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Executives

Michael Davis – CEO

Trevor Reid – CFO

Peter Freyberg – CEO, Xstrata Coal

Charlie Sartain – CEO, Xstrata Queensland Ltd.

Analysts

Andrew Keen – HSBC Bank Plc

Jason Fairclough – Merrill Lynch International Ltd.

Michael Bogusz – Macquarie Capital Ltd.

Liam Fitzpatrick – Credit Suisse Securities Ltd.

Xstrata Plc (OTC:XSRAY) Q2 2011 Earnings Call August 2, 2011 4:00 AM ET

Michael Davis

Okay. Good morning, ladies and gentlemen, and welcome to the presentation of Xstrata’s Half Year Results for the six months for June 2011. And as usual, I’d also like to welcome those who are attending the presentation via webcast and those by telephone.

Now, with me this morning are the other members of my executive committee, and who most of you will recognize. If you don’t by now, we have a problem. In the front of the room, in order, are Trevor Reid, our Chief Financial Officer; Santiago Zaldumbide, the Executive Director of Xstrata and Chief Executive of Xstrata Zinc; Peter Freyberg, Chief Executive, Xstrata Coal; Peet Nienaber, Chief Executive, Xstrata Alloys; Ian Pearce, Chief Executive of Nickel; Charlie Sartain, Chief Executive of Xstrata Copper. Benny Levene is our Chief Legal Counsel, he’s not with us today. But Thras Moraitis, our Executive General Manager Strategy of Corporate Affairs, is in the audience this morning.

A substantially stronger financial performance in the first half reflected increased market conditions and a pleasing recovery of operational performance in the second quarter of this half. Operating profit of $4.3 billion was about 31% above the first half of 2010; EBITDA was 30% higher at $5.8 billion; and earnings per share rose by 24% to $0.98 per share.

And you’ll have noticed that we have raised interim dividend substantially by 160% over last year’s interim payment to $0.13 per share, reflecting our financial performance and our confidence in the medium term outlook despite the very significant capital investment program. In response to a tough inflation environment, we’ve continued to focus on cost control, and our business has achieved, I think, a creditable $52 million of real cost savings.

A stronger second quarter largely offsets the one-off incidents in the early part of the year, many of which you know about, positioning us for a much better second half performance. Indeed, I think we’re going into second half with really good momentum.

The safety performance continued to improve, with a 21% reduction in total recordable injuries to 5.5 per million hour’s works, compared to 7 million last year. I’m pleased to say that our organic growth program remained on schedule and we are on track to deliver 50% growth in volumes by the end of 2014. Three projects successfully started production in the first half, including two major thermal coal mines and a smaller nickel project, all of them reaching commissioning ahead of schedule and within budget.

And we also announced or completed the number of bolt-on acquisitions of various growth projects to enhance the pipeline as well. So, with that brief introduction, I am going to hand over to Trevor now, who will take you through the key points of Xstrata’s operational and financial performance, before I come back and talk about the organic growth of the company.

Trevor Reid

Thank you, Mick, and good morning, ladies and gentlemen. Now as usual, we have provided a detailed report on our financial and operating performance this morning in your packs. And so, I’m going to limit my presentation to the key points.

Growing demand for our products from emerging Asian economies and recovering Western markets in the first half of 2010 and the improved commodity prices compared to the same last year. Sentiment was dampened somewhat around March, as uncertainty about European sovereign debt, Chinese inflation, the tragic earthquake and tsunami in Japan and civil unrest in the Middle East weighed on all markets, but began to improve again toward the end of the period.

Average commodity prices remained above the prior-year level for all of Xstrata’s products. The group operational performance recovered well in the second quarter, following a challenging start to the year, particularly in coal and copper, and this provided strong momentum into the second half. And group revenue for the first half rose by 23% to $16.8 billion.

Despite an increasingly inflationary cost environment, operating profits increased by 31% as improved revenues more than offset cost pressures. Net finance costs were lower during the first half last year, principally due to the inclusion of earnings associated with the Prodaco coal operations.

The income tax charge for the first half increased by 31% as a result of higher operating profit. The effective tax rate was 26%, slightly below the guidance I provided at our 2010 preliminary results presentation, and I expect the tax rate to remain at 26% for the full year. Attributable profit before exceptionals increased by 25% to $2.9 billion, matching the second half of 2010 result. Earnings per share before exceptionals was $0.98 per share, which is a 24% increase.

Operating EBITDA rose by 30% to $5.8 billion, reflecting robust base metal and coal prices. Copper was the largest contributor, and the anticipation of a shortfall in copper supply this year, along with investor appetite for commodities, lifted copper prices to new highs during the six months of 2011. And the average cash copper price has rose by 32% to $4.26 per pound during the first half.

Improved grades at Ernest Henry and the strong operating performance at Lomas Bayas compensated for difficult conditions at Collahuasi, Tintaya and Alumbrera. And second quarter production increased by 6% over the first quarter to compensate for the one-off impacts that constrained production in early parts of the year. Production momentum is expected to continue into the second half.

Nickel prices increased 21% above the comparable period in 2010. A strong operational performance from a nickel business benefited from the rapid 50% restart of the Falcondo ferronickel operation in February and a full six month contribution from the Nickel Rim South mine commissioned last spring and together with stronger prices, contributed over $400 million to EBITDA.

Demand for thermal coal increased from Asian and European markets during the period, despite slightly reduced demands in China, as domestic prices fell below imported coal prices. And the early commissioning of the low cost Mangoola operation, and a rapid recovery from flooding at our open-cut mines mitigated the full impact of the severe flooding in Queensland at the start of the year, a fire at Blakefield South and significant underground water issues at the Ulan mine.

The Queensland floods of 2011 were unprecedented in recent years in its severity. But this is not the first year in which adverse weather and flooding has impacted production. And it is pleasing that the investments that Peter and his team have made to improve flood defenses and wet weather recovery enabled our coal mines to recover rapidly. And all affected operations were fully operational by the end of the first quarter; ahead of many of our peers.

Three longwall moves took places at underground coking coal operations in the first half and with continuous production in the second half, Mangoola and ATCOM East ramping to full production and our flood affected mines operational again, coal production is expected to increase materially through the second half of the year. Zinc open cut operations at Mount Isa and McArthur River were also affected by significant rainfall and also recovered well to record increased volumes over the past period. A robust performance from our own zinc mines was offset by lower zinc volumes at Antamina, where the mine plant encountered a predominantly copper ore zone.

Higher commodity prices added $2.8 billion to operating profit, with coal and copper contributing over $2 billion or 75% of this increase. The group recorded another solid cost performance in the period, achieving real unit cost savings of $52 million, despite the negative impact of some $54 million due to declining grades at some of our more mature operations. And the cost associated with the restart of the high-cost Falcondo ferronickel operation in the Dominican Republic, which supplemented nickel margins, but increased overall operating costs.

Real cost savings were achieved from a range of operating efficiency initiatives in the zinc business and the ramping up of production from lower-cost growth projects such as the Mangoola thermal coal operation and Nickel Rim South. Copper C1 costs were maintained at similar levels to last year, despite significant inflationary impact, adverse exchange rates and the costs associated with operations such as Tintaya and the Ernest Henry open cut, as they reach the end of their lives.

Nevertheless, significant CPI and renewed mining industry inflation as a result of buoyant commodity market conditions did reduce earnings by some $412 million. Mining sector specific inflation had a $239 million impact, as the cost of labor, energy and the price of key inputs such as tires, explosives and steel rose significantly over and above consumer price inflation.

