Xstrata's CEO Discusses Q2 2012 Results - Earnings Call Transcript

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Xstrata Plc (OTC:XSRAY) Q2 2012 Earnings Call August 7, 2012 4:00 AM ET


Mick Davis – CEO

Trevor Reid – CFO

Santiago Zaldumbide – Executive Director and CEO, Xstrata Zinc

Charlie Sartain – CEO, Xstrata Queensland Ltd.

Ian Pearce – CEO, Xstrata Nickel

Peter Freyberg – CEO, Xstrata Coal

John Bond – Chairman


Jason Fairclough – Bank of America/Merrill Lynch

Liam Fitzpatrick – Credit Suisse

Myles Allsop – UBS

Robert Clifford – Deutsche Bank

Peter Davey – Standard Bank

Reene Clavick – Renaissance

Alison Turner – Panmure Gordon

Mick Davis

Good morning, ladies and gentlemen and welcome to the Presentation of Xstrata’s Half Year Results for the Six Months Ended 30th of June 2012. These results, if I read the newspaper, seem to have been anticipated with lot of interest and I hope that we are going to be able to address that in our presentation this morning. And in that context let me also welcome those who’re attending the presentation via the webcast and those also who are listening on the telephone.

Now with me this morning are the other members of our Executive Committee who I think are familiar to most of you. So, at the front me are our CFO, Trevor Reid; Santiago Zaldumbide, Executive Director and Chief Executive of Xstrata Zinc; Peter Freyberg, Chief Executive of Xstrata Coal; Charlie Sartain, of Copper; and Ian Pearce, Chief Executive of Xstrata Nickel; and Peet Nienaber, the Chief Executive of our Alloys business. Our Chief Legal Counsel, Benny Levene; and Thras Moraitis, the Executive General Manager Strategy comprised two other final members of the Executive Committee.

Before I carry on maybe it’s a good moment just to pause and just note that this will be this is Peet’s last results presentation. He retires in a month’s time. And you know Peet and Santiago were the two colleagues that I joined when I came to Xstrata sort of, I don’t know, 11 years ago now in October, running the two businesses of the Group and who essentially stood with me and then with Trevor in terms of thinking how to build the group up.

But Peet has run Xstrata Alloys from long before that and in fact with his mentor start of the company which they went public then they bought by Glencore, then came into Xstrata and has run their operation in the most exemplary fashion. And in the last few years in quite difficult in complex circumstances with the increase in power prices and the inherent complexity of running operations in South Africa and has done the most outstanding job and he has been a very highly talented Executive and a great pleasure to have a colleague with Executive Committee and somebody who we are going to miss a great deal at Xstrata.

So, I guess on your behalf and on our behalf I think I should pause and say to Peet a really large thank you for the great contribution you’ve made to the building up where I think is now this great company. And we wish you well in retirement and we hope that you’ll bring as much vigor to the animals in the farm as you bought to earning the facilities alloys and I am sure that will continue to have many, many years of sheer experience together but just in a different form, but thank you very much Peet.

I should also note that Santiago, who has to be one of most remarkable executives that I have worked with, is having a rather special birthday tomorrow. And well I am not sure it’d be appropriate this results presentation to lead you in, happy birthday Santiago it’s I am quite tinted to do I have to say.

Just to see the expression on his face, but I think again on behalf of all us Santiago many happy returns for tomorrow, what an incredible, incredible innings you had and what an amazing contribution you have made to not in Xstrata but to the corporate life in Spain and into the zinc industry, and again such a great pleasure to have you as part of the team.

So moving on our financial performance in the first half of the year, a cyclical downturn in commodity prices as well as the transition year, which we shared that to the market last year and again this year when we produced our results in February where we marked great production from certain legacy and end of life operations to our next generation of lower cost mines.

And commodity prices fell significantly, in particularly for nickel and for zinc, compared to the same period last year and were the major contributor to reduced profitability, while we were shielded from the full impact of lower spot coal prices by higher annual contracts.

The EBITDA was $4 billion was 31% lower than the same period last year. Our earnings per share fell to $0.75, 23% lower than the first half of 2011 on a pre-exceptional basis. We’ve declared an interim dividend of $0.14 and 8% higher than last year’s significant increase, marking our confidence in the medium-term prospects and our robust balance sheet, with gearing at a pretty comfortable 19% in the midst of our peak year for capital spending.

So against this background of lower prices, the cost pressures are rising from our transition from older mines and ongoing cost inflation across the industry, operational performance, I think, remains quite robust. In the second quarter volumes, as you have rose across the Group providing us with very decent momentum to achieve our expectations of higher volumes in the second half.

Now despite the challenging environment, our businesses again achieved over $100 million of real unit cost savings, continuing our unbroken record of net cost reduction in real terms, which we’ve managed to achieve and reported on every single reporting period.

Following a detailed review of each of the business units, we have identified significant additional cost savings for the second half of the year to more than offset the cost pressures we expect to face.

Safety performance continued to improve in terms of total recordable injuries including contractors to 5 million hours worked. This year marks the tipping point of the strategy to transform our portfolio through organic growth that we have consistently pursued for the past five years and that strategy has delivered long-life, lower cost operations were further embedded growth potential such as the Mangoola and Goedgevonden coal mines, Nickel Rim South and the major expansion of the Antamina copper-zinc mine, all producing at or above nameplate capacity. By the end of the year, total of rich commissioning accelerating our transition from certain legacy, end of life operations to new and expanded efficient operations.

The Antapaccay copper mine in Peru has now started commissioning and in total four copper projects will start production this year. Koniambo New Caledonia will deliver its first ore to furnace before the end of year. And Silopi ferrochrome pelletizing plant in South Africa will improve efficiency in our ferrochrome business and the Lady Loretta and George Fisher zinc-lead mines in Australia will commission ahead of schedule

Our business will be transformed in terms of asset quality, cost comparativeness and further capital efficient growth potential. Now as you read me, differed around $1 billion of capital expenditure from this year. And we will return to this later. But we’ve done this with impacting any of our approved projects and we reviewed our unapproved project portfolio to priorities the highest returning projects and consider the timing of future investments.

So that is a brief introduction. I hand over to Trevor, he is going to take you through the key points of our operational financial performance and then we’ll elaborate further on our program of organic growth.

Trevor Reid

Well, thanks Mick, and good morning ladies and gentlemen. As usual, we’ve provided a very detail report on our financial and operating performance in the packs that you have. So once again I am going to limit my presentation to the key points.

After a strong start to the year for commodities, renewed turmoil in the eurozone and a slowing growth rate in China has severely affected commodity prices in the first half of 2012. Lower prices across every commodity with a main driver of a 42% reduction in operating profit to just under $2.5 billion. Foreign currency gains reduced the net interest expense in dollar terms and you will also note our lower income tax expense, which reflects a one-off reversal of circa $450 million of prior year tax provisions.

If you strip-up the impact of this reversal, the effective tax rate before exceptional items was 24%, which is slightly lower than the 26% effective tax rate for the first half of 2011 due to reduced earnings in some higher-tax jurisdictions.

I expect the effective tax rate to be around 15% for the year, which if you exclude the right pack is equivalent to around 24% for the full year on a normalized basis.

During the first half of 2012, we have to recognize a number of non-cash exceptional items in the income statement, which in total reduced earnings by $253 million. We’ve included impairment of our investment in London following the release of the 2012 interim results and impairment of goodwill following the announcement of the closure of our brands with Zinc mine and the recognition of a non-cash loss upon the sale of 51% controlling interest in our harder electricity project in Chile to a specialist power Generation Company.

Following the enactment of the mineral resources rent tax in Australia, which became effective on 1 July. We’ve had to recognize an exceptional deferred tax credit. Now this treatment is completely in line with our peers in Australia and you can expect to see similar items in their accounts.

Our show of earnings from non-controlling interest fell 44% due to reduced earnings Alumbrera, where restrictions imposed by the Argentinean Government caused by temporarily suspend copper sales to export customers during the second quarter.

