Xstrata (LON:XTA)

QUOTE AND NEWS
Reuters  Apr 4  Comment 
Glencore Xstrata Plc's interim chairman, former BP Plc chief executive Tony Hayward, is in the running to take the job permanently, the Wall Street Journal reported on Friday, citing people familiar with the situation.
Bloomberg  Apr 2  Comment 
Glencore Xstrata Plc, the global commodity trader run by billionaire Ivan Glasenberg, is seeking $15 billion of loans to refinance $17.3 billion of credit lines arranged last year, according to four people with knowledge ...
Resource Investor  Feb 7  Comment 
A group led by China Minmetals Corp. is nearing an agreement to purchase Glencore Xstrata Plc’s Las Bambas copper project in Peru.
Reuters  Jun 3  Comment 
Glencore Xstrata Plc sacked 1,000 workers across three of its chrome mines in South Africa for going on illegal strike last week, bringing those operations to a standstill, the company said on Monday.
Reuters  May 30  Comment 
Glencore Xstrata Plc said on Thursday three of its chrome mines in South Africa were at a standstill after up to 1,500 workers embarked on an illegal strike this week.     
Reuters  Feb 19  Comment 
Global miner Xstrata Plc's $5.9 billion Tampakan mine in the Philippines has been granted an environmental compliance certificate by the government, the company said on Tuesday, removing one of the hurdles delaying work on Southeast Asia's biggest...
Mining Weekly  Dec 12  Comment 
Global miner Xstrata Plc's Philippine unit has delayed by three years, to 2019, a target to start production at the $5.9-billion Tampakan copper-gold mine in the country's south, as it remains hopeful of winning approvals from...
Bloomberg  Nov 17  Comment 
Glencore $31 Billion Deal for Xstrata Looking Completed: Energy Glencore International Plc’s $31 billion bid for control of Xstrata Plc has never looked so certain after...
MarketWatch  Oct 1  Comment 
The independent board memebers of Xstrata PLC on Monday agreed to a revised merger offer from Glencore International PLC , ending a long-running saga that began earlier this year. Agreement by Xstrata board members to the $33 billion merger came...




 
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Xstrata is an international mining group, operating in 19 countries spanning 4 continents with 2008 revenues of $27.9 billion.[1][2][3] It focuses on seven internationally traded commodities, of which coal (28% of revenues) and copper (41% of revenues) are the most important.[2] The group also has exposure to gold and silver.[2] Its primary source of revenue is mining for metals, alloys and coal and selling the metals or investing in the commodity market. The group also provides technological services such as software used for mining purposes that contribute a small portion of its revenue.

The global recession and drop in commodity prices have taken a serious toll on Xstrata's bottom line. Copper is the company's main product, and during the second half of 2008, copper prices declined from $4.08 per pound to $1.32 per pound. Copper profitability dropped and global inventory ballooned.[4] From 2007 to 2009, Xstrata's net income fell by 77% due to the decrease in metal prices caused by the worldwide 2008-2009 recession.[5] In 2008, Xstrata had $27.9 billion in revenue, a decrease of 2.07% from its 2007 performance.[1]

The mining group planned to merge with Anglo American PLC, a very close competitor.[6] However, this merger is under scrutiny by both mining groups due to Xstrata's plunge in profits.[7]

Business Overview

Xstrata Group was founded in 2001 and is headquartered in Zug, Switzerland.[8] The group is divided into six subsidiaries, five of which focus on mining operations.[3] The sixth subsidiary is Xstrata Technology Services, which provides technological services catered to support both Xstrata subsidiary operations and third-party customers.[9] With this exception, the subsidiaries operate independently of each other.

Business and Financial Metrics

General Fundamentals (in millions) 2006 2007 2008
Total Revenue[1]$17,102.0$28,542.0$27,952.0
Net Income[10]$3,966.0$9,027.0$6,076.0
Operating Costs[11][12]$8490.0$15,544.0$16,001.0

Revenue decreased by 2.07% since 2007 due to the 2008 and 2009 recession. The recession caused a global decrease in demand for construction metals and manufacturing materials. This decrease in demand caused an immediate decrease in prices for all the metal commodities which are mined by Xstrata.[5] When the prices of copper and chrome - Xstrata's most profitable metals - reduced by over 50% in the first half of 2009, Xstrata's year-over-year net income decreased by 32% in 2008 and its half-year net income decreased by 77% in 2009.[5][10] In August 2009, Xstrata was forced to close 17 out of 20 chrome furnaces due to low demand and inoperable low market prices.[5] However, due to a surge in coal, Xstrata's second most mined substance, between 2007 and 2008, Xstrata's revenue has only decreased by 2.07%.[13]

