The changing face of supply

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A legitimate conviction
3

Key demand drivers

China remains the key driver of secular demand, despite managed moderation of growth
Chinese GDP growing off a larger base
US$ Billion

Chinese housing prices have bottomed

100
Diffusion index of of MoM price change in 70 cities

6000

5000

China will add $26.5 trillion to the global economy by 2020

30%

90 80 70 60 50 40 30 20 10 0 Apr-11 Jun-11

25%

China requires 10 million housing units a year over the next two decades to meet urban housing demand

4000

20%

3000

15%

2000

10%

1000

5%

Dec-11

Jan-11

May-11

Mar-11

Jan-12

Aug-11

0 2000 2005 2010 2015 2020

Annual USD increment
Sources: Dragonomics

0%
Nominal GDP Growth

Real GDP growth

Existing housing

New housing
4

Nov-11

Mar-12

Feb-11

Feb-12

Jul-11

Sep-11

Oct-11

Other emerging economies are also global growth generators

Indias economy could be larger than the US and Chinas by 2050
Income Trend Growth Thresholds
GDP per capita (US$ per person) 50,000

Commodity Demand Intensity Correlates with Growth Thresholds

Copper demand per capita (kg per 1,000 persons) 6,000 5,000 4,000 3,000 2,000

40,000

30,000

20,000

Chinas per capita copper demand growth accelerated after the 30% urbanisation mark; India looks like it is set to do the same

10,000

1,000
0 0% 20% 40% 60% 80% Urbanisation ratio
Japan South Korea

100%

0 0% 10% 20% 30% 40% 50% Urbanisation ratio

India

China

US India China 5

Sources: Barclays Capital, World Bank

which translates directly into commodity demand growth

Indias domestic supply unable to meet demand in many commodities
Indias Copper Concentrate Shortfall (Kt)
2500 300

Indias Coal Supply Shortfall (MTOE)

2000

250

200 1500 150 1000 100 500

50

0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025

0 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023
6

Source: BP Statistical Review, Barclays Capital

Maintaining supply
7

Maintaining supply from existing sources is becoming increasingly challenging

Amid rapidly declining ore grades and aging mines
Declining head grades
120 110 100 800 90 80 70 60
(400)

mean producers have to run harder to stand still

Mt 1,600 1,200

Annualised Chinese domestic iron ore ROM production

Head grades, indexed to 2000 base

Contained iron 400 Apr-03 Dec-04 Aug-06 Apr-08 Dec-09 Aug-11

Copper supply is falling short of expectations

0

50 40 2000 2002 2004 2006 2008 2010 Forecast 2012 2014 2016 2018 2020 2022 2024

(800) (1,200) (1,600)

Zinc

Copper

Nickel

kt Cu difference between planned vs actual production 2005 2006 2007 2008 2009 2010 2011e
8

Source: Wood Mackenzie, Xstrata estimates. Deutsche Bank

Majors have announced significant increases in projected capex to ensure continued growth
Top 40 mining companies- planned capex $bn
120

114 107

100

+53% 74 64 76

80

60

51 41

40

20

0 2006 Other 2007 Copper 2008 Coal 2009 2010 Precious Metals 2011 2012 Diversifieds
9

Source: McKinsey

Natural resource companies are compelled to access future resources in new geographies
Highly Prospective New Frontiers
Ukraine (iron ore, thermal coal, coking coal) Russia (copper, iron ore, thermal coal, coking coal, zinc, nickel) Kazakhstan (copper, zinc, oil, FeCr, iron ore) Mongolia (copper, thermal coal, coking coal) China (copper, iron ore, thermal coal, coking coal, zinc, nickel, aluminium) India (copper, iron ore, thermal coal, zinc, nickel) Philippines, Papua New Guinea, New Caledonia (copper, nickel)

Mexico (copper, iron ore, thermal coal, zinc) Colombia (thermal coal) Ecuador (copper) Peru and Chile (copper, iron ore, zinc)

Venezuela (copper, thermal coal, nickel)

Turkey (copper)

Mauritania, Sierra Leone, Guinea (iron ore)

Rep Congo (iron ore) Eq. Guinea, Cameroon (oil/gas) D.R. Congo and Zambia (copper) Tanzania (nickel) Botswana (copper) Mozambique (thermal coal) Indonesia (thermal coal, coking coal, nickel)

Argentina (copper)

Brazil (copper, iron ore, nickel)

South Africa (iron ore, thermal coal, coking coal, zinc, nickel)

Source: Bloomberg, Wood Mackenzie, WBMS

10

A substantial proportion of future capital is in these new geographies

Value of Au, Cu, Ni, Fe projects started $bn
North America 6.1 24.8 13.2 100.9 15.2 37.4 24.6 41.6 2.4 6.8
0 20 40 Previous 5 years 60 Next 5 years 80 100 120

