ࡱ> 7 q8bjbjUU 5z7|7|<jbhl5558P5<5l2T6T6"v6v66;8;8;8wkykykykykykyk$@m `ok;87@;8;8;8k>v66ok >>>;8VR66wk>;8wk>>@SgDp"#k6H6 dr,5:|h&#kTk<lhfo >o#k> The Xstrata Listing: An Analysis of Climate Risks A report by Claros Consulting For Friends of the Earth July 2002 Executive summary Xstrata, the mining conglomerate, was admitted to the Official List of the UK Listing Authority in March 2002, with J.P Morgan plc acting as Sponsor. This report investigates whether the Xstrata Listing Particulars properly met the requirements of investors, followed the listing rules and disclosed all the risks the company faces, particularly in the area of climate change. Climate change: a significant risk factor for investors Climate change is generally acknowledged as one on the major challenges facing the twenty first century and has thus been recognised by global business leaders, investors and governments. The Kyoto Protocol is placing emissions targets on countries including Japan and the European Union. Additional action to address climate change is likely. Many governments are planning to implement climate change mitigation policies, including trading permits in carbon emissions, where those burning fuels such as coal (such as electricity producers) have to buy permits; carbon taxes; and the promotion of energy efficiency and renewable energy. The implications of climate change for shareholders and insurers have led to the investment community taking an active interest in the issue. Over the last ten years a number of initiatives, supported by major investment institutions, have been established to look at climate change. A key area has been to call for greater disclosure of information by companies on the risks of climate change (and other environmental issues) on their business and shareholder value. If investors increasingly expect proper disclosure of a company's environmental and climate risks in its Annual Report, then this disclosure should be at least matched in its Listing Particulars. . And a major impact on Xstratas value . Climate policies will have great significance for companies, such as Xstrata, where the use of their core products results in the emission of greenhouse gases. Either by restricting demand directly or by making coal more expensive compared to lower emitting alternatives, any combination of these policies could lead to reduced coal demand, particularly in Europe and Japan, which make up 32% and 27% of Xstrata's coal sales respectively. Studies have demonstrated that, in Europe and the US, climate change mitigation policies could have a major negative impact on coal mining more so than any other sector. Coal is by far the most carbon intensive fuel and would therefore be most affected by carbon levies or emissions permits. The resulting cost increase of coal, and incentives to use renewable energy sources, would encourage power stations to consider alternatives to coal. One study found the market value of a coal company could fall by as much as 64% under climate mitigation policies and the survival of such companies could be under threat.Other studies have modelled the impact of climate change policies on European Power market in some detail, finding a major shift away from coal. The collapse in the share price of RJB Mining (now UK Coal Plc) is indicative the of potential risk to Xstrata. .yet inadequately disclosed in the Listing Particulars Given the serious implications of climate change mitigation for coal companies, and the importance of fully informing investors of these risks, it is of considerable concern that Xstrata has paid them such little attention in its Listing Particulars. Particular deficiencies include: A one sided discussion of coal market prospects, which fails to mention climate change as a factor, which ignores the disadvantages of coal and factors such as the reduced level of growth in OECD coal demand forecast by organisations such as the International Energy Agency A failure to consider the specific impact that climate mitigation measures would have on its key markets of Europe and Japan, and instead suggesting these present good opportunities, and generally failing to consider the impact of climate change measures would have on demand for coal and on the producer price for coal. Inadequate mentions of climate change, treating it as a regulatory risk rather than a fundamental business risk, and failing to mention the fundamental problems associated with coal use in respect of climate change. Downplaying the risks of Kyoto, and in particular using incorrect statements to imply Kyoto is less likely than it is. Ignoring the potential for climate related action other than the Kyoto Protocol, such as national climate plans, European plans for emissions trading, business led initiative, international action beyond Kyoto and legal action by affected parties. Failing to properly analyse, evaluated and disclose the impact of climate change on the companys business. and ignored in the valuation of reserves. The Competent Persons Reports do not appear to have been carried out correctly. Despite the requirement for detailed economic studies and specified economic conditions, no disclosure or analysis of the impact of climate change mitigation policies on the valuation of reserves has been made. The studies discussed in this report demonstrate that it is possible to fairly accurately model the impact of climate change on a coal business such as Xstrata. In contrast, unjustified assumptions have been used to increase the coal price, resulting in a major boost to the valuation of $573m. These shortcomings may be have arisen because valuations have been incorrectly based on Australian and South African codes, which differ from the tighter Chapter 19 of the UK Listing Rules (on mineral companies). Errors and omissions requiring action by the Financial Services Authority. All in all we can identify 30 specific failures in the Xstrata Listing Particulars, for which both the company and the Sponsor should take responsibility.Both should have analysed the climate change and its implications for Xstrata's core business before publication of the Listing Particulars and disclosed their findings. It is the view of this report that these failures constitute a breach of the UK Listing requirements that is serious enough to require public censure of the company and/or the Sponsor. The FSA should investigate this matter urgently and take appropriate remedial action. It is also strongly recommended that Financial Services Authority conduct a review of the Listing Rules to ensure they fully reflect the changing needs of investors with regard to environmental and social issues. Introduction Xstrata, the mining conglomerate, was admitted to the Official List of the UK Listing Authority and to trading on the London Stock Exchange in March 2002 in a Global Offer of 100,000,000 Ordinary Shares. The Sponsor and Financial Adviser was J.P Morgan plc. JP Morgan Securities, Deutsche Bank London and Cazenove & Co Ltd were Joint Bookrunners. For the listing, as is required, Listing Particulars were published, dated 20th March 2002. These Listing Particulars should include all information that investors and their professional advisers would reasonably require to make an informed assessment of the company. This report investigates whether the Xstrata Listing Particulars did indeed meet the requirements of investors, followed the listing rules and disclosed properly all the risks the company faces, particularly in the area of climate change. This major environmental issue affects all businesses, but particularly those involved in the coal industry. This report is divided into five sections Section One looks at investors interest in environmental issues and in particular the issue of climate change. Section Two looks at the business of Xstrata and the impact that climate change mitigation policy could have on that business. Section Three looks at the Listing Particulars of Xstrata, and reflects whether the particulars adequately disclosed the risks of climate change and the potential impact on the business. Section Four looks at the valuation of the coal reserves provided in the Listing Particulars and especially whether climate change related factors have been adequately included in that assessment. Section Five presents conclusions and considers why there were shortcomings in the Listing Particulars and what should be done about them.  