The other major impact on our earnings was from the weaker U.S. dollar against all our operating regional currencies, which reduced profit by $765 million. The group’s earnings are particularly sensitive to the relative performance of the Australian dollar, which strengthened 16% against the U.S. dollar to record levels during the first half.

The Aussie dollar alone had a $536 million impact on profits, while the strengthening of the South African rand and the Canadian dollar reduced earnings by $95 million and $82 million respectively. Other expenses of $266 million relate almost exclusively to costs associated with one-off impacts to production, experienced from flooding and the underground fire at the Blakefield South coal mine. Now, no provisions have been recorded in respect to potential insurance recoveries for a substantial portion of these costs.

As activity ramps up across the global mining industry to respond to robust market conditions, input costs are rising sharply. Growing demand and tighter availability are leading to increasing electricity and fuel prices, higher costs for key consumables, including raw material, fuel and steel and steep year-on-year increases in labor rates.

To illustrate the scale of inflation, diesel prices have risen by around 70% over the past two years and energy prices in South Africa are appreciating by over 20% per annum, and labor costs in Australia have risen some 40% since early 2009. Now, clearly, the weaker U.S. dollar has significantly exacerbated the impact in terms of dollar-denominated cost.

In times of significant cost inflation and higher commodity prices, the ability to retain competitive cost positions across our portfolio and avoid increased costs become embedded in all – is all the more important.

Our decentralized management structure, characterized by local decision-making and devolved accountability, encourages operational management to pursue incremental cost reductions at every operation, which cumulatively, have resulted in sustainable cost improvements to combat the rising tide of cost inflation.

By way of example, at Xstrata Coal, we have improved the productivity of draglines, excavators and shovels by some 20% and increased haul truck utilization by 22% since 2008 to optimize the efficiency of our open cut Australian and South African operations. Energy efficiency programs are in place at all operations and continued to offset some of the increases in energy costs.

For example, over the past five years, Xstrata’s San Juan de Nieva zinc smelter in Spain, already one of the most efficient zinc smelters in the world, has saved over $8 million by recycling superheated steam from the roasting stage to power steam turbine generators, instead of external energy. And at Lomas Bayas in Chile, energy contracts have been negotiated locally for the additional power required for the mine’s expansion with an expected saving of $30 million over the next few years.

Incremental process improvements aim to enhance the efficiency with which we use consumables. For example, at the Brunswick mine in Canada, we have realized cumulative savings of $23 million from reduced hydrogen peroxide, sulfuric acid and cement binder usage over the last five years. To mitigate labor cost pressures, we have reduced the use of contractors to move to owner operation at a number of coal mines in Australia and at the Kidd copper mine in Canada.

In transport, Xstrata Coal has moved around one-third of New South Wales exports to a newly-established, wholly-owned rail haulage division to reduce costs and improve availability, with expected cash cost savings of $100 million over the next four years.

Xstrata Rail’s average payload per train is already more than 4% above the established providers, and together with improved cycle times, is increasing throughput and reducing demurrage. Increased competition has also motivated third-party rail haulage providers used by Xstrata to reduce their costs and improve their performance.

By the end of 2011, three new trains, sourced partly from China to reduce capital costs, will double capacity, with the potential to expand Xstrata Rail further, in line with increased volumes from our coal expansion project.

Initiatives to improve the recovery of by-product at a number of operations, including Ernest Henry’s new magnetized plant, debottlenecking at the Nikkelverk refinery, and improved lead, silver and copper recoveries at San Juan de Nieva have provided additional by-product credits at strong commodity prices to offset C1 cash costs.

Now, while we do not have a centralized procurement function, global agreement with suppliers such as Michelin and Caterpillar are already realizing savings to our businesses and our business continue to collaborate regionally to leverage our regional scale and benefit from volume discounts, shorter lead time and greater regional influence. We have also progressively increased sourcing from Asia, where we have established a new China-based procurement hub.

In total, despite the substantial headwinds of inflationary pressure and adverse ForEx exchange rates, our businesses did achieve real unit cost savings. And we maintained EBITDA margins at pre-financial crisis levels of around 35%. Set against the inexorable creep of rising costs at aging operations, this cost performance is all the more impressive.

The successive commissioning of new lower-cost operations and expansions, the strategic repositioning of Xstrata Nickel and Xstrata Zinc during the downturn and our focus on year-on-year real cost savings have led to significantly improved cost positions in most commodity businesses. Xstrata Zinc has been transformed into the world’s largest low-cost integrated producer of zinc, from a fourth quartile position in 2006.

C1 cash costs at our zinc mining operations has been reduced by 44%, from $0.58 per pound in 2008 to $0.32 in the first half. On an integrated mine smelter basis, C1 costs have been more than halved to $0.23 per pound from $0.50 in 2008. Every year, Santiago and his team have identified a range of incremental cost initiatives to unlock value and improve our recovery of valuable byproducts, while undertaking low risk, low capital cost expansions, and debottlenecking at our existing operations to achieve major unit cost improvements, all of which translates into cumulative real unit cost savings of over $650 million since 2002.

Xstrata Nickel has moved from the third quartile in 2008 to the lower end of the second quartile in 2011, benefiting from the commissioning of the poly-metallic Nickel Rim South operation and the significant restructuring of the Sudbury operations in 2009. Illustrating the repositioning of this business as a low cost producer, C1 mining costs have been reduced by 62% over three years, from $5.63 per pound in 2008 to $2.14 per pound in the first half of 2011.

Now, the restart of the higher cost Falcondo ferronickel operation this year to 50% of its capacity has delivered increased margins during favorable market conditions. And this underlines our overriding focus on value, rather than a slavish focus on cost alone.

Xstrata Copper has successfully combated the deterioration in costs that is so difficult to avoid at some aging operations and has shifted its mines further down the cost curve. Over the next three years, our five brownfield copper expansions and the greenfield Las Bambas project will contribute significant lower cost volumes, pushing costs down by a further 20%.

Xstrata Alloys remains the lowest cost ferrochrome producer in South Africa, having improved energy and efficiency at its smelters by around 25%, reduced reliance on high-priced coke and initiated a series of actions to increase our ability to source and agglomerate UG2 platinum tailings as a low-cost feed source.

Despite the success of efficiency programs at open cut and underground operations and improvements to transport infrastructure performance, our coal operations have moved marginally higher relative to the global industry, due to the exposure of Xstrata’s operations to the strong Australian dollar and South African rand. As I mentioned earlier, both currencies have strengthened considerably since 2008, by some 21% in the case of the Aussie dollar and 17% in South Africa, appreciably more than competitive currencies in other regions such as Indonesia and Russia.

The next step change in our cost competitives of our portfolio is well under way, as we progressively deliver new lower cost production from the portfolio of growth projects. Xstrata operations generated almost $5 billion of cash during the first half and free cash flow was $3 billion, in line with the comparable period in 2010. Expansionary capital expenditure was $2.5 billion, $1 billion higher than the first half of last year. Net debt increased by 6% to $8.1 billion, whilst gearing remained unchanged at a modest 15% from the end of 2010. Our investment grade credit rating was strengthened further during the period. Moody’s revised the outlook for the group’s Baa2 rating to positive. And Standard & Poor’s raised its long-term corporate credit rating for Xstrata from BBB to BBB+.

