Xstrata cuts spending as commodity prices slide

Swiss mining giant Xstrata has swung into austerity mode in the face of falling commodity prices, targeting cost savings of $US970 million and deferring $US1 billion worth of spending this year.
Nanjing Night Net

Xstrata reported a sharp 31 per cent drop in interim earnings before interest, tax depreciation and amortisation to $US4 billion, compared with a year earlier.

It blamed the drop on slumping commodity prices in the first half of 2012, citing renewed turmoil in the eurozone and a slowing growth rate in China.

Earnings per share fell 23 per cent to 75 US cents, before exceptional items. The board declared an interim dividend of 14 US cents per share, up 8 per cent on a year ago.

Xstrata is in the throes of a friendly scrip merger with major shareholder Glencore International and today’s weak profit figures may undermine efforts by some investors pushing for a higher effective bid price. Shareholders are scheduled to vote on the merger on 7 September.

Chief executive Mick Davis said Xstrata’s “pro-active response to the cyclical downturn will defend margins and ensure our business emerges in a stronger competitive position to capture the benefits of stronger global economic growth”.

Mr Davis said the $US970 million in savings would more than offset expected cost increases of about $US580 million for the full year, resulting from the inevitable cost pressures of ageing operations reaching the end of their production, including lower grades.

“The resultant expected net real cost saving for the year of around $US390 million is a creditable cost performance against the very complex operating environment in 2012, compounded by the transition phase of our growth strategy and the potential risk of distraction arising from the proposed merger with Glencore,” he said.

‘Resequencing’

After reviewing its development pipeline Xstrata had “resequenced capital spending and deferred $US1 billion of expenditure originally planned for 2012,” the company said. “Our 2013 budgeted spending will increase by $US400 million, with $600 million deferred beyond that, without affecting the commissioning schedule of any of our approved projects.”

“Consequently, we expect capital spending in 2012 to reduce to $US7.2 billion, $US1 billion less than our previous guidance, smoothing the profile of capital spending across the next two years.”

Impairments included: $US514 million against its investment in Lonmin, $US162 million lost in the revaluation of a hydroelectric project in Chile, owned in joint ventrue with Origin Energy; $US111 million from closure of the Brunswick zinc mine, and $US21 million in merger costs.

These were offset by a $US579 million “deferred tax asset” credit tied to July commencement of the Minerals Resource Rent Tax in Australia.

Last week, Xstrata reported commodity price falls across the board in its first-half production report, year on year, including for copper (down 14 per cent to $US8087/tonne), Australian coking coal (down 16.5 per cent to $US217/t), nickel (down 28 per cent to $US18,438/t), zinc (down 15 per cent to $US1978/t) and lead (down 21 per cent to $US2035/t).

Bucking the trend were gold (up 14 per cent to $US1651/oz) and Australian thermal coal (up 4 per cent to $US108/t).

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