The changing face of supply

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2

Disclaimer

A legitimate conviction

3

0%

5%

10%

15%

20%

25%

30%

0

1000

2000

3000

4000

5000

6000

2000 2005 2010 2015 2020Annual USD increment Nominal GDP Growth

US$ Billion

Real GDP growth

China remains the key driver of secular demand, despite managed moderation of growth

4

Key demand drivers

Sources: Dragonomics

0

10

20

30

40

50

60

70

80

90

100

Jan-

11

Feb-

11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb-

12

Mar

-12

Diff

usio

n in

dex

of o

fMoM

pric

e ch

ange

in 7

0 ci

ties

Existing housing New housing

Chinese GDP growing off a larger base

China will add $26.5 trillion to

the global economy by 2020

Chinese housing prices have bottomed

China requires 10 million housing units a year over the next

two decades to meet urban housing

demand

India’s economy could be larger than the US’ and China’s by 2050

5

Other emerging economies are also global growth generators…

Sources: Barclays Capital, World Bank

Income Trend Growth Thresholds Commodity Demand Intensity Correlates with Growth Thresholds

0

10,000

20,000

30,000

40,000

50,000

0% 20% 40% 60% 80% 100%Urbanisation ratio

GDP per capita (US$ per person)

India China Japan South Korea US

0

1,000

2,000

3,000

4,000

5,000

6,000

0% 10% 20% 30% 40% 50%

Urbanisation ratio

Copper demand per capita (kg per 1,000 persons)

China’s per capita copper

demand growth accelerated

after the 30% urbanisation

mark; India looks like it is set to do the

same

India China

0

50

100

150

200

250

300

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

2020

2023

India’s domestic supply unable to meet demand in many commodities

6

…which translates directly into commodity demand growth

Source: BP Statistical Review, Barclays Capital

India’s Copper Concentrate Shortfall (Kt) India’s Coal Supply Shortfall (MTOE)

0

500

1000

1500

2000

2500

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

Maintaining supply

7

40

50

60

70

80

90

100

110

120

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

Zinc Copper Nickel

Forecast

Amid rapidly declining ore grades and aging mines

8

Maintaining supply from existing sources is becoming increasingly challenging

Source: Wood Mackenzie, Xstrata estimates. Deutsche Bank

Hea

d gr

ades

, ind

exed

to 2

000

base

Declining head grades … …mean producers have to “run harder to stand still”

-

400

800

1,200

1,600

Apr-03 Dec-04 Aug-06 Apr-08 Dec-09 Aug-11

Mt

Annualised Chinese domestic iron ore ROM production

Contained iron

(1,600)

(1,200)

(800)

(400)

0

2005 2006 2007 2008 2009 2010 2011e

kt Cu difference between planned vs actual production

Copper supply is falling short of expectations

9

Majors have announced significant increases in projected capex to ensure continued growth

Source: McKinsey

41

51

74

64

76

107

114

0

20

40

60

80

100

120

2006 2007 2008 2009 2010 2011 2012

Other Copper Coal Precious Metals Diversifieds

Top 40 mining companies- planned capex $bn

+53%

10

Natural resource companies are compelled to access future resources in ‘new’ geographies

Mexico(copper, iron ore, thermal coal, zinc)

Peru and Chile(copper, iron

ore, zinc)

Ecuador(copper)

Brazil(copper, iron ore, nickel)

Argentina(copper)

Venezuela(copper,

thermal coal, nickel)

Colombia(thermal coal)

Turkey(copper)

Russia(copper, iron ore,

thermal coal, coking coal, zinc,

nickel)

Ukraine(iron ore, thermal coal, coking coal)

Kazakhstan(copper, zinc, oil,

FeCr, iron ore)

D.R. Congo and Zambia

(copper)

Botswana(copper)

South Africa(iron ore, thermal coal,

coking coal, zinc, nickel)

Mauritania, Sierra Leone, Guinea

(iron ore)

Mozambique(thermal coal)

China(copper, iron ore,

thermal coal, coking coal, zinc, nickel, aluminium)

India(copper, iron ore, thermal coal, zinc,

nickel)

Mongolia(copper, thermal coal, coking coal)