Latin America

APAC

Africa

Europe

Source: McKinsey

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Insufficient infrastructure & associated costs in new geographies drive further capex intensity
30000 Capital Intensity 1985-2011 Greenfield + Brownfield copper projects 2012-2015 Greenfield copper projects in construction 2016-2020 Greenfield unapproved copper projects Xstrata Brownfield copper projects Xstrata Greenfield copper projects 2011 US$ $7,700/t $14,970/t $18,600/t $8,920/t $13,315/t

2011 $US/t Cu equivalent annual production

25000

Antucoya Miheevskoye Salobo I

20000

Capital intensity

15000

Oyu Tolgoi Ok Tedi Alumbrera Batu Hijau Antamina Tenke Antapaccay Esperanza

Caserones Sierra Gorda Xstrata Greenfield Xstrata Brownfield

10000

5000

Collahuasi Escondida
1985 1990 1995 2000 2005 2010 2015 2020

0 1980

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

Start date 1985 to 2011 greenfield projects Xstrata projects under construction-combined position 2012 to 2015 greenfield projects in construction 12

However, the vast majority of mega projects have experienced cost and schedule over-runs
Schedule over-runs (% of estimate)
40% 35% 30% 25% 20% 15% 10% 5% 0% -80 -60 -40 -20 0 20 40 60 80 100 120 40% 35% 30% 25% 20% 15% 10% 5% 0% -80 -60 -40 -20 0 20 40 60 80 100 120

Cost over-runs (% of estimate)

Source: McKinsey

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Preserving Returns
14

What makes return preservation difficult?

Size and complexity Lead times Cost over-runs
Under-estimation of labour/input inflation Constrained foundry and heavy equipment manufacturing capacity Competition with other industries for scarce capacity Stretched EPCM Underengineering/ poor project definition Under-estimation of multiple project risks Skills shortages Productivity at contractor level, especially on-site

Schedule over-runs
Delays and complexities in permitting and social licence to operate Community resistance/ NGO involvement Complex relocations and land purchase requirements Commissioning delays impact NPV
15

Greenfield projects in new geographies have significant infrastructure requirements Many projects are large and more complex, requiring scale to deliver returns on larger capex

Engineering contractors are extremely capacity constrained

Getting the top team in a Tier 1 EPCM is increasingly difficult
Backlog of publically listed EPCMs as a percentage of revenues (2007 index)
140 130 120 110 100 90 80 70 60 50 2007 2008 2009 2010 Jacobs SNC Lavalin Fluor

Source: McKinsey

16

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

Supply and demand growth of labour: per cent CAGR 2005-15
Managers/admin Professionals Technicians Trade Semi-skilled Labourers
5.4 2.3 5.9 1.9 6.5 2.5 5.7 0.8 5.7 0.2 6.1 -0.2 -1 1 Demand 3 Supply 5 7

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 Canadian Mining Human Resources Council

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

-Australia National Resources Sector Employment Taskforce

the artisan shortage in the coal sector is severeand will intensity as the demand for energy increases and more coal mines are opened

-Colliery Training College

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

17

Heavy equipment lead times are rapidly returning to 2007 levels

Grinding mills Locomotives Barges Draglines Ship Loaders Crushers Large Haul trucks Tyres Reclaimers Rope Shovels Wagons Gas generators 0 1 2 3 4 5 2007 delivery time Current delivery time Normal delivery time

2011 lead time outlook (years)

Source: Rio Tinto/McKinsey

18

Key consumables are also in short supply

Global Tyre Supply/Demand (Thousands of 40 to 63 Units )
175 185

+7% pa 120 127 135 143

155

165

117 98 105

2006

2007

2008

2009 2010 Demand

2011

2012

2013

2014 Supply

2015

2016

Source: McKinsey

19

Increasingly complex social issues causing schedule over-runs

Survey of 190 Delayed projects; Causes of Delay Sustainability (eg stakeholder, community, environment-related)

73%

Commercial (eg cost or contract related)

63%

Technical

21%

0%

20%

40%

60%

80%

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. Friends 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

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New approaches to project management are essential if returns are to be maintained

Xstrata deploys innovative solutions
Size and complexity Operational Access to key inputs/ infrastructure Key Skills EPCM and on-theground capabilities

Lead times

Cost over-runs

Schedule over-runs

Procurement and sourcing agreements Infrastructure/energy/water solutions Balance NPV and return by staging development of large projects 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
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Political; government sponsorship

Community shared value

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

Governments Mining Companies

Benefit from:

Investment in country Taxes Employment Infrastructure Products vital to society Security of tenure and a stable investment regime Transparency Infrastructure A skill base Communities

Benefit from:
The Social Licence to Operate Access to diverse sources of capital New resources and business opportunities Key skills

Governments

Mining Companies

In return provide:

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
The Social Licence to Operate Employees Suppliers
22

Communities

Benefit 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:

A new approach to delivering value and returns is required

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 owners team, EPCM JVs Licence to operate governments, communities, NGOs Infrastructure and support service financing and provision Prioritisation of low capex intensity growth
23