The improved ratings recognized Xstrata’s moderate gearing position, recognition of the ongoing improvements to the group’s business profile from the real cost savings being achieved across the business, and the further diversification of the asset base. We maintained significant headroom within our corporate debt facilities, with no covenant. And at the end of June, we had $7.4 billion available to be drawn. With only modest debt maturities over the next two years and a good spread over the subsequent years, I believe we are well placed to fund all our growth initiatives.

Expansionary capital expenditure during the first half increased by 56% to $2.5 billion, reflecting the number of major projects which are now reaching their peak funding stage. Xstrata Copper incurred $1.1 billion of expansionary capital during the period, including $420 million in respect to the Las Bambas project in Peru, reflecting early ordering of long-lead items at the beginning of the project’s construction phase. $260 million at the Antapaccay brownfield extension to the Tintaya project in Peru, and this project will reach commissioning next year, and a further $263 million at the Ernest Henry underground, Collahuasi, Antamina and Kidd brownfield expansions.

Xstrata Coal spent over $500 million on their project pipeline, which included the successful commissioning of Mangoola, which commenced ahead of schedule in February, and in South Africa, the commissioning of the ATCOM East Project. Xstrata Nickel incurred $620 million, including $500 million at Koniambo.

Expansionary capital spending is expected to be $4.3 billion in the second half of this year, taking our full-year spending to approximately $6.8 billion and around $2 billion of sustaining CapEx, which is in line with the guidance provided at our 2010 preliminary results presentation. Our continued confidence in the medium-term outlook and our strong financial position had enabled us to return to our progressive dividend policy, rebased at pre-financial crisis levels.

We have consequently proposed an interim dividend of $0.13 per share, which is 160% higher than the interim dividend we did last year, and the proposed dividend amounts to just shy of $400 million, which will be paid on 7 of October to shareholders on the register at 16 September. As in the past, we expect to pay interim and final dividends broadly in a one-third, two-thirds ratio.

On that positive note, I’ll now hand you back to Mick.

Michael Davis

Our track record of successful project development now boasts 17 new expanded operations since our inception less than a decade ago in each of our major commodities. This includes the three projects which reached commission in 2011, and as I’ve said, on time and certainly within budget.

We are currently constructing 22 separate expansion projects, representing capital expenditure of $15 billion, including five new projects approved to commence construction so far this year. A further five of our current projects in construction will begin production in the second half of this year, bringing the total new projects producing first product in 2011 to eight. Another nine projects representing capital expenditure of $7 billion are moving towards the approval stage in the near term, including six brownfield coal expansions, more than replenishing our pipeline of approved growth.

The majority of our near-term coal projects involve the lower risk development of open cut mines and a processing plant, a formula that Peter and his team at Xstrata Coal have successfully delivered many times in the past. All of our projects remain on schedule and we are on track to deliver 50% increase in copper-equivalent volumes by the end of 2014, in part due to our decision to continue investing in growth through the downturn of the late 2008-2009 period, as Trevor has referred to.

Around 80% of the 50% targeted increase will come from projects that are already approved or completed. In addition to volume growth, our projects have the equally important benefit of substantially reducing overall operating costs by around 20% in total, and our projects will deliver robust returns on investment, even at conservative long-term prices.

The greenfield Mangoola thermal coal project in New South Wales commenced mining in January and its coal plant commissioned in February, three months ahead of schedule, $178 million below budgeted CapEx. Safety performance throughout the construction and commissioning phase has been excellent, with zero loss time to injuries and outstanding performance.

Mangoola’s early start not only benefited the project’s NPV and capital budget, but also was particularly welcome as it provided new lower-cost coal volumes at a time when a number of one-off events, which Trevor has referred to, have constrained production for some existing operations. The new mine will produce 8 million pounds of salable thermal coal at full production.

The ATCOM East thermal coal operation in South Africa is currently commissioning and remains within budget. It will produce 4 million tons at full production, of which around 65% is for the export market. The upgrade to the coal handling and preparation plant and run of mine were completed in 2011, and initial coal is flowing through the system ahead of schedule.

The two new coal mines alone will deliver 7 million tons of new thermal coal production in 2011. Approved projects continue to make good progress, and delivery of growth is gathering momentum. Five of our 22 projects currently in construction will begin production this year, namely the Kidd mine extension in Canada, the Black Star Deeps project to extend the life of the Black Star open cut mine at Mount Isa, which is now 70% complete. The extension to the Newlands Northern Underground coal operation, which is 60% complete. The expansion of the Handlebar Hill in Mount Isa region, currently 30% complete following approval in the first half of the year, but with a very rapid development profile. And an expansion to Antamina’s copper processing capacity to 130,000 tons per day, now just under two-thirds complete.

Next year, four very substantial projects are also on track to commission. The Antapaccay extension to its entire copper mine, the Greenfield Koniambo ferronickel complex, the next phase expansion of the Lomas Bayas copper mine and the Ravensworth North coal operation.

The number and scale of projects we have already completed to go with the projects currently in implementation provide us with a wealth of project development, using this growth, growing our positive knowledge, our business is incorporating lessons learned from one project in the design and implementation of another, sharing best practices and developing innovative solutions across businesses and regions. Now, as you know, we’ve started this more centralized development project team of specialists. Some people might think this is odd, perhaps even a problem for a company building over 20 major projects and with more to come.

But again, our experience to-date is demonstrating that a devolved management structure with significant project development skills within each business unit allows us to build a larger number of projects simultaneously without the elevated bureaucracy associated with a large centralized specialized projects team.

It also creates a far broader range of innovative solutions and responses to problems faced in a more locally appropriate manner. My focus is now to ensure that the underground experiences and other innovations by the various different business units are widely shared at both operational and executive management levels to ensure that each of our projects benefits from the lessons learned.

Bringing a major project to fruition requires successful navigation of a major range of challenges. Clearly, greenfield developments in remote locations with limited existing infrastructure are at the most challenging end of the spectrum, and often have unique issues to contend with. Whether as a result of environmental considerations, community dynamics, political security risks, accessibility to the location or operating conditions.

But to some extent, all operations, all projects must contend with rising costs, a growing global shortage of skills and extended lead times for key equipment and engineering. Now, our business are addressing these challenges with a range of initiatives. For example, at Mangoola, an extended detailed engineering phase during the financial crisis led to much improved project definition, quantity estimates and early procurement of major equipment.

Together, with extensive community engagement, these initiatives allow the project to be commissioned within its budget and schedule. The innovative modular design of the Koniambo project has provided us with direct experience of successfully competing complex engineering and construction work in Malaysia and China. Xstrata Copper, the 10-year strategic alliance with Bechtel has secured access to engineering capacity across multiple projects, has enabled us to offer experienced contractors a clear career path across successive Xstrata projects, retaining valuable expertise and reducing turnover.

Now our business has entered a range of other innovative alliances with partnerships and suppliers, including joint ventures with Michelin that includes investments in manufacturing capacity to secure future supply and a growing part of Caterpillar to ensure key suppliers can fulfill our requirements to major equipment and for services promptly and within our budget.

The replicable copper concentrator design initially employed for Antapaccay and Las Bambas projects is demonstrating the benefits of pre-ordering major capital items to reduce engineering times and costs and improve construction efficiency. People with the right skills are a vital ingredient for the success of our organic growth strategy and competition for skills. In particular, project development skills is intense across the industry.

A global resourcing initiatives aims to identify and offer employees within Xstrata opportunities at other growth projects within the group to retain core competencies and facilitate knowledge sharing between our commodity business and across the different geographic regions and reduce the pressure on external recruitment.