Investor Interest in Climate Change Climate Change It is harder to think of a bigger issue to address than climate change Peter Moon, Chief Investment Officer, Universities Superannuation SchemeClimate change is generally acknowledged to be one of the biggest social and environmental issues facing business and society in the twenty first century. Governments have recognised the importance of climate change, notably when most governments signed the Framework Convention on Climate Change (UNFCCC) at the Rio Earth Summit in 1992. International negotiations on climate change continued since then under the UNFCCC, leading to the development of the Kyoto protocol in 1997. In the words of the European Commission, dated 4 March 2002: There is broad consensus in the scientific community that climate change is happening faster and to a greater extent than previously expected, confirmed [in 2001] by the Third Assessment Report from the Intergovernmental Panel on Climate Change (IPCC), which was the outcome of a process involving 2000 international scientific experts. Due to the projected growth of emissions of greenhouse gases, the world's climate could warm up by up to 5.8C by the end of this century. National governments have developed climate change action plans. Business also recognises the importance of climate change. For example, at the 2000 World Economic Forum, business leaders voted climate change as the most significant issue facing business in the 21st century. Requirement to disclose environmental and social impacts In response to growing public concerns about the environmental, social and ethical impacts of companies, the Government moved to make pension funds disclose if such matters were taken into account when determining their investments. In the UK, the SRI disclosure regulation, introduced under the 1995 Pensions Act, requires the trustees of pension funds to state their policy on: the extent (if at all) to which social, environmental and ethical issues are taken into account in the selection, realisation and retention of investments This regulation, which came into force in July 2000, has required pension funds and their fund managers to consider social and environmental issues in greater depth than previously. In particular, ever mindful of their duties to maximise returns to investors, they have particularly focused on where such issues may have an impact on performance. However, in seeking to analyse and understand such issues, a frequent concern has been the availability of information on social and environmental issues from companies, without which it is clearly difficult to assess the impact of social and environmental issues on performance. Thus a focus for many investors has been to call for greater disclosure by companies of such issues. In particular, the Association of British Insurers, the industry body for the life insurance industry, issued Disclosure Guidelines on Social Responsibility in 2001. The following is an extract: With regard to policies, procedures and verification, the annual report should: 2.1 Include information on SEE [social, environmental and ethical]-related risks and opportunities that may significantly affect the companys short and long term value, and how they might impact on the business. 2.2 Describe the companys policies and procedures for managing risks to short and long term value arising from SEE matters. If the annual report and accounts states that the company has no such policies and procedures, the Board should provide reasons for their absence. These disclosure guidelines are targeted at annual reports rather than the Listing Particulars of companies, as this is the area that institutional investors can directly influence through corporate governance, in particular the annual vote on the accepting the report and accounts. Note that a number of institutional investors have indicated that they will start to vote against the annual report and accounts if there is inadequate reporting on environmental and social issues. It is generally recognised that at the time of listing, companies should make a more extensive disclosure than is required for annual reporting, because investors will not be familiar with the company. Certainly, it would seem reasonable that listing materials should disclose as a minimum the information that investors expect to see annually. Another important initiative is the London Principles, due to be launched at the Rio+10 summit in South Africa as part of the British Governments contribution. Backed by the City of London Corporation and the Department For Environment, Food and Rural Affairs, and supported by the Prime Minister, it is expected that the principles will call for financial institutions to ensure that the costs of environmental risks are reflected in the pricing of financial and risk management products. This will inevitably require financial institutions to have access to the requisite information. Investor response to climate change Investors have also increasingly recognised the importance of climate change. A number of investor-related initiatives have been developed on climate change. The United Nations Environment Programme Financial Initiative dates back to 1992 when the "UNEP Statement by Banks on the Environment and Sustainable Development" was launched in New York. Insurers followed in 1995, and now over 275 financial institutions work with the Initiative, including a considerable number of UK organisations.  The Statements, signed by the members, recognise that identifying and quantifying environmental risk should be part of the normal process of risk assessment and management, and encourage the development of products and services which will actively promote environmental protection. The UNEPFI has three working groups, one of which is on climate change. This has been involved in the UNFCCC process, attending the various conferences. It has been involved in developing a Greenhouse Gas Indicator, for measuring an organisations greenhouse gas emissions. It is currently completing a new study on climate change and financial institutions and is starting to emphasise the investment implications of climate change, particularly in relation to energy industries. UK* supporters of the Carbon Disclosure Project Abbey National Allianz / Dresdner, Baillie Gifford & Co Central Finance Board of the Methodist Church, Clerical Medical Investment Management Cooperative Insurance Society Credit Suisse Group, Henderson Global Investors, Jupiter Asset Management Local Authority Pension Funds Forum, Legal & General, Merrill Lynch Investment Management Morley Fund Management, Newton Investment Management Societe Generale Asset Management UK Storebrand Investments Swiss Re Asset Management, Threadneedle Investments, UBS Global Asset Management (UK), Universities Superannuation Scheme *Includes institutions where support is co-ordinated from the UK or with significant UK presence.One of Britains biggest pension funds, the Universities Superannuation Scheme, commissioned a study of the risk management implications of climate change Climate Change - a Risk Management Challenge for Institutional Investors. The study found that climate change was a major emerging risk management challenge for institutional investors. The report recommended 10 action points for investors. One called for investors to engage with companies on the need to report on their climate change exposures and the managements response. As a result of that study, it was decided to form an informal investors group to continue exploring the impacts of climate change and how investors should respond. That group now has 12 members, with over 300bn of assets under management. A large international group of institutional investors, with assets under management of around $4trillion, supported the Carbon Disclosure Project (CDP). Launched in May 2002 the project has substantial UK support. According to the project co-ordinator, there are potential business risks and opportunities related to actions stemming from the perception of climate change that have implications for the value of shareholdings in corporations worldwide. The CDP wrote to the 500 largest quoted companies in the world by market capitalisation asking for the disclosure of investment-relevant information concerning their greenhouse gas emissions. The data will be used to compile a sectoral and investment report. A number of major investment institutions have also conducted their own research on climate change and affected sectors. They include Friends Ivory & Sime, Henderson Global Investors, Co-operative Insurance Society and Morley Fund Management. Morley in their forthcoming study state that deficiencies in the disclosure of information on climate change exposures and greenhouse gas emissions make analysis of climate change risks impossible and conclude that there is a need for greater disclosure. Overall it is clear that increasingly investors are recognising that climate change is a significant risk issue and adequate disclosure is necessary if they are to be able to maximise their performance and meet their other obligations to investors. Information on climate change exposure appears to be very much the sort of information that investors would reasonably require. Of course, disclosure of climate change risks may be less important if the company is not particularly exposed to the potential risks. However, as we examine in the next section, coal companies such as Xstrata are widely recognised as being exposed to the risk of climate change. The business of Xstrata: Is there a likely performance impact? The most sensible way for governments to tackle this genuine (but long-term) problem [climate change] is to send a powerful signal that the world must move towards a low-carbon future-The Economist July6th 2002. Xstratas principal business is the extraction and production of coal, principally for the thermal coal market, and with a large proportion of its production going for export. Coal accounts for 70% of the estimated earnings, and 62% of the net present value (from the Listing Particulars). In this regard, it is more exposed to the international market for coal than any of the other major mining groups listed in London. The exposure to coal is significant because the burning of coal directly results in the production of carbon dioxide, the principal greenhouse gas. Measures to reduce such emissions are likely to involve, at some level, burning less coal. This challenge to the core market for its fuel is the basis for our view that the value of Xstrata is directly and substantially at risk from climate change mitigation policies. More specifically, the principal market for coal (and for Xstrata) is in the generation of electric power. There are a number of alternative ways of generating electric power. Power from coal involves the production of around twice the amount of greenhouse gases compared with natural gas, and many times the greenhouse gases involved in hydropower, nuclear power, and renewable energy. If a value is placed on carbon emissions, this competition limits the extent to which coal-based power producers can pass on any increased costs to consumers, and can also mean that it is less likely to be profitable to operate coal-fired plants. To meet international obligations and other pressures, countries are beginning to develop policies to reduce greenhouse gas emissions. A wide range of policies has been used or is under development. Among them are various measures to improve energy efficiency, particularly in the production, transmission and use of electric power essentially supporting a given level of economic output with far less input energy, especially coal. These are intended to reduce the demand for power, and hence for thermal coal. Notable of this type are the climate mitigation plans of Japan. Japan faces a particularly challenging Kyoto target of a reduction of greenhouse gas emissions of 6%. Energy efficiency plays a key part in plans to meet this target.  