Attributable profit before exceptionals decreased by 23% to $2.2 billion giving earnings per share before exceptional items for the half year up $0.75.

Now, if you exclude that non-exceptional tax adjustment, our earnings per share was $0.59 per share. Operating EBITDA decreased by 31% to $4 billion again reflecting lower commodity prices during the first half and in particular lower base metal prices, which accounted for the majority of the reduction.

We were partially shield it from the impact of lowest spot coal prices during the second quarter by our exposure to sales under longer term fixed prices contracts. Lower prices across every commodity reduced operating profit by $1.1 billion compared to the first half of 2011. And whether main driver in the reduction operating profit down to 2.5 billion.

Average Nickel prices fell 28%, Lead 21%, Zinc 15% and Copper 14% during the first half. Lower base metal prices represent 85% of the $1.1 billion sales price variance. We continue to experience inflationary cost pressures for key inputs.

Although we have observed that the rate of CPI and mining industry inflation has slowed. The combined impact of CPI and mining inflation increased cost by some 386 million in the first half of 2012 compared to the corresponding period over the – period in the prior year and represented the total annual inflation rate for our businesses of some 6.5%. The inflation rate has decreased from record levels seen in recent years, and we expect this to moderate further in the medium term as a number of mining companies delay or cancel proposed projects.

The stronger US dollar against the currency is the commodity producing countries at a $261 million to operating profit, partially mitigating the impact of inflation. Nickel and coal production volumes rose while zinc volumes were maintained despite end of life operations at Brunswick and Perseverance mines in Canada, but were offset by lower volumes in our copper and ferrochrome businesses.

In total, lower volumes reduced operating profit by some $639 million reflecting the transitional nature of this year for our copper business.

During the first half our business has achieved real unit savings of some $105 million. Efficiency improvements at our zinc operations, higher coals production from lower cost operations, increased production and improved head grades at Raglan and Sudbury nickel operations and lower power costs and higher production at Falcondo ferronickel operation more than offset headwinds experienced in the some of our copper operations.

Depreciation and amortization decreased mainly due to the lower volumes in the copper business and partially offset by higher production in the coal business.

Now our copper business is currency undergoing a significant transition as we close a number of our material lower grade operations and commissioned new lower cost mines and expansions. By the end of the year we will have commissioned four new or extended copper operations providing a significant increase in lower cost copper production.

Despite the stronger second quarter, copper production volumes declined by 18% in the first half, compared to the previous and sales volumes were some 25%. This production decline was of course largely for shadowed at analyst presentations during the course of last year and again at our 2011 results presentation here in February of this year.

First half earnings were reduced by plant lower production at end of life mines including Tintaya and Ernest Henry open pit, as those operations transition to their respective expansion project and planned lower grades at Collahuasi.

In addition, challenging geotechnical issues in Tintaya restricted mining rates, while at Collahuasi reduced production and operating conditions from an extended ball mill outage and adverse weather also impacted volumes. The combined impact of these factors on earnings was $530 million.

Earnings were further reduced by $262 million as we were forced to suspend sales from Alumbrera, as we sort to resolve temporary restrictions imposed by the Argentine government. But I am pleased to say that the situation has been resolved to the point where we have been able to resume concentrate shipments and we should fully recoup the backlog by the end of this year.

We reduced volumes in our Ferrochrome business due to lower capacity utilization to respond to power buyback request from Eskcom, the local electricity provider. And in our Nickel business, the schedule of custom feed processing and meant that we processed a greater portion of lower margin third-party material which offset the positive impact of the higher mine production from our own mines.

While zinc mine production was broadly flat year-on-year, higher grades at our Australian Zinc-lead operations only partially offset lower grades at the Canadian Zinc operations, as they approached the end of their operational lives and Antamina continues to mine its copper riche ozone and consequently produced lower volumes of zinc.

Coal production increased by 13% in the first half as a result of increased thermal coal volumes across every division, as a result of the contribution of new mines at Mangoola, Goedgevonden and ATCOM East. The successful return to production of the Blakefield South mine and the completion of the boxcut and commencement of development at Ulan West.

Thermal and coking coal volumes were also high in the second quarter from the first quarter as our Queensland coal operations benefited from fuel production, disruptions up to the impact of wet weather and longwall moves in the first quarter.

Xstrata’s operations generated $3.2 billion of cash during the first half and free cash flow was almost $1 billion. Investment into our proved organic growth projects continued to ramp up in what is our peak year for capital spending. Expansionary capital spending in total for the first half was $3.3 billion, around $900 million higher than in the first half of last year. Net debt increased to $11.4 billion, but despite the higher levels of investment, gearing remained at a comfortable 19% compared to 15% at the beginning of the period.

Our major projects continued to make good progress and we spend just over $600 million at the Greenfield Koniambo nickel project in New Caledonia, where first ore is expected to be process by the end of this year. Engineering and procurement are now complete and construction is progressing well. Around $400 million we’ve spent during the period to progress the Greenfield Las Bambas copper project in Peru, following the receipt of the final site construction permits in May, after some delays in getting that permit. Las Bambas is now in full construction as Charlie will outline in more detail later.

The Antapaccay project in Southern Peru incurred $300 million to bring the project to commissioning as we announced earlier today. And other major items for capital spend included $270 million at the 8 million ton per annum Ravensworth North thermal coal project in Australia. And $230 million spent in advancing the brownfield Ulan West coal project.

I think it is also worth noting that for the 2002 approved projects, which are not yet producing, but which will commission over the next couple of years, we have already invested in excess of $ billion.

In May 2012, shareholders approved a special resolution to allow Xstrata to pay dividends without deduction of Swiss withholding tax. The approved deduction of the share premium account has enabled us to create a distributable reserve, from which the payment of the 2011 final dividend of $0.27 per share, and subsequent dividend payments will also be made without deduction of withholding taxes.

Our continued confidence in the medium-term outlook and our strong financial position has enabled us to continue our progressive dividend policy. And the board has proposed an interim dividend of $0.14 per share, which amounts to $414 million, and will be paid on the 30 of September to shareholders on the register at 31 August. As in the past, we’ll expect to pay interim and final dividends broadly in a one-third, two-third ratio.

Thank you very much. And I’ll now hand back to Mick.

Mick Davis

Thank you, Trevor. So, recent falls in commodity prices have, as in late 2008, sort of reignited suggestions that the recent era of elevated commodity prices and strong demand and the inability of the supply side of respond sufficiently to that demand is sort of drawing to a close, the lack of conviction syndrome. Now there is no doubt that reached another cyclical slowdown within a longer-term trend. Yet the fundamental drivers of the secular uplift in demand, which we based the whole thesis of Xstrata going back to 2002, continue to exert significant influence.

The urbanization and industrialization of very large, young or working age population is not yet complete and in some countries the inexorable process is only in its infancy. Indonesia, Mexico, Russia are forecast to join China, India and Brazil as one of the –among the largest economies by 2050, implying significant growth from this point.

Now looking back through history, seismic shifts in the world such as the industrial revolution, the industrialization in United States and Japan, the post-war recovery of the 1950s and 1960s, have all endured for more than one decade. The urbanization of China and other emerging economies is following similar trajectories, with the distinction of being the order of magnitude greater in size, pointing to perhaps to an even longer duration.

But the economic cycle will, of course, continue to turn even within these longer term trends. And since midway through the first quarter of 2012, also sort of radar, which has uses sort of a leading economic and end-use indicators point to cyclical economic weakness in 2012. And the short-term trough, we found ourselves in today arises from the combined impact of fiscal austerity in OECD economies, slower recovery in United States and tempered growth in China as that government reined in certain overheated elements of its economy.

So all commodities have been impacted in the current environment and I have noted a concerned however. That the current weakness in the thermal coal price might be reflecting more than just tempered cyclical weakness. And in particularly implications of shale gas or thermal coal is a current hot topic.

