 YTD
Total HDSAs Total Black people
Xstrata’s historical performance on transformation
38
Progressive growth in BEE procurement - R9.1bn in 2008 from BEE suppliers (c.52% of total procurement)1
Effective procurement policy- Preference to HDSA-owned or controlled businesses in all discretionary
procurement- Support HDSA suppliers through management training and by sharing
technology and expertise- Encourage mainstream suppliers to partner with HDSA companies
Total
Notes:1. Excluding Xstrata Coal procurement for 2004 and 2005
Xstrata’s historical performance on transformation
Annexure C – Comparison of applicable empowerment legislation
40
Comparison of applicable empowerment legislation
DTI Codes Charter Mining Code
20% weighting
Exercisable voting rights in 6-10 years
– 25%+1 in hands of black persons
– 10% in hands of black women
Economic interest in 6-10 years
– 25% (of black people)
– 10% (of women)
Various others, e.g. broad-based, ESOPS
Realisation points depending on how much progress achieved over time
15% HDSAs in 5 years and 26% in 10 years
No weighting
Refers to HDSAs
Target for 2014
– 26% voting rights – 26% economic interest – 26% Net value
Net value only applicable after 2 years (from date of agreement)
– Net value measured as assets less acquisition debt
Flow through and modified flow through principles are introduced
10% weighting
Black persons on Board: 50% in years 6-10
50% Black executive directors
40% Black senior and other top management
Not directly in Charter, but refers to HDSA management control under ownership
Refers to black people and black women
Target of 40% on Executive Committee (by 2009)
Demonstrable HDSA fiduciary participation
15% weighting
Black persons not HDSA
Targets of 43-68% in 0-5 years, and 60-80% in 6-10 years for various levels of management (all adjusted for women)
Can only earn points after 40% exceeded
Adjustment for women: 50% of all targets
Refers to HDSAs
40% HDSAs
10% women
Refers to Black people and Black women
40% Black people in each of the following (by 2009)
– Top management, Senior management, Middle management, Junior management
10% Black women in management
Management control
Ownership
Employment equity
41
DTI Codes Charter Mining Code
15% weighting
Black persons not HDSAs
3% of turnover spent on training of Black persons in 6-10 years (adjusted for women)
Adjustment for women: 50% of all targets
Refers to HDSAs
Career paths
Opportunity to become literate and numerate
Refers to HDSAs
100% of employees offered the opportunity (by 2005?)
– For skills development
– For learning programmes
– To be functionally literate and numerate
5% weighting
Focus on “Black” communities
1% of net profit after tax in years 6-10
Consultations in drawing up IDP and SLP
1% of net profit after tax
Not in DTI Codes Upgrading and conversions - SLP
100% of hostels upgraded into single accommodation apartments and/or converted into housing units (by 2014)
Mine community and rural development
Housing and living conditions
Human resource development
Comparison of applicable empowerment legislation
42
DTI Codes Charter Mining Code
20% weighting
BEE procurement of 50% in 0-5 years and 70% in 6-10 years
Various others, e.g. SMME’s, black-owned and women-owned suppliers
Concept of discretionary spend
HDSAs given preferred supplier status
20% from local suppliers of capital goods in 0-5 years (30% in 6-10 years)
50% from local suppliers of services in 0-5 years (70% in 6-10 years)
15% from local suppliers of consumables in 0-5 years (30% in 6-10 years)
10% from Local BEE SMMEs in 0-5 years (and 20% in 6-10years)
15% from either 50% black owned or 30% black women owned in 0-5 years (and 20% in 10 years)
15% weighting
3% of net profit after tax in years 6-10
Not in Charter Not in Mining Code
Not in DTI Codes Identify levels and grow baseline
42% of annual production volume in percentage measured from the refined stage
Enterprise
development
Procurement
Beneficiation
Comparison of applicable empowerment legislation