Xstrata profits up

Mining and metals firm Xstrata Plc hit forecasts with its first-half profits on Monday and moved to soothe investor worries about the future of the mining industry in South Africa, where it has metal and coal assets.

The Swiss-based firm, which listed in London in March, said it supported efforts to increase the stake of South Africa’s black majority in mining, but uncertainty about future laws was a worry.

”I remain confident that the industry is going to be able to address these issues with the government. There clearly are areas where we have concerns and they will have to be addressed,” said Chief Executive Mick Davis in an interview.

Xstrata’s shares fell 13% on Friday after a leaked report of government proposals to put 30% of existing operations in the hands of black-owned miners before being given a licence to expand. It also proposed giving control of all new mining projects to black business within 10 years.

”The language and the process of developing public policy in South Africa is often quite robust and quite controversial and is always very complex,” Davis said.

Xstrata shares bounced 2,5% on Monday to 592 pence by 0900 GMT after Friday’s big losses.

”The (South African) proposals themselves are not that damaging to Xstrata, but the effect of this on sentiment is going to hang around for some time,” said John Meyer, analyst at SG Securities in London.

PROFITS IN LINE

Xstrata reported attributable profit of $112,9-million on a pro forma basis for the six months to end June — up 20% on a year ago — against forecasts of $105-126 million. Pro forma earnings per share also came in as forecast at 45 cents.

The figures include income from its acquired coal business from January 1, but which under UK accounting rules were only counted from March, when it took control of the operations.

Prices for Xstrata’s main commodities — ferroalloys, zinc and thermal coal — were weaker in the first half, with zinc hit hard by the economic slowdown and prices at 30-year lows.

Davis said the tough conditions had continued into the second half and were likely to remain for some time, though he did not give detailed forecasts.

Cashflows remained strong and analysts said Xstrata had done well to increase earnings despite the low commodity prices.

Weaker currencies in South Africa and Australia, which account for most of its costs, also helped, though recent US dollar weakness meant this was unlikely to be much help again.

The acquisitive firm wants assets in a wider spread of regions and commodities.

”There are opportunities there, but you’ve got to put in the right conditions for them to be worthwhile to pursue,” Davis said. ”We think platinum would be a great enhancer to our portfolio.”

He declined to comment on speculation Xstrata was keen on South Africa’s Impala Platinum Holdings Ltd, saying only: ”Clearly Impala is one of the premier assets in the platinum industry.”

SOUTH AFRICAN WORRIES

Xstrata Plc was formed from a combination of the metals and mining assets of Swiss-listed Xstrata AG and $2,5-billion of coal assets in South Africa and Australia, acquired from commodities giant Glencore International AG.

Meyer said an Impala deal would be good sense, with platinum assets producing strong cash flows.

Impala had become more of a platinum refiner and less of a miner and though it was still highly exposed to South African platinum mining, was better able to spread the risk.

”The key here is uncertainty. Investors do not like that much uncertainty, even if companies are suddenly cheap and you can see great asset value in them,” Meyer said.

Analyst Tessa Kohn-Speyer, of fund managers Barclays Private Investors, said South African miners would remain under pressure.

”The issue with the minerals bill and what they’re proposing about control of stakes in new mining projects is really quite negative (for foreign investors),” she said.

Xstrata joined the FTSE 100 index last month, but since their London debut the shares have lost about 40%, valuing the firm at 1,43-billion pounds.

They have underperformed their London-listed mining and metals rivals by about 22% since their debut, according to Reuters data. – Reuters

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