Xstrata plc Com Stk USD 0.50 (XTA)

Company overview

Xstrata is a global diversified mining group. Headquartered in Zug, Switzerland, Xstrata maintains a meaningful position in a number of major international commodity markets including copper, coking coal, thermal coal, ferrochrome, nickel, vanadium and zinc with additional exposure to gold, cobalt, lead and silver. The company's operations and projects span over 20 countries. It employs over 70,000 people at more than 100 operations Its primary listing is on the London Stock Exchange and it is a constituent of the FTSE 100 Index.

HL Comment (7 February 2012)

In conjunction with its full year results, management confirmed that an all-share merger with Glencore worth $90 billion had been agreed. Glencore will issue 2.8 new shares for each Xstrata share in a deal which both management boards described as a "merger of equals". The ratio is a 15.2% premium to Xstrata shareholders compared with its share price just before confirmation of merger talks was announced. Glencore shareholders will own 55% of the combined group, with Xstrata shareholders holding the rest of the new company. The newly formed group will be known as Glencore Xstrata International. The new company will have combined revenues of more than $200 billion and it will be a global leader in export thermal coal, ferrochrome and integrated zinc production. Operations and projects will cover 33 countries, 101 mines and more than 50 metallurgical facilities and have around 130,000 employees.

Negative Points:

• Estimated annual cost savings of $500m are below some analysts estimates in the region of $800m.
• The merger could encounter regulatory issues.
• For the full year 2011, Xstrata copper production declined by 3%.
• Elevated costs remain an industry concern. Diesel prices, increased energy costs in South Africa and rising wages across producer nations have previously been highlighted.
• Production was impacted by a series of natural events during the first quarter of 2011.
• Xstrata's desire to grow via acquisition brings acquisition risk and project delivery risk.

Positive Points:

• A 15.2% premium is being paid.
• The merger creates a major and significantly diversified player in the global mining industry.
• Full year results exceeded analyst estimates. Operating earnings (EBITDA) came in at $11.6 billion, up 12% on the prior year.
• Coal production, the group's second most profitable product, increased by 7.0% over 2011. Strong second half production was highlighted with record annual production of coal and nickel.
• Management continues to focus on costs. Real cost savings of $391 million were recorded over the year.
• A policy to increase shareholder returns remains in place. A final dividend of 27 cents per share was proposed, bringing the full year dividend to 40 cents, a 60% increase on 2010.
• Natural events permitting, coming comparatives should become easier. Early 2011 saw a series of natural events impacting production.
• While the economy in China has slowed, growth is still way above that enjoyed in the Western world.

Consensus:

On balance, market consensus indicates a buy.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: US dollar.