Presentation slides - Xstrata

Merrill Lynch Mining Conference
Dublin, 10 May 2007
Mick Davis

Xstrata’s Xstrata s pursuit of
shareholder value
• Two main fronts:
• Growth and diversification where value enhancing opportunities
meet our criteria
• Continuous programmes of productivity gains and resource to
reserve conversions to enhance NPV of asset base
• Pre-requisites for success
• Diversification by product, geography and currency
• Critical mass to compete for value
• Range and scale of growth options
• Unremitting delivery of incremental value creation & operating
excellence
Diversification
NUMBER OF KEY
GEOGRAPHIES
Global
Player
Mining and Metals Arena – Xstrata’s progress since 2002
3+ regions
1-3 regions
Regional
Player
INTEGRATED
MONOLYTHS
Alcan
24.9
Impala
14.4
Lonmin
9.4
XTA 2002
3.4
Alcoa
37.5
Freeport*
36.3
Antofagasta
8.1
FOCUSED
LOCALS
Vedanta
8.3
Norilsk
31.4
Key: Size of bubble represents enterprise value (US$bn) as of 14 March 2007; Freeport includes Phelps Dodge
GLOBAL
DIVERSIFIEDS
Xstrata
60.7
CVRD
103.8
TeckCominco
12.2
LOCAL
HEROES
BHP
Billiton
128.1
Rio
Tinto
72.8
1-3 commodities 3+ commodities 8+ commodities
Anglo
American
75.1
1
2
1

Xstrata:
Growth in diversification
EBITDA 2001-2006
2001 2006
2001:
US$126m
Pre-IPO
Zinc
47%
Alloys
53%
Alloys
17%
Thermal
Coal
20%
Note: EBITDA on a pro-forma basis
Critical mass
US$bn
160
140
120
100
80
60
40
20
0
BHP
2002:
US$482m
IPO and Coal
Acquisition
Zinc
63%
2005:
US$3.1bn
MIM and Organic
Growth
Coking
Coal
9%
Zinc
10%
Alloys
11%
Thermal
Coal
34%
Copper
36%
Aluminium
Coking 3%
Coal
3%
Thermal
Coal
10%
Nickel
13%
Zinc
18%
2006:
US$10.4bn
Falconbridge, Tintaya
and 1 / 3 Cerrejon
Consolidation has led to a smaller number of larger, more rational powerhouses
with leading access to capital, investment opportunities and quality assets
CVRD
RIO
Anglo American
Xstrata
Norilsk
Alcoa
Barrick
Alcan
Newmont
Teck Cominco
Freeport
Chalco
Alumina
Zinifex
Oxiana
Alloys
2%
Copper
51%
Value of mining industry:
~US$800bn
Value of top5 diversifieds:
~US$450bn (54%)_
3
4
2

Xstrata:
Growth in scale
Top 5 Copper producers (mined)
Codelco
BHP Billiton
Phelps Dodge
Xstrata
Rio Tinto
Top 5 Thermal Export producers
Xstrata
BHP Billiton
Anglo American
PT Bumi Resources
Drummond Co.
810
987
967
1,198
47
41
35
26
23
0 20 40 60
Mt
1,873
0 1,000 2,000
Kt
Top 5 Zinc producers (mined)
Xstrata
Teck Cominco
Zinifex
Glencore
Vedanta
Top 5 Coking Coal producers
BHP/Mitsubishi
Fording
Anglo
Xstrata
Rio Tinto
16
12
11
10
493
0 20 40 60
Mt
600
599
659
839
0 250 500 750 1,000
Kt
58
Top 5 Nickel producers (refined)
Norilsk
Inco
BHP Billiton
Xstrata
Jinchuan
Top 5 Chrome producers
Xstrata
Kazchrome
Samancor
Chelyabinsk
Hernic
The importance of growth optionality
• There is a gap
between the
expectation and
the reality of
project delivery
• High prevailing
prices have not
shortened this
expectation gap
8000 kt Cu
7000
6000
5000
4000
3000
2000
1000
The top 50
probable and
possible mine
projects in 2001
total 7.1 Mt
2001
2002
2003
2005
2006 Q1
2006 Q4
2006 Q4
2006 Q1
2003
2002
275
270
90
109
833
776
1,188
0 500 1,000 1,500
Kt
145
177
243
0 100 200 300
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
2005
Kt
5
Only 1.3 Mt of project
mine production is
operational/under
construction in 2007
compared with the 2001
forecast of 7 Mt.
Copper Project Growth: Expectations vs Reality
Conversion of
the 2001 mine
project pipeline
to committed
6
3

