Xstrata cost cut approach pays off

Miner Xstrata posted a smaller-than-expected drop in first-half profit as it cut costs to cushion the impact of weaker markets, overcoming what it said was a risk of distraction from trader Glencore’s $26bn takeover bid.
By The Newsroom
Published 8th Aug 2012, 10:25 BST

The Anglo-Swiss miner, one of the world’s largest producers of thermal coal and copper, was hit along with its peers by falling commodity markets against a backdrop of stubbornly high wages and inflation, although it was partly shielded from tumbling thermal coal prices by higher-priced contracts.

The miner did feel the pain of market turbulence, taking a $514m hit to write down the value of its almost 25 per cent stake in South African miner Lonmin as the platinum sector suffers from a lethal cocktail of squeezed margins and increasingly militant unions.

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Xstrata agreed earlier this year to be taken over by commodities trader Glencore, its largest shareholder. But the deal hit trouble in June after the miner’s second-largest shareholder, Qatar Holdings, demanded an improved offer.

Xstrata’s results had been keenly anticipated for signs of worsening profitability or a deteriorating outlook that could strengthen Glencore’s case for keeping the offer as it is – 2.8 new shares for every share. Qatar is demanding a ratio of 3.25.

Chief executive Mick Davis sidestepped questions on talks and the offer. “The business model of the combined entity is a more powerful business model. But the inherent capacity of Xstrata to generate value as a standalone company is very powerful indeed.”