And I thought therefore smooth aggression at this stage to comment in this aspect would be appropriate. Unconventional gas as undoubtedly has a role to play in meeting future energy needs. But the reality is that it is likely to remain a phenomenon largely restricted in United States until at least 2020.

And as you’re aware the United States is a most advanced and exploiting shale gas and has rapidly developed the technology to recover this gas increasingly lower cost. Success in United States and exploiting unconventional gas reserves has not been easily replicated in other countries.

The development has been inhibited by a range of factors including land access limitations, more complex or difficult geology that draws high extraction costs and most importantly the lack of established power plant or reticulation network to transport gas and this is a particular issue in Asia.

So for the key industrialization urbanizing countries in Asia, thermal coal remains a lowest cost fuel source for power generation and this is fuel seaborne coal demand at growth at 8% and since the start of the last decade.

Now demand growth, of course, has been nominated by China, which is increasingly lying on imposed defeat its incremental energy needs. Last year China consumed 3.3 billion tons of thermal coal and its demand has been growing by around 250 million tons of coal per annum.

For ongoing process of the organization, we’ll drive similar annual growth rates going forward. Now related to the overhead, China is effective towards large preserves of unconventional gas, estimated some of about 25 trillion cubic liters and this could help feed the record economy energy demand obviously.

Then through recovery is not that easy. The gases is accounted to much deeper less payable rocks is a lack of supportive infrastructure and most of the gas is located in dry airs of app the vast volumes of vote required for extractor.

But that said they doesn’t appear history to be any challenge too big in China and I guess gas will eventually be exploded. But even assuming that aggressive development targets are made this taking new supply will appear to just 225 million tons of coal equivalent in 2025.

So our shell gas were undoubtedly planning and importantly meeting growing global demand for energy unconventional gas suppliers represent less than 12% of global energy requirements and a projected effect to remain below 6% in 2025.

So to satisfy growing energy demands, coal along with nuclear and renewable energy will continue to provide an important source of energy in the global energy mix for the foreseeable future.

Having done that and we now return to how we responded to this and welcome but (inaudible) of cyclical weakness. As you know, year-on-year delivery of real cost savings is a whole mark of our approach to managing our operations and an important indicator of our operational ability is all sort of, (inaudible).

Our cost performance in the first half continues unbroken record of real cost savings at every reporting period since our IPO in 2002.

Now in the early year, and as we cut costs primarily by turning underperforming, higher cost acquired assets, and turning them around. But over the last few years, operating teams have demonstrated an ability to reduce costs from a mature and more stable asset base, both in buoyant markets and in tough operating conditions.

So just as in the previous year’s cyclical – just as the previous cyclical downturn of late 2008 maybe 2009, we are once again taking preemptive action to ensure that our businesses remain competitive and defend margins. So as ever, our businesses have responded to the operating environment identifying substantial additional cost savings to offset cost pressures and lower prices.

We now expect to reduce costs by around $970 million in total, comprising an additional 355 million of savings over the $650 million savings provided in our original budget. Identified savings will be more than offset our increased expectations of increased unit costs of around $580 million for the full year excluding inflation, which arise from the inevitable cost impacts of ageing operations, which have reached the end of their lives, including from lower grades.

The result net real cost saving for the year of around $390 million is has to be really against where there is a very complex operating environment in 2012, compounded by this transitioned phase of our growth strategy and the potential risk of distraction arising from the complex major discussions we’ve had with Glencore. But I’m very clearly pleased with the outcome so far.

Our approach to reducing costs is firmly rooted in this very core belief that our operational managers are best placed to determine how to run their sites more efficiently. We don’t impose top down cost savings targets from the centre. We never have. Instead, I ask every commodity business and every site manager to identify incremental improvements, they can make in accordance with the specifics of their operations and I really have to say, I am constantly impressed by the commitment and drive of our people to find innovative ways to do things better tomorrow than they did today.

Each biz commodity business units have identified their range of initiatives to reduce costs. And as this chart shows, the identified initiatives very significantly between our businesses and typically comprised tens of small initiatives that together contributed significant savings.

But broadly the savings can be split into four categories, increased throughput and productivity gains, expected to contribute around about two-fifth of the savings for example due to the accelerated ramp-up of their costs operations all lead to savings and then a lot of that will come through the second half of the year.

Prices and procurement savings from our commodity business has jointly finding additional economies of scale to improve equipment availability on site will provide one-third of the total savings. So then acting together and improving a lot of availability is an important factor. Reducing or optimizing our use of consumables such as tires, working exposures will contribute a further 17% and the balance will come from energy efficiency savings.

In terms of specific initiatives, our two most energy-intensive businesses, Xstrata Alloys and Xstrata Nickel, have identified efficiency improvements that will yield over $55 million in 2012, including the shift to 100% procured power at Falcondo and optimizing our ferrochrome furnace schedule to reduce the impact of higher winter power tariffs. Xstrata Copper’s reorganization of its north Queensland division to a lean organization to support its narrower focus on mine production will save around about $78 million.

Improved productivity and corporate savings at Xstrata coal and accelerated shifted from third party service providers to in-house capabilities although now it’s over $200 million of savings.

While Xstrata’s zincs continues to – across its portfolio including around $100 million of savings from increased productivity as a new and expanded lower cost operations in Australia start-up ahead of schedule during the second half and further savings from the more efficient use of consumables.

The cost savings initiatives were implementing today, our pro-active response to current market conditions. But I guess even more importantly reviewed a sustainable benefit adding significant long-term value to our shareholders.

Now, over the first two years, Xstrata strategy has evolved through this – through three distinct phases. First, we pursued rapid growth receives a world time an integrated acquisitions. We then transformed those assets through operational excellence and on ongoing focus on improving our sustainable performance. Our process are obviously continues today.

And for the past five years, we’ve embarked on an ambitious organic growth strategy to effect the third phase of our transformation, which reaches its peak this year in terms of spend.

As I have already indicated this morning, this strategy has already delivered long-life, low cost operations with embedded further growth potential. And clearly Antamina, 10 major projects were reached commissioning by the end of 2012 across every business commodity, commissioning 10 new projects this year.

The impact on the quality of our businesses is striking, will introduce serving new Tier 1 world class assets into our portfolio and expand another four. We avail our significant reductions in our world unit cost in every commodity and by way the example of 85% of our copper production in 2016 will be amongst and as competitive in the industry, in the bottom half of the industry cost curve, compared to 42% today.

Average mine lives will be substantially extended, our projects will deliver robust returns on our investment throughout the commodity cycle and we will gain another raft of low capital cost, brownfield expansion options embedded within the world class assets which we have now developing.

Notwithstanding the impact of cost and other pressures on some of our projects, and you know these. It would simply would not be possible to acquire assets of this overall either arching quality and strategic fit without paying a substantially higher price than our existing capital investment, a pleasing result.

Now this slide clearly shows the transformation that our business is currently undergoing as we commissioning a large number of approved gain projects starting now. The Antapaccay project in Southern Peru has commenced commissioning and is on-track and within its original budget to start production this year and reach full production next year.

And within – little less than next five months other major projects including Koniambo the Greenfield nickel operation in New Caledonia, the Tswelopele pelletizing plant to improve our efficiency of the ferrochrome smelters, the Ravensworth North Stage I coal development and the George Fisher and Lady Loretta zinc-lead mines in Australia will also reach commissioning. These projects remain on schedule and in fact we will be able to accelerate the development of both George Fisher and Lady Loretta.

Further 11 projects will commence production in the next two years and by only 2014 organic growth strategy will increase capacity by 50% in corporate driven terms over 2009 levels, a promise which you have well aware of.

By 2015, our major organic growth program will be substantially complete, generating increased cash flows while our capital spending and return on capital revert to more normalized levels and more comfortable levels following the keeping – following the peak in CapEx this year.

And following with our project spending, we have – Xstrata has highlighted, we’ve resequenced capital spending and deferred $1 billion of expenditure currently originally planned for 2012. Consequently, our 2013 budgetary spending will increase by $400 million, with $600 million deferred will be on that plant.