Indonesia(thermal coal, coking coal,

nickel)

Philippines, Papua New Guinea, New

Caledonia(copper, nickel)

Source: Bloomberg, Wood Mackenzie, WBMS

Eq. Guinea,

Cameroon (oil/gas)

Rep Congo (iron ore)

Tanzania (nickel)

Highly Prospective New Frontiers

11

A substantial proportion of future capital is in these new geographies

Source: McKinsey

6.8

41.6

37.4

100.9

24.8

2.4

24.6

15.2

13.2

6.1

0 20 40 60 80 100 120

Europe

Africa

APAC

Latin America

North America

Previous 5 years Next 5 years

Value of Au, Cu, Ni, Fe projects started $bn

0

5000

10000

15000

20000

25000

30000

1980 1985 1990 1995 2000 2005 2010 2015 2020

Ok Tedi

Escondida

Alumbrera

Antamina

BatuHijau

Collahuasi

XstrataBrownfield

XstrataGreenfield

Antucoya

Miheevskoye

12

Insufficient infrastructure & associated costs in new geographies drive further capex intensity

Source: Wood Mackenzie, Xstrata EstimatesNote: bubble size denotes annual copper equivalent production

Cap

ital i

nten

sity

2011

$U

S/t

Cu

equi

vale

nt a

nnua

l pro

duct

ion

Start date

Salobo ICaserones

Oyu TolgoiSierra Gorda

Esperanza

Tenke

1985 to 2011 greenfield projects

2012 to 2015 greenfield projects in construction

Capital Intensity 2011 US$1985-2011 Greenfield + Brownfield copper projects $7,700/t2012-2015 Greenfield copper projects in construction $14,970/t2016-2020 Greenfield unapproved copper projects $18,600/tXstrata Brownfield copper projects $8,920/tXstrata Greenfield copper projects $13,315/t

Antapaccay

Xstrata projects under construction-combined position

13

However, the vast majority of mega projects have experienced cost and schedule over-runs

Source: McKinsey

0%

5%

10%

15%

20%

25%

30%

35%

40%

-80 -60 -40 -20 0 20 40 60 80 100 120

Schedule over-runs (% of estimate)

0%

5%

10%

15%

20%

25%

30%

35%

40%

-80 -60 -40 -20 0 20 40 60 80 100 120

Cost over-runs (% of estimate)

Preserving Returns

14

15

What makes return preservation difficult?

Size and complexity Lead times Cost over-runs Schedule

over-runs

Greenfield projects in new

geographies have significant

infrastructure requirements

Many projects are large and more

complex, requiring scale to deliver returns on

larger capex

Constrained foundry and

heavy equipment manufacturing

capacity

Competition with other industries

for scarce capacity

Under-estimation of labour/input

inflation

Stretched EPCM

Under-engineering/ poor project definition

Under-estimation of multiple project risks

Skills shortages

Productivity at contractor level, especially on-site

Delays and complexities in permitting and social licence to

operate

Community resistance/ NGO

involvement

Complex re-locations and land

purchase requirements

Commissioning delays impact

NPV

16

Engineering contractors are extremely capacity constrained Getting the top team in a Tier 1 EPCM is increasingly difficult

Source: McKinsey

50

60

70

80

90

100

110

120

130

140

2007 2008 2009 2010

Backlog of publically listed EPCMs as a percentage of revenues (2007 index)

Jacobs

SNC Lavalin

Fluor

“…the artisan shortage in the coal sector is severe…and will intensity as the demand for energy increases and more coal mines are

opened”

-Colliery Training College

“Resources projects may be short of 36,000 trades workers by 2015…”

-Australia National Resources Sector Employment Taskforce

Source: Minerals Council of Australia- labour in the Australian minerals sector and McKinsey 17

A dearth of key skills is plaguing the sector in key commodity geographies

-0.2

0.2

0.8

2.5

1.9

2.3

6.1

5.7

5.7

6.5

5.9

5.4

-1 1 3 5 7

Labourers

Semi-skilled

Trade

Technicians

Professionals

Managers/admin

Demand Supply

Supply and demand growth of labour: per cent CAGR 2005-15

Canadian Mining Human Resources Council

“…the ageing workforce, productivity, and challenges attracting new talent… will make it

hard to fill vacancies” “by 2020 Canada will need an additional

100,000 new mining workers…”

