LONDON, Oct. 14 -- Xstrata's zinc division is pressing on with its efficiency drive and expects total cost savings this year of at least $US200 million ($A202.51 million), the unit's chief executive said.
The world's number one integrated zinc producer is also moving forward with expansions that will boost zinc output by a fifth by 2017 despite looming closures of mines running out of ore.
"This year we are going to have another cost reduction of no less than $US200 million," chief executive Santiago Zaldumbide told Reuters.
Xstrata's zinc division – which has operations in Canada, Europe and Australia – achieved real unit cost savings of $US192 million last year and $US66 million in the first half of 2010.
"Every year it gets more difficult... but every year we put pressure and pressure (on the business)," he said when asked about cost savings next year.
Xstrata's holds up its zinc division as a case study in how to turn around businesses after it lifted Australia's Mt. Isa Mine to a leading ranking even though its former owners had planned a partial closure of the operations.
The Mt. Isa region now contains the largest zinc resource in the world at 32 million tonnes and mine costs are in the bottom half of the cost curve instead of near the top.
Cost cutting has helped boost return on capital in the zinc division to an average of 26 per cent over the past six years and it is targeting an average of at least 20 per cent for the future, Mr Zaldumbide said in an interview during LME Week.
On the production outlook, Xstrata is scrambling to head off a looming series of mine closures after it tripled mined zinc output since 2004 to 1.03 million tonnes last year.
Refined zinc production capacity has doubled to 825,000 tonnes in the same period.
Closures of mines coming to the end of their lives in coming years would more than halve Xstrata's mined zinc output to 462,000 tonnes, but new projects and expansions will add 738,000 tonnes, giving net growth to 1.2 million tonnes by 2017.
The Xstrata group grew rapidly through a series of acquisitions, but the focus now is more on developing projects, such as the $US113 million Black Star Deeps expansion at Mt. Isa.
"It's not so easy (to find acquisitions). The good assets, the good companies I know and I don't see it happening. It has to be mainly to be done through organic growth," he said.
Bullish on zinc, sees deficit
The global market in zinc – mainly used to galvanise steel – is in surplus, but is expected to dip into deficit next year as China's domestic supply fails to keep up with demand, Mr Zaldumbide said.
"I think that the Chinese effect is going faster than I would have anticipated. Also the situation in concentrate is very tight and going to be tighter," he said.
"Because of that, the reduction in TCs (treatment charges) has happened and will continue happening. This will affect metal production, there is no question about it."
In the first half, spot treatment charges – fees paid by sellers of concentrate to smelters to process the material – halved to below $US100 per tonne.
The sharp fluctuation in treatment charges does not have an impact on Xstrata because it is fully integrated with its own smelters processing its mined material.
"We are in a very comfortable position because we are well integrated, which is not the case for most companies. If you have high TCs well then your smelters benefit; if you have low TCs, then your mines benefit."
Other major zinc producers are Canada's Teck Cominco Ltd and Vedanta's Hindustan Zinc .
Vedanta became the biggest mined producer of zinc after it bought the zinc assets of Anglo American for $US1.34 billion in May.
Xstrata plans to boost smelter capacity using its own Albion technology that is able to treat bulk lead-zinc concentrates unlike traditional smelters.
Refined zinc output is expected to rise 15 per cent to 950,000 tonnes by 2017.