And importantly, this resequencing will not affect the commissioning schedule of any of our approved projects, and no projects will therefore be cancelled. We now expect our expansion in – capital expenditure in 2012 to reduce to $7.2 billion, $1 billion less than our previous guidance, smoothening the profile of capital spending across the next two years.

I have to say the experience we have gained in successfully delivering 23 organic projects since 2002, has provided some pretty important and valuable insights. And during an ongoing review of unapproved projects, we have implemented an important method from previous major projects and increased the engineering work and the planning we do before approving capital projects and commencing construction. This will allow us to mitigate execution and technical risk and provide a greater level of certainty in capital cost estimates often approval.

We do continue to invest judiciously in prospective near to medium-term projects as such Agua Rica and El Pachón, Kabanga nickel and the Wandoan coal project to be bring towards an appropriate decision on investment. The timing of approvals will be sequenced to maximize returns and account for anticipated conditions as well as meet investor expectations, which will book us cost loud and clear on the churn requirements.

We will maintain a flexible portfolio of future growth options to include the Cerrejón phase two and Collahuasi’s phase three and four expansions, but we’re going to minimize study costs, while keeping those options alive.

I think I’ll now hand over now to Santiago, who’s going to talk to you about our projects approved by Xstrata Board, subjected to final activity approvals which we expect to come through, which is the Phase III of the McArthur River Mine in an urban territory. And Santiago and his team have (inaudible) sort to remove one obstacle after another the many years and therefore to realize the full potential of this vast resource base in the McArthur River Mine. And it’s a striking example in a way which we go back pursuing value creation within Xstrata at all levels. Santiago?

Santiago Zaldumbide

Thank you, Mick. Good morning, ladies and gentlemen. It is with great satisfaction that I stand here to way to present the next expansion of McArthur River Mine, the product of almost a decade of perseverance, innovation and entrepreneurship.

From the time it was discovered in 1955, very strong base at McArthur River was been recognized as we among the largest in the world. However, the nature of the ore and the fact that only one combined zinc are led constitute could be produced in any volume, meant it is commercial viability of McArthur River remain in question for decades.

With the advancement of the grinding technology and the emergence of buyers mentor in the 19s which were able to treat bulk concentrate McArthurn River Mine finally start to production of 1 million tons per annum or run-off a mine ore. However, the underground mine was only going to exploit two of the eight available ore bodies and encounter significant technical difficulties because of the nature of Xstrata.

By 2002 with an estimated mine life of less than five years and rising costs the mine became uneconomic.

In 2003, Xstrata acquired McArthur River as a part of the MIM acquisition. Immediately, we searched for a way to exploit a vast potential of the underlying orebody, despite the lack of technology to separate the zinc and lead and the ongoing closure of entire smelters downward the key customers for bulk concentrates.

First, we had to gain access to all eight orebodies by converting the mine into an open cut operation. This is not a simple as it sounds and in all protecting the pit from the notorious seasonal rains in the area and finding an environmentally acceptable way to redirect a section of the McArthur River which run on top of the main deposit.

Our Japanese partners divested their 25% to us for $4 million in 2005 giving us a full ownership of the mine.

We finally received environmental approval for the open pit in 2009 and construction was completed in 2010. We now have a mine with over 15 years life mining 2.5 million tons of run of mine per annum with around 200,000 tons of zinc contain but was still constraint by availability of customers who take bulk concentrates.

So our imperative was to find a technological solution to separate the zinc and lead and produce a mainstream concentrate which will be acceptable to all the smelters.

Although, we had inherited MIM’s Albion technology its high CapEx and power requirements meant that even with Xstrata zinc process improvement it did not provide a compelling solution for this particular project. In parallel, we tested an advanced alternative leaching technology, which ultimately won the race. For this proprietary low energy technology installed at the McArthur River Mine we are now able to separate the lead from the zinc, allowing us to produce worldly marketable concentrate with 50% zinc rate and low lead content suitable for use by standard electronic zinc smelters including our own.

With the final piece of the parcel in place some nine years later I am able to announce the expansion of McArthur River to 5.5 million tons run of my plan more than double current production. The full potential of the resource can finally be realized through a capital and energy efficient lower operating cost, largest scale and long-life open cut operation sitting on top of 50 years ore body.

On 17th, July the Minister of Natural Resources, Environment and Heritage pronounced that the third phase expansion can commence subject to a normal set of recommendations. We now await the relevant approvals from the Minister of Resources.

The $360 million McArthur River third phase expansion has been approved by Xstrata Board and is expected to commission late in 2013. Producing and annualized average of 380,000 tons of zinc in concentrate per year by the end of 2014 with the proportion of commission and concentrate growing rapidly each year from the initial 200,000 tons. At the same time, cost we reviewed by around 20%, research will increase by around 70 million tons to 115 million tons and the mine life will extend to 2038.

All-in-all, this project will earn Xstrata’s cost of capital at a zinc metal price of $1,340 per ton. Production will introduce into a market at the time of projected supply, demand deficit will leave. This is a phenomenal transformation of a failing operation into one of the world’s premier zinc mines and accomplishment of which my team is rightly proud. It is a tribute to the entrepreneurship and dedication.

As you already know, we are constructing two new mines and expanding another in parallel with McArthur River expansion all of which are around halfway to commissioning. The Lady Loretta mine is due to produce first ore in November of this year and due to change in mine sequence it’s almost a year ahead of the original plan. We expect to produce 142,000 tons of zinc in concentrate at full capacity. The very high grade ore at Lady Loretta enable us to transport the ore kilometers to be processed in the Mount Isa concentrator, avoiding the need to invest in a processing plant at a Lady Loretta mine.

On George Fisher, now we claim to renew ore block this provision year will enable an extra 1 million tons of ore that we produced some six months ahead of the original plan due to early lateral development.

We are on track to deliver the 4.3 million tons of ore in 2013, increasing to 4.5 million tons or around 250,000 tons of zinc content from 2014. At the same time, we are in the process of commission a new crushing facility at George Fisher to accommodate the additional ore and further reduced costs.

Finally, the Bracemac-McLeod project in Canada continues to be on time and within budget and is expected to commence production in the first quarter of 2013 with planned capacity of 90,000 tons of zinc in concentrate. Similarly to Lady Loretta, Bracemac is a very low capital project as it is able to make use of the existing Matagami concentrator four kilometers away.

It is instructed to step back from the returns of rich growth project and reflect on the overall impact on production and cost. Those further expansions will increase production of zinc in Australia to over 800,000 tons by 2014 while reducing our cash cost of Mount Isa by over 50% and McArthur River by around 20%.

This will propel our Australian production into a leading competitive position on both volumes and costs. In both cases from operations, which raise that (inaudible) were considered to be at the end of their lives. Overall, the growth projects, I have touched on today, will more than offset the production decline in end of life operations such as Brunswick and Perseverance. All are highly capital efficient. And I am pleased, we will progress may so far in constructing them.

Beyond this, we have a series of our equally capital efficient focusing Australia, Canada and Ireland. Xstrata Zinc is well positioned to rise to the challenges of delivering higher return and capital efficient growth into a market, which is showing every sign of growing deficits with the next couple of years.

So, I now hand over to Charlie to talk about our copper business. Thank you.

Charlie Sartain

Thanks very much, Santiago. After several years of planning and development and shareholder patience, the second half of 2012 marks the inflection point for the strategic transformation of our copper business from predominately short life mines into one of the world’s largest low cost copper producers, underpinned by long life assets.

Following the startup of underground mining at Ernest Henry operation late last year after open-pit mining was completed, and the successful commissioning of the major expansion biomass 40% of Antamina this March where throughput is already consistently running above the nameplate capacity. We will be commissioning a further three projects this year that lift our annualized production rates towards 1 million tons by the end of 2012. So these projects together with Las Bambas will bring our annualized copper production to 1.5 million tons by 2015.

