Xstrata pays dividend, upbeat on markets

Allan Seccombe | Mon, 08 Feb 2010 10:58
[miningmx.com] -- Diversified resources producer Xstrata views the medium-term outlook for commodities as “promising”, resuming dividend payments and it will decide on 10 new projects this year worth $9bn this year, said CEO Mick Davis.

After approving five projects worth $2bn in the past six months, Xstrata is gearing up for more growth – largely from low-risk brownfield expansions – to meet commodity demand from industrialising nations like China, India and Brazil as well as the 30-nation Organisation for Economic Cooperation and Development (OECD).

Xstrata paid an eight cents per share dividend for the second half of the year despite a 41% fall in attributable profit to $2.77bn. It posted operational cash flow of $5.7bn, with the bulk of that coming in the second half when $3.7bn was generated. Net debt stood at $12.9bn and cash was steady at around $1.18bn. Its gearing is at 26%, down from 40%.

“The group’s decision to re-instate the dividend is evidence of the board’s increasing confidence of the business outlook,” Liberum Capital said in a note.

Xstrata has no major debt falling due until mid-2011 and it has $6.3bn of headroom on its bank facilities. Together with its cash generation, this places it in a "sound financial position to fund our future capital expenditure plans," said CFO Trevor Reid.

The result of the economic downturn in late 2008 and into 2009 showed up the shortcomings of the resources supply side, Davis said. The sector had battled to meet soaring demand before global markets turned south and the outlook is no better.

“The mining industry’s swingeing cuts to expenditure on exploration, projects and infrastructure has delayed the onset of new capacity by at least 18 to 24 months and means the supply-side will fall further behind in its ability to supply even modest increases in future demand,” Davis said.

It is into this gap Xstrata is now positioning its suite of commodities, most notably copper and thermal coal. It appears to have stepped back from its merger and acquisition strategy, which saw it make a friendly overture for a nil-premium takeover of Anglo American. The focus is now on assets it already owns.

Of the five projects approved in recent months, three have been in copper to expand output from Lomas Bayas and Antamina, and converting Ernest Henry to an underground mine.

Another three projects will come before Xstrata’s board this year, which, combined with the expansions, will push up copper output 60% by 2015. In 2009, Xstrata mined 907,000 tonnes of copper, down from just above 950,000 tonnes a year earlier.

The expansion projects are expected to doiubled nickle volumes and increase coal output by more than 50%.

Xstrata reckons probable copper mine supply in 2015 has been reduced by some 2.2 million tonnes compared to a forecast 18 months ago because of reduced capital availability and development risks like water and power.

“The delays have extended mine development timelines and are limiting the industry’s ability to meet forecast demand in the medium term,” it said. “Tight physical market conditions will return as the demand recovery outpaces supply growth over the coming years.”

Barclays Capital’s Kevin Norrish forecast record highs for copper in 2012, with the average for the year seen at $8,500/tonne as OECD demand steps up.

Looking at the overall commodity market, Davis saw continuing “robust economic growth and demand” for resources from industrialising nations. He cautioned inflation was a risk in China where growth is forecast at about nine percent this year, but that measures taken to curtail this risk are positive.

“By contrast, the OECD seems set to experience low growth for a while, as consumers continue to deleverage, giving rise to a so-called ‘two-speed world’ and reinforcing the position of the East as the main driver of global commodity demand growth,” he said.

“In my opinion, the medium term outlook for commodity demand remains very promising,” he added, pointing to China and other industrialising nations pushing for domestic consumption-led growth.