We’ve also adopted, I think, industry-leading community relations policies and practices, recognizing that broad-based support for our activities and positive community relationships are vitally important to avoid potentially catastrophic delays through protests. There have been a number of announcements both this year and last year from the industry in respect with significant cost increases and substantial delays for projects under construction.

Companies large and small have issued brief press releases updating the market on their own trials and tribulations. Many of these announcements have been rather matter of fact, perhaps reflecting the regular nature of these occurrences. But project overruns in an industry searching for opportunity to meet demand should not be treated as de rigueur. They merit some more detailed consideration. So now I’ll turn to Koniambo.

It goes without saying that this remains a world-class project. It is 76% complete and it’s on schedule. It’s on schedule to produce first metal in the second half of next year. It uses uncomplicated pyro-metallurgical smelter technology and will produce ferronickel at a time of market need.

The initial mine life of 25 years and the annual production of 60,000 tons of nickel and ferronickel can be extended to more than 50 years of economic operation, with the potential for further brownfield limelight and separate lite expansions beyond that.

Koniambo will reach full production in 2014, delivering a world-class nickel operation into our portfolio to provide global scale, propelling Xstrata Nickel into the top three nickel producers in the world, complementing already low nickel operating costs.

The main site infrastructure has been completed and the port is already under operating management control. Engineering work is more than 99% complete, procurement is 95% complete, and the bulk of critical materials are on island. Safety performance of the project has been excellent and has continued to improve, despite a multitude of cultures and nationalities joining our workforce in the past year.

In the first half of 2011, the project team completed the furnace tower for the metallurgical plant, mine development work has commenced and is progressing well and the program to construct on-site infrastructure is around two-thirds complete. Only on-site construction work is outstanding to complete the project. But the simple issues are today, I’m announcing that while Koniambo will still begin producing metal on the planned schedule, its cost is now forecast to be $5 billion, with just over $1 billion more than originally planned.

Due to the provisional third-party finance from our partners and the French government, the additional amount Xstrata has to provide $800 million or $4.6 billion in total. The increased cost arises from productivity and contractor underperformance, which have increased costs by $420 million against our budget and the exogenous impact of hyperinflation on the cost of labor, contractor rates and materials, which increased costs by $730 million.

30% is a significant increase, but considerably less, I guess, than the overruns experienced generally by the industry of up to 200% in some cases. Now there are reasons why they’ve managed to contain this increase in project costs, even though as I’ve explained, Koniambo is more complex than most.

But I must also make this point. The Koniambo experience does not indicate a general overrun in the other 21 projects currently under construction. I’m pleased to report to you, in fact, that after careful review, these are within original budget and as previously mentioned, on schedule. And I will return to this point later.

Koniambo’s remote location in the northern province of New Caledonia represents a combination of unique challenges including a shortage of in-country skilled workers, restricted in-country working hours and elevated labor costs. And whereas in other regions like Australia, Canada, Peru, our projects benefit from a competition from a number of contractors and suppliers and a wider pool of available skills, New Caledonia is a relatively closed market.

From a smaller pool of skills, there’s a significant competition between the major projects currently underway on the island with knock-on effects including the need for greater supervision and lower overall productivity. This situation also means that there are no useful benchmarks to estimate the productivity on island, which had up until the end of last year, been negatively impacted by a series of one-off events.

Now that we’ve operated for a reasonable period beginning in February in the current final stage of on-island construction, we are able to gauge the likely productivity rates of a workforce up to 5,700 at its peak, drawn from 35 nationalities and 75 different contractor firms. So given our experience of on-island productivity rates gained over the past six months and price escalation, we now have confidence to update the project’s original 2007 budget with a revised firm capital estimate.

In the light of the challenges we saw, and consistent with our decision to protect the project’s NPV by avoiding project delays, we amended our original project plan in two critical respects. First, we decide to move as many of the project hours off-island as possible and we’ve reported to you on this in previous presentations, but it does bear repetition. We constructed the metallurgical product in the modules at the engineering yard in Qingdao in China, as well as pre-fabricating concrete blocks and then shipping them to Koniambo.

We took the decision to build the power plant off-island as well. The met plant, and prefabricated concrete decision has been a spectacular success. The various modules and pre-engineered components were delivered on time and not only did this approach take something like 11 million hours off-island, it also delivered cost savings of $260 million.

I cannot say the same for the power plant. We overestimated the capacity of the contractor, and although the cost is on budget, the delivery is significantly late. This late delivery, together with other contracts and EPCM under performance on-island, has negatively affected the project.

A lack of materials and certain reworks and concomitant impacts on productivity have caused an overrun in the project cost. However, the decision to move than 11 million hours off-island remains the correct one. Had we maintained these hours on-island, given what we understand today about the level of productivity we can expect in this remote location, exposed to an overheated contractor environment, I am convinced that the overruns would have been orders of magnitudes greater.

Secondly, we decided to take action to avoid debilitating social and recent blockades experienced by some of our peer groups, which could have caused significant delays and seriously damaged the project’s NPV. We therefore employed more local labor than initially planned. We knew they were more expensive and less productive than the available foreign labor. But the judgment we made was that the impact on cost was more than justified by the fact that we have not suffered blockades and risked or project delays.

In total, the project team achieved over $400 million of cost savings, including $140 million of procurement savings. And we had hoped, to offset the full extent of the increased controllable cost for other productivities and savings.

Labor and contractor costs have escalated at a rate significantly higher than those prevailing at the time of the project approvals in 2007 and account for 80% of the hyperinflationary $730 million cost impact. Steel prices peaked in 2008 at very high levels, just as we had to place the orders for the metallurgical plant and together with excessive escalations in equipment rates, make up the balance of the inflationary-induced overrun.

But the project’s double-digit IRR remains intact, notwithstanding the increase in project cost, helped by improved industry dynamics and the resulting increased consensus view on nickel’s long-term price. Now, this final stage is not easy and it’s not without risk. However, with just over one year to go, virtually all the materials are on site and the vast majority of our workforce is mobilized to enable construction to proceed. Our off-site strategy means engineering work is unusually advanced for this stage of the last cycle of a mega-project. I think all the ingredients are now in place and I believe we have the right project leadership and dedicated performance management teams for each key work stream to ensure that we meet our targets.

As we move into 2012, we will have substantially completed construction work, allowing us to focus on systems completion. And I am confident that the project will produce first nickel in the second half of next year within its revised budget, and the project will be substantially complete by the end of 2012, with full ramp-up achieved by the end of 2014. The infrastructure being constructed today will also facilitate a lower capital cost second phase expansion to double the capacity with very substantial returns.

Turning now to other major projects; the Antapaccay extension to Xstrata Copper’s Tintaya mine in southern Peru will be one of the next major projects to start production and remains on track to commission in the second half of next year within its capital budget of $1.47 billion.

We acquired Antapaccay as one of the two satellite deposits as part of our $750 million acquisition of the Tintaya mine in 2006 from BHP Billiton. Since that acquisition, Charlie and his team have rapidly developed the project through feasibility studies and environmental and social approvals to the construction stage, and the project makes very good progress today.

Construction started in the third quarter of 2010 and by the end of June, detailed engineering was 93% complete. All major orders had been placed with procurement 81% complete and prices have been fixed, or in the case of contractor rates, are within project escalation. Major earthworks are nearing completion and 17% of construction activities have been concluded, including the foundations of the sag and bournemouth. In total, the project is over one-quarter complete on an earned value basis.