As I speak, we celebrate a very important milestone with the start of commissioning at the Antapaccay processing plant. First concentrator is expected within the next 10 weeks, but more on Antapaccay later.

In Australia, I was very pleased to announce last week the start of mining on time and within budget at our new Mount Margaret mine which is adjacent to our Ernest Henry operation in North Queensland. We were able to secure the Mount Margaret deposits and mining leases in 2011 for $175 million and have been able to rapidly advance the permitting and the development to provide additional fee to existing concentrator at Ernest Henry.

The Mount Margaret deposits will add around 30,000 tons of annual copper production to Ernest Henry over a five-year period, plus important gold and magnetite credits, strengthening the economics of the Ernest Henry complex and taking immediate advantage of the available installed capacity of the concentrator and of course the associated infrastructure.

At Ernest Henry mining we have successfully transitioned to an underground (inaudible) operation at a rate of around 2 million tons per annum that will progressively reached levels of 3 million tons per annum by the end of this year. We’ll complete phase 2 of this growth project at the end of 2013 with the sinking hoisting shaft which will increase the annual mining capacity to 6 million tons. Underground mining at Ernest Henry will sustain production for a further 12 years at an average of 50,000 tons of copper in concentrator per annum.

In Chile commissioning of our Lomas Bayas 2 project will be completed in the fourth quarter sustaining Lomas Bayas production for further 16 years at 75,000 tons per annum. The project has involved the development of the new Fortuna de Cobre open pit mine to further supplement ore from the original Lomas Bayas pit to get with additional crushing, conveying and leaching infrastructure to support the new mining operations.

I am very pleased to report that we’re delivering the 160,000 tons per annum Antapaccay project in Peru on time and in line with the original budget of $1.47 billion, which is a remarkable achievement for a project undertaken through a period of industry inflation and local-social economic instability.

Antapaccay is the combination of a strategy that we initiated almost six years ago, immediately after we acquired the Tintaya operation for $750 million. In this short space of time, we have delivered $2.5 billion in EBITDA from Tintaya. We have confirmed a further 1.3 billion tons of new mine resources and we have completed concept studies, feasibility studies and now the construction of the Antapaccay project with important reinvestment in the region.

Antapaccay is strategically very important project for us. One that established as a new large scale modern concentrator in the middle of a world-class mineral district with a new mine, exploiting a 1 billion ton copper mineral resource. Not only that’s give us an operations with first quarter our cash costs, but it does so at in industry leading capital efficiency of less than $10,000 per annual copper equivalent ton.

The further potential of this mineral district is also pretty exciting, since acquisition, we have increased the Antapaccay mineral resource base four times and we do so again today with a further 27% increase to over 1 billion tons of 0.49% copper and with gold credits.

In addition to Antapaccay, we’ve also outlined further mineral resource of 324 million tons grading 0.93% copper at the nearby Coroccohuayco deposit. Coroccohuayco has the potential to feed either the Antapaccay plant or the existing Tintaya Mill, thereby delivering additional production for us.

I am very proud to mention that Xstrata Copper has operated the Tintaya mine for the last six years and develop the Antapaccay project to the highest sustainable development standards, including an industry leading environmental performance and significant economic contributions to all levels of government, and of course, to the local communities.

Our community programs in the area have benefited more than 70 separate communities in the Espinar province including a modern fully equipped hospital, a commercial dairy plant directly benefiting over 50,00 people and a major state-of-the-art educational and IT center.

I am confident that despite the complex social and political environment that resulted in violent protest during May in the province of Espinar near our Tintaya and Antapaccay operations. Our genuine commitment to engage in transparent two way dialogue and to contribute to the sustainable development of our local contributies – communities will allow us to successfully operate in the area for many years to come.

Here are some recent photos of the Antapaccay projects showing progress to-date. After mine operation started in March, construction is now complete on the main equipment including the primary crusher, the stacker and the main grinding mills.

Commissioning of the primary crusher has started and the commissioning of the concentrator will now progressing a series of sequential steps over the coming weeks, with first concentrate production schedule for October of this year.

Also in Peru, I am pleased to report that the major long life low cost Las Bambas project is now under full construction as Trevor mentioned, following receipt of the final site construction permit on the 31st of May.

The workforce is now mobilized and they are in excess of 7,500 people on site. Early works and mass earthworks are underway with the primary crusher and concentrator areas under construction along with the key project support infrastructure.

All large long-lead order items have been received at our storage facilities in Southern Peru, including the 240 foot SAG mills, the 226 foot ball mills, the primary crusher and the four DLS motor drives.

In keeping at our approach to project development and reducing technical, executional and cost risks, we have elected to do more of the planning work upfront, which will smooth capital expenditure this year and next year and has allowed us to maintain a final commissioning date towards the end of 2014. To this end, we have now completed almost 90% of the engineering work, another 50% of the procurement.

On this basis we are now able to estimate the Las Bambas capital cost of $5.2 billion with more accuracy, which is a 7% increase on our previous estimate. This includes a $130 million increase resulting from permitting delays following the change in government in Peru and an additional amount related to community relocation and infrastructure costs and community agreements to mitigate the risk of further delays.

Las Bambas really is a world-class Tier One project that will deliver 400,000 tons of copper per year for at least to first five years and has a life in excess of 20 years, with significant brownfield expansion potential.

Importantly and like Antapaccay, it also has a lower capital intensity of around $13,000 per annual ton of copper equivalent, production and it will deliver us first quartile cash costs further enhancing Xstrata coppers competitive position. Las Bambas will earn Xstrata cost of capital at a copper price of $1.82 per pound.

I would be remiss if I didn’t touch on our joint venture operations at Collahuasi, as prior to our aim of the spectacular progress of our organic growth pipeline and our operational performance, it’s fair to say that recent safety and operational performance at Collahuasi does leave a lot to be desired.

As you know this is an incredible asset with a giant resource that now stands at in excess of 7.5 billion tons grading 0.8% copper. We determine to ensure that its full potential is realized. Along with the other major JV partner Anglo American, we’ve now initiated management changes and have put in place a business improvement plan to achieve this goal.

Xstrata and Anglo Senior Management have assumed direct leadership of Collahuasi for an initial period of three months and all the partners are providing key staff to form task forces in the key operational areas to assist with the trends formation of the organization and to directly implement fundamental and sustainable improvement initiatives.

In the first stage of the intervention, we’ve had 30 senior technical and management staff directly involved in the business. The initial areas of focus have been on safety management, availabilities and maintenance of key plant and equipment, mine and technical services planning and grinding and flotation optimization. It’s still of course very early days, but we’ve already seen improvements to the business planning in July and production operational performance is more in line with the targets that we were expecting.

Following the weak first half production result, we do anticipate that the repairs to the ball mill will be completed by the end of August and this together with the improvement plan will help lift performances and the operation during the second half.

Production next year will be boosted by higher growths, along with the commissioning of the second milling expansion from a 150,000 tons to 160,000 tons per day.

In summary, I am very excited the way we have reached this point in Xstrata copper’s business strategy. An enormous effort has gone into, getting us here successfully by the whole team from the optimization of our existing operations, which enabled us to mitigate fees, cost pressures and a number of mines moving towards the end of their lives, to the parallel development of eight expansion and growth projects as a cornerstone of our business strategy. The fruits of our efforts are finally upon us.

So I’ll now hand up to Ian and to give you an update on the coming Koniambo project.

Ian Pearce

Thank you and good morning, ladies and gentlemen. I am delighted to take this opportunity to update you on the good progress we’re making on our Koniambo project. We are on track to deliver first ore to furnace by the end of this year and remain on target for approved capital expenditure. We’re renewing first production. We have started to test critical systems and ready commissions and key components of the plant and supporting mine infrastructure.

Meanwhile, the operations team is ramping up staffing and training as they prepare to take the reins and ensure smooth hand over from the project team.

