-- 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 email@example.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
August 07, 2012 09:48 ET (13:48 GMT)
Copyright (c) 2012 Dow Jones & Company, Inc.