Xstrata is an international mining group, operating in 19 countries spanning 4 continents with 2008 revenues of $27.9 billion. It focuses on seven internationally traded commodities, of which coal (28% of revenues) and copper (41% of revenues) are the most important. The group also has exposure to gold and silver. 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. 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. In 2008, Xstrata had $27.9 billion in revenue, a decrease of 2.07% from its 2007 performance.
Xstrata Group was founded in 2001 and is headquartered in Zug, Switzerland. The group is divided into six subsidiaries, five of which focus on mining operations. The sixth subsidiary is Xstrata Technology Services, which provides technological services catered to support both Xstrata subsidiary operations and third-party customers. With this exception, the subsidiaries operate independently of each other.
|General Fundamentals (in millions)||2006||2007||2008|
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. 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. In August 2009, Xstrata was forced to close 17 out of 20 chrome furnaces due to low demand and inoperable low market prices. 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%.
Because of this unexpected decline in profitability, Xstrata has put resources into finding efficient ways to reduce operating costs since 2007. 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. Similarly, zinc ouput increased by 23% while operating costs decreased by 32%. Xstrata is stopping mining activity in less productive mines and increasing output in operational mines to combat the recession.
The unexpected decline has also forced Xstrata to review its merger terms with Anglo-American, a closely-competitive mining group with similar products. The merger was planned to help both groups to compete better against BHP Billiton, the world's largest mining group. However, the 77% decrease in profit since 2008 has forced Anglo-American to reject the initial merger offer.
|Sources of Revenue||2006($m)||2007($m)||2008($m)|
|Coal||3617.0 (21%)||4,201.0 (15%)||7,944.0 (28%)|
|Copper||7,007.0 (41%)||12,794.0 (45%)||11,464.0 (41%)|
|Alloys **||N/A||1,223.0 (4%)||1,733.0 (6%)|
|Nickel||1,678.0 (10%)||5,252.0 (18%)||3105.0 (11%)|
|Technology||120.0 (1%)||217.0 (1%)||235.0 (1%)|
|Zinc Lead||3,721.0 (22%)||4726.0 (17%)||3,202.0 (12%)|
|Total||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.
The decrease in copper, zinc, nickel, and alloys prices have reduced their contributions to Xstrata's total revenue. However, Xstrata lost only 2.07% of its total revenue since 2007 due to an increase in coal prices. Xstrata Coal is also Xstrata's most profitable division, providing 49% of the total net income in 2008.  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. 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.
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. 
Much of the increase in demand for key commodities such as copper and zinc has come from fast-growing developing nations.  In particular, China's share of consumption of commodities such as nickel and other industrial metals has been increasing at a strong pace. Goldman Sachs reports that Chinese share in world demand for copper and other base metals has more than doubled since 2000. 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.
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. The spot price of zinc has decreased by more than 48% within the year. 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. Perilya and CBH Resources also have announced to cut down the production by over 20% in their mines. 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
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. Peabody Energy, an energy production company, predicts that global electricity demand will decline 1 to 2 percent in 2009. 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. 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. Already coal-based electricity has declined 5% (15 million tons) in 2009 from 2008 levels. 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.
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. China and India together represent 85% of the projected increase in global coal demand. Thus, Xstrata expects to see the coal demand drop in the long term but expects security in coal in the long term.
|Name||2008 Operating Revenue ($m) ||2008 Net Income ($m)||2008 Expenses ($m)||2008 Total Assets ($m)|
|BHP Billiton (BHP)||50,211||5,877||35,975||75,889|
|Anglo American (AAUK)||26,310.99||5,215.00||18,592||21,756.00|
|MMC Norilsk Nickel||13,980||(-449)||14,429||20,225|
|Eurasian Natural Resources||6,823.00||2,642||4,181||9,375|
|Vedanta Resources PLC||6,578.90||219.40||6358.6||7,571.3|