We will begin to reap the benefits of Koniambo starting in 2013 as ramps-up to full production capacity of 60,000 tons of nickel and ferronickel within two years. It was significant increase across Xstrata Nickel’s volumes, are providing a bottom second core to our cost structure for many years to come.

This picture shows the current view of the smelter, power station and coal plant, the covered conveyor see in the program with transport power station – coal from the coal plant to the power station.

In April, we reached the major milestone when we successfully delivered first ore to the ore stockpile area was in total running the oil through the oil preparation plant on the mountain, on which the mine is located and on to 11 kilometer Overland conveyor to reach ore stockpile area at the plant.

The test was completed smoothly, safely and on time. You can see the oil being unloaded into the oil preparation plant in the bottom left picture. The next to that it was delivered at the end of the conveyor to wet ore stockpile. It was a part now and for everyone on side of course.

First metal will be produced from Line 1 in late 2012 while deliberately phase construction Line 2 will be completed in the first half of 2013. While our efforts are currently focused on the readiness of Line, construction activity is ramping-up on Line 2 and we expect to complete Line 2 more quickly, thanks the experienced we’ve gained from Line 1.

Today, there are 6,100 workers around 300 less than at the peak and we continue to demobilised project teams as infrastructures hand over to commissioning and the operations team. This is important because it is opening up work – Line 2 completion and supervision of a smaller footprint is improving productivity.

The oil preparation plant pictured here is now completing commissioning. We have finished construction to fleet converted to the metallurgical plant, the diesel generators. We see order intake in deceleration and demineralization plants and the on-site communication control center. The next set of milestones include starting up power generation from the combined turbine generators, commencing installation of the Finnish refractory which in fact began last week, completing the smelter and refinery and completing the borrowing in Lion 1 of the coal steam turbine generator.

Pictured here is the progress made on the power plant and conveyor over the past year. As I’ve mentioned, the conveyors really fully commissioned. We put together our operations management team early on so that it can work alongside the project team increasing the knowledge of the plant and the mine. We have assembled an experienced management team drawing on expertise from our Xstrata sites and within the mining industry in New Caledonia.

To date, 728 operational staff have been mobilized in line with our plan. Another 140 will be in place for the commencement of production of Lion 1. The extensive training program is full experienced recruits and those new to the industry include Xstrata sustainable development requirements and expectations of replace health, safety and management of the environment and we are both training includes before they arrive and once they onsite to perform their jobs to core safely and effectively.

During the commissioning phase, we are bringing in additional resources from other Xstrata sites on short-term and medium-term assignments to ensure as much as possible and smooth ramp up of the metallurgical plant and supporting facilities. We are receiving additional support from the vendors. We supply key equipments and systems.

From a design of sending back to 2004 through approval in 2007 the modulization of which took place in China, India and elsewhere with shifting of the modules to New Caledonia and the on-site constructions till mobilization over 6,400 people of 42 nationalities on remote Ireland in the Pacific and finally the construction and commissioning of more than 400 systems much progress has been made as we’ve approached the production of first metal. We are confident in our ability to meet our goals and bring Koniambo into production.

I’ll now hand over to Peter for an update on some of the coal projects.

Peter Freyberg

Thanks. Thank you, Ian and good morning. Xstrata Coal, as well, underway with the transformation to new lower cost production through the consolidation of mines into Tier-1 large scale complexes. Our track record of expanding existing mines and constructing new ones speaks for itself including the commissioning in 2011 of the new ATCOM operation, the second of three major South African open-pit complexes that are being developed; and the commissioning of the Greenfield, Mangoola mine ahead of schedule and under budget, which achieved nameplate capacity in its first year of operation.

These operations along with other recent key projects such as Glendell, Liddell and Goedgevonden have improved productivity and reduced costs across the business. The next six approved projects which commissioned between 2012 and 2015 will further consolidate our leading position in the industry.

All the major projects are under construction. The two most advanced are the Ravensworth North project which produced its first coal this year and Ulan West which is already producing development in coal. The Longwall at Ulan West will commence in 2014. Approved in December 2010 Ravensworth North is unscheduled to produce first tons during the second half of this year.

Following the expansion of the Coal Handling and Preparation Plant facilities, Ravensworth complex will produce 8 million tons per annum of export thermal and semi-soft coking coal at full production from quarter four 2013.

The project transforms Ravensworth complex into Tier 1 assets for the mine life of approximately 26 years and costs in the lower half of the costs curve. Like Ravensworth, the expansions are dual and transform risk complex into Tier 1 assets with the mine life of around 18 years in second cortile cost.

Ulan open cut produce first coal in April this year and this is on track to produce 1 million tons of thermal coal by the end of 2012. This will be followed by the Ulan West project which is progressing on schedule. Ulan West was established the second underground longwall with the commissioning as I said occurring in 2014. Ulan West is expected to produce around 6.7 million tons per annum of export thermal coal.

Some years ago we said about converting what was then a district setters subscale coal operations in Australia and South Africa into a few large scale and efficient complexes able to share infrastructure and equipment and benefit from the resulting economies of scale. It is indeed rewarding to now observe the strategy coming to fruition and delivering the promise benefits.

Thank you. I’ll now hand you back to Mick

Mick Davis

Thanks, Peter. And I’ve got this really has been a quite long presentation. But as you can tell 2012, is really a landmark year for Xstrata and there is lot of information to share. The projects reaching commissioning this year provide a steep change in the quality and average costs price for other business which we have again been speaking about for some time.

And we’ve established the strong foundation which we continue to generate value for our shareholder for four decades to come. And the completion of our current organic growth strategy will be as important in the life of Xstrata as an initial acquisition its strategy of the first five years following our IPO, having numerous new first Tier operation to our portfolio. So we expect the volume growth, we are brining into creation, the real time for a cyclical recovery.

And our proactive response to the cyclical downturn will define margins and ensure that our businesses emerge in a stronger competitive position to capture the benefits of the improved global economic growth. And in the medium term, rising the market commodities from emerging economies, coupled I think with a ongoing industry underperformance from aging operations and increasingly conflicts operating conditions and deferred capital projects.

Well, I think continue to defer – to continue to support commodity prices in excess of historical averages. So altogether, we have a highly competitive platform from which to deliver value and a broad range of investment options to respond dynamically to market conditions and new opportunities. Following our peak CapEx this year, we expect returns to start normalizing as projects commissioned and deliver promise cash flows. So we will be in a strong position to world growth, investment across a broad range of potential projects or value-adding acquisitions against capital returns all the while mainlining our commitment to robust and prudent balance sheet.

Now, the shareholder meeting to propose the agreed merger with Glencore will now take place on the 7 of September and a subject to shareholder and equity approvals, we expect the transaction declare in the fourth quarter. And if completed this merger represents an opportunity to pursue the strategy at outline (inaudible) part of an enlarge group with enhanced growth options and the unique well integrated – vertically integrated business model to capture value at each stage from mine to customer.

So the next and maturated stage of our confirmation from the modest beginning the 10 years ago, to one of the world’s great mining companies, I think is insight.

So thank you very much for your attention. That brings us to end of the presentation. And as usual we will open ourselves to questions. There is microphone. Put your hand up. The microphone will be brought to you and then fire away.

Question-and-Answer Session

Jason Fairclough – Bank of America/Merrill Lynch

Can I go Mick?

Mick Davis

Sure, please, yes, you are always number one.

Jason Fairclough – Bank of America/Merrill Lynch

Jason Fairclough, Bank of America Merrill Lynch. Just you’ve kind of touched on it already Mick but to what extent are your business heads planning for life as new opening company versus planning for the integration with Glencore and to what extent are those different propositions?

Mick Davis

Okay, but I think from our point of view one of the great values of this merging with Glencore is we take substantially two businesses, which joined together quite easily in the sense that we have the bulk of production capability and assets sitting with Xstrata and the incredible marketing capability and trading capability of Glencore sitting with Glencore. And in fact the integration therefore at businesses and asset level is much less complex than we would have in a normal sort of merger type operations.