Xstrata:
Growth Optionality
2007 2008
2009
ALLOYS
• Project Bokamoso
(Ferrochrome)
COAL
• Glendell
• Goedgevonden
• Rolleston expansion
• Southstock 5 seam
open cut
• Cerrejon expansion
COPPER
• Alumbrera Flotation
(Moly)
• Mt Isa Northern
3500
NICKEL
• Raglan expansion
ZINC
• McArthur River
• Lennard Shelf
• Mt Isa concentrator
expansion
ALLOYS
• Lion Project phase
II (Ferrochrome)
COAL
• Bulga UG –
Blakefield
• Southstock 5 seam
underground
• Donkin
COPPER
• Roseby Project
• Collahuasi
debottlenecking
• Lomas Bayas
expansion
NICKEL
• Raglan Phase 2
ZINC
• Perseverance
Delivery of value creation
and operating excellence
COAL
• Ulan West
• Togara North
COPPER
• Altonorte Phase 5
• Antapaccay
NICKEL
• Nickel Rim South
• Fraser Morgan
2010+
• Critical for success and more important than any other
characteristic
COAL
• Wandoan
• Cerrejon 2nd expansion
COPPER
• Collahuasi expansion
• Tampakan
• Las Bambas
• El Pachon
• El Morro
• Frieda River
NICKEL
• Kabanga
• Onaping Depth
• Koniambo
• Araguaia
ZINC
• Lady Loretta
• In Xstrata culture of value creation rests on four key principles:
• Value is determined by what you pay for assets and how you run
them
• Empowered and incentivised managements create value
• A commitment to growth drives pursuit of value
• Enhanced NPV, not cost-cutting, creates value
• Sustainability issues are intrinsic to value
7
8
4

Value is determined by what you pay
for assets and how you run them
• Critical to Xstrata’s strategy and performance has been a core – but
counter-intuitive – belief that there is no inherent impediment to
creating value from second tier assets
• Changing global landscape demands the capacity to manage assets of
disparate quality if value is to be created
Value (US$m)
2000
1800
1600
1400
1200
1000
800
600
400
200
0
794
240
Total Potential Acq. Price 2006
Freecash
50
Incremental Plant
Expansion Initiative
110
603
1,797
Synergies Price Movement Current Acquisition Value
Empowered and incentivised
managements create value
Increased NPV at Tintaya
since July 2006 acquisition
Based on the forward curve as at end
April 2007
• Xstrata’s own experience has proved that expertise sits within
any team, but that empowerment and incentivisation are
critical to create a culture of “owner operators”
• Post-acquisition integration is critical to success in
empowering a new team
• Xstrata’s management structure seeks to do this by…
1) …devolving authority and decision making
2) …removing the burden of corporate overhead
3) …limiting unnecessary process and structure across businesses
4) …incentivising accurately as well as generously
5) …sponsoring rational risk-taking through effective risk
management
9
10
5

Empowering and incentivising
managements
• Devolve authority and decision-making to the point of optimal
skills and information
• Each Xstrata business is responsible for everything to its own
EBIT line: accountability is strictly maintained
• Business can respond to changing situations more quickly and
high calibre individuals are attracted and retained
• Responsibility for growth projects rests with those who have the
task to make a return on the invested capital
• Remove the burden of corporate overhead
• MIM & Falconbridge had 450 and 970 on their corporate books
• Large head offices dis-empower operations, with loss of business
focus, accountability and even accurate data
• Clear and more devolved authority limits enable faster decisionmaking
Empowering and incentivising
managements (2)
• Limit process and structure across business units
• Challenge everything that blurs the lines of accountability across
the businesses
• The autonomy of an incentivised, empowered management
creates more value than imposed horizontal or central services
• Businesses are free to decide themselves to work together to
secure economies of scale or negotiating leverage
• Incentivise accurately as well as generously
• Short-/long-term bonuses/share options linked to particular
business, operation and even area of management and to return
on capital targets, efficiency gains, achievement of health and
safety targets and improving the NPV
• Bonuses are not allocated by seniority or employment band, or
even equally across senior management
11
12
6