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Xstrata Revenue vs Net Income[1]

Because of this unexpected decline in profitability, Xstrata has put resources into finding efficient ways to reduce operating costs since 2007.[14] Though operating costs have increased between 2007 and 2008, the increase in operating costs were 30% lower than the expected increase in operating costs due to expansion and addition of mining capital.[14] Similarly, zinc ouput increased by 23% while operating costs decreased by 32%.[14] Xstrata is stopping mining activity in less productive mines and increasing output in operational mines to combat the recession.[14]

The unexpected decline has also forced Xstrata to review its merger terms with Anglo-American, a closely-competitive mining group with similar products.[7] The merger was planned to help both groups to compete better against BHP Billiton, the world's largest mining group.[6] However, the 77% decrease in profit since 2008 has forced Anglo-American to reject the initial merger offer.[15]

Company Specific Metrics

Sources of Revenue 2006($m) 2007($m) 2008($m)
Chrome **[16]748.0(4%)N/AN/A
Coal[16]3617.0 (21%)4,201.0 (15%)7,944.0 (28%)
Copper[16]7,007.0 (41%)12,794.0 (45%)11,464.0 (41%)
Alloys **[16]N/A1,223.0 (4%)1,733.0 (6%)
Nickel[16]1,678.0 (10%)5,252.0 (18%)3105.0 (11%)
Technology[16]120.0 (1%)217.0 (1%) 235.0 (1%)
Unanalyzed[16]211.0129.0269.0
Zinc Lead[16]3,721.0 (22%)4726.0 (17%)3,202.0 (12%)
Total[16]17,102.0 (100%)28,542.0 (100%)27,952.0 (100%)

** Note: Xstrata Chrome was renamed to Xstrata Alloys after new alloy products were added to the mined materials.


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Xstrata Segment Revenue Data[10]

The decrease in copper, zinc, nickel, and alloys prices have reduced their contributions to Xstrata's total revenue.[10] However, Xstrata lost only 2.07% of its total revenue since 2007 due to an increase in coal prices.[1] Xstrata Coal is also Xstrata's most profitable division, providing 49% of the total net income in 2008. [17] Coal production and coal sales increased by 13% since 2007, and net income due to coal sales increased by 414% since 2007 due to high coal prices and high demand.[17] However, the rest of Xstrata's metal divsions sustained large decreases in net income due to low demand and low prices, causing the 77% decrease in net income between 2008-mid 2009.[17][5]

Company Segments

Xstrata has 6 business segments representing each of their sources of revenue and mining activities. Almost 70% of Xstrata revenue comes from Xstrata Copper and Xstrata Coal, its two largest divisions by number of employees. [17]