The key thing here for us is to make sure that the executives who are in charge of the trading and marketing of the business and executive in charge of operating assets while pursuing their objectives with clear lines of accountability nevertheless mesh together to create their commodity the most valuable proposition. And the integration process that we will be going through and have started is the right to achieve that in.

But at the same time, it is very important for us that our teams at the operating assets were not deflected in any way from running of their businesses and we see absolutely no problem in the sense that they have been continued with that focus. And in fact the value proposition of the combined group, I think are bringing on businesses into that merger, where people are focusing on doing the best of their possibly can for those businesses. It’s clearly an important consideration that we had at that in mind – that point in time we are now actually announced the merger.

So I am quite pleased in fact that we’ve been able to keep the business as focused and what they need to do. At the same time, the company for the merged entity and from an Xstrata point of view, clearly, as we’ve said at the time that this is a unique opportunity to create a business, which has unique characteristics to it and an important proposition for our shareholders to have put before them. At the same time, Xstrata continues to deliver, I think great value and that value proposition is powerful under in any circumstances.

Jason Fairclough – Bank of America/Merrill Lynch

So just a follow-up, if that’s okay, the – so what are your thoughts on Xstrata as a standalone vehicle if there is more loaded that?

Mick Davis

I mean – unfortunate circumstance, the merger doesn’t go ahead for whatever reason. And clearly, I mean Xstrata is well set to produce value for its shareholders. It’s a great asset base. It’s a great set of projects. I think with very good management team and certainly good operators. So I think as a standalone entity, I have been asked this question incidentally a number of times by shareholders over the last couple of months. And I have said that I think the business model of the combined entity is a more powerful business model. That the inherent capacity of Xstrata to generate value as a standalone company remains very, very powerful indeed. And we have no concerns on that matter.

Liam Fitzpatrick – Credit Suisse

Good morning. It’s a Liam Fitzpatrick from Credit Suisse. Just three questions just more on the business front and the merger. Firstly on your debt levels, it increased about 3 billion in H1 and you’re talking about sequencing CapEx. Do you have any specific credit thresholds that you look at that would make you sequence more aggressively in the future?

And then secondly, you’ve given a very bullish structural outlook on thermal coal, I note some one of your charts you have thermal going over the 100 million tons by ‘15, ‘16, can you may be comment around one down and what your plans out there?

Mick Davis

Yeah. On issue of balance sheet management, I mean – as I think Trevor has led out to the market on many occasions, our primary driver is to keep Xstrata in a healthy investment great position, and therefore metrics as they guide that a clearly sort of the gearing ratios, the cash flow ratios, et cetera. And those are the measures that we think about and we think about our balance sheet management. And quite honestly, given the way that we structured our balance sheet over the last couple years, I don’t foresee us having any issues along those particular lines.

On the issue of coal, I mean, London I think remains a very, very important component of Xstrata’s growth potential going forward, but it is not part of the current phase of expansion. And from our point of view it’s important for us to keep that project viable and the optionality that project strong and at the appropriate moment it’s clearly to trigger the project in phase. It is a fabulous resource. It’s a resource which will deliver coal into the market at an appropriate time. And as we said, some time back when we look at the investments in the supporting infrastructure that it is important, that it would be continue to insure that that project is in position that we can make the investment decisions at the appropriate time in the appropriate market conditions.

Myles Allsop – UBS

Myles Allsop from UBS. Just a few quick questions, may be firstly on the coal side in terms of markets – realized prices in the second half, and how robust do you think they are, are you seeing any the contracts being reenact on at this point, obviously, spot prices being considerably lower than the contract prices?

Mick Davis

Okay. Peter?

Peter Freyberg

Certainly, we are fairly well sold at this point in terms of thermal coal and have only about 10% to go for the rest of the year. And we were able I think by seeing where the market was trending to position ourselves quite well. Certainly there are some spot cargos out there with traders that are seeing prices lower and are having difficulty in performing, but in general, our relationship with our customers is fairly good and we are working through those. We are not materially affected at all by this and working through that situation. We are seeing recovery in the markets.

I think the market probably bottomed about a month ago and there has been steady improvement over the last four or five weeks, maybe we have seen thermal prices increasing by $5 or $6 in the spot market and also looking into 2013. This is I think being prompted by the fact that some of the US coal is out of the money now which been helped along by the fact that we’ve seen an increase in oil prices has been helped along by the fact that we are seeing a reduction of exports out Columbia with some of the industrial issues that are happening there. So we are seeing firming and looking a bit forward we are positive going in to Q4.

Myles Allsop – UBS

May be just one quick questions one around the management, sort of, retention bonuses and the changes that have happened so far since the scheme documents were released. Could you just give us a bit more color around that where these incremental cost savings come from? Are there anymore cost savings that you kind of envisage?

Mick Davis

Yeah, I can’t actually give you more color but as I said in the – or we announced the changes for the executive committee that the Board supports very strongly the view that the retention arrangement should be there to provide a certain amount – certainly some money to retain people to do the job that we’ve done in a highly uncertain and complex environment, and we stand by that is an important principle.

However, at the same time, you know, it’s been the view of Xstrata that having a constructive relationship with our shareholders is as important as any other factor. And given the investor – I mean is – the executive committee joined me in a suggestion that we in fact subject to our performance allow retention conditions to performance requirement. And that performance requirement will be to find an additional $300 million reserve embedded savings, sustainable savings over two year period, which would cover the full cost of any retention payments that would be in addition to anything that we have identified up to now.

And now the $500 million were sort of the synergistic benefits mainly coming out of the marketing and trading business. And to find the additional 300 million as a result of the actual merger process, not 300 million in our existing asset base. And to be frank with you, we didn’t identify what those cost savings were going to be or are at the moment and – as we move into the merger and into the integration we will try to determine those, as we said we’ve got considerable risk for that.

But if you achieve that we’ll fund fully retention payments and we will ensure embedded value of the company depending on what discount rate you want to use to present value with 300 million going forward, but of – $1.5 billion perhaps to $1.75 billion worth of additional value. So we think it is a substantive commitment that the Executive Committee has made. But unfortunately, we’re going to have to – you have to give us sometime to determine where that savings maybe – may come from and what they are and as soon as we’ve got that we will certainly (inaudible).

Robert Clifford – Deutsche Bank

Good morning, Robert Clifford, Deutsche Bank. Just on the $1 billion CapEx deferral, which projects are in there? What’s change or what’s the process to make that decision on deferral and how much of the deferral is an active decision versus being required to defer because of various exogenous impacts?

Mick Davis

Trevor, you want to pick that.

Trevor Reid

Look, a substantial portion of the deferral is less than Mr. Charlie indicated. Some of that was in force task due to the delay in the fermenting. However as Charlie said, we have used that opportunity to substantially increase our engineering and tenure at – the actual construction period when we’ll be at our peak life before – to the extent that we can compress that that has a benefit and that derisks the project.

So I’d say, sort of half of it is in relation to deferral of expenditure on actual project. The risk comes in a deferral of early works on our unapproved projects. We have a number of unapproved projects, which in our budget we were planning to spend significant amounts of money in early works in terms of excess roads, in terms of early works, civil works before the approval of those projects. And those have been delayed. Obviously, we’re also keeping those projects alive. So you will see $1 billion is deferred in this year, next year we’re up by about 400 million. The 600 is broadly related to the early works, the accelerated early works that we had on a number of unapproved projects. But in terms of our approved projects we maintain our schedule and we basically maintain our capital over the period to 2014.

Peter Davey – Standard Bank

Peter Davey from Standard Bank, hopped back Mick.

Mick Davis

Hi Peter.

Peter Davey – Standard Bank

Seems we almost jumped to be on the CapEx. Collahuasi, what is gone sort of wrong there that 30 extra management have been parachuted in – you know parachuted yourselves and Anglo being there for many years now. And outwardly it seems like everything is going okay until the mill failure. Now that there is an implied far bigger problem, can you just elaborate on that and how that’s going to impact Collahuasi and the potential future plans for that mine going forward?