Antapaccay is the first project to benefit from our standard copper concentrator design, which has enabled long lead items to be ordered and processed well in advance. And our strategic relationship with Bechtel and other major companies has substantially derisked the project by securing key skills and equipment for the duration of construction.

The operation will start production as Tintaya comes to the end of its life to replace and expand production to 160,000 tons of copper at full production for the first five years, and an average of 143,000 tons for at least a further 22 years.

Antapaccay represents the first stage of an integrated regional strategy to develop Southern Peru into a major new copper region for Xstrata, producing more than 500,000 tons of copper annually. The existing and new infrastructure in Tintaya and Antapaccay paves the way for the construction of the approved $4.2 billion Las Bambas greenfield project.

Las Bambas is the largest of our approved copper projects and remains on track. It will add 400,000 tons of copper at first quartile cash costs with significant gold, silver and moly by-product credits. It’s around about 150,000 kilometers from Antapaccay and will use common upgraded transport infrastructure to take this product from a filter plant at Antapaccay to the port.

The project is being sequenced with Antapaccay. So, as Antapaccay commissions and ramps up to full production, its skilled construction workforce can progressively move across to Las Bambas, reducing recruitment and retention risks and providing for a number of other synergies. The Environmental and Social Impact Assessment, the ESIA, for Las Bambas was approved by the Peruvian Mining Ministry in March this year, allowing final permitting for site construction to progress in the second half.

Construction of the new resettlement infrastructure commenced in the first half and the main site access road construction will be started in the third quarter. Engineering and procurement and construction planning are already 40% complete. Commissioning is scheduled for the second half of 2014. Now, Las Bambas is not immune from the industry-wide cost pressures. The project, nevertheless, remains on schedule and it is at an early stage of construction, with a range of mitigation strategies being put in place to control rising costs.

For example, early purchase commitments on the mining equipment fleet have secured savings of $100 million against the original estimates. And synergies from the Antapaccay project construction are progressively being incorporated into the Las Bambas estimates. As with Antapaccay, a fiscal stability certificate issued by the national government is in place for the project.

A large community resettlement program is currently underway, but despite the challenges that typically arise with major relocations in remote mining developed in Peru, we are starting from position of strength, with really positive local relationships formed over the seven years that our teams have been in the region and a commitment to uphold best international practice standards in our engagement with the community during and after resettlement.

Let me comment at this stage on the concerns that have been raised in recent weeks about the investment climate in Peru, following the recent change of government. President Humala, who took office this week, has underlined his government’s intention to maintain Peru’s economic growth and stability by re-nominating the current governor of the Central Bank of Peru, Julio Velarde, for another term and appointing experienced Ministers to the Cabinet, including Minister of Mines and Energy, Carlos Herrera. Other positive signals from the new administration include a commitment to respect fiscal stability agreements currently in place for all of Xstrata’s operations and projects in Peru, including Antapaccay and Las Bambas.

From initial interactions with the incoming government, we believe that President Humala is cognizant of the mining sector’s significant contribution to Peru’s economic growth. Mining company contributions to the Peruvian government are already high amongst resource-rich nations, while the new government has confirmed its intention to negotiate additional fiscal contributions to mining sector to also recognize the importance of pursuing with the competitiveness of Peru’s fast-growing and valuable mining industry.

Early indications of a willingness to consult with the mining industry to try and find a sensible way forward, I think are quite encouraging and constructive. Beyond the projects currently in construction and those approaching approval, our power plant contains a number of further growth options which are quite exciting.

These projects are not included in our growth targets or statistics about our scale of capital spending, but to provide significant additional expansion potential in coal, copper, nickel, zinc and iron ore to continue our growth trajectory over many years. We’re investing about $1 billion in feasibility and scooping work across a range of potential projects.

Current expansions could provide for over 90 million tons of annual production. In copper, projects including El Pachón in Argentina and the substantial Tampakan copper growth project in the Philippines have the potential to more than double current production by adding over 1 million tons, further expansions at Mount Isa and to capitalize on our extensive zinc resource base, now the largest in the world.

As you know, we have acquired a number of iron ore projects in Africa with extensive resources, including one or two nearer-term opportunities. But I’d like to touch on two major greenfield projects in more detail. To give you a sense of the caliber and the magnitude of the project that underpins our next phase of growth. The Wandoan thermal coal project in Australia and the El Pachón copper project are potentially world-class developments.

Wandoan project holds tenements in Queensland’s Surat Basin which are equivalent in size to the active mining area of the entire Hunter Valley in New South Wales. The project has proven resource base of more than 1 billion tons to underpin thermal coal exports from an initial stage of up to 22 million tons per annum. The project’s massive reserve and resource base supports options to expand production very substantially to over 100 million tons based on a mine life of 30 years.

The project is currently moving through feasibility stage and earlier this year, Chief Commonwealth government environmental approval. Further approvals will be required before we can take the construction decision and when done, will acquire additional infrastructure to open up the Surat Basin. And to this end, an environmental impact study for the Surat Basin Rail was approved at the end of last year and proposed Wiggles Island and better clava coal terminals offer potential port capacity. The feasibility study into Phase I of the development of Wandoan will be completed in the first half of next year and the first phase of production could be around 2015.

El Pachón is a substantial copper project in Argentina’s San Juan province, near to the border of Chile. El Pachón’s feasibility study is currently being updated and an environmental and social impact assessment is expected to be completed in the first half of next year. The project has a substantial resource base of 1.8 billion tons at 0.51% copper. The largest drilling completed to date is being carried out to further define the deposits and more drilling is planned for the Southern Hemisphere summer months.

Now dependent on approvals, El Pachón could start production in 2016. Both projects are exciting prospects, amongst many others that will sustain growth from our portfolio in the coming years. Now, as I’ve said before, while we are progressively bringing on a substantial market growth from our pipeline over the next few years, we remain alive to opportunities to add to our portfolio through acquisitions. And I’m sure it’s a relief to those of you who remain convinced that we are just M&A junkies that at least, we are keeping our hand in. A range of smaller deals conducted in 2011 to date have in the main, provided near growth opportunities, some of which are immediately being executed.

Earlier this year, we purchased two Exco resource copper projects in Australia to bolster Ernest Henry’s production profile from the second half of 2012. Xstrata Zinc’s purchase of the remaining interest in Lady Loretta has enabled Santiago to immediately push forward with the construction of the greenfield mine to feed the Mount Isa concentrator. The proposed acquisition of the remaining interest in Pallas Green and the purchase of the Hackett River and Wishbone exploration properties in Nunavut in north Canada provide expose to further zinc opportunities to supplement Xstrata Zinc’s growth pipeline of $900 million of approved growth projects.

Xstrata Coal’s recommended cash offer for Canada’s First Coal Corporation through a scheme arrangement has recently received very positive response from proxy shareholder acceptances ahead of a court meeting later this week, so more news to follow on that.

A highly diversified portfolio of approved projects by geography is an important means of mitigating political and geographic risks, including those that relate to resource nationalism. Near term approvals in early stage projects display an even greater diversification across geographic regions, albeit including one or two projects in riskier territories. With the range of potential growth projects in a number of different countries, diversified companies can prioritize new investments in the most favorable jurisdictions that offers a stable investment climate for the long term commitments to rebuild or require to build at least a mine.

Our portfolio of approved projects is diversified across eight countries. Two-thirds of capital expenditures earmarked for copper and coal projects. The majority of the 22 projects in construction are lower risk, higher return brownfields expansion and represent 60% of the capital spending. The more capital intensive Greenfield developments of Koniambo, Las Bambas, Bracemac-McLeod and Lady Loretta comprise the remaining 40% of our $15 billion CapEx program.