As the ultimate goal of these policies is to reduce carbon emissions, it is very difficult to see how coal consumption in Japan can increase if Japan is to meet its emissions targets. Japan accounts for approximately 27% of the coal sales of Xstrata. Other competitive pressures on coal are likely to come from measures to boost renewable energy, as adopted by the European Union. For example, UK power utilities have to obtain 10% of their power from renewable energy sources by 2010. This means that the market open to coal-fired power will be reduced by 10% In many countries, the most important policies to mitigate greenhouse gas emissions will be market-based mechanisms to capture the cost of carbon dioxide. While some regimes are considering carbon taxes, where emissions of carbon are taxed at a certain rate, the most popular systems are based on emissions trading, where permits to emit greenhouse gases are auctioned or allocated to companies. Trading allows the most economically efficient ways of reducing emissions to be found. The European Community plans to launch an emissions trading regime by 2005. Approximately 32% of Xstratas coal sales are to Europe. In the UK, both a tax and an emissions trading system are being developed the climate change levy is essentially a carbon tax, and, for certain high emission sectors, an emissions trading regime was launched on 2nd April 2002. Impact on coal price Coal users who have to buy emissions permits to burn coal will find the effective costs will rise sharply, as the costs of permits will be significant compared with the cost of coal. Estimates of the longer term cost of emissions are $5-$40/tonne CO2 which equates to $30-$100/tonne of coal. In the earlier days of trading prices have been lower, around $1-$10 (reflecting the fact that until market mechanisms are finalised, sellers can be expected to be more prevalent than buyers) but nonetheless a significant proportion of the cost of thermal coal (in the Listing Particulars) of $29/tonne. This general analysis has been confirmed by the Third Assessment Report of the Intergovernmental Panel on Climate Change (IPCC), which considered mitigation policies. They have stated: In general, it is easier to identify activities, which stand to suffer economic costs [under greenhouse gas mitigation efforts] compared to those which may benefit, and the economic costs are more immediate, more concentrated and more certain. Under mitigation policies, coal, possibly oil and gas, and certain energy intensive sectors, such as steel production, are most likely to suffer an economic disadvantage. This is also the view of the International Energy Agency: Coal use will be most affected by the introduction of policies to reduce CO2 emissions because of coals high carbon/energy ratio. Moreover, in considering Cost for the Coal Sector of Mitigation Options, the IPCC also states, citing 1999 and 2000 studies that: the reduction in coal exports to Annex B countries [such as the Europe and Japan] for thermal power generation will severely impact some coal-exporting countries. In particular, Colombia, Indonesia, and South Africa will incur substantial losses in income with attendant job and revenues losses South Africa could feel the greatest impacts of the major non-Annex B coal-exporting countries. In particular, [a 2000 study] forecasts revenue losses forSouth Africa as being as high as 4% of gross national product. It is clear that the need to include such costs in the combustion of coal is very likely to have an adverse impact on the demand for coal in markets where such regimes are or will be put in place. Such an adverse effect will inevitably impact on the international price of coal, and thus reduce Xstratas margins and profitability substantially. Competitive pressures should increase. It is worth noting the very high sensitivity to the coal price in the valuation of Xstratas reserves a 10% fall ($3 fall) in the coal price, a not unreasonable consequence of climate price moves, would reduce the value of the stated reserves by some $699m. Impact on coal market As the potential impacts of climate change mitigation policies are becoming more obvious, a number of studies are estimating in increasing detail, and with increasing rigour, the consequences of these policies for companies involved in energy markets. In particular, studies are increasingly focusing on the impact of climate mitigation policies on shareholder value. One study by Innovest Strategic Value Advisors for the CERES Sustainable Governance project assessed the crude exposure of US utilities to carbon taxes finding that the exposures ranged by a factor of 100 fold. In certain cases, the exposure was as much as 45% of equity value, with a $20/ton carbon tax. Faced with such risks, companies are likely to seek to reduce their carbon exposures and for power utilities this will mean shifting away from coal fired power production. This raises an important issue: a key feature of the power market is the very long-term nature of the investment with new power facilities. Because of uncertainties over climate change mitigation power, utilities are likely to become increasingly reluctant to develop new coal power even in regimes where the impact of current climate change policies may be modest unless the economics are compelling, as they risk being left with an uneconomic plant. Other studies have used macro-economic modelling to assess the impact of climate change taxes or permits on key sectors. Two studies have looked at the US in some detail. One, Neutralising the Adverse Industry Impacts of CO2 Abatement Policies: What does it cost, A Lans Bovenberg and Lawrence H Goulder, used a inter-temporal, numerical general equilibrium model of the United States, which incorporated a detailed model of the US energy industry, including aspects such as relative inelastic capital flows and supply and demand elasticities. The study found a major negative impact on the US coal mining industries from climate change mitigation policies the figures below show the impact of a $25 carbon tax, with the revenue recycled through personal income taxes. Impact on the coal mining sector Relative to base case Output: 2002: -19.1% 2025: -23.3% After tax profits: 2002: -32.5% 2025: -25.8% Equity value: -27.8% A second similar study, prepared for the Center for Clean Air Policy in the US, confirmed the above findings. Using a similar (but different) dynamic general equilibrium model, they modelled the impacts of carbon abatement policies. The underlying policy they investigated was considerably stricter than the previous study, based on meeting US Kyoto commitments (with a $72/tonne price of carbon emissions in 2010). They found that the impact of climate control polices on equity values for the US coal mining sector were significant, with a fall in value of 64%. Notably the impact on the coal mining sector was far greater than on any other sector the maximum decline in value in other sectors was 8%. While these studies were focused on the US, where Xstrata has little involvement, they illustrate firstly, the potential scale of the impact of climate change mitigation policy on the value of coal mining companies, and secondly the possibility of valuing the impact of climate policy. It would be reasonably straightforward to modify the analysis to international coal companies. Perhaps the most interesting and relevant study has been carried out by ICF Consulting. Entitled European Carbon Market Outlook: Implications for Power Prices and Asset values, June 2002, it modelled the impact of the EU emission trading directive on the European electricity market. The model is sophisticated, looking at some 15,000 generating units, modelling their cash flows and looking at likely plant closure and construction. The study was able to illustrate the impact of the emissions trading directive at both a macro and micro level: The most threatened assets were older coal and oil fired power stations, and coal and oil fired power stations with high leverage. The load factor at a German coal power plant fell from a baseline figure of 30% to 12% by 2010 (and 0% by 2015) under an emissions constrained regime. Without emissions costs, the load factor would have risen to around 40%. At a Spanish coal unit, emissions trading would cause cash flow to become negative by 2010, and seriously negative by 2020, almost certainly resulting in early closure of the plant. In one scenario, overall power station closures were estimated at 38GW by 2010, the around 70% of them coal. Response of other carbon producers Leading energy