Mick Davis

Well, look, I think Collahuasi is an example of joint venture, which hasn’t worked well whereas say Antamina is example of joint venture if the independent management works very well. And I do think that we as shareholders, the major shareholders perhaps stood back over too long in terms of intervening at Collahuasi. And from north side it’s unfortunate, but there has been a series of issues of underperformance of Collahuasi have a quite long period of time, which we’ve reported on and which we’ve tried to address with the management teams in terms of changed structure and stuff like that.

But I think there comes a time when you actually have to directly intervene and the health and safety issues and the earlier this year the concern about the sharpness of the plans to get every facet of that operation working effectively. Necessarily, I think both ourselves and Anglo recognizing that we have to do a short or chop intervention. And as you said, putting some sort of – people in place for short period of time, we are really refocus and get that organization pointing in the right direction. It’s such – for me it’s such a great (inaudible) that absorb the such great potential, is actually not delivering on that potential and that essentially is a thrust.

So I think, to some extent we hold our hands up and said, we should have done this earlier. We always – our complexity is in joint ventures, but there is no reason why the joint venture cannot actually act effectively and basically Anglo and ourselves in collaboration with other partner have decided, let’s going on and then just do the right thing. John, I don’t know if you want to add anything to this....

John Bond

Yeah. Thanks Mick. Just a couple of points there. I think the one of the fundamental issues that we are looking to address now is to instill a management and leadership culture which is much more closely aligned with what we are accustom to in our managed operations. At all levels of the organization and that was something that was quite difficult to do we’ve tried over the last few years to install through embedded in the organization without actually having the direct control.

So that other things going to be an important feature of what we’re looking to see is that leadership approach there which reflects, so we would like to see thing undertaken from a safety management systems and culture right through to is mixed planning, the planning aspects of the business and why that we manage it through the processes and the systems.

And also to insure that there is an understanding of what accountability means in setting and then delivering against on budget and planning on targets. And it’s very important for us to get all of that correct and implies prior to taking any major investment decisions. We are talking about several billion dollars worth of potential investment decisions into the future Collahuasi. We need to have confidence that it’s an organization and a business that can deliver against its own budgets prior to making a further very substantial capital investment decisions.

Mick Davis

I think that – it actually was pay tribute to our partners Anglo in particular that we have been – we were quickly able to reach common cores on what needs to be done and there has been willingness to act on it decisively. And I am sure we are going to see results in the second half.

Peter Davey – Standard Bank

So just to, sort of, put an end to that then the potential to go to perhaps some million tons out of here is something that’s a little bit longer dated than it perhaps would have been get Collahuasi working properly first then look at whole expansion?

Mick Davis

We made it very clear Peter that we are not going to make any significant further commitments in relation to expansion projects which really means going into the major feasibility study until such time as we’ve got confidence that we have got a stable, reliable organization and business. So it really depends on how quickly that can be progressed.

Reene Clavick – Renaissance

Reene Clavick with Renaissance. Just a follow-up on couple of questions. One, the focus on copper. If you look at the longer term challenges in terms of optimizing the potential of those assets in Peru, the major issues going forward, you know, how much of it relates to environmental issues in terms of land availability in tailing stands or – what capacity you already have there? How much it relates to water issues and getting communities onside just to give us a timeframe, let’s say, 5, 10 year view on Blue Sky, how are you thinking about these things internally?

And then the second question just on the additional 355 million of cost reductions that you identified. On an annualized basis what is that number? And if you don’t know an NPV on that, how is that value communicated from Xstrata Board to going core in terms of the value that in place on the transaction?

Mick Davis

Well, I am not sure, what your last question means, to be honest with you, but let me try and deal with it. We have a history of cost reductions in that business and so yeah, saving an additional 390 million this year in real cost terms, is not unusual. And how if we will continue to do that in our cost saving capability is well understood by the market and we continue to do that and hence – and you can see that taking place, as we look at – our business sit on the cash share cost curves.

Now clearly all those things are take into accounting our valuation and no doubt the market actually values it. Glencore fully understand it, because they are sitting on our board. Beyond that and I think that further communication with the member because I think is well understood. To do with big issues in Peru, I am not sure again what particular challenges you’re talking about optimization maybe Charlie you, you can cover it.

Charlie Sartain

Yeah. Thanks, Mick. When I think the – where we see the strategic issues and challenges in Peru, the technical aspects of the business and development of the resource base, where we see is relatively straightforward and in a relative sense, I guess, because we’ve got very substantial resource basis in both the Tintaya and Antapaccay district and also Las Bambas. So with the infrastructure that’s now going in there, both with Antapaccay and Las Bambas, they will set a very, very solid platform for further growth as Mick mentioned in this presentation.

The key is sustainability – it’s a sustainable development since and ensuring that the community in different levels of government really believes that the company is continuing to ensure that it has a good understanding of the expectations and requirements of the community. So the social expectations in Peroni to be well understood and we need to make sure that we are, to the extent that we can, delivering against the community and vision for the future of those regions. And we have a very well established management team and organization that’s able I think to understand the various issues in that context and to work with the communities and delivering the vision that the communities have for future and development of those resources.

Mick Davis

Any further questions?

Peter Davey – Standard Bank

Peter Davey. Just – Trevor just give us understanding the basis behind the write down of London, because it’s not mark-to-market, so how do you arrive at 500 million?

Trevor Reid

What we’ve looked at is as we look at the outlook for London on a standalone basis given their guidance in terms of their growth projects and their existing operations. And clearly when we initially looked at London and when we bought initial stake, we had the perception that we were ultimately going to move to a controlled position and we could accelerate the number of those projects and the number – and indeed the growth in operations themselves.

In the period post, you see where our views are moderated on our ability or the attractiveness of our buying out the full stake. We’ve had to be guided by what London can do as standalone company, and it’s become very evident since in this last period that given the state of the platinum industry in South Africa and given the liquidity within Lehman’s balance sheet that enable that projects are going to be delayed, and the indeed the growth within the company is going to be delayed. So we meet present value – the value of that asset.

Mick Davis

There is a question I think in the middle row here.

Alison Turner – Panmure Gordon

Thanks, it’s Alison Turner from Panmure Gordon. Well, I wanted to ask about you never learned – and the industry in expressing a commitment both to maintaining a stable balance sheet, but also to progressive dividends as well as some fairly punchy CapEx numbers borrowing some line of tweaking of those.

If the short-term trough in commodity prices turns out to be longer-term, how sacrosanct others different elements? How sacrosanct is the dividend, for example, and how do you think about that trade off vis-à-vis differing CapEx and again compared to the potential acquisition opportunities which might be out there?

Trevor Reid

Look, I think our major priority going into this period of extended and enhanced capital expenditure was didn’t show where the balance sheet that enabled us to complete that program without losing our investment grade, and I think we’ve done that.

If we are to try and draw a halt on our approved capital program at this stage we at now that would be incredibly expensive and value destructive. So clearly my primary priority is to – was to enter this period of accelerated capital spend with the balance sheet that could sustain very extreme headwinds in terms of pricing.

Given our outlook for commodities even if you – you’re on a downside case, we still think that we will be able to maintain a progressive dividend because we think that ultimately our shareholders do respect that and they do want that.

I would hope that the yield will go down as our share price increases, but I think that it is a very affordable dividend policy in the current environment. What we did allude to earlier on is that we have a number of projects that follow on from our approved project pipeline, which clearly we can moderate according to economic conditions at that time. And to some extent our decision to differ some of early stage works reflects that although it also reflects just state at the projects are in.

So I would like to – there is very little flexibility in our approved capital program at the moment. It would be expensive to moderate that obviously we could but it will be expensive to do that and I think value destructive, but I think we can not only do that but we can maintain our dividend.

Mick Davis

Okay, well. I think, if there are no further questions and I thank you very much for your attendance. It’s been all of our morning, I apologize for that. And as usual we’re available, if you have any further queries.

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