Developed markets remain subject to a number of well-publicized risks and uncertainties that are influencing sentiment, including European sovereign debts and the outlook for the U.S. economy following, I guess, the recent budget shenanigans and hopefully, those are over. The range of leading indicators of economic growth that we monitor at Xstrata point to emerging economies settling down to lower, but a positive growth rate.

But given the range of commentators and experts in these subjects are, I’m not sure that I can really add much more to the debate about the very short term risks that are likely to dominate sentiment for the remainder of the year. But when it comes to the economies that are driving the bulk of demand for our projects, largely China and Asia, I do have a few things to say.

I’m pleased to note they have continued to grow rapidly. Industrial production accelerated over 15% in June, but continued high inflation has given rise to concerns about overheating sectors of the economy, including food and investment properties. In response, the Chinese government has been implementing a range of targeted policy measures to tame inflation and shepherd the economy to slower, but sustainable growth.

One of the main targets has been the asset bubble that emerged from the commercial housing boom. The government’s deliberate efforts to restructure the housing market by deflating the top end and expanding available housing – the availability of socializing at the bottom end is starting, I think, to bear fruit.

Expectations are that the target of 10 million new social housing units for construction in 2011, at least 70% will be financed and under construction by year end. This equates to around 280 million square meters in floor area and is enough to offset a 10% fall in commercial housing starts.

Now, although these policy measures are slowing activity in the construction sector as planned, growth is still likely to exceed 20% this year. Second quarter Chinese GDP continues to grow at around about 9.5%, compared to 9.7% in the first quarter. And I have to say, there really is very little sign so far of the hard landing that has concerned the markets.

Now, CPI inflation approached a three-year high of 6.4%, in particular, food price inflation, which is an important driver of Chinese policy. I think it’s sort of peaking and a fall in inflation would allow a relaxation of monetary policy, while existing structural drivers, such as higher value-added industrialization, urbanization and technology catch-up will support growth. Already, the government has selectively increased liquidity by excluding some small and medium-sized enterprises from lending constraints.

I think actually, it’s a mistake to analyze China as a single monolithic economy. In essence, the disparity in GDP per capita, urbanization, industrialization rates between the developed Southeast with many of us have become familiar and the under-developed Central and Western provinces demarcates, I think, two economies that are growing rapidly but on the basis of very different fundamentals.

In the Southeastern provinces, China remains on track to bring about a fundamental shift in the drivers of its economic growth, away from exports and centered more on growing domestic demand, effectively picking up the slack from slowing infrastructure investment over the medium term, a very good thing.

The growth, which resembles more closely that of a developed economy, is supplemented by the ongoing urbanization of Central and Western China, where urbanization rates remain below 40%, compared with the cursor regions, which are approaching 60%. 700 million rural residents still remain in these provinces, of whom 300 million to 350 million are expect to migrate to cities over the next 20 years. $100 billion of new infrastructure projects were approved in 2010, and will require substantial volumes of imported commodities as construction begins.

Similarly, the importance of the 250 million to 300 million emerging rural discretionary consumers cannot be underestimated. Land reform is creating real wealth and greater spending power, and I expect, demand for commodities, driven by domestic consumption, such as durable goods, continue to support demand for our products.

In summary, we delivered at Xstrata an earnings growth of around 30% despite a number of one-off impacts to our operations in the early part of the year. Our recovery has been swift and robust and we are now operating with good momentum to deliver a substantially stronger second half. Our cost performance remains very good, and we continue to benefit from the restructurings undertaken during the downturn and the ongoing cost initiatives that have moved our business progressively down the industry cost curves.

I’ve spent some time today on our growth projects, with the overall message that all of our projects remain stable to deliver 50% increase in volumes and substantial cost savings by end of 2014. Five projects are due to commission in the remainder of the year, with several large projects on track to start production in 2012, including Antapaccay and including Koniambo.

We’ve continued to pursue acquisitions to augment our growth pipeline, and I’ve said before, while on-market transactions and prices will control remain challenging, as and when we see the opportunity to create value, we are really well placed to act. The strong balance sheet that Trevor spoke about puts us in a position of independence, where we can deliver our growth strategy from our own resources, with the flexibility to return cash to shareholders through an increased dividend and to pursue value-creating opportunities should they arise.

As global economies continue hopefully to improve over time, Xstrata is really well positioned to continue to deliver value to our shareholders. Now, that’s sort of been a major filibuster on my part. But if there’s enough time, I can take some questions.(inaudible).

Question-and-Answer Session

Andrew Keen – HSBC Bank Plc

Mick, it’s Andrew Keen from HSBC. Two questions. Firstly, on Koniambo, thank you for giving a detailed update on the CapEx. Just a question on that, you’ve actually had quite a CapEx blowout at the end of that project. How much of that is really due to issues over the last six months and how much of that is really due to issues that have been building for a while? Should we read across that CapEx blowout too much into any of your other project pipeline?

And secondly, just a more general question on your organic growth. You once said rightly that you led the industry in terms of M&A, but the problem was, everybody else got religion. In terms of organic growth, you’ve got quite a lot of converts out there. Everybody else is talking about very strong growth pipelines. Is there a risk in that? Is there a point in your strategy that you think you move away from growth and back towards yield?

Michael Davis

Okay. Koniambo first, let me say to you that we did not want to salami slice the market, in terms of coming up with estimates on Koniambo, given the inflationary pressures, because a lot depended on what was going to happen on-site in this very important construction phase.

I mean, essentially, what we’ve had here is a situation where Koniambo, given its remoteness, allows – it’s very difficult to estimate what on-site productivities were going to be, because there are no local comparables. In Peru – for instance, Charlie has a range of comparable projects where you can actually get a read-across as to what onsite productivities were going to be. Our only insight into Koniambo was, in fact, what had happened on Koniambo just before we were making estimates.

And because of the nature of the problems that I was describing to you, where we had underperformance of some EPCM issues, a buildup of local labor, we did not get a good feel for what productivities were going to be in this construction phase until we had a period where we could operate – in a sort of period free of one-off impacts. So it took us a while to get a handle on what those productivities were going to be, and we did not want to come back to the market and give an estimate until we could be pretty sure that that’s what was going to happen in this crucial phase of construction.

So, yes, the inflationary impacts have been building up over time, but we had mitigants against that and we had cost savings over the period. But it was difficult to get a final estimate which we could feel comfortable with and it took a while to do that. So, we took the decision, let’s make sure we understand what the productivities are going to be on island, recognizing the unique nature of remote island build, recognize what was happening within the inflationary period, understanding the unique nature of some of those inflationary pressures on contract and labor rates in a remote island situation where we have no competitive tension at all.

Essentially, Koniambo is competing against the oil and gas industry projects, and the oil and gas industry projects have a very permissive way in which they actually attract contractors and labor. We’ve got a handle on that and there, we are now able to issue with a definitive estimate as we stand right now. So, I make no apologies for the fact that we took our time to do it. And then I recognize that 80% of that is inflation, hyperinflation. 80% of that 80% is labor rates and contractor rates. And so, it’s very important for us here to say, what is their read-across into Las Bambas, Antapaccay, into the coal projects?

And that’s why we spent some time reviewing those projects to ensure, in fact, that it wasn’t a read across. There’s not an automatic crossover of Koniambo experience to those projects. They operate in different markets, they have different competitive tensions. We did our estimates for those projects much later. Remember, Koniambo was estimated in 2007. Those projects that we estimated were completed only a year or so ago.