-Canadian Mining Human Resources Council

18

0 1 2 3 4 5

Gas generators

Wagons

Rope Shovels

Reclaimers

Tyres

Large Haul trucks

Crushers

Ship Loaders

Draglines

Barges

Locomotives

Grinding mills

2011 lead time outlook (years)

2007 delivery timeCurrent delivery timeNormal delivery time

Heavy equipment lead times are rapidly returning to 2007 levels

Source: Rio Tinto/McKinsey

19

98105

117 120127

135143

155165

175185

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Global Tyre Supply/Demand (Thousands of 40” to 63” Units )

Demand Supply

+7% pa

Key consumables are also in short supply

Source: McKinsey

20

Increasingly complex social issues causing schedule over-runs

• Changing regulation gives a stronger voice to community opposition to mining projects, e.g. new IFC Standard 7

• Complex re-negotiations and land purchase requirements– Increased competition for land between

agriculture and mining, e.g. Queensland government are introducing legislation around “strategic cropping land”

• NGO involvement– Growing activism against mining, e.g.

Friend’s of the Earth legal challenge to coal projects in Australia in respect of climate change

• Resource nationalism– Increased regulations/taxes/

nationalisation

Source: Goldman Sachs research report, 2011

21%

63%

73%

0% 20% 40% 60% 80%

Survey of 190 Delayed projects; Causes of Delay

Sustainability (eg stakeholder, community, environment-related)

Commercial (eg cost or contract related)

Technical

21

New approaches to project management are essential if returns are to be maintainedXstrata deploys innovative solutions

Size and complexity Lead times Cost

over-runsSchedule over-runs

• Procurement and sourcing agreements• Infrastructure/energy/water solutions• Balance NPV and return by staging development of large projects

OperationalAccess to key inputs/

infrastructure

Key Skills EPCM and on-the-ground capabilities

Political; government sponsorship

Community shared value

Ability to attract top engineering, technical and operating people • Ability to attract top engineering, technical and operating people through an attractive overall career offering and alliances with EPCM contractors

• Develop and train local labour in core skills• Relevant project design and development technology

• Demonstrate superior asset stewardship and local benefits• Strong relationships based on trust/clear expectations• Sustainable and stable agreements• Best-in-class sustainability credentials

• Social licence to operate through strong community relationships, sustainable social investment, communication, employment

• Trusted reputation and brand, transparency, sustainability practices, appropriate share of value

22

Managing risks: a symbiotic relationship between miners, communities & governments

Mining Companies

Communities

Governments

GovernmentsBenefit from: Investment in country Taxes Employment Infrastructure Products vital to society

In return provide: Security of tenure and a

stable investment regime Transparency Infrastructure A skill base

Mining CompaniesBenefit from:

The Social Licence to Operate Access to diverse sources of capital

New resources and business opportunities Key skills

In return: Provide vital products

Take on risk of investment Corporate Social Investment Provide skills and capabilities Employ sustainable practices

Provide world-class technologies Contribute to national and local coffers

CommunitiesBenefit from: New infrastructure and advanced technology Jobs, training and development Corporate Social investment Development of and procurement from local suppliers

and enterprises

In return provide: The Social Licence to Operate Employees Suppliers

23

• Long-term demand for commodities remains intact

• The nature of the supply-side is changing fundamentally

– Traditional sources of supply are being depleted and are more costly to extract

– Natural resource companies have to seek resources in the new, highly prospective geographies

• Further pressure on capex intensity

– Large capex programmes have been announced and underway

• But delays and capex overruns are common-place

• New approaches are required to deliver promised returns

• Innovative procurement strategies, including modularisation

• Standardisation

• Approaches to skills procurement and local development

• Smart project management, strengthened owner’s team, EPCM JVs

• Licence to operate – governments, communities, NGOs

• Infrastructure and support service financing and provision

• Prioritisation of low capex intensity growth

A new approach to delivering value and returns is required