Xstrata is responding proactively to the environmental, social and economic challenges posed by climate change. It is one of the principal risks facing our business.

Climate change and Xstrata

Xstrata Coal supports the weight of scientific opinion in relation to climate change and believes action is required to avoid negative climate change impacts. We believe our environment will continue to change and that this may pose social, economic and environmental risks and consequences that can only be addressed through comprehensive global action. Xstrata believes that access to an affordable, reliable and secure energy supply is critical to economic and social development, and the reduction of emissions from the production and use of coal that is necessary and achievable. Meeting rising global energy demands in developed and developing economies will require access to a diverse mix of energy sources (including fossil fuels) and commercial-scale low-emission technologies, to ensure energy security, economic growth and sustainable environmental performance.

Climate Change Strategy

Throughout 2010, we further refined our Climate Change Strategy in line with Xstrata Coal’s broader SD goals and SD Strategy. The Climate Change Strategy and five-year plan will be reviewed on an annual basis to drive continuous improvement. Climate change remains a significant issue for our business and will be a key factor in maintaining our licence to operate, and securing our long-term competitive advantage. Xstrata Coal recognises that climate change poses a range of potential physical, financial and social risks as well as uncertainties to our business. In response, we are focused on proactive engagement, participation, management and investment to address climate change issues. In the short term, we will focus on the following issues to underpin a longer term carbon and Climate Change Strategy:

Improving our GHG and energy reporting performance

Further integrating carbon considerations into our LOM, procurement, project investment and business management processes

Continuing to add and actively assess the pipeline of GHG abatement projects across the business, which feeds into the existing Xstrata Coal Marginal Abatement Cost Curve (MACC)

Prioritising low-emission technology research and development in both upstream and downstream areas. We have developed four Climate Change Strategy areas which address opportunities throughout the lifecycle of our products, including project planning and design, operational efficiency,
and research and development.

Government policy and stakeholder engagement

• We work with government and key stakeholders to understand the impacts of policy and regulation on industry and support the development of a comprehensive and binding international
  agreement on climate change.
• We establish respectful dialogues among government, NGOs and other stakeholders in key markets and countries with existing operations.
• We demonstrate leadership on climate change issues, and our actions are transparent, equitable and credible. We encourage the development of policies and regulation that aim to achieve least-cost abatement and support investment in the development of an appropriate suite of low-emission power generation options.

Product stewardship

• We contribute to the research, development and demonstration of low-emission technologies.
• We develop strategic alliances in the area of capacity building, which will support the long-term commercial application of low-emission technologies.
• We understand the full lifecycle of emissions from the exploration, mining, processing, refining, fabricating, use and disposal of our products.
• We adapt and incorporate lifecycle analysis into our business planning, product procurement and project management processes.
• We work with government and key stakeholders to understand and adapt to the potential physical impacts of climate change.

Business integration

• We actively manage and record our energy and emission profile.
• We incorporate a price on carbon into our investment decisions.
• We consider opportunities for beneficial use of coal and waste mine gas to maximise use of our resources and to assist in reducing our energy demand.
• We consider the abatement of fugitive emissions a priority at our operations.

Market developments

We develop alliances and collaborate with our customers, both domestic and international, in demonstrating the sustainable use of coal through new power generation technologies.

We understand the impact of carbon constraints on global energy and monitor the impact of competition from alternative fuels and energy sources on demand for our product.

Government policy and stakeholder engagement

During 2010, Xstrata continued to participate in public policy development around climate change and the proposed introduction of a carbon price. We believe that any sound climate change framework should proceed from a set of fundamental principles.

In 2010, we continued to be involved with government and a range of stakeholders on the development of the Climate Change Policy in Australia, and the treatment of coal mine
fugitive emissions. As part of our Climate Change Strategy, we have developed a group-wide Stakeholder Engagement and Management Plan with
the aim of communicating our achievements in the area of climate change, and building our transparency and credibility with our stakeholders in this area.

Xstrata Coal, in co-operation with the minerals sector, has developed a set of guiding principles to assist with the development of climate change policy. These principles form an important platform to test the effectiveness of proposed policies to address climate change, while ensuring ongoing economic growth, energy security and social development.

We believe that transition to a low-emission future will require the alignment of three fundamental components.

• A global agreement for reducing GHG emissions that includes emissions-reduction commitments from all major emitting nations.
• Market-based measures that promote least-cost abatement while balancing adverse social and economic impacts.
• Significant investment in a broad range of low-emission technologies and adaptation measures.

In the absence of a global agreement in the near term, the imperative for all nations is to sustainably reduce the production of GHG emissions without compromising international competitiveness, energy security, economic growth, improved living standards or poverty alleviation.

A measured transition to a low-carbon economy can be accomplished by a variety of policy mechanisms that integrate all of the following design features.

• A clear, predictable and long-term price signal: We must ensure that carbon price signals influence producers and consumers so GHG emissions and carbon consumption are reduced, and the focus on low-carbon technologies is increased.
• Broad-based: The carbon price should cover the broadest possible range of GHG emission sources, sinks and low carbon energy options.
• Internationally competitive: We need to progressively reduce emissions without distorting trade and investment flows or compromising the international trade competitiveness of the Australian industry.
• Revenue-neutral: The objective is to establish a carbon price to change behaviour, not raise revenues. If revenues are raised, they should be used to provide assistance to individuals and firms adversely affected by the policy measures, not diverted into general revenue.
• Simple and effective: The aim should be to achieve sustainable emissions reductions at the least economic cost, and the carbon price should be simple to implement.
• Measured, equitable transition: The aim is to avoid adverse economic and social consequences, ensure continued energy security, provide equitable treatment of existing investment and deliver greater certainty to new investment.
• Technology: We need to encourage the adoption of the most efficient low-emission technologies through a carbon price signal, together with fiscal measures where market failure is demonstrated.

Consultation on these policy measures should be conducted in an open and transparent way and should include genuine consultation with all stakeholders. The financial implications and risk associated with proposed policies and regulations in various international markets could have a negative impact on the pricing and production of coal. While we have considered these risks, uncertainty in several markets regarding government legislation means we cannot yet fully understand the financial impacts until final legislation is passed by the respective governments. Nonetheless, we must be ready to respond to these risks. This is why we continue to model and monitor a range of carbon trading and carbon tax scenarios for internal business analysis, and for use in our ongoing negotiations with governments regarding climate change regulations and customer market impacts.

Please see the Xstrata website for more information on the company's position in regard to climate change.