Cost cuts help Xstrata beat profit expectations

Tue Aug 7, 2012 8:22am EDT
 
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By Clara Ferreira-Marques

LONDON (Reuters) - Miner Xstrata XTA.L 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 (GLEN.L: Quote) $26 billion takeover bid.

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 $514 million hit to write down the value of its almost 25 percent stake in South African miner Lonmin (LMI.L: Quote) as the platinum sector suffers from a lethal cocktail of squeezed margins and increasingly militant unions.

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. We have no concerns on that front."

Analysts see Xstrata's ability to control costs as key.

The miner has grown by turning around underperforming assets and has cut costs at every reporting period since its listing. It said on Tuesday it had lowered unit costs in real terms by $105 million, a drop led by its energy-consuming nickel and zinc arms. Over the year, that will add up to $390 million.   Continued...