companies are starting to plan for a carbon-constrained world. Shell has developed a series of Energy Scenarios to help it plan for new energy futures, and is developing a hydrogen business and others. In its business decision planning, Shell has said it will include consideration of the effect of a carbon price penalty in our investment calculations for new projects, and existing major assets, with major GHG emissions. BP rebranded itself Beyond Petroleum and has invested in fuel cell and solar technologies. Its CEO, Lord Browne has said In 1997 we accepted that the risks were serious and that precautionary action was justified . We do accept the challenge. To reinvent the energy business, to stabilize our emissions and in doing so to make a contribution to the challenge facing the world. The mining company, and direct competitor of Xstrata, Rio Tinto has recognised the challenges facing coal and is working on looking into more efficient use of coal in power stations and heat recovery from coal - and is reporting on it publicly. It seems reasonable to suggest that Xstrata should review thoroughly, if it has not done so already, the implications of climate change on its business, and the conclusions should be made public so investors can be properly informed. In Xstratas case there may be some compensating factors that could reduce the risks such as the production of high quality coal or low production costs. However, these factors are unlikely to completely offset the impact of the climate change mitigation measures. And, of course they should be properly disclosed so investors can assess their validity and applicability. To illustrate the sort of impact that climate change could have on the share price of Xstrata, it is worth looking at the long term price history of another UK Listed coal mining company, UK Coal plc. Originally listed as RJB mining in 1993, the company performed well for a few years but then faced a sudden collapse in share price. UK Coal Plc versus FTSE 250  While it would be wrong to claim climate change was the principal factor in collapse of the UK Coal plc share price, it probably played a part. The companys long-term price contracts expired in 1998 and it became impossible to replace them, due to the twin pressures of coal imports and the dash for gas. However, concerns over climate change, already high in 1997, meant that any attempt to win significant political concessions were very unlikely to succeed, and a collapsing share price was the net result. It is worth noting that the listing particulars of RJB mining did not contain any information about climate change and its implications on the long-term demand for coal. Overall, the evidence is sufficient to conclude the following: Climate change mitigation presents a serious threat to the international coal market, and will seek to reduce demand for coal. This will serve to reduce the international price for coal. Xstrata could see significantly reduced revenues as a result of climate change mitigation, and even more dramatic reductions in profits. The value at risk could be a significant proportion of the total market capitalisation of the company. While detailed studies have not been conducted explicitly in respect of Xstratas business, there does not seem to be any fundamental reason why such analysis cannot be carried out. Most importantly, the risks seem to be sufficient to imply that a full discussion of the impacts of climate change mitigation policy should have been made available to investors in the Listing Particulars. Thus we next examine what was actually said on climate change risks in the Listing Particulars. The Xstrata Listing Particulars: Were investors properly informed of risk factors? The relevant listing requirements The directors of Xstrata and the sponsor, J.P.Morgan plc have significant responsibilities in the preparing the Listing Particulars. In this section we examine what was actually said in the Listing Particulars and whether they meet these obligations. Firstly, it is worth identifying what is formally required under UK laws and UK Listing rules. There seem to be three particularly relevant requirements for present purposes: (1) General duty of disclosure Under section 80(1) of the Financial Services and Markets Act 2000, the Listing Particulars: must contain all such information as investors and their professional advisers would reasonably require, and reasonably expect to find there, for the purpose of making an informed assessment of- (a) the assets and liabilities, financial position, profits and losses, and prospects of the issuer of the securities; and (b) the rights attaching to the securities. (2) The Listing Rules: Contents of Listing Particulars: The recent developments and prospects of the group Under chapter 6, paragraph 6.G.1 (b) of the listing rules, the following information must be included in the Listing Particulars (unless otherwise agreed by the UK Listing Authority): Information on the groups prospects for at least the current financial year. Such information must relate to the financial and trading prospects of the group together with any material information which may be relevant thereto, including all special trade factors or risks (if any) which are not mentioned elsewhere and which are unlikely to be known or anticipated by the general public and which could materially affect the profits. (3) The Listing Rules: Mineral companies: Competent Persons Report Under Chapter 19 of the Listing Rules (the specific rules for mineral companies), the Listing Particulars must contain a Competent Persons Report. Under paragraph 19.15 (r) Special Factors the competent persons report must contain the following information A statement setting out any additional information required for a proper appraisal of special circumstances such as difficulties in transporting or marketing the extracts which may affect the commercial viability of the project, or an appropriate negative statement. Analysis of Xstratas Listing Particulars Part 1: Information on the Group: Coal Business This is the key section laying out the main business of the group and the markets in which it operates. Investors will form the key impression of the company here, so it is important that this section is complete and balanced. Instead the Listing Particulars take a very one-sided view of the coal market. There is a notable omission of any mention of climate change, even in terms of a reference to later sections. The following identifies some of the passages in the section that could potentially mislead investors. Background: Page 36, Para 2 Coal is currently the cheapest fuel on a contained heat basis and prices have remained significantly below the price of oil or natural gas. Coal retains a number of other advantages, namely less volatile supply, stable supply from a wide range of politically secure geographic locations, and easy and safe storage and transportation by rail and ship. These factors are expected to secure the long term demand for coal. On a contained heat basis coal may be the cheapest fuel, but once factors such as the lower efficiency of coal-fired plants are taken into account and the cost of the addressing the pollution which comes from coal combustion (e.g. through fitting flue gas desulphurisation), much, if not all, of the cost advantage disappears. There is a notable failure to mention any of the disadvantages of coal, especially its high carbon intensity. Other disadvantages include the lower flexibility of coal power plants, high transport costs, handling difficulties with coal, and a range of externalities such as the production of other pollutants and the disposal of ash. Coal power generation is likely to come under increased pressure to pay for these externalities. One indication of the potential comes from ExternE, a major project by the European Commission to look at the externalities of power generation. This estimated the externalities for coal at 17 to 138 ECU/MWh, compared with gas at 6 to 60 ECU/MWh. Indeed the disadvantages of coal are such that the long-term demand for export coal is far from secure. Supply and demand: Page 36, para 5 Growth in thermal coal demand is closely related to growth in electricity consumption, with approximately 38% of the energy used for global electricity generation accounted for by coal. OECD electricity demand and coal fired electricity generation increased at an average rate of 2.9% per annum between 1990 and 2000 and total OECD electricity demand is projected to continue increasing from 2000 to 2020 with the highest growth rates expected in Asia. The company expects that seaborne thermal coal imports will increase to satisfy this growing demand. This section is potentially seriously misleading in that it uses valid facts, but invites investors to make inappropriate conclusions from those statements. Firstly, it encourages the investor to assume that there will be a continuing link between electricity generation and coal demand. It uses the convenience of similar growth rates over a particular period to reinforce this impression by conflating reference to two different historic growth trends. However, apart from the historic reference, which is of course no guide to the future, it is without justification or qualification. Many analysts consider that climate change mitigation and other factors are likely to see a significant switch away from coal and there is a growing likelihood that electricity generation will decouple from coal demand. Indeed the International Energy Agency expects that the importance of coal in electricity generation within the OECD will decline, its share falling by 4% in 2020 Secondly, it provides