Xstrata ramps up austerity to defer $1bn spending

Coal comfort.SWISS miner 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.

Xstrata overnight reported a 31 per cent drop in interim earnings before interest, tax, depreciation and amortisation to $US4 billion, compared with the previous corresponding half-year, due to a severe drop in commodity prices in the first half of 2012, blamed on renewed turmoil in the eurozone and a slowing growth rate in China.

Attributable profit fell 23 per cent to $US2.2 billion, or US75¢ per share, before exceptional items which reduced earnings by $US253 million. Impairments included: $US514 million against its investment in Lonmin, a $US162 million loss on the sale of a hydroelectric project in Chile to a joint venture 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 credit tied to July commencement of the Mineral Resource Rent Tax in Australia. The board declared an interim dividend of US14¢ 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 yesterday’s profit drop could see those investors hoping for a higher price. Shareholders are due to vote on the merger on September 7.

Chief executive Mick Davis said if the merger was voted down ”the inherent capacity of Xstrata to generate value as a stand-alone company remains very powerful indeed”.

Mr Davis decried the ”lack of conviction syndrome” which had spooked commodities markets and said the current slowdown was cyclical, not the end of the secular change in demand. Addressing concerns that shale gas would undermine thermal coal demand, Mr Davis said shale production would be largely confined to the US until next decade and coal would remain the cheapest power source for developing economies.

Xstrata shares rose 2 per cent or 18.5 pence to 901.5p in early London trade. Glencore shares also rose 2 per cent or 7.15p to 336p.

Xstrata said the $US970 million in savings would more than offset expected cost inflation of about $US580 million in 2012.

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