Xstrata Q3 output mixed
October 20, 2009
By Eric Onstad
London - Xstrata cautioned that the buoyant rand was crimping margins, pushing its share price down over two percent on Tuesday and drawing market warnings about the risk to mining profits from strengthening currencies.
"I think that's going to be the story for the second half, the decimation of margins by currencies," said analyst Peter Davey at Ambrian.
The Anglo-Swiss group also reported higher coal production in the third quarter, thanks to acquisitions, while lower ore grades cut copper output.
Shares in the group, for which coal and copper are the most profitable products, closed 2.43 percent lower at 1004 pence, underperforming a 1.16 percent fall in the mining sector index. They have outperformed the index by 50 percent this year.
Analyst Charles Kernot at Evolution Securities, who downgraded Xstrata to "sell", was wary about rising currencies in operating countries such as South Africa and Australia.
"We believe that the market is failing to take account of the negative effects of operating currency strength which, as Xstrata itself points out, detracts from US dollar commodity price strength," he said.
Xstrata said in its production report that the South African rand was at 14-month highs. "The strong rand has resulted in margins remaining under pressure," it said.
Other miners will also be hit by strong local currencies, especially rival Anglo American which has high exposure to South Africa. BHP Billiton and Rio Tinto have extensive operations in Australia.
The main currency impact would be in Australia and South Africa with less in South America since costs there are typically in US dollars, Davey said, adding that strong price gains in copper and aluminium would help cancel out the negative currency effects for those metals.
Xstrata said its financial performance continued to be strong in the third quarter, but gave no details.
First-half earnings per share slid 77 percent on weak metals prices, hit by the global economic downturn, although currencies had a positive impact in that period.
Xstrata, the world's biggest exporter of "thermal" coal used in power plants, said total coal production for the three months to end September rose nine percent to 25.6 million tons after it bought the Prodeco coal mines in Colombia but mined copper output fell 10 percent to 212,173 tons.
Coal was responsible for the bulk of operating profit in the first half as nickel and alloys units posted losses, but analysts said a rebound in copper prices meant that both coal and copper would be strong contributors in the second half.
Liberum Capital, which called the production report "solid", said copper was due to account for 45 percent of second half core earnings and thermal coal 35 percent.
Copper prices have doubled so far this year on strong demand from China after tumbling late last year, but the third quarter average price was still 24 percent down from last year.
"We were surprised by the 3Q09 weakness on the copper division, usually when they start outperforming, but lower grades in Australia sounds like a deferral for a quarter or so," said analyst Tim Huff at RBS, which rates Xstrata a "buy".
The average selling prices for coal in the third quarter were lower, with prices for Australian thermal coal falling 31 percent to $73.8 per ton. Australian thermal coal accounted for 43 percent of Xstrata's total coal output.
Xstrata, the world's largest zinc producer, said mined zinc in concentrate production rose 10 percent. Mined nickel output was largely flat, and ferrochrome production fell 20 percent.
Xstrata made no comment about the outlook for commodity markets, but in August when the firm released interim results it warned that hopes of a quick recovery could be premature.
Last week, Xstrata gave up its pursuit of rival Anglo American Plc, dropping a "merger of equals" proposal after refusing demands from Anglo shareholders that it pay a premium. - Reuters
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