historic figures of growth rates, and then goes on to refer to projected continuing increases, without providing a figure. This means investors are likely to assume the historic figures may well apply. In fact, forecasts for future growth in demand are likely to be significantly lower than the historic rates given. The IEA forecast for OECD electricity demand is growth rate of only 1.6% a year to 2020, only half the rate from 1971 to 1997. Thirdly, the Listing Particulars mention OECD electricity demand as being projected to continue increasing, dropping the reference to coal demand, but inviting investors to assume that the links discussed above imply coal demand will continue to increase. The IEA forecast for growth in OECD consumption of coal is only 0.3% per annum, with the key markets for Xstrata of OECD Europe declining by 0.6% per annum while OECD Pacific grows by only 0.4% per annum. On world trade in coal the IEA says: World trade in coal is unlikely to expand much, mainly because overall coal consumption will rise relatively slowly The IPCC TAR WGIII suggests the lower growth in OECD coal is already happening, with growth in coal consumption switching to non-OECD countries. It says (p.570) that GHG mitigation is expected to lead to a decline in coal output relative to a reference case, especially in Annex B countries. Indeed the process may have already started; recent trends in coal consumption indicate a 4% reduction in OECD countries and a 12.5% increase in the rest of the world in 1997 versus (WCI, 1999) Page 37, para 7 Continuing strong growth in demand for thermal coal in Asia, particularly in Japan, Korea, and Taiwan is expected. At the same time imports have been increasing into Europe particularly into the UK and Germany. Germany has committed to phase out its uneconomic domestic mines between 2002 and 2010. This may lead to a further increase in German imports of thermal coal. Demand has also been affected by the United States, which was traditionally an exporter of thermal coal but since the beginning of 2001 become [sic] a net importer of thermal coal. Without lying, this paragraph risks misleading investors about prospects for coal. In Japan, measures to restrict CO2 emissions are likely to mean that continuing strong growth in demand is unlikely to materialise. In Europe, on 23rd October 2001 the Commission adopted a draft Directive on emissions trading, stating that: An internal EU system for greenhouse gas emissions trading is an important cornerstone in the Commission's strategy for reaching the Kyoto target in the most cost-effective wayThe proposed Directive aims at establishing an EU framework for emissions trading and an EU-wide market for emissions.The Commission proposes that emissions trading in the EU should start in 2005, and in a first phase cover CO2 emissions from large industrial and energy activities. These are estimated to account for about 46% of the EU's total CO2 emissions in 2010, and about 4,000 to 5,000 installations across the EU will be affected. In 2004 the Commission will consider an extension of the Directive to other sectors and greenhouse gases. This was followed on 4th March 2002 by the greenhouse gas reduction commitments on EU countries becoming binding when the Council of EU environment ministers decided to ratify the Kyoto Protocol. These measures mean that power generation may switch from coal to lower carbon sources, greatly reducing or even negating the potential for German coal imports. The ICF study predicted that emissions trading could result in the closure of 15GW of power capacity in Germany, predominantly coal. Pricing and costs: Page 37, para 1 The price of thermal coal is largely driven by the prevailing coal supply and demand balance and market outlook. . At a simplistic level this is true. However, there is no mention here of the significant impact that taxes or regulation could have on pricing and the demand for coal. A carbon tax, or the need to buy emissions trading permits, would have the effect of raising the price the consumer pays for fuel, while depressing the price producers receive for the fuel. Such taxes, or more particularly permits, are increasingly likely. Market Outlook Page 39, para 5 There has been consistent and predictable growth in demand for coal, which has not been significantly impacted by economic cycles or depressed Asian economies. Again potentially misleading: a historic statement that has the intention of being read as a forward-looking statement. The adjectives consistent and predictable are used without justification or explanation to reinforce this impression. As the IPCC statement above shows, there have been significant fluctuations in demand in recent years. Most recently mild winters in Europe and the United States depressed demand in 2001-2 (something that climate change makes more likely). And fluctuations in coal prices from over $35/tonne in Jan 96, down to just over $20/tonne in spring 2000, back up to $35 a tonne a year later and now back down to under $25/tonne do not testify to stable market conditions. Furthermore, emissions trading may shift coal power from a baseload source to an intermediate, more variable source of power, which will increase demand volatility. Part 1: Information on the Group: Regulatory and environmental matters. This section lays out the key regulatory environment in which the group operates. Most of the factors listed in this section are to do with the groups operations. However, it also includes a factor, climate change, which fundamentally affects the market in which the company is involved. There must be some concern that by placing such a key factor in this section means that investors are likely to take it less seriously. Page 61, para 7 In December 1997, in Kyoto, Japan, the signatories to the United Nations Conventions on Climate Change established a binding set of emissions targets for developed nations. These restrictions, known as the Kyoto Protocol, propose emission targets to reduce greenhouse gas emissions that could adversely affect the price of, and demand for, coal. Recently, the parties to the protocol, including Japan, agreed that despite US opposition, they would continue negotiations aimed at implementing and ratifying the Kyoto Protocol. This is the first of only two mentions of climate change in the Listing Particulars, and the most detailed. However, it is seriously inadequate and incomplete, particularly to an issue with a significant likelihood of having a major adverse impact on the value of the company. Specific omissions are: The Listing Particulars fail to mention climate change as a fundamentally important issue, and fail to mention that the use of coal inevitably produces carbon dioxide, a greenhouse gas and the major contributor to human-induced climate change. While a full discussion of the importance of climate change would be beyond the scope of the Listing Particulars, it would be appropriate to recognise the seriousness of climate change itself as an issue. It is clearly relevant to the companys business because action to mitigate climate change could impact on demand for the companys products. Furthermore, it is important to recognise that the momentum for action to reduce greenhouse gas emissions (and thus affect the demand for coal) is not just based on the Kyoto protocol, but is more deeply based on a major environmental problem that is likely to remain a challenge for many years. See the comment on the ENEX listing below. The Listing Particulars do not highlight the specific and important fact, as mentioned earlier, that coal is the most carbon intensive of fuel sources. As coal is around twice as carbon intensive as its major competitor in the power generation market, natural gas, it means that it is the most vulnerable fuel source to measures to mitigate carbon dioxide emissions, as has been borne out by studies mentioned earlier. The Listing Particulars only mention the UN Framework Convention on Climate Change in passing without explaining in more detail its significance or importance to the business of Xstrata. The objective of the convention is to achieve stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system The long-term problem in achieving this is coal. We can burn all the conventional oil and gas and still meet ambitious goals for tackling climate change. However, coal resources are so extensive that either its use must be restricted or we must fund a way to sequester the carbon dioxide produced from coal use. While the Listing Particulars mention the Kyoto Protocol, they do not mention any of the other actions that are occurring to mitigate climate change. These include: National climate change plans and policies in key markets. Of particular interest clearly are national plans in key markets, such as Japan and Germany. European level policies, notably the plan to introduce emissions trading by 2005 in key sectors. Business led initiatives, such as the World Business Council for Sustainable Development initiatives to develop measuring and reporting guidelines for greenhouse gas emissions, and to promote eco-efficiency among businesses. Consumer and NGO led initiatives, such as interest in green power. Other government initiatives to promote renewable energy and energy efficiency. The Listing Particulars do not mention the potential for further action beyond the period 2008-2012 and the fact that this is considered likely. Indeed such action could bring a number of developing countries into the emissions control framework, such as Korea (already an OECD member and a high emitter of greenhouse gases per capita) and possibly Taiwan, both cited as markets for Xstratas coal. For