Empowering and incentivising
managements (3)
• Sponsor rational risk-taking through effective risk
management
• Rational risk-taking is essential to create value
• Highly robust risk management process is critical to managing
devolved, entrepreneurial teams
• A supportive environment encourages fast communication of
problems
• Speed of response and widespread dissemination of the issue
also support an entrepreneurial culture
A commitment to growth drives a
pursuit of value
• A constant search for growth creates momentum across
management teams
• Each business in Xstrata is responsible for delivering its
growth
• Experience of MIM and Falconbridge where managements were
never challenged to grow their business
• Business development teams work together frequently and draw
on support from the corporate as necessary
• Complacency and self-satisfaction are inimical to pursuit of
value: a sense of restlessness is important. This reflects
Xstrata’s origins with a base of tier two assets
13
14
7

Enhanced NPV creates value, value
not cost-cutting
cost cutting
• Cost-cutting can destroy value
• eg maintenance and development cuts at former MIM
• The mining process destroys NPV from day one
• Ore reserves deplete, grade falls away, costs increase with depth
and increased material movement
• Each operation in Xstrata manages its own NPV analysis
• Presented with annual plan; target of year-on-year enhancement
• No capital allocation is approved without a detailed NPV analysis
• This has driven efficiency gains (eg Tintaya) and on-going reserve
extensions (eg Alumbrera and Mount Isa)
• “Think big; look small” – no value creation is too insignificant (eg
US$5m for 30% increase in Zn concentrator throughput)
Sustainability issues
are intrinsic to the pursuit of value
• Effective management of sustainability issues imperative for long-term
success and an important indicator of operational excellence
• Xstrata’s framework sets out standards our operations must adhere to
but responses appropriate to the identified risks at each site
• 61% improvement in Xstrata TRIFR rates since 2002
• All former
35.0 33.0
Falconbridge sites
30.0
audited within 100
26.5
24.3
days of take-over. 25.0
TRIFR LTIFR
Total Recordable and
Loss Time Injury
Frequency Rates
(Per million hours worked)
20.0
15.0
10.0
5.0
0.0
12.0
7.9
18.5
5.3
15.0
4.3
13.1
2002 2003 2004 2005 2006* Falconbridge**
3.3
* excludes Falconbridge acquisition,
** Falconbridge TRIFR for 12 months to 31.12.06 calculated according to Xstrata definitions
5.2
15
16
8

Conclusion
• Extended period of commodity price strength, but mining
companies face major challenges:
• Cost inflation continues to reduce operating margins and the
projected returns from new projects
• New projects/acquisitions have to come from new and complex
geographies and more opaque ownership structures
• Shortages in skills, equipment and cost-effective power all constrain
new growth
• Volatility in commodity and equity prices increase risks
• Companies need to be more effective in capturing value in and
out their portfolio; unremitting in their drive for efficiency;
smarter in how they access and interpret market data; and
quicker to make decisions
• Xstrata’s corporate structure provides confidence we can capture
further shareholder value going forward
Appendix
17
9

2006 Results
2006 Results
10

Progress vs FTSE diversified peers:
Earnings
Progress vs FTSE diversified peers:
Margins and cost savings
11

Xstrata plc
• A major global diversified mining group
• Headquartered in Switzerland
• Listed on London & Zurich Stock Exchanges
Progress since the IPO
• Top 20 in FTSE 100; S&P Europe 350 Index
• Market capitalisation approx US$45 billion
• Employs 43,000+ people worldwide
• Xstrata transformed in the 5 years since IPO in
March 2002
• Growth and value pursued through
• 3 company-transforming acquisitions
• Smaller, valuable bolt-on acquisitions (eg. Tintaya,
Cerrejón, Nordenham)
• Extension of mine lives at key assets
• Delivery of significant internal growth projects (Lion,
Rolleston, San Juan)
• Industry leading performance in containing operating
costs across the group
23
24
12