  • Xstrata Copper (Revenue: $11,464m, 41% | Net Income: $2,297m, 32%)[17]: Xstrata Copper is Xstrata's largest division in terms of revenue and expenses since the beginning of 2006. [4]. During the second half of 2008, copper prices declined from $4.08 per pound to $1.32 per pound, causing a big drop in copper profitability and a corresponding increase in copper inventory.[4] Global copper inventories had 390,000 metric tons of copper under inventory, an increase of 64% since 2007.[4] As of the beginning of 2009, Xstrata Copper and its competitors has decreased its combined copper output by 600,000 metric tons and is expected to decrease copper output by 1 million metric tons by 2009 year end.[4] Xstrata Copper operates in Argentina, Australia, Canada, Chile, and Peru.[18] In all of the mining facilities in those countries, the division's copper output has ranged from a 1-35% decrease since 2007.[18]
  • Xstrata Coal (Revenue: $7,944m, 28% | Net Income: $3,549m, 49%)[17]: Xstrata Coal was the largest division until 2006 and has been the second largest division in terms of revenue and expenses since.[13] In 2008, Xstrata Coal became highly profitable after coal prices surged between 2007 and 2008.[13] Xstrata Coal had quadrupled its net income and increased contribution to the total revenue of Xstrata by 13%.[13] Xstrata Coal divides its market segments into Pacific and Atlantic thermal coal markets and a coking coal market.[19] In the Pacific thermal coal market, Xstrata's sells 75% of its thermal coal to Japan, South Korea, and Taiwan.[19] Due to the nature of the 2008 and 2009 financial crisis in these and other countries, Xstrata Coal's ability to sustain the large net income gains is questionable.[19] Xstrata expects greater instability in the energy markets and cautions that the gains in Xstrata Coal in 2008 may not be replicable.[19]
  • Xstrata Zinc (Revenue: $3,202m, 12% | Net Income: $113m, 2%)[17]: Xstrata Zinc is the third largest division of Xstrata in terms of revenue. Due to the 2008 and 2009 financial crisis, Xstrata Zinc's net income and revenue have substantially decreased since 2007. Revenue has decreased by 32.2%[10] and net income has decreased by 92.6%.[17] Xstrata Zinc also mines and produces industrial lead. Both of these metals' commodity prices dropped during the recession, with lead dropping by 20% and zinc dropping by 42%[20] The market for both of these metals are highly volatile and depend on many markets affected by the recession such as construction and durable goods manufacturing.[20] Thus, Xstrata cautions that further drops in net income and revenue are likely for Xstrata Zinc. [20]
  • Xstrata Nickel (Revenue: $3,105m, 11% | Net Income: $341m, 5%)[17]: Xstrata Nickel is the fourth largest division of Xstrata by revenue. Xstrata Nickel also shared the plunge in revenue and net income, with revenue falling by 40.8% and net income falling by 84.3% since 2007.[16][17]. The 2008 and 2009 financial crisis forced average nickel prices in the commodity markets to fall by 43% in 2008 compared to 2007.[21] This, combined with the weakened demand that the recessions brought for construction and durable goods, forced Xstrata Nickel and competitors to cut production by 21%.[21] Xstrata expects China, its largest market for nickel, to increase its demand to pre-recessionary levels by the end of 2009. [21]
  • Xstrata Alloys (Revenue: $2,002m, 7% | Net Income: $1,007m, 14%)[17]: Xstrata Alloy is the smallest of Xstrata's mining divisions, though its net income is many times higher than Xstrata Nickel and Xstrata Zinc.[17] This is because of a surge in chrome prices since 2007.[22] Chrome increased by 97% between 2007 and 2008.[22] Xstrata Alloys also mines platinum, though at a much lesser scale than chrome.[22] While platinum prices followed suit with the rest of the mined metals by receding 61% in 2008, the small amounts mined by Xstrata Alloys was offset by the larger more profitable chrome.[22] Xstrata Alloys expects both platinum and chrome to have robust demand by 2009 year end.[22]
  • Xstrata Technologies (Revenue: $235m, 1% | Net Income: $32m, <1%)[17]: Xstrata technologies does not directly participate in mining activities.[23] It provides mining technology services to its partner divisions in Xstrata and some external mining companies.[23]

Key Trends and Forces

Continued Growth in Developing Countries Puts Upward Pressure on Metal Commodity Prices

Much of the increase in demand for key commodities such as copper and zinc has come from fast-growing developing nations. [24] In particular, China's share of consumption of commodities such as nickel and other industrial metals has been increasing at a strong pace.[21] Goldman Sachs reports that Chinese share in world demand for copper and other base metals has more than doubled since 2000.[24] This increases both copper prices and copper producers' operating margins. Other rapidly industrializing markets such as Brazil, India, and Russia have the potential to increase demand. Higher demand for essential construction materials such as copper, encouraging higher spot metal prices, would lead to higher margins for Xstrata.[21]

Existing Zinc mines are being shut down due to economic inviability, and low prices are reducing the stock of zinc in the market

The increased supply of zinc from mine expansions in China, Australia, Bolivia, Kazakhstan, India and Canada has led to a global surplus inventory of about 150,000 tonnes in 2008.[25] The spot price of zinc has decreased by more than 48% within the year.[26] The lower prices have reduced the already narrow margin of some of the more cost ineffective mines around world. Intec, Aim Resources and Hudson Bay Minerals have suspended operations and stopped development works at their mines.[26] Perilya and CBH Resources also have announced to cut down the production by over 20% in their mines.[26] The continuation of the trend would ensure the survival of only the relatively cost effective producers. Xstrata Zinc is thus making all efforts to cut costs and improve productivity[20]