example, a study from the Australian Coal Research Board stated that Despite the expected growth in primary energy demand and consumption of black coal in Non Annex B countries, future planning should take account of the possibility that demand from several key Non Annex B countries may be significantly undermined by climate change policies, particularly during the second commitment period The Listing Particulars do not mention the potential of those harmed by climate change to seek redress through the courts. As a major producer of a product whose use is a major contributor to climate change, there is a potential risk for investors in this area. Already public reports indicate that potential victims of climate change have begun to consider the possibility. These include major reinsurers, who faced increased risks from climate-related catastrophes as well as countries at particular risk from climate change, such as Tuvalu. The final sentence is inaccurate and potentially misleading. Rather than continue negotiations aimed at implementing and ratifying the Kyoto Protocol, which implies that major negotiations were still on-going, by date of the Listing Particulars, major negotiations were concluded and the parties were proceeding to ratification. More correct would be to state that most parties to the protocol have agreed that despite US opposition, they would ratify the Kyoto Protocol. Indeed, since the publication of the Listing Particulars both the EU and Japan have ratified the protocol - the EUs agreement to do this coming on 4th March 2002, before the Xstrata listing. Although there was some uncertainty about whether the protocol will come into force, the statement is inaccurate and has the effect of making the implementation of the Kyoto protocol seem more remote and less likely. It is worth noting that this sentence appeared in the aborted ENEX Resources Listing (except for the word recently) and was not updated or revised despite the conclusion of negotiations to finalise the details of the Kyoto Protocol. The proposed listing of ENEX resources In 2001 an attempt was made to list the coal assets of Xstrata, ENEX and Duiker, as a separate entity, on the Australian Stock Exchange. The listing was pulled as a result of the events of September 2001, and the deal was restructured with the ENEX assets being combined with Xstrata AG, and listing in London instead of Australia. The business is fundamentally the same, and at least one director is in common. An offer memorandum for ENEX was prepared (and has much text in common with the Xstrata document). It makes an interesting comparison with the Xstrata Listing Particulars in the area of climate change. While still inadequate, the ENEX disclosure of climate change risks was significantly more detailed than that of Xstrata: The overall discussion of climate change was far more extensive, running to 26 lines instead of 5. It stated more clearly the fundamental challenge of climate change to coal mining: Coal mining is a greenhouse gas emitting industry because of the greenhouse gases attributable to coal use and because of the greenhouse gases emitted in extracting coal. It stated more clearly the fact that climate change posed a risk to its major markets: The major export markets for coal may be affected by regulations or policies including the imposition of taxes on the products and sales of coal. It mentioned the potential for emissions trading, one of the ways that coal markets are most likely to be affected, although it did not explore the impacts in any detail. There must be some concern that it was felt appropriate to downgrade the risk warning when the issue was moved to the UK, with a specific concern that the UK may be seen as an easy touch when it comes to disclosure of environmental business risks. Part IV: Investment Considerations This section lays out additional factors that prospective investors should consider. It is an appropriate area for consideration of some risks, but less so for factors which are fundamental to the prospects of the business. Commodity Price Volatility and Cost Efficiency: Page 85, para 2 Prices may be affected by government actions and, in the case of coal, could be affected when the carbon tax is enforced in certain Central European Countries in 2005 and if the Kyoto Protocol is ratified in the countries to which the group supplies coal. See Information on group regulatory and environmental matters in Part 1. This is the second mention of climate change in the Listing Particulars. Again it is seriously incomplete. The phrase When the carbon tax is enforced in certain central European Countries is unnecessarily vague. Which countries? How much? When exactly? If Germany, a key export market, this should have been stated explicitly and discussed. The statement fails to mention the development of the EU greenhouse gas emissions trading scheme, which could have a major impact on the demand for coal (see the ICF report discussed earlier) and is probably even more significant than the impact of the carbon tax measures described. The statement makes no attempt to quantify the impact of the measures described on coal demand or net prices, despite the fact that this appears perfectly possible. The use of and could be read as meaning that both the carbon tax and the ratification of Kyoto are necessary to impact the price of coal, when of course either may have an impact or would have been preferable. The statement implies that it is the ratification of the Kyoto protocol in countries to which the group supplies coal that is most significant for the price of coal. This is misleading. As a globally traded commodity, the impact on the coal price will come from the overall impact of the Kyoto protocol on the aggregate demand for coal, not from the ratification by specific countries. Ratification by specific countries may be significant for the current business of Xstrata, in that it will have to find alternative markets, but this is a different point. The reference to the discussion in Part 1 is not helpful, given the limitations of that discussion. Sponsors Report on Xstrata The sponsor plays an important role in the listing process. They are required to ensure that the prospective issuer, in this case, Xstrata, complies with all relevant Listing Rules. In particular, paragraph 2.9 (c) of the Listing Rules states that the sponsor must: provide to the UK Listing Authority any information or explanation known to it in such form and within such time limit as the UK Listing Authority may reasonably require for the purpose of verifying whether listing rules are being and have been complied with by it or by an issuer. J.P. Morgans report is remarkable in that, in its 60 pages it does not see fit to mention climate change even once. The report has failed to acknowledge the existence of climate change, let alone its implications for Xstratas core business, the extraction and production of coal. We believe that JP Morgan should have both acknowledged and analysed the risk of climate change to the business of its client, Xstrata. We note that J.P. Morgan also acted as Financial Adviser. This dual role will potentially give rise to a conflict between the public interest duties of the Sponsor and the private obligations as Financial Adviser. The Xstrata Listing Particulars: Have the reserves been properly valued? Chapter 19 of the Listing Rules requires mineral companies seeking listing to obtain a Competent Persons Report, which, inter alia, provides estimates of the companys proven and probable reserves and valuation of those reserves: (l) an estimate of net present value () of proven and probable reserves (analysed separately); (m) the principal assumptions on which the valuation of proven and probable reserves is based including those relating to discount factors, exchange rates and economic conditions; (n) information to demonstrate the sensitivity to changes in the principal assumptions. The definition of proven reserves is those measured mineral resources of which detailed technical and economic studies have demonstrated that the extraction can be justified at the time of determination and under specified economic conditions. The definition of probable reserves is those measured and/or indicated mineral resources which are not yet proven but of which detailed technical and economic studies have demonstrated that extraction can be justified at the time of determination and under specified economic conditions.. The important aspects here are the need for detailed economic studies, and the specification of the economic conditions used in the Listing Particulars. It appears that the Listing Particulars of Xstrata have fallen some way short of these two requirements. There is very limited reference to specified economic conditions under which the proven or probable reserves have been valued. Some variables used in the valuation have been disclosed, such as the discount rate and the coal price, but others are obscure such as the A$/US$ exchange rate has been based on consensus forecasts. Others such as the coal price are disclosed, but the rationale for the values used is not disclosed. Of greatest concern is that the valuation includes an increase in the coal price between 2003 and 2004 of some 8.2%. (and a rise of 3.7% of between 2002 and 2003). No reason is given for this increase other than to state they are derived from independent forecasts from the McCloskey Group This seems to be some way from specified economic conditions if a variation in coal price is to be used, then surely some justification should be provided. It also contrasts directly with the assumption of an approximate 2.5% per annum