Three major acquisitions in 2006
Three major acquisitions successfully completed,
combined cost of $19.6 bn
March 2006: 1/3 stake in Cerrejón Coal
• high quality, premium priced thermal coal
• growing US, Latin America and European markets
June 2006: Tintaya acquisition
• additional 120 ktpa copper; strategic position in Southern Peru
• 472 mt resources at Antapaccay (0.7% Cu grade), 9Km from Tintaya
• $110m of synergies and $50m benefit from management initiatives
October 2006: Completion of Falconbridge acquisition
• 1 million tpa copper producer with exceptional growth projects
• Major global nickel business
• World’s largest zinc producer
• Profitable integrated aluminium division
Integration of Falconbridge
• Formal integration completed 4 months after change in management
control
• US$545 million annual synergies from 2007
• Falconbridge nickel assets transformed into Xstrata Nickel
• New CEO, Ian Pearce; head office in Toronto
• Significant potential in co-operation with CVRD INCO at Sudbury, with
active engagement underway
• Sudbury synergy update of $120m pa remains conservative
• Falconbridge copper assets integrated into Xstrata Copper
• Industry leading copper portfolio and project pipeline
• Operational synergies: $60m pa fully realised from 2007
• One-off $58m benefit
• Falconbridge zinc assets integrated into Xstrata Zinc
• Further improvement in proportion of own concentrate feed
• Operational synergies: $11m pa
25
26
13

Key Financial Results – Pro Forma
$m
Revenue
EBITDA
EBIT
Net interest expense
Income tax expense
Exceptional items
Minority interests
Attributable profit
EPS – basic ($), before exceptional items
EPS – basic ($)
EBIT variance
($m, statutory 2005 vs pro forma 2006,
continuing operations)
2,520
Zinc 994
Copper 1,098
4,623
Alloys (120)
56
Coal (242)
2005
Acquisitions
Higher prices
Lower prices
Real costs
68
(179)
2006
26,877
10,441
8,340
(1,055)
(2,127)
140
(413)
4,885
(138)
5.13
5.28
FX
Other inc/exp
Volumes
Inflation
(274)
(Excluding 3 rd party sales and including impact of ATCOM, ATC and DTJV as JANES in 2001)
2005
17,199
D&A
5,843
3,932
(797)
(733)
56
(226)
2,232
2.52
2.58
(66)
2006
%
56
79
112
32
(190)
150
(83)
119
104
105
8,340
27
28
14

Operating Cash Flow
$m
Cash generated from operations
Net interest paid
Dividends received
Taxation
Cash flow before capital expenditure
Sustaining capital expenditure
Disposal of fixed assets
Free cash flow
Expansionary capital expenditure
Cash flow after capital expenditure
Positioned For Future Growth
2006
Pro forma
9,370
(965)
2
(1,486)
6,921
(893)
32
6,060
(1,163)
4,897
2005
Statutory
2,780
(92)
17
(380)
2,325
(412)
11
1,924
(455)
1,469
Strong Balance Sheet to Fund Future Growth
• $8 billion equity issues
• $2.25 billion debut US bond offering
• Strong cash generation from existing operations
• Repayment in full of all bridge facilities and investment
grade status maintained
• TSR of 112% in 2006
• Year end debt $13.6m, gearing 41%, debt/EBITDA 1.3
times
%
237
-
(88)
(291)
198
117
191
215
(156)
233
29
30
15

In pursuit of growth and value
• Optimise and expand existing operations
• Evaluate projects and pursue organic growth
• Seek bolt-on acquisitions for existing business units
• Enter new attractive commodities
• Pursue transforming transactions
Xstrata Mission Statement
We will grow and manage a diversified portfolio
of metals and mining businesses
with the single aim of delivering
industry-leading returns for our shareholders.
We can achieve this only through genuine partnerships
with employees, customers, shareholders, local communities and other
stakeholders,
which are based on integrity, co-operation,
transparency and mutual value-creation.
31
16