The global economic slowdown has limited the demand for coal but long-term prospects are secure

Global demand for coal remained weak in the first quarter of 2009, driven by low capacity utilization at steel mills and a fall in the demand for electricity.[27] Peabody Energy, an energy production company, predicts that global electricity demand will decline 1 to 2 percent in 2009.[27] Peabody estimates that economic contraction in the United States and low natural gas prices could lead to 70 to 90 million tons of lower coal demand in 2009.[27] Moreover, U.S. GDP is expected to decline 2.5 percent in 2009, which Peabody predicts will lead to a two-year reduction in electricity demand.[27] Already coal-based electricity has declined 5% (15 million tons) in 2009 from 2008 levels.[27] The coal industry has seen more than 60 million tons of announced production cuts in the U.S., and U.S. production has declined 8 million tons year-to-date.[27]

However, the long-term outlook of coal is positive. The International Energy Agency (IEA) projects demand for coal will rise more than any other fuel in absolute terms, accounting for over a third of the increase in energy use between 2006 and 2030.[28] China and India together represent 85% of the projected increase in global coal demand.[28] Thus, Xstrata expects to see the coal demand drop in the long term but expects security in coal in the long term.[13]

Competitors

  • BHP Billiton (BHP): BHP Billiton is the world's largest mining company with a focus on base metals such as copper, coal, nickel, ferroalloys, and zinc. In addition to mining, BHP also has a few side projects on oil, minerals, and natural gas. Since it is the largest mining company and mines many of the same resources as Xstrata's divisions, BHP is the most influential competitor. Its economies of scale due to size makes BHP Billiton a very close competitor in terms of prices.[29]
  • Anglo American (AAUK): Anglo American is the closest competitor to Xstrata. It mines ferroalloys, alloys, copper, coal, nickel, zinc, and provides technological solutions of its own.[30] The company also competes with Xstrata for mining areas in the Americas and some parts of Europe. Due to their near equality, Anglo-American and Xstrata are scrutinizing a merger plan. Since Anglo American is the second largest mining company in the metal mining industry, the merger between Xstrata and Anglo American will make competition against BHP Billiton effective.[31]
  • MMC Norilsk Nickel: MMC Norilsk Nickel produces nickel, palladium, platinum, and copper. It also produces various by-products, such as cobalt, chromium, rhodium, silver, gold, iridium, ruthenium, selenium, tellurium and sulfur. It competes with Xstrata to produce and sell nickel and copper in similar geographic areas in Australia and the Americas.[32]
  • Eurasian Natural Minerals Corporation: ENMC has five operating divisions: the Ferroalloy Division, which produces and sells chrome and other iron-based alloys; the Iron Ore Division, which produces and sells iron ore concentrate and pellets; the Alumina and Aluminium Division, which produces and sells alumina and aluminum; the Energy Division, which is an electricity provider in Kazakhstan, and the Logistics Division, which provides transportation and logistical services. Its Ferroalloy division competes closely with Xstrata's Ferroalloy division in terms of geography of mines and prices. However, the rest of the divisions do not compete directly.[33]
  • Vedanta Resources PLC: Vedanta is organized in five segments: aluminium, copper, zinc, iron ore and others. The majority of the copper mining activities happen in Australia, while the rest of the operations occur in India. Since Vedanta is a smaller mining company, and since it operates in geographic segments different from Xstrata, Vedanta is a competitor to Xstrata only in terms of final selling price.[34]
Name 2008 Operating Revenue ($m) [35] 2008 Net Income ($m)[35] 2008 Expenses ($m) 2008 Total Assets ($m)
BHP Billiton (BHP)50,211 5,877 35,975[38] 75,889[39]
Xstrata (LON:XTA)27,9523,59521,876[40]55,314[40]
Anglo American (AAUK)26,310.995,215.0018,592[41] 21,756.00[41]
MMC Norilsk Nickel13,980 (-449) 14,429[42] 20,225[42]
Eurasian Natural Resources6,823.002,6424,181[43] 9,375[44]
Vedanta Resources PLC6,578.90219.406358.6[45]7,571.3[46]