So, we are quite comfortable with where we’re at on those projects and there’s no read-across. Coal is dead boring. You dig a hole in the ground, you order some equipment, you build a wash plant, way it goes. Antapaccay is just about locked and loaded, and Las Bambas, while we are not immune to cost pressures, because we are in this early stage of engineering, we have found and are finding mitigants to match them. So, I’m pretty comfortable where we are right now in other projects, and that is the reason why we are at Koniambo, in terms of the assessment.

Your second question is a much more difficult question to answer. Clearly, everybody’s got religion. Everybody is devout, fundamentalist in their view, and everybody is trying to build as much as they can. I have to say two things about projects. Clearly, Xstrata is always going to be able to deliver the projects that it talks about. So, it gives you an idea it’s going to come to fruition with Xstrata. The other guys are not going to be able to do it so easily.

The reality is, not every project you see is going to happen. And it’s not going to happen on the time scale that people say it’s going to happen. It’s bloody difficult. You are in complex geographies. You have got complex issues to deal with, even in solid countries like Australia, where they’re changing the basis of how they’re going to tax you, where we get environmental permitting approval from central government and immediately face a challenge by NGOs in a court process, which puts its own delays on things. So there is no – the ability for you to interpret what somebody says we’re going to produce and what they ultimately produce is actually quite difficult.

And we take our own view as to what projects are likely to come on and in what timeframe. And I’m sufficiently comfortable that, over the next five to 10 years, supply is simply not going to catch up to demand. There’s just not sufficient capacity to replace the older degrading mines as they come to the end of their lives with new operations to replace that capacity and bring in a bundle of new capacity that needs to meet the demand that is out there, even on a fairly conservative view of what growth is likely to be out of China and India and other countries.

But obviously in a continuum, you have to be vibrant and flexible in the way that you move from being M&A focused on growth to being project-focused on growth, there will come a time when that will change. And it will make sense – it’ll make more sense to buy production which already is existing rather to bore production. I’m hopeful that we’ve demonstrated to you that Xstrata is flexible enough to make those strategic changes early on, and that we’re not slaves to the past and while we respect precedent, we’re creative enough to understand the dynamics of the future.

Jason Fairclough – Merrill Lynch International Ltd.

Morning, Mick. Jason Fairclough, Bank America Merrill Lynch. I guess a follow-up question on the hyperinflation, and then just a question on Australia. First on hyperinflation, I’m just wondering, do you think your business model, being different from the peers, means that you’re more or less impacted by this prevailing climate of hyperinflation? And I guess – I don’t think there was any mention today of the Australian carbon tax, just wondering if you had any thoughts on that?

Michael Davis

I have lots of thoughts. I don’t think that we are, as a company, differently impacted by hyperinflation than other companies because of our structure. I think the projects are definitely impacted. So, Koniambo certainly faces higher inflationary pressures than, say, a project in Australia and Peru, even though they’ve got their own hyperinflation, because of the uniqueness and remoteness of the island, there isn’t any competitive tension there.

So, when the contractors come of our project, they’ve got another project to go to in Koniambo. And so, we competing, as I said, with the oil and gas industry when it comes to Koniambo, and because we made the decision to go on the local labor, was a really good decision from the point of view of preserving sort of a social equilibrium and not facing the really significant delays we could potentially have faced. And let me say in parentheses, my view is that long delays destroy NPV in today’s environment more than cost overruns, because you don’t capture the value in selling units at high prices.

The local labor content, because of the unique French-European practices applied in Koniambo, mean that you’re paying a hell of a lot for your money and you’re not getting a lot for your money, with respect. So, there’s an additional factor that one has to face.

So, it’s not the structure of the company. How you combat, how you find mitigants, could well be a structural issue. And again, I’d like to think that the nimbleness of having a decentralized capacity done at different business units allows these guys to react timelessly as they see issues, rather than waiting for some huge bureaucratic central organization with a bunch of really smart and clever people, who, the last time they actually ran underground and did a project, was probably 20 years ago, and really are not going to be in touch with what is capable of being done at the local level. So, I’d like to think that we can respond better.

On the issue of carbon tax, I didn’t say a lot in my speech, because clearly, they wouldn’t let me. But if you read my Chief Executive report, I do say a hell of a lot. It’s a bad thing. I have no problem with pricing carbon. I think there should be a price for carbon. I think there should a price signal. That’s the way the world works. But carbon price, a unilateral carbon price at the rate that they’ve said, is a bloody stupid idea.

It’s not going to lead to a reduction in global emissions in the way they think it will achieve, because essentially, what will happen is one of two things. Either businesses will curtail activities so they don’t pay the increased cost, like the coal industry in the very gaseous mines. And in that situation, the coal is going to be produced by Indonesia and by somebody else. And I can tell you ironically, the coals that they’re going to use are going to emit more gas than the coals coming out of Australia. And so, the impact in carbon emissions is going to be zero.

Secondly, the capacity of the industry to respond in the next five to 10 years, which is the timeframe in which they want to achieve a 5% reduction in emissions, the coal industry does not have the technical capability to respond within that period. There has to be a better way of doing things.

Our view on pricing signals is consistent, constructive, consistent with what the rest of the world is doing. So you protect your export industries and you don’t impair them in relation to others, but you find other ways to pass carbon in a way which sends signals allowing gradual change, but definitive change in terms of greenhouse gas emissions, and allows companies to operate in a way which doesn’t in fact impair employment opportunities, but does allow for change over time. Carbon tax is a really blunt instrument which is designed to raise revenue and not designed actually to address the issue of greenhouse gas emissions effectively.

Michael Bogusz – Macquarie Capital Ltd.

Morning, Mick. Michael Bogusz from Macquarie. Two questions, firstly, on diversification. You’ve championed the diversified mining model. Does there come a point where you diversify from a country risk point of view, given Emrati Australia, then the carbon tax? Secondly, I guess on the commodities as well; 12 months ago, I was asked whether Xstrata would ever look at uranium, given the events of the first half this year and where it’s pricing. Is there an opportunity for Xstrata to add value there? And then finally, I guess more a question for Peter, can you give us an update on Askaf, given that it’s gone into pre-feas stage?

Michael Davis

Okay. I’ll hand to Peter now, and on Askaf in Mauritania. But look here, obviously I’ve been a powerful advocate of diversified mining companies, both in terms of the diversification of cash flows into the business, and notwithstanding – and it was a great model, because for a long time, diversifiers traded at multiples significantly above pure play commodities. That situation is a little different today. But nevertheless, I still believe in the view that diversifying by commodity is a good thing, because it allows you to deploy cash flows in areas where you can, in fact, create value, even if they’re not in the commodity that generated the cash.

And it gives you a wider range of options and a wider range of capacity to share your ability to add value across different commodities when the opportunities appear. I also think that diversification by geography is very important. As I made the point, I think it’s one of our major mitigations in trying to combat this question of resource nationalism.

There is absolutely nothing wrong in governments deciding they want to change the basis of sharing their rents with projects between the people that own the resources, being the people, and the guys who benefit from the resources, mining companies like us, such as ourselves. There is actually no issue in that. If tomorrow government X says, you have the resource. The royalties are going to be XYZ, which is different to what it was in the old days, we can say, fine. We can look at that. We can build that into our cost. does it make a return, yes, we’ll invest. If it doesn’t, we won’t, we’ll go somewhere else. That’s no issue of that.

