-- Company positive about the medium-term outlook for
commodities
-- Will invest judiciously in growth projects as it re-sequences
capital expenditure
-- Eyes net cost savings of $390 million in 2012; takes $514
million impairment charge on Lonmin
(Adds detail, analyst comment.)
By Alex MacDonald
LONDON--Anglo-Swiss miner Xstrata PLC (XTA.LN) said Tuesday it
remains positive about the medium-term outlook for commodities, but
may slow down some investments as the industry faces a dip in
demand and prices in the near term.
"We have undoubtedly reached another cyclical downturn," in the
mining industry, said Xstrata's Chief Executive Mick Davis in a
statement. This was illustrated by a drop of nearly a third in the
company's first-half earnings.
But the longer-term trend in the commodities industry of
increasing demand and constrained supply growth will continue, Mr.
Davis added. Demand for commodities is forecast to continue growing
as Indonesia, Mexico and Russia catch up to China, India, and
Brazil to become some of the world's-largest economies by 2050, he
said.
Xstrata's weaker first-half earnings could give more weight to
the company's position that its proposed multi-billion dollar
merger with commodities giant, Glencore International PLC
(GLEN.LN), offers value to investors. The merger would create the
world's fourth-largest mining company with a market capitalization
of $62 billion, but the two companies are under mounting pressure
from some of Xstrata's largest shareholders to sweeten the terms of
the deal.
Xstrata has cut this year's capital expenditure to $7.2 billion
by deferring about $1 billion in spending, largely due to
permitting delays at its Peruvian Las Bambas copper project. The
company may also moderate investment and defer some early-stage
works on projects that have not yet been given the green light, in
accordance to economic conditions, said Chief Financial Officer
Trevor Reid.
Xstrata said the changes in its capital-expenditure plans should
not alter the timing of any projects that already have final
approval.
Xstrata reported a 31% year-on-year drop in earnings before
interest, taxes, depreciation and amortization, or Ebitda,
excluding exceptional gains or charges, to $4.01 billion for the
first half of the year. Net profit fell 33% to $1.94 billion and
revenue fell 7% to $15.55 billion.
Despite this, Xstrata declared an interim dividend of $0.14 a
share, up 8% on the year. "This increase marks our confidence in
the medium-term outlook...and our robust financial position," Mr.
Davis said. The company's gearing is at a comfortable 19%, despite
Xstrata being in its peak year for capital investment, he said.
Mr. Reid said the company has the balance sheet capacity to
continue funding its approved projects without sacrificing its
investment-grade credit rating or dividend policy.
Earnings at Xstrata fell largely due to lower commodity prices
and reduced copper output as the company transitions from older
copper mines to newer mines.
It also suffered an impairment charge of $514 million related to
its investment in South African producer Lonmin PLC (LMI.LN). This
reflects the dismal performance of the entire platinum industry,
where rising costs and lackluster prices have squeezed profit
margins and led several platinum producers to put some projects on
hold.
However, the first-half performance was ahead of analysts'
expectations for Ebitda of $3.87 billion. This was largely due to
better-than-expected performance on reducing costs, said Jeffrey
Largey of Macquarie Research.
Xstrata realized $105 million in net cost savings in the first
half due to improved productivity, procurement policies, and energy
efficiency. Full-year cost savings should reach $390 million, the
company said.
It also expects higher output in the second half of 2012,
compared with the first half, as it continues to commission a total
of 10 projects this year.
Mr. Davis made no significant comment on Xstrata's merger with
Glencore, except to reiterate that he expects the transaction to
close in the fourth quarter. He said Xstrata has the ability to
provide significant value to shareholders either as part of a
merged entity, or on a standalone basis.
At 1324 GMT, Xstrata's shares were up 2.5% to 905 pence a
shares, resulting in a market capitalization of GBP27.19
billion.
-Write to Alex MacDonald at alex.macdonald@dowjones.com
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