reduction in coal prices that is also used (presumably in subsequent years). Using the sensitivity analysis provided, we estimate that this increase in price may have increased the valuation of the reserves by some $573 million - this single factor has increased the total value of the coal reserves by some 25%. Furthermore, as mentioned above, the valuation uses a long term 2.5% per annum reduction in both operating costs and coal prices. No reason is given why this should be similar (which obviously limits the impact on profits) and no analysis is provided as to what would be the consequences of varying these factors. More fundamentally, specified economic conditions would appear to require an assessment of the potential market for the mineral. In the case of coal this would appear to include an assessment of the potential impact, if any of climate change mitigation measures on the demand for and price of coal. No mention is made of factors that might influence coal demand and price. However, it appears that, de facto, an assumption has been made that climate change will not impact on the market for coal or its price. Firstly, this does not seem to be the most reasonable or neutral assumption. Secondly, there is no disclosure of what assumptions have been made in this area in the document. Under the Listing Rules, the Listing Particulars should also include an estimate of the impact of the sensitivity of the valuation to changes in the assumptions. Thus it should also include an estimate of the impact that changes in the climate change regime might have on the valuation of its reserves. It might be argued that it is not possible to analyse or assess the impact of climate change measures with sufficient robustness to use them in valuations. The studies discussed in the earlier section indicate that this is not the case. It is possible to model with some accuracy the impacts of climate change mitigation measures on the demand for coal and other fossil fuels. This can be converted into impacts on price, and thus into the valuation of reserves. The greatest area of uncertainty lies in predicting exact direction of policy, but an assumption about climate policy based on current commitments, policies and intended policies is better than ignoring it altogether. In addition, by providing some sensitivity analysis the investor can assess different policy trajectories. One reason why this failure to include proper economic studies may have occurred is that according to the Listing Particulars (pages 269 (first page of the CPR re Australia) and page 345 (first page of CPR re South Africa), the reviews of resources and reserves were conducted in accordance with the Australian JORC Code (and for the South African assets, the South African Code for reporting of Mineral Resources and Mineral Reserves) Clearly, neither the JORC Code nor the South African Code are the same as the UKs Listing Rules. If definitions were identical, then it would be unlikely that there would be any problem on this basis alone. However, the equivalent definitions of probable and proven reserves in both these overseas instruments do not require detailed economic studies or extraction to be justified under specified economic conditions. (Indeed, the equivalent definitions seem to have more in common with the broader definitions in Chapter 19 for oil and gas reserves.) Note that it is no answer to this discrepancy to assert that the valuation of probable and proven reserves has been conducted in accordance with Chapter 19, if the resources and reserves have been estimated and reported on another basis, in view of the knock-on effect of the definitions. Conclusions and Recommendations. Failures of the Xstrata Listing There have been serious deficiencies in the listing of Xstrata. The statements in the Listing Particulars on climate change represent the barest minimum of disclosure. They appear to be there to protect the company from charges that it failed to mention climate change rather than to properly inform investors of the risks and consequences of climate change mitigation for their businesses. There are several inaccuracies in what has been disclosed. More significantly, there are a number of serious omissions, and other statements on market prospects are potentially misleading. The valuation of reserves appears to have been conducted under overseas Codes, which differ from the tighter Chapter 19 of the UKs listing rules, and has failed to make clear key assumptions used. The specific failures are as follows: Not disclosing that the use of coal is a major contributor to climate change; Not disclosing that coal is the most carbon-intensive fossil fuel and thus pre-eminently exposed to measures to reduce greenhouse gas emissions, not least those intended to reduce the demand for coal-based electricity generation; Not disclosing, or analysing the possible impact on the company of Japan - said to account for 27% of Xstratas coal sales - meeting her Kyoto targets; Not disclosing, or analysing the possible impact on the company of, emissions trading regimes in the EU said to account for 32% of Xstratas coal sales; Not disclosing, alongside the advantages of coal, any of the several disadvantages; Encouraging the investor to assume that there will be a continuing link between electricity generation and coal demand, and in the process conflating two different historic growth trends; Not disclosing that the International Energy Agency expects that coals share of energy production will fall by four percentage points by 2020 in OECD countries, and not analysing the possible impact of such a decline on the company; Not disclosing a figure for a projected increase in OECD electricity demand from 2000 to 2020, whilst disclosing a figure for 1990-2000; Not disclosing that the International Energy Agencys forecast for growth in coal consumption in the OECD, where the majority of Xstratas sales occur, is only 0.3% per annum to 2020; Not disclosing the IPCCs indication that lower growth in OECD coal consumption is already happening; Asserting that continuing strong growth in demand in Japan is expected without disclosing, and analysing the possible impact of, measures by Japan to restrict CO2 emissions; Suggesting future increases in German coal imports of thermal coal without disclosing, and analysing the possible impact of measures by Germany and the EU to restrict CO2 emissions; Not disclosing the possible impact that taxes, emissions trading or regulation could have on the thermal coal price; Asserting growth in demand for coal with the apparent intention of implying future growth in demand; Mentioning, only barely, the Kyoto Protocol; Not mentioning the fundamental significance of climate change as an issue, which makes action likely whether or not the Kyoto Protocol comes into force. Not mentioning any of the other actions that might arise to mitigate climate change, such as national climate change plans and policies in main markets and business-led initiatives; Not disclosing the potential for action beyond the Kyoto period 2008-12, which may affect Asian markets such as Taiwan and Korea; Not disclosing the potential for legal action for those affected by climate change, seeking redress through the courts; Not ensuring that statements regarding the state of negotiations of the Kyoto protocol are up to date and accurate; Using vague and unsubstantiated references to carbon taxes, possibly to diminish their impact; Not disclosing the likelihood of a European Emissions trading scheme and its impact; Implying it is only ratification of the Kyoto Protocol by countries in which the company supplies coal that is significant, when the risks concern global demand for coal; Not disclosing sufficient information concerning the specified economic conditions justifying extraction, such conditions requiring specification under Chapter 19 for the purposes of valuation; Not explaining or justifying 8.2% and 3.7% rises in the coal price between 2003/4 and 2002/3, respectively, for the purposes of valuation, thereby (on the basis of the sensitivity analysis provided) not accounting for a possible US $573 million (25%) increase in the value of the reserves; Not explaining or justifying a long-term 2.5% per annum reduction in both operating costs and coal prices; Not disclosing, or analysing the impact of climate change measures on the valuation of the reserves, despite detailed economic studies and specified economic conditions being necessary elements of a Chapter 19 valuation; Not disclosing information to demonstrate the sensitivity of the valuation to changes in the assumptions; Not estimating and valuing the reserves solely under Chapter 19; Not disclosing any information concerning the detailed economic studies justifying extraction, such studies being required by Chapter 19 for the purposes of valuation. Furthermore, in disclosing climate change risks it is possible to go beyond extended risk warnings and actually quantify the risks and implication of climate change mitigation policy. Given the significant nature of the risks this would have been appropriate. We note that a full disclosure in this way would not necessarily have deterred investors from investing, but would have ensured they would have invested on a properly informed basis. Thus we must conclude that there has been a breach of the UK Listing requirements. For example, the listing appears to have breached the general duty of disclosure under Section 80(1) of the Financial Services and Markets Act; paragraph 6.G.1 (b) of The Listing Rules (Contents of Listing Particulars: The recent developments and prospects of the group); paragraph 19.15 (r) of the Listing Rules (Competent Person's Report, Special Factors) and the rules for estimating and valuing the reserves in accordance with Chapter 19 Responsibilities The next questions that arise are who is responsible for these failures and what should be done about it. The directors must take primary responsibility for the Listing Particulars. Climate change and its implications have been widely discussed in the business community and particularly in the coal industry. Thus the company management must have been aware of the issue, and its potential. At a minimum they need to explain the reasons why the company chose to disclose so little of such a major risk to the company. We note that the ENEX listing contained rather more information on climate change (although still significantly insufficient), and that at least one director of Xstrata was also involved in that proposed flotation. The Sponsor must bear a significant level of responsibility. They should inform the company of what investors might reasonably require. We note that J.P. Morgan has not been involved in any of the climate change-related initiatives discussed in Section One. However, these activities have been reasonably well publicised and due diligence should have discovered both the potential significance of this issue to coal mining companies as well as investors interest in this area. The UK Listing Authority has responsibility for approving the Listing Particulars, although it is dependent on the issuer and sponsor for providing it with relevant information. However, we note that the UKLA has no specific guidelines in place for the disclosure of social and environmental factors and no procedures for checking a companys statements in this area. Recommendations 1) Investigate Xstrata listing and public censure We believe the UKLA should take substantive action to address this failure. It should investigate the deficiencies in the Listing Particulars discussed in this report. We believe that these are sufficiently extensive and potentially significant to require a public censure of the company and/or the sponsor and to require appropriate remedial action. Such action is both justified and necessary on its own account. In addition, it would send a clear signal to issuers and listed companies that the UKLA regards the disclosure of relevant social and environmental information as important. 2) Review UK Listing Rules Furthermore, we believe the UKLA should urgently conduct a review of the Listing Rules and how they address environmental and social issues to ensure that they fully reflect the changing needs of investors, and to ensure that the UK retains leadership in the financial services industry. Endnotes The Xstrata Listing: An Analysis of Climate Risks PAGE  PAGE 4 Claros Consulting July 2002  Foreward to Climate Change, a Risk Management Challenge for Institutional Investors, Universities Superannuation Scheme.  MEMO/02/46 http://europa.eu.int/rapid/start/cgi/guesten.ksh?p_action.gettxt=gt&doc=MEMO/02/46|0|AGED&lg=EN&display=  Taken from Statutory Instrument 1999 no 1849 para 2 (4)(b).  See www.unepfi.net for more information.  Available on-line at www.ushq.co.uk. The author of this report was also lead author of that study.  See www.cdproject.net for more information.  Environmental enemy No. 1, The Economist, July 6th 2002, p.11  http://unfccc.int/text/resource/iuckit/fact21.html  See Reports of Japan to UNFCCC, IEA Japan Energy Review,  Source: Calculated from Xstrata Listing Particulars: tables on page 41, 38 and 43  Source: Calculated from Xstrata Listing Particulars: tables on page 46, 38 and 43  The estimates from the ICF study. One tonne of carbon produces 3.6 tonnes of carbon dioxide when combusted. One tonne of coal contains slightly less than one tonne of carbon because of ash and sulphur content, so will produce 2.5 to 3 tonnes of carbon dioxide.  Xstrata Listing Particulars, p292  Climate Change 2001: Mitigation, Contribution of Working Group III to the Third Assessment Report of the Intergovernmental Panel on Climate Change, Summary for Policymakers, section 15, page 11.  Energy and Climate Change: an IEA Source-Book for Kyoto and beyond, IEA/OECD, 1997.  Climate Change 2001: Mitigation, Contribution of Working Group III to the Third Assessment Report of the Intergovernmental Panel on Climate Change, Chapter 9, section 9.2.2.1, pages 570-571.  Xstrata Listing Particulars, p 293 and 367.  Value at risk: Climate Change and the Future of Governance, CERES, April 2002. Available at www.ceres.org  In Behavioural and Distributional Impacts of Environmental Policies: Evidence and Controversies. C. Carraro and G Metcalf, eds, University of Chicago Press. See also Confronting the Adverse Industry Impacts of CO2 Abatement Policies: What does it cost, Lawrence H Goulder, Climate Issues Brief no 23, Resources for the future, September 2000  Allowance Allocation: Who wins and loses under a Carbon Dioxide Control Program? by Anne E Smith and Martin T Ross of Charles River Associates, Centre for Clean Air Policy  Note that these studies then went on to examine how the coal mining sector could be compensated for the loss in value of their assets. However, while interesting, such compensation is unlikely to be relevant in Xstratas case as an international coal company.   HYPERLINK "http://www.shell.com" www.shell.com Our approach to climate change -Taking Action on Sustainable Development: Climate Change  Speech at Stanford University, March 11 2002. Text available at www.bp.com/centres/press/stanford  From German Case studies, mortality impact based on Years of life Lost approach. See http://externe.jrc.es/Germany+Coal.htm  World Energy Outlook 2000 highlights, Chapter 3, p79, International Energy Agency.  World Energy Outlook 2000 highlights, Chapter 2, p45, International Energy Agency.  World Energy Outlook 2000, International Energy Agency. According to the International Energy Agency growth, coal consumption is expected to grow by 1.7% per annum to 2020. However, most of this growth is in developing countries (and particularly India and China, where subsidised domestic production is prevalent).  World Energy Outlook 2000, International Energy Agency highlights, Chapter 2, p42  IP/01/1465 http://europa.eu.int/rapid/start/cgi/guesten.ksh?p_action.gettxt=gt&doc=IP/01/1465|0|AGED&lg=EN&display=  IP/02/355 http://europa.eu.int/rapid/start/cgi/guesten.ksh?p_action.gettxt=gt&doc=IP/02/355|0|AGED&lg=EN&display= For more information see MEMO/02/46 http://europa.eu.int/rapid/start/cgi/guesten.ksh?p_action.gettxt=gt&doc=MEMO/02/46|0|AGED&lg=EN&display=  Xstrata: Too soon for Premium Pricing Credit Suisse First Boston research note.  United Nations Framework Convention on Climate Change, available at www.unfccc.int  See, for example, the comments by Michael Grubb, energy and climate expert at the Carbon Trust reported in the article Blowing hot and cold, p8 of supplement How Many Planets? a Survey of the global environment, The Economist, July 6th 2002 in  http://www.acarp.com.au/Completed/abstracts/C8002abstract.  The 1999 AUSTRALASIAN CODE FOR REPORTING OF MINERAL RESOURCES AND ORE RESERVES: see http://www.jorc.org/main.php?action=4. For the South African Code, see: www.saimm.co.za/pages/comppages/samrec_version.pdf.  In the JORC Code, A Probable Ore Reserve is defined as the economically mineable part of an Indicated, and in some circumstances Measured, Mineral Resource. It includes diluting materials and allowances for losses which may occur when the material is mined. Appropriate assessments, which may include feasibility studies, have been carried out, and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. These assessments demonstrate at the time of reporting that extraction could reasonably be justified. A Probable Ore Reserve has a lower level of confidence than a Proved Ore Reserve.; and A Proved Ore Reserve is defined as the economically mineable part of a Measured Mineral Resource. It includes diluting materials and allowances for losses which may occur when the material is mined. Appropriate assessments, which may include feasibility studies, have been carried out, and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. These assessments demonstrate at the time of reporting that extraction could reasonably be justified. For example, appropriate assessments, with optional feasibility studies, are not the same as detailed economic studies. UK Members of the UNEP Financial Institutions Initiative. Abbey National Plc. Barclays Group Plc. AVIVA Plc. Cooperative Bank. Co-operative Insurance Society Ltd. Friends Provident Life Office HSBC Holdings Plc. Legal and General Group Plc. Lloyds TSB Bank NatWest Group NPI (part of the AMP Group) Prudential Plc. Royal Bank of Scotland Plc. Standard Chartered Plc. Sumitomo Marine & Fire Insurance Co. (Europe) Woolwich Plc. Aon Group (Associate) Barlow Lyde & Gilbert (Associate) In addition, many overseas organisations with significant presences in London are members, such as Deutsche Bank and Credit Suisse A note on Sources Two key sources are mentioned in this report. The first, the International Energy Agency (IEA), is the Paris-based energy forum for 26 industrialised countries. Associated with the OECD, it is the authoritative source of energy statistics, as well as research and analysis on all aspects of world energy. The second is the Intergovernmental Panel on Climate Change (IPCC), This scientific body was established by governments to advise on the science of climate change, bringing together the vast body of scientific knowledge in an understandable way. Its process is very thorough, inclusive and peer reviewed. 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