References

  1. 1.0 1.1 1.2 1.3 1.4 DigitalLook: Xstrata Company Research
  2. 2.0 2.1 2.2 Xstrata PLC Homepage
  3. 3.0 3.1 2008 Xstrata Annual Report, Worldwide Operations, Page 4 (PDF 6)
  4. 4.0 4.1 4.2 4.3 4.4 2008 Xstrata Annual Report, Performance: Operating Review, Copper, Page 56 (PDF 58)
  5. 5.0 5.1 5.2 5.3 5.4 Bloomberg: Xstrata Profit Falls 77%, August 4 2009
  6. 6.0 6.1 Bloomberg: Xstrata’s Davis Says Glencore Supports Anglo Merger, August 4 2009
  7. 7.0 7.1 Reuters: Xstrata seen plunging - no new Anglo merger move, July 30 2009
  8. Xstrata: Group History
  9. 2008 Xstrata Annual Report, Worldwide Operations, Page 5 (PDF 7)
  10. 10.0 10.1 10.2 10.3 10.4 10.5 DigitalLook: Xstrata Fundamentals
  11. 2008 Xstrata Consolidated Income Statement
  12. 2007 Xstrata Consolidated Income Statement
  13. 13.0 13.1 13.2 13.3 13.4 2008 Xstrata Annual Report, Performance: Operating Review, Coal, Page 49 (PDF 51)
  14. 14.0 14.1 14.2 14.3 2008 Xstrata Annual Report, Page 14 (PDF 16)
  15. The Wall Street Journal: Anglo American Rejects Invitation From Xstrata to Merge, June 22, 2009
  16. 16.0 16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8 16.9 DigitalLook: Xstrata Geographic and Product Analysis
  17. 17.00 17.01 17.02 17.03 17.04 17.05 17.06 17.07 17.08 17.09 17.10 17.11 17.12 2008 Xstrata Annual Report, Performance by Business, Page 6 (PDF 8)
  18. 18.0 18.1 2008 Xstrata Annual Report, Performance: Operating Review, Copper, Financial and Operating Data, Page 57 (PDF 59)
  19. 19.0 19.1 19.2 19.3 2008 Xstrata Annual Report, Performance: Operating Review, Coal, Page 57 (PDF 59)
  20. 20.0 20.1 20.2 20.3 2008 Xstrata Annual Report, Performance: Operating Review, Zinc, Page 70 (PDF 72)
  21. 21.0 21.1 21.2 21.3 21.4 2008 Xstrata Annual Report, Performance: Operating Review, Nickel, Page 64 (PDF 66)
  22. 22.0 22.1 22.2 22.3 22.4 2008 Xstrata Annual Report, Performance: Operating Review, Alloys, Page 46 (PDF 48)
  23. 23.0 23.1 2008 Xstrata Annual Report, Performance: Operating Review, Technological Services, Page 75 (PDF 77)
  24. 24.0 24.1 'BRICs' Chapter 20: 'BRICs and Global Commodities Markets,' Goldman Sachs
  25. The Economic Times: Zinc shrinks as supply outpaces demand, 19th Nov 2008
  26. 26.0 26.1 26.2 The Hindu Business Line: Zinc prices may continue to decline
  27. 27.0 27.1 27.2 27.3 27.4 27.5 Peabody Quarter 1 2009 Earnings Release: Global Coal Markets and Peabody's Position, Page 2
  28. 28.0 28.1 2009 Peabody Energy 10-K, Management's Discussion & Analysis, Page 47
  29. Google Finance: BLT
  30. Anglo American: What We Do
  31. Google Finance: AAL
  32. Google Finance: MNOD
  33. Google Finance: ENRC
  34. Google finance: Vedanta
  35. 35.0 35.1 35.2 Google Finance: Metal Mining
  36. Russia Profile: Norilsk
  37. Xstrata: A Milestone in Transformational Growth
  38. BHP Billiton: Income Statement 2008
  39. BHP Billiton: Balance Statement 2008
  40. 40.0 40.1 Digitallook Fundamentals: Xstrata
  41. 41.0 41.1 DigitalLook: AAUK Fundamentals
  42. 42.0 42.1 Norilsk: 2009 Financial Statement, Page 30 (PDF 32)
  43. ENRC Half Year Results 2008, Page 10
  44. ENRC Half Year Results 2008, Page 30
  45. Vedanta Resources: Consolidated Income Statement 2008
  46. Vedanta Resources: Consolidated Balance Statement
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