Xstrata Profit Falls 77% After Metals Prices Drop

Xstrata Plc, the world’s largest exporter of coal used for power, said first-half profit fell 77 percent after metals prices slumped.

Net income slipped to $643 million, from $2.77 billion a year earlier, the Zug, Switzerland-based company said today in a statement. That missed the $773 million median of six analyst estimates compiled by Bloomberg. Sales dropped 39 percent to $9.9 billion.

Chief Executive Officer Mick Davis is proposing a “merger of equals” with Anglo American Plc and has cut spending and output of some metals after commodity prices slumped in the second half of 2008 amid a global economic slowdown. Xstrata, the world’s fourth-largest copper producer, is still seeking talks with London-based Anglo, which rejected the bid in June.

“This is without doubt an opportunity which merits serious consideration, without the defensiveness and usual distractions that often stand in the way of the pursuit of shareholder value,” Davis said in today’s statement.

Davis, who wants to combine mines in Canada, Australia and South Africa with nearby sites operated by Anglo, said the merger would add $1 billion a year to the enlarged company’s earnings before interest, tax depreciation and amortization by the third year following the deal. The merger would also give Xstrata access to platinum, diamond and iron ore through Anglo’s stakes in Anglo Platinum Ltd., De Beers and Kumba Iron Ore Ltd.

Cost Reduction

Anglo CEO Cynthia Carroll last week said the approach was “a distraction” and reiterated her pledge to boost job cuts to 19,000 this year to help save $2 billion of costs by 2011.

Xstrata reduced operating costs by 1.1 percent to save $119 million in the first half, the company said. Its debt to equity ratio fell to 28 percent, from 40 percent at the end of 2008 following a 4.1 billion-pound ($7 billion) rights offer which completed in March, it said.

“While some uncertainty remains over the short-term outlook, the medium to longer-term fundamentals for commodities remain very robust,” Davis said.

Xstrata last week reported first-half production of coal rose 11 percent on increased output from the Newlands Northern mine in Australia and as the inclusion of the Prodeco unit’s Colombian mines added 5 million tons of output.

Chrome Slump

Mined copper and nickel production also rose while chrome output slumped 60 percent as Xstrata’s venture with Merafe Resources Ltd. suspended 17 of 20 furnaces in response to weak demand.

Average realized prices for Australian thermal coal rose 14 percent in the first half to $89 a metric ton, while prices for coking coal, used in steelmaking, fell 14 percent to $143 a ton, the company said last week. Coal was the largest contributor to Xstrata’s operating earnings last year, followed by copper.

The average price of copper for immediate delivery on the London Metal Exchange fell 50 percent in the first half to $4,067 a ton from a year earlier. Nickel prices slid 57 percent to $11,788 a ton and zinc slumped 42 percent to $1,330 a ton. link....