Xstrata Copper Output Down but Coal Up; Major Growth Projects Ahead

Jul 31, 2012 (Dow Jones) LONDON -- Anglo-Swiss miner Xstrata PLC (XTA.LN) Tuesday reported lower mined copper output but higher coal output in the first half of the year compared with a year earlier as it continues to make progress on completing 10 major growth projects in 2012.

Xstrata, which is seeking shareholder and regulatory approval to merge with mining titan Glencore International PLC (GLEN.LN), said mined copper output dropped 18% on year to 354,612 metric tons while consolidated coal production rose 13% to 43.4 million tons. Copper and coal are the main earnings drivers for Xstrata, accounting for 42% and 33%, respectively, of 2011 operating earnings before interest, taxes, depreciation and amortization, or Ebitda.

Analysts have previously said that a drop in Xstrata's first-half earnings, which are due to be released on Aug 7, could give Glencore more leverage to argue that its current share-swap ratio of 2.8 Glencore shares for every Xstrata share represents good value and therefore shouldn't be raised. Similarly, a rise in Xstrata's earnings could swing the argument in favor of sovereign wealth fund Qatar Holding LLC and other large Xstrata shareholders who are calling on Glencore to bump up its share swap ratio in line with what they consider to be an appropriate value for Xstrata. Qatar Holding, Xstrata's second-largest shareholder after Glencore, has called on Glencore to sweeten its share-swap ratio to 3.25.

A London-based analyst who wished not to be named urged caution about jumping to conclusions until further financial information has been disclosed. "You can't read too much into today's production report. There isn't enough [figures] to swing the argument in favor of a bump up or otherwise," he noted, adding that the picture will become more clear when Xstrata unveils its interim financial results in two weeks.

Anglo American PLC (AAL.LN) last week reported a drop in first-half earnings despite higher output from several of its key divisions after falling commodity prices led to lower achieved sales prices.

Xstrata had already flagged that its copper output would be down as it transitions from maturing copper mines to new production capacity. The company, for instance, is transitioning to underground mining at the Australian Ernest Henry mine and expects its Peruvian Antapaccay copper plant to start production in the third quarter. Antapaccay will ramp up to 160,000 tons of annual copper output from 2013.

Xstrata said it expects Chile's Collahuasi copper mine, in which it has a 44% stake, to increase output in the second half of the year after suffering setbacks related to lower grades, weather disruptions and a ball-mill failure in the first half.

Meanwhile, consolidated coal output rose due a 17% rise in thermal coal output and a 6.5% on year rise in coking coal output, buoyed by higher second-quarter output from the restart of Blakefield South operations in Australia, the start-up the Australian Ulan open cut mine and higher output from, among other things, its Colombian joint venture Cerrejon, which benefited from lower rainfall. But achieved coal prices during the first half of the year were mixed depending on geography and product, Xstrata figures showed.

Nickel output rose 2.6% on year to 52,783 tons, buoyed by strong mine performance at the Sudbury and Raglan mines and at the Falcondo ferronickel operations. Meanwhile, zinc metal output was down 0.4% at 364,833 tons in the first half of the year. Production of nickel and zinc metal accounted for 11% and 10%, respectively, of last year's operating Ebitda.

Other projects that are due to be commissioned in 2012 include the Lomas Bayas, and Mount Margaret copper projects, Ravensworth North and Ulan open cut coal projects, and the Koniambo nickel project.

Xstrata's shares closed Tuesday up 0.4% at 848 pence. Xstrata's shares are down 13.3% since the beginning of the year.