But doing it retrospectively, when companies have already taken on board the risk of the exploration, the risk of development, the risk of financing, the risk of project build, the risk of commissioning. When those risks have been borne and managed, then to come in and say, now we’re going to change the basis of that, is somebody reaching into my pocket without actually contributing to the partnership he wants to join?

I find that fundamentally offensive and I don’t actually think that’s a good policy. It creates instability in the minds of investors as to how you should actually progress yourself in particular geographies going forward. I really caution against that as a principal policy, but I have no issue with companies deciding they want to actually change the basis of sharing of rents going forward. There is absolutely no problem with that.

And then, the decisions they make on that is decisions they make in relation to, what will that do to the beneficiation of resources in our country? How much do we want resources to be beneficiated? Those are the signals that give potential investors like me, and I respond to those signals, objectively, purely dispassionately. But I think that being diversified in an environment where governments are looking for revenue, and therefore are looking to change the basis of seeking that revenue from companies, diversifying by geography is clearly an important mitigant in terms of how we grow forward.

Onto a much less controversial issue, Peter, can you talk about Askaf?

Peter Freyberg

Well, it’s nice to be able to talk about the Iron Ore business. The company that runs Askaf Sphere, which we are have 88% of now, just raised $120 million to progress studies in Mauritania. So, we’re at an advanced stage now with Askaf and also discussions with the Mauritanian government over El Aouj and Lithuania. So it’s an interesting time. I think Askaf is a relatively straightforward project, and we just started working with the Mauritanian government and SNIM, our partners in El Aouj, on how to develop the pipeline there. But progress is good and the studies are properly funded.

Michael Bogusz – Macquarie Capital Ltd.

Just on Askaf, is it still going to be in first production next year or I guess, has that been pushed out?

Peter Freyberg

We’re getting – we’re currently funding the tail end of the pre-feasibility study. The feasibility study stage is next. Not overly complex, there are issues to resolve over the logistics, and I think we’ll be making a decision sometime next year as to how to take that forward.

Michael Bogusz – Macquarie Capital Ltd.

Thanks, Peter. And sorry, Mick, just my question on uranium.

Michael Davis

I’m sorry. I apologize. Uranium. Look, I have to say to you, some decisions you make based on a bit of prejudice. And uranium and me is one of those things. I think it’s shared by my team, so hopefully I’m not making a unilateral decision-taking.

But uranium is a commodity which sort of is embedded in the politics of nations and yes, we have enough difficulties in managing our relationships with governments and political dimensions to immediately want to take on board a commodity which, in itself, is politically in line of sight. And I’ve sort of tended not to want to do that and that’s sort of my position as well. And quite honestly, with the potential of Olympic Dam coming on to produce buckets and buckets of uranium, I’m not sure that it’s a smart move to try and get into BHP’s backyard.

Michael Bogusz – Macquarie Capital Ltd.

Thanks, Mick.

Johan Root -- Barclays Capital

Johan Root at Barclays Capital. Mick, just a couple of questions. In your results statement, you mentioned a cost savings of around $100 million over the next four years from developments on the transportation in New South Wales. Can you just elaborate on the CapEx to date spent on this and whether we can see more of that in that region, and perhaps extrapolate that to the other states within Australia? And then secondly, on the development on the coal projects, I’m sorry, contracts, could you give us a split of where you are in terms of quarterly deliveries versus...

Michael Davis

Well, let me hand that to Peter again.

Peter Freyberg

Just on the trend, Johan, as I think was mentioned earlier on, we’ve kind of got three trains running. The capital for the first three train sets was just over $14 million. The returns that we’re getting are double digit returns on our investment. However, the trains are actually performing a lot better than we expected and we’re actually seeing capital savings as we increase our Chinese procurement element of those trains.

So, we’ll actually see ourselves going from 10 million, 20 million to 30 million tons very rapidly with the New South Wales trains. And obviously, there are implications for running similar trains in Queensland, albeit a different gauge, and we’re currently looking at that, at the moment, for our expansion options there.

Johan Root -- Barclays Capital

Can you talk about the contracts?

Peter Freyberg

Sorry, I missed that question.

Johan Root -- Barclays Capital

On the core contracts, I’m just looking for the split of the contracts in the coal market, quarterly basis?

Peter Freyberg

Well, certainly on the coking coal – sorry, I missed that question. On the coking coal, majority of coal sold today is on quarterly basis. I think the market today is looking more at -they rather follow what everybody else is doing, rather than get into annual pricing.

There is some reluctance and resistance to go to the monthly model that is being pushed out there. On the thermal side, certainly in Asia, we are still running along a similar model to as we have in the past, where we have a number of events during the year where we set price for certain tonnages, the first and the most important one, obviously, being the start of the Japanese fiscal year. And the majority of the coal, certainly into Japan, is sold on that basis and that sets the price for a lot of the other coal that’s sold into Asia.

South African and Atlantic coal is more – tends to be sold on an annual basis, where we enter into annual contracts in Europe still, to a certain extent, often index-based. So, we price those through the year, depending on whether we let it float or whether we fix it.

Johan Root -- Barclays Capital

Thank you.

Michael Davis

One of the other exciting aspects of the train system in New South Wales is the fact that we all want to be engine drivers, and there’s nothing more exciting for choosing ourselves. We went to visit one of the operations in New South Wales and we had time constraints and we flew down by helicopter and we flew over one of the new Xstrata trains. They are just brand new, spanking new, it is fantastic and we got to the mine.

It was filling up and it was just so exciting there. And the thing was, that they wouldn’t let us within three meters of it because of safety issues, and so we couldn’t climb up into the engine and drive it away. But it does fulfill a number of needs, both economic and – both for one’s well-being and reliving childhood fantasies.

Liam Fitzpatrick – Credit Suisse Securities Ltd.

Good morning. It’s Liam Fitzpatrick from Credit Suisse. Just two questions around the Peruvian exposure that you’ve got. Assuming that they do respect the Fiscal Stability Agreement at Las Bambas, what protection does that actually give you? And then on timing, is there any indication when we may get details on the potential windfall tax?

Michael Davis

Charlie?

Charlie Sartain

Thanks for the question. I think it’s important, first of all, to state that it’s a much better position to be in to have fiscal stability certificates in place than not to have them in Peru. And it was an important process that we followed after securing approvals there to just ensure that we did have stability certificates, which we have in Antapaccay and Las Bambas, as Mick mentioned, but also in our Antamina joint venture.

So, I think that puts by law, it puts you in a strong position in Peru. The government has signaled an intention to respect fiscal stability, but also an intention to consult with the industry about possible additional contributions, so and that’s the process that we’ve just initiated with the government.

We have been encouraged by the statements that the government does recognize the need to retain competitiveness with other countries. And we’re in a process at the moment of sharing with the government there and understanding of the overall tax and fiscal positioning in Peru relative to other countries. That will – been laid into further discussions with the government and it’s a process that will take place over several months, I guess, and seeing how we end up with that. But I certainly see two camps there. There’s the ones where companies are actually having a conversation from a position of relative strength compared to other projects, which have not yet been approved and don’t have the protection, and by law in Peru, of fiscal stability.

Michael Davis

Okay, on account of the fact that I’ve kept you for a rather long time, I’m happy to take a couple more questions, but I think we should start drawing to a close. So if there are any more – are there any more questions?

Well, on that basis, let me thank you again for your attendance and people will be outside. If you want to continue the debate, please feel free to do so.

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